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 SEPTEMBER 30, 2016

 

OR

 

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

 

FOR THE TRANSITION FROM __________ TO __________

 

COMMISSION FILE NUMBER: 333-184550

 

SQN AIF IV, L.P.

(Exact name of registrant as specified in its charter)

 

Delaware		36-4740732
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer ID No.)
100 Wall Street, 28th Floor
New York, NY		10005
(Address of principal executive offices)		(Zip code)

 

Issuer’s telephone number: (212) 422-2166

 

 

(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]

 

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 November 14, 2016 there were 74,965.07 units of the Registrant’s limited partnership interests issued and outstanding.

 

 

 

SQN AIF IV, L.P. and Subsidiaries

 

INDEX

 

PART I – FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements	3
	Condensed Consolidated Balance Sheets at September 30, 2016 (unaudited) and December 31, 2015	3
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)	4
	Condensed Consolidated Statement of Changes in Partners’ Equity for the Nine Months Ended September 30, 2016 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015 (unaudited)	6
	Notes to Condensed Consolidated Financial Statements (unaudited)	8
Item 2.	General Partner’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	38
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3.	Defaults Upon Senior Securities	40
Item 4.	Mine Safety Disclosures	40
Item 5.	Other Information	40
Item 6.	Exhibits	40
Signatures		41

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

SQN AIF IV, L.P. and Subsidiaries

(A Delaware Limited Partnership)

Condensed Consolidated Balance Sheets

 

		September 30, 2016				December 31, 2015
Assets
Cash and cash equivalents		$	3,846,030			$	4,782,256
Investments in finance leases, net			7,233,074				3,358,435
Investments in equipment subject to operating leases, net			828,741				1,025,127
Equipment notes receivable, including accrued interest of $515,065 and $151,448			28,350,967				11,025,523
Residual value investment in equipment on lease			2,936,126				2,938,065
Initial direct costs, net of accumulated amortization of $167,636 and $51,055			289,214				323,697
Collaterized loans receivable, including accrued interest of $625,618 and $166,577			27,143,217				10,370,610
Investment in Informage SQN Technologies LLC			529,755				649,055
Investment in SQN Helo LLC			1,139,260				1,224,937
Equipment investment through SPV			39,690,711				42,408,395
Other assets			2,876,435				3,908,546
Total Assets		$	114,863,530			$	82,014,646
Liabilities and Partners’ Equity
Liabilities:
Loans payable		$	56,991,679			$	34,550,746
Accounts payable and accrued liabilities			1,799,921				1,924,212
Deferred revenue			235,401				-
Distributions payable to Limited Partners			-				1,014,328
Distributions payable to General Partner			70,073				27,860
Security deposits payable			74,581				94,942
Total Liabilities			59,171,655				37,612,088
Commitments and Contingencies			-				-
Partners’ Equity (Deficit):
Limited Partners			51,057,252				39,621,119
General Partner			(144,445	)			(83,186	)
Total Partners’ Equity attributable to the Partnership			50,912,807				39,537,933
Non-controlling interest in consolidated entities			4,779,068				4,864,625
Total Equity			55,691,875				44,402,558
Total Liabilities and Partners’ Equity		$	114,863,530			$	82,014,646

 

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

 

 

SQN AIF IV, L.P. and Subsidiaries

(A Delaware Limited Partnership)

Condensed Consolidated Statements of Operations

(Unaudited)

 

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2016				2015				2016				2015
Revenue:
Rental income		$	81,115			$	81,116			$	243,347			$	1,645,019
Finance income			312,950				41,089				777,228				138,466
Interest income			1,238,271				245,922				2,971,449				1,015,854
Income from equipment investment through SPV			3,793,359				-				12,465,552				-
Investment loss from equity method investments			(32,393	)			(192,799	)			(124,977	)			(486,554	)
Loss on sale of assets			-				-				-				(57,440	)
Other income			86,590				56,550				268,008				313,223
Total Revenue			5,479,892				231,878				16,600,607				2,568,568
Expenses:
Management fees - Investment Manager			375,000				375,000				1,125,000				1,125,000
Depreciation and amortization			100,500				75,628				315,968				1,561,227
Professional fees			33,706				33,810				178,591				166,986
Administration expense			13,313				20,499				79,142				51,342
Interest expense			875,297				73,248				2,187,412				907,818
Other expenses			(88	)			1,621				285,747				55,060
Expenses from equipment investment through SPV (including depreciation expense of approximately $966,000 and $2,713,000 for the three and nine months ending September 30, 2016, respectively)			4,485,331				-				13,325,166				-
Total Expenses			5,883,059				579,806				17,497,026				3,867,433
Foreign currency transaction losses			312,477				38,418				1,092,544				18,843
Net loss			(715,644	)			(386,346	)			(1,988,963	)			(1,317,708	)
Net (loss) income attributable to non-controlling interest in consolidated entities			(68,590	)			735				(84,363	)			(85,496	)
Net loss attributable to the Partnership		$	(647,054	)		$	(387,081	)		$	(1,904,600	)		$	(1,232,212	)
Net loss attributable to the Partnership
Limited Partners		$	(640,583	)		$	(383,210	)		$	(1,885,554	)		$	(1,219,890	)
General Partner			(6,471	)			(3,871	)			(19,046	)			(12,322	)
Net loss attributable to the Partnership		$	(647,054	)		$	(387,081	)		$	(1,904,600	)		$	(1,232,212	)
Weighted average number of limited partnership interests outstanding			74,965.07				40,521.23				70,517.85				34,520.95
Net loss attributable to Limited Partners per weighted average number of limited partnership interests outstanding		$	(8.55	)		$	(9.46	)		$	(26.74	)		$	(35.34	)

 

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

 

 

SQN AIF IV, L.P. and Subsidiaries

(A Delaware Limited Partnership)

Condensed Consolidated Statements of Changes in Partners’ Equity (Unaudited)

Nine Months Ended September 30, 2016

 

		Limited Partnership				Total				General				Limited				Non-controlling
		Interests				Equity				Partner				Partners				Interest
Balance, January 1, 2016			55,315.99			$	44,402,558			$	(83,186	)		$	39,621,119			$	4,864,625
Limited Partners’ capital contributions			19,650.08				19,650,079				-				19,650,079				-
Offering expenses			-				(102,330	)			-				(102,330	)			-
Underwriting fees			-				(1,949,907	)			-				(1,949,907	)			-
Net loss			-				(1,988,963	)			(19,046	)			(1,885,554	)			(84,363	)
Distributions to partners			-				(4,263,533	)			(42,213	)			(4,221,320	)			-
Redemption of non-controlling interest			-				(1,194	)			-				-				(1,194	)
Redemption of initial Limited Partners’ contributions			-				(54,835	)			-				(54,835	)			-
Balance, September 30, 2016			74,966.07			$	55,691,875			$	(144,445	)		$	51,057,252			$	4,779,068

 

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

 

 

SQN AIF IV, L.P. and Subsidiaries

(A Delaware Limited Partnership)

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

		For the Nine Months Ended September 30,
		2016				2015
Cash flows from operating activities:
Net loss		$	(1,988,963	)		$	(1,317,708	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Finance income			(777,228	)			(138,466	)
Accrued interest income			(2,589,021	)			(815,177	)
Investment loss from equity method investments			124,977				486,554
Depreciation and amortization			315,968				1,561,227
Loss on sale of assets			-				57,440
Rental income adjustment for Echo and Echo II			-				186,048
Foreign currency transaction losses			1,084,140				12,588
Change in operating assets and liabilities:
Minimum rents receivable			2,322,512				342,916
Accrued interest income			1,376,074				710,793
Other assets			1,032,111				4,526,745
Accounts payable and accrued liabilities			(124,291	)			(35,791	)
Deferred revenue			235,401				-
Security deposits payable			(20,361	)			20,360
Accrued interest on note payable			1,411,190				(674,826	)
Net cash provided by operating activities			2,402,509				4,922,703
Cash flows from investing activities:
Purchase of finance leases			(2,729,966	)			(1,023,427	)
Purchase of residual value investments of equipment subject to lease			-				(745,703	)
Cash received from residual value investments of equipment subject to lease			1,939				-
Cash paid for initial direct costs			(165,349	)			(64,247	)
Cash reimbursement received for initial direct costs			70,250				-
Cash paid for collateralized loans receivable			(10,242,700	)			(10,964,992	)
Cash received from collateralized loans receivable			1,163,478				150,000
Cash received from equipment loans receivable			-				1,128,812
Proceeds from sale of leased assets			-				15,431,895
Investment in Informage SQN Technologies			-				(103,532	)
Proceeds from Informage SQN Technologies			80,000				610,936
Investment in SQN Helo			-				(1,465,000	)
Investment in H&P			-				(6,818,000	)
Equipment investment through SPV			2,717,684				-
Cash paid for equipment notes receivable			(22,294,431	)			(1,216,377	)
Repayment of equipment notes receivable			1,636,753				287,268
Net cash used in investing activities			(29,762,342	)			(4,792,367	)
Cash flows from financing activities:
Cash received from loan payable			16,926,071				-
Repayments of loan payable			(2,808,629	)			(11,304,675	)
Cash paid to financial institutions for equipment notes payable			-				(2,460,262	)
Cash received from non-controlling interest contribution			-				1,788,750
Cash received from Limited Partner capital contributions			19,146,741				17,948,564
Cash paid for Limited Partner distributions			(5,235,648	)			(2,500,218	)
Cash paid for Initial Limited Partners contribution redemption			(54,835	)			-
Distribution of income from consolidated entities			-				(197,474	)
Cash paid for non-controlling interest distributions			(1,194	)			(1,075,835	)
Cash paid for underwriting fees			(1,446,569	)			(1,602,700	)
Cash paid for offering costs			(102,330	)			(325,653	)
Net cash provided by financing activities			26,423,607				270,497
Net (decrease) increase in cash and cash equivalents			(936,226	)			400,833
Cash and cash equivalents, beginning of period			4,782,256				4,035,214
Cash and cash equivalents, end of period		$	3,846,030			$	4,436,047

 

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

 

 

SQN AIF IV, L.P. and Subsidiaries

(A Delaware Limited Partnership)

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

		For the Nine Months Ended September 30,
		2016				2015
Supplemental disclosure of other cash flow information:
Cash paid for interest		$	558,070			$	351,678
Supplemental disclosure of non-cash investing and financing activities:
Units issued as underwriting fee discount		$	503,338			$	199,504
Distributions payable to General Partner		$	42,213			$	20,711
Reclassification of equipment notes receivable to investment in finance leases		$	2,861,620			$	-
Reclassification of initial direct cost to collateralized loans receivable		$	10,000			$	-
Reclassification of equipment subject to operating leases to other assets		$	-			$	(181,778	)
Increase in equipment loans receivable		$	-			$	(108,636	)
Increase in collateralized loans receivable		$	(6,912,301	)		$	-

 

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

 

 

SQN AIF IV, L.P. and Subsidiaries

(A Delaware Limited Partnership)

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2016 and 2015

(Unaudited)

 

1.	Organization and Nature of Operations

 

Organization – SQN AIF IV, L.P. (the “Partnership”) was formed on August 10, 2012, as a Delaware limited partnership and 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, 2036.

 

Nature of Operations – The principal investment strategy of the Partnership is to invest in business-essential, revenue-producing (or cost-savings) equipment or other physical assets with high in-place value and long, relative to the investment term, economic life and project financings. The Partnership executes its investment strategy by making investments in equipment already subject to lease or originating equipment leases in such equipment, which will include: (i) purchasing equipment and leasing it to third-party end users; (ii) providing equipment and other asset and project financings; (iii) acquiring equipment subject to lease and (iv) acquiring ownership rights (residual value interests) in leased equipment at lease expiration. From time to time, the Partnership may also purchase equipment and sell it directly to its leasing customers. The Partnership may use other investment structures that SQN Capital Management, 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 SQN AIF IV GP, LLC (the “General Partner”), a wholly-owned subsidiary of the Partnership’s Investment Manager. Both the Partnership’s General Partner and its Investment Manager are Delaware limited liability companies. The General Partner manages and controls the day to day activities and operations of the Partnership, pursuant to the terms of the Limited Partnership Agreement. The General Partner paid an aggregate capital contribution of $100 for a 1% interest in the Partnership’s income, losses and distributions. The Investment Manager makes all investment decisions and manages the investment portfolio of the Partnership.

 

On June 3, 2015, SQN Alpha, LLC (“Alpha”), a special purpose entity which is 32.5% owned by the Partnership and 67.5% owned by SQN Portfolio Acquisition Company, LLC (“SQN PAC”), acquired a promissory note with a principal amount equal to $2,650,000. The promissory note accrues interest at the rate of 11.1% per annum, payable quarterly in arrears, and matures on June 30, 2020. The promissory note is secured by a pledge of shares in an investment portfolio of insurance companies under common control of the third party which include equipment leases, direct hard assets and infrastructure investments, and other securities. On June 3, 2015, a participation agreement was entered into between SQN PAC (“Alpha Participation A”), the Partnership (“Alpha Participation B”), Alpha and SQN Capital Management, LLC. Under the agreement, Alpha created two collateralized participation interests for the collateral (“Promissory Note”); Alpha Participation A’s principal contribution is $1,788,750 and accrues interest at 9% per annum and Alpha Participation B’s principal contribution is $861,250 and accrues interest at 15.05% per annum. SQN Capital Management, LLC was appointed as a servicer for the Promissory Note. Alpha Participation A’s interest is senior to Alpha Participation B’s interest. Since the Partnership bears the primary risks and rewards of Alpha, the Partnership consolidates Alpha into the consolidated financial statements. SQN PAC’s 67.5% investment in Alpha is presented as non-controlling interest on the condensed consolidated financial statements.

 

 

On December 2, 2015, the Partnership formed a special purpose entity SQN Juliet, LLC (“Juliet”), a limited liability company registered in the state of Delaware which is wholly owned by the Partnership. On December 29, 2015, Juliet entered into a loan agreement with a third party to borrow $3,071,000 for the funding of two loan facilities. The loan accrues interest at the rate of 8.5% per annum and matures on December 29, 2016. On December 31, 2015, Juliet extended two separate loan facilities to two borrowers. The borrowers are both subsidiaries of a UK based parent company that provides small and medium sized secured business loans (“Just Loans”). Each facility provides financing up to a maximum borrowing of £5,037,500 or together a total of £10,075,000 and accrues interest at a rate of 10% per annum. The funds can be drawn down in increments of up to £1,000,000 per month per facility with the exception of the first draws which were each in the amount of £1,037,500 in order to fund a certain third party fee of £37,500. The funds can be drawn up to the one year anniversary of the loan facilities or December 31, 2016 (“Availability Date”). The loan is repayable in monthly interest only payments due on the last day of each month. Principal is due nine months after the Availability Date or September 30, 2017 (“Termination Date”). The loans are secured by share pledges of the borrowers, a guaranty from the UK based parent company, and the underlying loan portfolio that Just Loans generates. On December 29, 2015, a participation agreement was entered into between a third party (“Juliet Participation A”), the Partnership (“Juliet Participation B”), and Juliet. In connection with the participation agreement, the Partnership assigned to Juliet various finance leases and equipment notes receivables with a total value equal to $4,866,750. Under the agreement, Juliet created two collateralized participation interests for the underlying loans (“Underlying Loans”); Juliet Participation A’s principal balance is $3,071,000 and accrues interest at 8.5% per annum and Juliet Participation B’s principal balance is the value of their assigned finance leases and equipment notes receivable of $4,866,750. Juliet Participation A’s interest is senior to Juliet Participation B’s interest. On April 22, 2016, the participation agreement dated December 29, 2015 between Juliet Participation A, Juliet Participation B, and Juliet was amended and restated. In connection with the amended participation agreement, Juliet Participation A funded Juliet cash of approximately $8,511,000 and assigned their interests of approximately $3,986,000 in a loan facility for a wood pellet business in Texas, which along with the outstanding principal payable balance of approximately $2,124,000 on the Just Loans transaction resulted in a Juliet Participation A balance of approximately $14,621,000. Under the amended agreement, Juliet Participation A’s principal balance accrues interest at 6% per annum and Juliet Participation B’s principal balance accrues interest at 12% per annum. Juliet Participation A’s interest is senior to Juliet Participation B’s interest.

 

On December 16, 2015, SQN Marine, LLC (“Marine”), a special purpose vehicle which is wholly owned by the Partnership, entered into a sale and assignment of partnership interest agreement with the Partnership and a third party. Under the terms of the agreement, Marine acquired an 88.20% (90% of 98%) economic interest in a portfolio of container feeder vessels, for an aggregate investment of $28,266,789. Marine contributed cash of $12,135,718 and entered into two loans payable with separate third parties of $7,500,000 and $9,604,091. Marine acquired their economic interest in the vessels through a limited partnership interest in CONT Feeder Portfolio GmbH & Co. KG, a Germany based limited partnership (“CONT Feeder”), which acquired and operates the container feeder vessels, and entered into a separate note payable with an unrelated third party of $14,375,654. Marine bears the risks and rewards of ownership of CONT Feeder and therefore Marine consolidates the financial statements of CONT Feeder. Since the Partnership bears the primary risks and rewards of Marine, the Partnership consolidates Marine into the consolidated financial statements. A third party contributed $3,140,754 to purchase a 10% share of CONT Feeder which is presented as non-controlling interest on the condensed consolidated financial statements.

 

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 is currently in the Operating Period. The Offering Period concluded on April 2, 2016, which was three years from the date the Partnership was declared effective by the Securities and Exchange Commission (“SEC”). 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 Operating Period began on the date of the Partnership’s initial closing, which occurred on May 29, 2013 and will last for three years unless extended at the sole discretion of the General Partner. The General Partner has extended the Operating Period for an additional one year. 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.

 

 

SQN Securities, LLC (“Securities”), is a Delaware limited liability company and a majority-owned subsidiary of the Investment Manager. Securities, was the Partnership’s selling agent, and received an underwriting fee of 3% of the gross proceeds from Limited Partners’ capital contributions (excluding proceeds, if any, the Partnership received from the sale of its Units to the General Partner or its affiliates). In addition, the Partnership paid a 7% sales commission to broker-dealers unaffiliated with the General Partner who sold the Partnership’s Units, on a best efforts basis. When the 7% sales commission was not required to be paid, the Partnership applied the proceeds that would otherwise be payable as sales commission toward the purchase of additional fractional Units at $1,000 per Unit.

 

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 6.5% annually, paid quarterly as 1.625%, of each Limited Partners’ capital contribution (pro-rated to the date of admission for each Limited Partner). During the nine months ended September 30, 2016, the Partnership declared and made quarterly cash distributions to its Limited Partners totaling $4,221,320. As of September 30, 2016, the Partnership has accrued $70,073 for distributions payable to the General Partner.

 

From May 29, 2013 through April 2, 2016, the Partnership admitted 1,508 Limited Partners with total capital contributions of $74,965,064 resulting in the sale of 74,965.07 Units. The Partnership received cash contributions of $72,504,327 and applied $2,460,737 which would have otherwise been paid as sales commission to the purchase of 2,460.74 additional Units.

 

2.	Summary of Significant Accounting Policies

 

Basis of Presentation — The condensed consolidated financial statements of SQN AIF IV, L.P. and Subsidiaries at September 30, 2016 and for the three and nine months ended September 30, 2016 and 2015 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 consolidated 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 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 audited consolidated financial statements of the Partnership for the year ended December 31, 2015 and notes thereto contained in the Partnership’s annual report on Form 10-K for the year ended December 31, 2015, as filed with the SEC on March 30, 2016.

 

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

 

Non-controlling interest represents the minority equity holders’ investment in Alpha and CONT Feeder plus the minority’s share of the net operating results and other components of equity relating to the non-controlling interest.

 

 

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.

 

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 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 a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist of funds maintained in checking and money market accounts 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 an international financial institution in order to minimize risk relating to exceeding insured limits. The Partnership, through Summit Asset Management Limited, maintains an unrestricted bank account at a major financial institution in the United Kingdom for purposes of receiving payments and funding transactions in Pound Sterling.

 

Credit Risk — In the normal course of business, the Partnership is exposed to credit risk. Credit risk is the risk that the Partnerships’ counterparty to an agreement 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.

 

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 and the industry in which the potential lessee operates. Unguaranteed residual values are reviewed for impairment in accordance with the Partnership’s policy relating to impairment review.

 

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 September 30, 2016, an allowance for doubtful lease, notes and loan accounts is not currently provided since, in the opinion of the Investment Manager, all accounts recorded on the books are deemed collectible.

 

Equipment Notes and Loans Receivable — Equipment notes and loans receivable are reported in the 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 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.

 

 

Initial Direct Costs — The Partnership capitalizes initial direct costs associated with the origination and funding of lease assets. These costs are amortized on a lease by lease basis over the actual contract term of each lease using the effective interest rate method for finance leases and the straight-line method for operating leases. Upon disposal of the underlying lease assets, both the initial direct costs and the associated accumulated amortization are relieved. Costs related to leases that are not consummated are not eligible for capitalization as initial direct costs and are expensed as incurred as acquisition expense.

 

Equity Method — The Partnership records its 24.5% investment in Informage SQN Technologies LLC and its 50% investment in SQN Helo, LLC using the equity method of accounting. According to U.S. GAAP, a company that holds 20% or greater investment in another company could potentially exercise significant influence over the investee company’s operating and financing activities and should therefore utilize the equity method of accounting. The Partnership’s portion of earnings in the investee are recorded as an increase in its investment and recognized in the condensed consolidated statements of operations, and any distributions received from the investee are recorded as a reduction in its investment.

 

Acquisition Expense — Acquisition expense represents costs which include, but are not limited to, legal fees and expenses, travel and communication expenses, cost of appraisals, accounting fees and expenses, and miscellaneous expenses related to the selection and acquisition of leased equipment which are incurred by the Partnership under the terms of the Partnership Agreement, as amended. As these costs are not eligible for capitalization as initial direct costs, such amounts are expensed as incurred.

 

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

 

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, and all consolidated entities, 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 February 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance to improve consolidation guidance for legal entities (Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842): Amendments to Leases Analysis), effective for fiscal years beginning after December 15, 2018 and interim periods within those years and early adoption is permitted. The standard amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making 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 is currently evaluating the impact of this guidance on its condensed consolidated financial statements.

 

In February 2015, the Financial Accounting Standards Board (“FASB”) issued new guidance to improve consolidation guidance for legal entities ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis), effective for fiscal years beginning after December 15, 2015 and interim periods within those years and early adoption is permitted. The new standard is intended to improve targeted areas of the consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures. The amendments in the ASU affect the consolidation evaluation for reporting organizations. In addition, the amendments in this ASU simplify and improve current U.S. GAAP by reducing the number of consolidation models. The Partnership is currently evaluating the impact of this guidance on its 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 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 pays the General Partner a fee for organizational and offering costs not to exceed 2% 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 September 30, 2016 and December 31, 2015.

 

The Partnership pays the Investment Manager during the Offering Period, Operating Period and the Liquidation Period a management fee equal to or the greater of, (i) 2.5% per annum of the aggregate offering proceeds, or (ii) $125,000 monthly, until such time as an amount equal to at least 15% of the Partnership’s Limited Partners’ capital contributions have been returned to the Limited Partners, after which the monthly management fee will equal 100% of the management fee as initially calculated above, less 1% for each additional 1% of the Partnership’s Limited Partners’ capital contributions returned to them. Such amounts are measured on the last day of each month. The management fee is paid regardless of the performance of the Partnership and will be adjusted in the future to reflect the total equity raised. For the three months ended September 30, 2016 and 2015, the Partnership paid $375,000 in management fee expense to the Investment Manager. For the nine months ended September 30, 2016 and 2015, the Partnership paid $1,125,000 in management fee expense to the Investment Manager.

 

Securities is a Delaware limited liability company and is majority-owned subsidiary of the Partnership’s Investment Manager. Securities in its capacity as the Partnership’s selling agent received an underwriting fee of 3% of the gross proceeds from Limited Partners’ capital contributions (excluding proceeds, if any, the Partnership received from the sale of the Partnership’s Units to the General Partner or its affiliates).

 

 

For the nine months ended September 30, 2016 and year ended December 31, 2015, the Partnership incurred the following transactions with Securities:

 

		September 30,2016				December 31,2015
		(unaudited)
Balance - beginning of period		$	—			$	—
Underwriting fees earned by Securities			574,402				845,343
Payments by the Partnership to Securities			(574,402	)			(845,343	)
Balance - end of period		$	—			$	—

 

For the nine months ended September 30, 2016 and 2015, the Partnership incurred the following underwriting fee transactions:

 

		Nine Months Ended September 30, 2016				Nine Months Ended September 30, 2015
Underwriting discount incurred by the Partnership		$	503,338			$	420,060
Underwriting fees earned by Securities			574,402				531,840
Fees paid to outside brokers			872,167				850,304
Total underwriting fees		$	1,949,907			$	1,802,204

 

4.	Investments in Finance Leases

 

At September 30, 2016 and December 31, 2015, net investment in finance leases consisted of the following:

 

		September 30, 2016				December 31, 2015
Minimum rents receivable		$	8,362,368			$	4,007,515
Estimated unguaranteed residual value			652,689				113,363
Unearned income			(1,781,983	)			(762,443	)
Total		$	7,233,074			$	3,358,435

 

Computer Networking Equipment

 

On February 29, 2016, the Partnership entered into a new finance lease transaction for computer networking equipment for $1,541,461. The finance lease requires 36 monthly payments of $48,171 commencing on March 1, 2016. At September 30, 2016, there were no significant changes to this lease.

 

On May 25, 2016, the Partnership entered into a second finance lease transaction for computer networking equipment for $656,772. The finance lease requires 36 monthly payments of $20,524 commencing on June 1, 2016. At September 30, 2016, there were no significant changes to this lease.

 

Furniture and Fixtures and Server Equipment

 

On January 31, 2016, the Master Equipment Lease for servers, fixtures and furniture for approximately $2,700,000 commenced and the Partnership reclassified the equipment note to investment in finance lease. The finance lease requires 36 monthly payments of $77,727 commencing on February 1, 2016. On June 24, 2016, Juliet entered into a second finance lease transaction for servers, fixtures and furniture for $337,131. The finance lease requires 31 monthly payments of $12,464 commenced on July 1, 2016. At September 30, 2016, there were no significant changes to this lease.

 

Anaerobic Digestion Plant

 

On January 31, 2016, construction of the anaerobic digestion plant was completed and the lease commenced and the Partnership reclassified the equipment note to investment in finance lease. The lease requires 20 quarterly payments of £41,616 ($59,823 applying exchange rate of 1.4375 at May 16, 2016) began on April 30, 2016. At September 30, 2016, there were no significant changes to this lease.

 

 

Furniture, Fixtures and Equipment, as well as Computer Hardware & Software

 

On December 30, 2015, the Partnership entered into a new finance lease transaction for furniture, fixtures and equipment, as well as computer hardware and software for $1,500,000. The finance lease requires 30 monthly payments of $58,950. At September 30, 2016, there were no significant changes to this lease.

 

Manufacturing Equipment

 

On October 7, 2015, the Partnership entered into a new finance lease transaction for manufacturing equipment for $58,000 (“SCHWRD 1”). The equipment is subject to a 60 month lease with a Connecticut-based engraving, decal and die manufacturing company. The finance lease requires 60 monthly payments of $1,277. On December 29, 2015, the Partnership entered into a second finance lease transaction for manufacturing equipment for $94,300 (“SCHWRD 2”). The finance lease requires 60 monthly payments of $2,077. On December 30, 2015, the Partnership assigned the SCHWRD 1 finance lease to Juliet. At September 30, 2016, there were no significant changes to this lease.

 

Computer Networking Equipment

 

On September 1, 2015, the Partnership entered into a new finance lease transaction for computer networking equipment for $446,677 (“Comp Net 1”). The Comp Net 1 finance lease requires 36 monthly payments of $14,195. On October 30, 2015, the Partnership entered into a second finance lease transaction for computer networking equipment for $297,689 (“Comp Net 2”). The Comp Net 2 finance lease requires 36 monthly payments of $9,460. On December 29, 2015, the Partnership entered into a third finance lease transaction for computer networking equipment for $389,266 (“Comp Net 3”). The Comp Net 3 finance lease requires 36 monthly payments of $12,456. On December 30, 2015, the Partnership assigned the Comp Net 1 and Comp Net 2 finance leases to Juliet. At September 30, 2016, there were no significant changes to this lease.

 

Gamma Knife Suite - TRCL

 

On April 30, 2015, the Partnership acquired from a third party, 20 quarterly lease payments with respect to a gamma knife suite leased to a hospital in the United Kingdom. The Partnership paid £375,000 ($576,750 applying exchange rate of 1.538 at April 30, 2015) for the equipment lease receivables which are payable under the lease from July 2015 through April 2020. The finance lease requires 20 quarterly payments of £25,060. The equipment lease receivables are secured by the gamma knife suite. At September 30, 2016, there were no significant changes to this lease.

 

Medical Equipment

 

On March 31, 2014, the Partnership entered into a finance lease transaction for medical equipment for $247,920. The finance lease requires 48 monthly payments of $7,415. On December 30, 2015, the Partnership assigned this finance lease to Juliet. At September 30, 2016, there were no significant changes to this lease.

 

5.	Investments in Equipment Subject to Operating Leases

 

On October 31, 2014, the Partnership entered into an agreement for the purchase of two operating leases for aircraft rotable parts equipment located in the United States of America with a total basis of $1,330,616. Each operating lease has a remaining term of 28 months and monthly payments of $26,493 and $1,800, respectively. On that same date, the Partnership entered into a participation agreement with the rotable parts servicer, whereby the servicer purchased a 5% interest in these operating leases. At September 30, 2016, there were no significant changes to this lease.

 

 

The composition of the equipment subject to operating leases of the Partnership as of September 30, 2016 and December 31, 2015 is as follows:

 

September 30, 2016:

 

Description		Cost Basis				Accumulated Depreciation				Net Book Value
Aircraft equipment		$	1,330,616			$	501,875			$	828,741
		$	1,330,616			$	501,875			$	828,741

 

December 31, 2015:

 

Description		Cost Basis				Accumulated Depreciation				Net Book Value
Aircraft equipment		$	1,330,616			$	305,489			$	1,025,127
		$	1,330,616			$	305,489			$	1,025,127

 

Depreciation expense for the three and nine months ended September 30, 2016 was $65,462 and $196,386, respectively.

 

6.	Equipment Notes Receivable

 

Manufacturing / Solar Equipment

 

On June 29, 2016, SQN Gamma LLC, assigned its commitment interest in a loan facility, under a Credit Agreement dated November 17, 2015, to the Partnership and to Juliet in the amount of $3,893,165 and $2,500,000, respectively. On June 30, 2016, the Partnership and Juliet funded $3,893,165 and $2,500,000, respectively under this loan facility. The loan facility accrues interest at a rate of 11% per annum and matures on March 31, 2021. The borrower is required to make 51 monthly payments of principal and interest beginning on January 31, 2017 and an additional final payment due at maturity date of 8% of the aggregate principal amount of loans made. The loan facility is secured by solar products manufacturing equipment. For the three and nine months ended September 30, 2016, the equipment notes earned interest income of $186,841.

 

Construction Equipment

 

On April 14, 2016, the Partnership, through its investment in Juliet, acquired an interest in loan notes from a third party leasing company for $1,529,674. The loan notes are secured by a portable wash plant and a fleet of cement mixers and dump trucks which are owned by a Texas-based construction company. Under the terms of the loan agreement, the borrower is required to make 72 monthly payments of principal and interest of $28,865. The loan is scheduled to mature on March 31, 2022. On June 3, 2016 and on June 24, 2016, the Partnership, through its investment in Juliet, acquired additional interest in two loan notes from the third party leasing company for $205,000 and $1,289,163, respectively. Under the terms of the loan agreements, the borrower is required to make 60 and 72 monthly payments of principal and interest of $4,450 and $24,326, respectively. The loans are scheduled to mature on June 30, 2021 and June 30, 2022, respectively. On September 30, 2016, the Partnership, through its investment in Juliet, acquired an additional interest in a loan note from the third party leasing company for $1,426,732, respectively. Under the terms of the loan agreement, the borrower is required to make 72 monthly payments of principal and interest of $57,925 and the loan is scheduled to mature on September 30, 2022. For the three and nine months ended September 30, 2016, the equipment notes earned interest income of $80,088 and $117,058, respectively.

 

 

Food Manufacturing Equipment

 

On April 11, 2016 (“Funding Date”), the Partnership extended a loan facility in the amount of $2,500,000 to a Minnesota-based manufacturer of a commercial low-sodium salt substitute. The loan is secured by food manufacturing equipment. Under the terms of the loan agreement, the borrower is required to make 36 monthly payments of principal and interest of $81,657. The loan is scheduled to mature on April 1, 2019. The borrower is required to make the first and last monthly payments on the Funding Date and then make 34 monthly payments of principal and interest of $81,657 which commenced on June 1, 2016. For the three and nine months ended September 30, 2016, the equipment note earned interest income of $77,235 and $147,604, respectively.

 

Manufacturing and Testing Equipment

 

On March 8, 2016 (“Funding Date”), the Partnership loaned $1,992,000 to a California-based LED lighting manufacturer located in California. The loan is secured by manufacturing and testing equipment located at one of the manufacturer’s facilities. The promissory note requires 30 monthly payments of approximately $76,016 and has a final balloon payment of 3% of the aggregate principal amount due on September 1, 2018. The borrower is required to make the first and last monthly payments on the Funding Date and then make 28 monthly payments of principal and interest of $76,016 which commenced on May 1, 2016. For the three and nine months ended September 30, 2016, the equipment note earned interest income of $44,875 and $108,363, respectively.

 

Transportation Equipment

 

On January 23, 2016 and on March 4, 2016, the Partnership acquired two loan notes from a third party leasing company for approximately $247,194 and $204,303, respectively. The loans are secured by transportation equipment. Under the terms of the loan agreements, the borrower is required to make 72 monthly payments of principal and interest of $4,697 and $4,045, respectively. The loans are scheduled to mature on January 23, 2022 and March 3, 2022, respectively. For the three and nine months ended September 30, 2016, the equipment notes earned interest income of $16,502 and $41,799, respectively.

 

Die Board Cutting Equipment

 

On January 22, 2016, June 16, 2016, August 4, 2016, and September 27, 2016, the Partnership advanced a total of $178,404, $91,728, $55,785 and $37,519 respectively, for die board cutting equipment on lease. The promissory note accrues interest at a rate of 6.6% per annum and matures on the earlier of lease commencement date or December 31, 2016 (“Maturity Date”). The loan is secured by die board cutting equipment. Under the terms of the loan agreement, the borrower is required to make interest only monthly payments commencing on February 1, 2016 with the outstanding principal and any unpaid interest due at Maturity Date. For the three and nine months ended September 30, 2016, the equipment notes earned interest income of $6,200 and $11,611, respectively. On October 24, 2016, the lease commenced. The lease requires 60 monthly payments of $6,329 beginning on October 24, 2016.

 

Secured Business Loans

 

On December 31, 2015, Juliet extended two separate loan facilities to two borrowers. The borrowers are both subsidiaries of a UK based parent company that provides small and medium sized secured business loans (“Just Loans”). Each facility provides financing up to a maximum borrowing of £5,037,500 or together a total of £10,075,000 and accrues interest at a rate of 10% per annum. The funds can be drawn down in increments of up to £1,000,000 per month per facility with the exception of the first draws which were each in the amount of £1,037,500 in order to fund a certain third party fee of £37,500. The funds can be drawn up to the one year anniversary of the loan facilities or December 31, 2016 (“Availability Date”). The loan is repayable in monthly interest only payments due on the last day of each month. Principal is due nine months after the Availability Date or September 30, 2017 (“Termination Date”). The loans are secured by share pledges of the borrowers, a guaranty from the UK based parent company, and the underlying loan portfolio that Just Loans generates. On December 29, 2015, Juliet advanced a total of $2,974,000 to the borrowers. On February 18, 2016, Juliet advanced a total of $2,878,000 to the borrowers. On April 18, 2016, the Partnership, through its investment in Juliet, advanced a total of $2,140,350 to the borrowers. For the three and nine months ended September 30, 2016, the equipment note earned interest income of $190,437 and $485,198, respectively.

 

 

Honey Production Equipment

 

On December 14, 2015, the Partnership acquired a loan note from a third party leasing company for approximately $12,789. The loan is secured by honey production equipment. Under the terms of the loan agreement, the borrower is required to make 36 monthly payments of principal and interest of $425. The loan is scheduled to mature on November 30, 2018. For the three and nine months ended September 30, 2016, the equipment note earned interest income of $357 and $1,107, respectively.

 

Towing Equipment

 

On October 30, 2015, the Partnership acquired a loan note from a third party leasing company for approximately $96,000. The loan is secured by a heavy duty tow truck which is owned by a Connecticut-based towing and repair company. Under the terms of the loan agreement, the borrower is required to make 60 monthly payments of principal and interest of $2,041. The loan is scheduled to mature on October 31, 2020. On December 30, 2015, the Partnership assigned this equipment notes receivable to Juliet. For the three and nine months ended September 30, 2016, the equipment note earned interest income of $2,147 and $5,966, respectively.

 

Tractor and Trailer Equipment

 

On October 30, 2015 and on November 4, 2015, the Partnership acquired two loan notes from a third party leasing company for approximately $147,919 and $15,000, respectively. The loans are secured by tractor and trailer equipment. Under the terms of the loans agreements, the borrower is required to make 60 monthly payments of principal and interest of $3,255 and $330, respectively. The loans are scheduled to mature on October 31, 2020. On December 30, 2015, the Partnership assigned these equipment notes receivable to Juliet. For the three and nine months ended September 30, 2016, the equipment notes earned interest income of $4,201 and $13,172, respectively.

 

Furniture, Fixtures and Equipment

 

On October 30, 2015, the Partnership acquired a loan note from a third party leasing company for approximately $817,045. The loan is secured by furniture, fixtures and equipment. Under the terms of the loan agreement, the borrower is required to make 35 monthly payments of approximately $26,145, accrues interest at a rate of 18.84% per annum and has a final balloon payment of approximately $123,000 on November 1, 2018. On December 30, 2015, the Partnership assigned this equipment note receivable to Juliet. For the three and nine months ended September 30, 2016, the equipment notes earned interest income of $29,033 and $82,773, respectively.

 

Furniture and Fixtures and Server Equipment

 

On August 5, 2015, the Partnership entered into a Master Equipment Lease agreement to lease approximately $2,700,000 of servers, fixtures and furniture to a third party lessee, an innovative provider of professional office environments. The lessee is required to make monthly payments until all equipment has been delivered and accepted by the lessee. After lease commencement, the equipment will be leased for a 3 year term. At lease maturity the lessee has the option to purchase the equipment for a fixed purchase price. All of the lessee’s obligations under the lease are guaranteed by the lessee’s parent company. On December 30, 2015, the Partnership assigned this equipment note receivable to Juliet. As of January 31, 2016, the Partnership funded approximately $2,155,005 under the ten draws under the Master Equipment Lease agreement. For the period ended September 30, 2016, the equipment note earned interest income of $41,256. On January 31, 2016, the lease commenced and the Partnership reclassified this equipment note to investment in finance lease.

 

Computer Networking Equipment

 

On June 10, 2015, the Partnership entered into a loan facility to provide financing up to a maximum borrowing of $1,000,000. The loan facility was secured by computer networking equipment. Under this loan facility, in June 2015, the Partnership advanced $319,147 to the borrower (“Loan Schedule 01”). In September 2015, the Partnership advanced another $319,147 to the borrower (“Loan Schedule 02”). Each loan schedule required 36 monthly payments of approximately $10,200, accrued interest at a rate of 16.85% per annum and had a final balloon payment of approximately $48,000. On December 30, 2015, the Partnership assigned these equipment notes receivable to Juliet. In February 2016, the Partnership received cash of $624,547 ($535,281 of principal and $89,266 of interest) as payment in full of these equipment notes.

 

 

Anaerobic Digestion Plant

 

On April 1, 2015, the Partnership entered into a loan facility with a borrower. Under the terms of the loan facility, the Partnership agreed to provide the borrower with financing in an amount up to £310,000 (approximately $474,000 applying various exchange rates) in connection with the construction financing of a waste water processing anaerobic digestion plant (the “Plant”) located in the United Kingdom. The loan facility accrues interest at a rate of 12% per annum and has a final repayment date of July 31, 2015. The loan facility was extended until completion of the Plant. The loan facility is secured by the Plant. On October 15, 2015, the Partnership made an additional advance of approximately £150,000 (approximately $232,485 applying exchange rate of 1.550 at October 15, 2015). After construction of the Plant is completed, the Plant operator has agreed to lease the Plant from the lender for a five year term. The Partnership has agreed in advance to purchase the lease receivables from the lender. The lease receivables will be secured by the lender’s ownership of the Plant. As of December 31, 2015, the Partnership advanced the full amount under this facility. For the period ended September 30, 2016, the equipment note earned interest income of $6,730. On January 31, 2016, construction of the anaerobic digestion plant was completed and the lease commenced and the Partnership reclassified this equipment note to investment in finance lease.

 

Mineral Processing Equipment

 

On September 27, 2013, the Partnership entered into a loan facility to provide financing up to a maximum borrowing of $3,000,000. The borrower is a Florida based company that builds, refurbishes and services mineral refining and mining equipment in the United States, Central and South America. The loan facility was secured by equipment that refines precious metals and other minerals. The Partnership advanced $2,500,000 to the borrower during September 2013. The loan facility required 48 monthly payments of principal and interest of $68,718 (revised from original payment of $69,577 upon second funding discussed below) and a balloon payment of $500,000 in September 2017. The loan facility was scheduled to mature in September 2017. On May 9, 2014, the Partnership made a second funding of $500,000 to the borrower under the above agreement. The loan facility required 41 monthly payments of principal and interest of $15,764 and matures in September 2017. The borrower’s obligations under the loan facility were also personally guaranteed by its majority shareholders.

 

On December 22, 2014, the outstanding principal of $2,537,822 and accrued interest of $204,721 of this note receivable was restructured into a new note receivable of $2,883,347. The new loan facility is secured by equipment that refines precious metals and other minerals and is guaranteed by the majority shareholders of the Florida based company referred to above. The new loan facility requires 48 monthly payments of principal and interest of $79,255 commencing on February 24, 2015 and a balloon payment of $500,000 in January 2019. The loan facility is scheduled to mature in September 2017. In connection with above restructured note, on December 22, 2014, the Partnership entered into a $200,000 promissory note with the same borrower. The promissory note requires five annual payments of $150,000 commencing on January 25, 2019 and matures in January 2023. As of December 31, 2014, the Partnership advanced $100,000. In January 2015, the Partnership advanced the remaining $100,000. In June 2015, the Partnership received a principal payment of $40,000. For the three and nine months ended September 30, 2016 and for the year ended December 31, 2015, the mineral processing equipment note is in non-accrual status as a result of non-payment. Based on a third party appraisal of the collateral value of the equipment, the Investment Manager believes that there is sufficient collateral value to cover the outstanding balance of the restructured note receivable and the promissory note.

 

Medical Equipment

 

On December 19, 2014, the Partnership entered into a $667,629 promissory note to finance the purchase of medical equipment located in Texas. The promissory note will be paid through 60 monthly installments of principal and interest of $15,300. The promissory note is secured by a first priority security interest in the medical equipment and other personal property located at the borrowers principal place of business. On December 30, 2015, the Partnership assigned this equipment note receivable to Juliet. For the three and nine months ended September 30, 2016, the medical equipment note earned interest income of $16,560 and $52,432, respectively.

 

 

Brake Manufacturing Equipment

 

On May 2, 2014, the Partnership purchased a promissory note secured by brake manufacturing equipment with an aggregate principal amount of $432,000. The promissory note requires quarterly payments of $34,786, accrues interest at 12.5% per annum and matures in January 2018. For the three and nine months ended September 30, 2016, the equipment note earned interest income of $21,824 and $39,384, respectively.

 

The future maturities of the Partnership’s equipment notes receivable at September 30, 2016 are as follows:

 

Periods ending September 30,
2017		$	12,937,595
2018			5,295,380
2019			4,312,317
2020			3,167,138
2021			1,462,488
2022			660,984
		$	27,835,902

 

7.	Residual Value Investment in Equipment on Lease

 

On September 15, 2014, the Partnership entered into a Residual Interest Purchase Agreement with a leasing company to purchase up to $3 million of residual value interests in equipment. The leasing company has entered into a Master Lease Agreement with a third party to lease cash handling machines or smart safes under one or more lease schedules with original equipment cost of $20 million (“OEC”) and a term of five years from initiation of each lease schedule. In connection with the Master Lease Agreement, the leasing company has entered into a finance arrangement with another third party to finance 85% of the OEC up to an aggregate facility of $17 million and the Partnership has agreed to finance the remaining 15% of the OEC up to an aggregate facility of $3 million. As of September 30, 2016, the Partnership had advanced a net total of $2,936,126.

 

8.	Collateralized Loan Receivable

 

On September 23, 2016, the Partnership, through its investment in Juliet, provided secured financing in the amount of $1,845,655 after applicable exchange rates for a motion picture production company in the United Kingdom. The loan is secured by all of the assets, including tax credits, of the borrower and all of the borrower’s rights to proceeds from the motion picture. The loan accrues interest at a rate of 12% per annum and is scheduled to mature 24 months after the funding date. For the three and nine months ended September 30, 2016, the loan facility earned interest income of $4,248.

 

On September 12, 2016, the Partnership, through its investment in Juliet, provided secured financing in the amount of $2,215,270 after applicable exchange rates for a motion picture production company in the United Kingdom. The loan is secured by all of the assets, including tax credits, of the borrower and all of the borrower’s rights to proceeds from the motion picture. The loan accrues interest at a rate of 12% per annum and is scheduled to mature 24 months after the funding date. For the three and nine months ended September 30, 2016, the loan facility earned interest income of $13,002.

 

On July 21, 2016, September 15, 2016, and September 30, 2016, the Partnership funded $1,817,444, $181,598 and $300,846, respectively under a wholesale financing arrangement with an international leasing company that does business between the United States and Mexico. The loans accrue interest at rate of 10% per annum and are secured by industrial and manufacturing equipment subject to equipment leases. For the three and nine months ended September 30, 2016, the loans earned interest income of $36,601.

 

 

On May 5, 2016, a third party on behalf of Juliet, provided secured financing in the amount of $2,926,342 after applicable exchange rates for a motion picture production company in the United Kingdom. The loan is secured by all of the assets, including tax credits, of the borrower and all of the borrower’s rights to proceeds from the motion picture. The loan accrues interest at a rate of 12% per annum and is scheduled to mature 18 months after the funding date. For the three and nine months ended September 30, 2016, the loan facility earned interest income of $73,522 and $120,719, respectively.

 

On February 4, 2015, the Partnership entered into a loan facility with a borrower to provide financing up to a maximum borrowing of $5,000,000. The borrower entered into an Export Prepayment Facility Agreement dated as of January 21, 2015 and in connection with the Export Prepayment Facility Agreement, the borrower entered into the loan facility with the Partnership and a third party to provide financing up to a maximum borrowing of $50,000,000, whereby the third party funded a total of $13,500,000 and is the senior lender and the Partnership funded a total of $1,500,000 and is the subordinate lender. The loan facility is secured by the borrower’s rights under the Export Prepayment Facility Agreement. In connection with the loan facility, the Partnership entered into a $1,500,000 promissory note with the borrower. The note accrues current pay interest at LIBOR plus 6.75% per annum and matures on February 4, 2020. On April 25, 2016, the Partnership’s loan facility in connection with the Export Prepayment Agreement was refinanced and the $1,500,000 subordinated note payable to the Partnership was paid in full.

 

On the same date, the Partnership entered into a separate loan agreement with the same borrower. In connection with the refinancing, the Partnership extended additional financing and received a promissory note from the borrower in the amount of $1,763,230. The note accrues interest at a rate of 20% per annum and matures on February 8, 2020. The borrower will make semi-annual payments of principal and interest in February and August. On August 5, 2016, the Partnership received a payment of $452,604. For the three and nine months ended September 30, 2016, the promissory notes earned interest income of $80,661 and $468,056, respectively.

 

On June 3, 2015, Alpha, a special purpose entity which is 32.5% owned by the Partnership and 67.5% owned by SQN PAC, acquired a promissory note issued by a third party with a principal amount equal to $2,650,000. The promissory note accrues interest at the rate of 11.1% per annum, payable quarterly in arrears, and matures on June 30, 2020. The promissory note is secured by a pledge of shares in an investment portfolio of insurance companies under common control of the third party which include equipment leases, direct hard asset and infrastructure investments, and other securities. On June 3, 2015, a participation agreement was entered into between SQN PAC (“Alpha Participation A”), the Partnership (“Alpha Participation B”), Alpha and SQN Capital Management, LLC. Under the agreement, Alpha created two collateralized participation interests for the collateral; Alpha Participation A’s principal contribution is $1,788,750 and accrues interest at 9% per annum and Alpha Participation B’s principal contribution is $861,250 and accrues interest at 15.05% per annum. SQN Capital Management, LLC was appointed as a servicer for the promissory note. Alpha Participation A’s interest is senior to Alpha Participation B’s interest. For the three and nine months ended September 30, 2016, the Alpha Participation B earned interest income of $32,961 and $98,166, respectively.

 

On August 13, 2015, the Partnership entered into a Loan Note Instrument to provide €1,640,000 ($1,824,992 applying exchange rate of 1.1128 at August 13, 2015) (the “Facility”) of financing to a borrower to acquire shares of a special purpose entity (the “SPE”). The SPE previously acquired, by assignment, the rights to lease a parcel of land in Ireland on which planning permissions have been granted to construct an aerobic digestion plant (“AD Plant”). The Facility accrues interest at the rate of 18% per annum, compounding monthly on the last business day of each month, and matures on May 16, 2016. The maturity date was extended to November 30, 2016. The Facility is secured by the shares of the SPE and also secured by a personal guaranty from the principal owner of the borrower. On May 13, 2016, in connection with an extension of the Facility, the Partnership funded an additional $56,750 after applicable exchange rates. On July 29, 2016, the Partnership funded $1,574,724, after applicable exchange rates, under a Loan Note Instrument to provide additional financing of the Facility. The Loan Note Instrument matures on November 30, 2016. For the three and nine months ended September 30, 2016, the Loan Note Instruments earned interest income of $136,164 and $302,034, respectively.

 

 

On December 28, 2015, the Partnership entered into a loan agreement and a $2,000,000 promissory note with a borrower. The promissory note accrues interest at the rate of 11% per annum, payable quarterly in arrears, and matures on December 28, 2020. On April 15, 2016, the loan agreement was amended and restated and the maturity date was amended to December 30, 2024. Under the amended and restated loan agreement, on April 15, 2016, Juliet entered into the amended and restated loan agreement and a $2,000,000 promissory note with the same borrower. The promissory note accrues interest at the rate of 11% per annum, payable quarterly in arrears, and matures on April 1, 2017. The promissory notes are secured by a pledge of shares in an investment portfolio of insurance companies under common control of the borrower which include equipment leases, direct hard asset and infrastructure investments, and other securities. For the three and nine months ended September 30, 2016, the promissory notes earned interest income of $110,611 and $266,469, respectively.

 

On October 2, 2015, the Partnership entered in a syndicated loan agreement. Under the terms of the agreement, the Partnership agreed to contribute $5,000,000 of the $40,000,000 facility which will be secured by all of the equipment of the wood pellet business in Texas. The borrower’s parent company also pledged assets located at the parent’s company’s headquarters in Germany as additional collateral for the loan. In January 2016, the Partnership received cash of $2,610,959 as payment from this facility. On April 22, 2016, the Partnership and a third party assigned their interests in this loan facility of $2,389,041 and $3,985,959, respectively to Juliet. For the three and nine months ended September 30, 2016 and for the period ended December 31, 2015, this loan is in non-accrual status. Based on an appraisal of the collateral value of the equipment, the Investment Manager believes that there is sufficient collateral value to cover the outstanding balance of this loan.

 

9.	Investment in Informage SQN Technologies LLC

 

On August 1, 2014, the Partnership, SQN PAC, an entity managed by the Partnership’s Investment Manager, and a third party formed a special purpose entity, Informage SQN Technologies LLC (“Informage SQN”), a Limited Liability Company registered in the state of Texas. Informage SQN was formed to finance cellular communications field measurement and testing and other related services to telecom clients on a contractual basis. The Partnership and SQN PAC each own 24.5% of Informage SQN, while the third party owns 51%. The Partnership accounts for its investment in Informage SQN using the equity method. The Partnership will make additional contributions up to $3,850,000 of total aggregate outstanding capital contributions. On February 9, 2015, the primary customer of Informage SQN filed for bankruptcy protection under Chapter 11 in order to reorganize the company. Informage SQN is not in default under any of the agreements with the Partnership. As of September 30, 2016, the Partnership has advanced a total of $1,357,622 and received total repayments of $690,936. For the three and nine months ended September 30, 2016, the Partnership recorded investment loss of $13,100 and $39,300, respectively for its proportionate share of Informage SQN’s net loss under the equity method pursuant to U.S. GAAP. As of September 30, 2016, the Partnership has an investment balance of $529,755.

 

10.	Investment in SQN Helo LLC

 

On January 7, 2015, the Partnership acquired a junior participation interest in a portfolio of eight helicopters for $1,500,000. The Partnership, SQN PAC, SQN Asset Finance Income Fund Limited (“SQN AFIF”), a Guernsey incorporated closed ended investment company, a fund managed by the Partnership’s Investment Manager and a third party formed a special purpose entity SQN Helo, LLC (“SQN Helo”) whose sole purpose is to acquire the helicopter portfolio. SQN Helo is the sole owner of eight special purpose entities each of which own a helicopter. The purchase price of the helicopter portfolio was approximately $23,201,000 comprised of approximately $11,925,000 of cash payments and the assumption of approximately $11,276,000 of nonrecourse indebtedness. SQN PAC also acquired a junior participation interest in SQN Helo for $1,500,000. The senior participation interests in SQN Helo were acquired by SQN AFIF and the third party. The Partnership and SQN PAC each own 50% of SQN Helo. The Partnership accounts for its investment in SQN Helo using the equity method. As of September 30, 2016, the Partnership has advanced a total of $1,465,000. For the three and nine months ended September 30, 2016, the Partnership recorded investment loss of $19,293 and $85,677, respectively for its proportionate share of SQN Helo’s net loss under the equity method pursuant to U.S. GAAP. As of September 30, 2016, the Partnership has an investment balance of $1,139,260.

 

 

11.	Equipment Investment through SPV

 

On December 16, 2015, Marine, a special purpose vehicle which is wholly owned by the Partnership, entered into a sale and assignment of partnership interest agreement with a third party. Under the terms of the agreement, Marine acquired an 88.20% (90% of 98%) economic interest in a portfolio of container feeder vessels. Marine acquired their economic interest in the vessels through a limited partnership interest in CONT Feeder, which acquired and operates the container feeder vessels. CONT Feeder acquired six container feeder vessels for $37,911,665, drydocking fees of $4,158,807 and inventory supplies of $337,923 for an aggregate investment of $42,408,395. As of September 30, 2016, the Partnership has an aggregate investment balance of $39,690,711.

 

CONT Feeder acquired and operates six container feeder vessels which collect shipping containers from different ports and transport them to central container terminals where they are loaded to bigger vessels. For the three months ended September 30, 2016, CONT Feeder recorded income of approximately $3,794,000 primarily from charter rental fees less total expenses of $4,485,000, consisting of ship operating expenses of approximately $2,215,000, ship management fees and charter commissions fees of approximately $550,000, general and administrative expenses of approximately $564,000, depreciation expense of approximately $966,000 and interest expense of approximately $190,000 resulting in a net loss of approximately $691,000. For the nine months ended September 30, 2016, CONT Feeder recorded income of approximately $12,466,000 primarily from charter rental fees less total expenses of $13,325,000, consisting of ship operating expenses, of approximately $7,236,000, ship management fees and charter commissions fees of approximately $1,511,000, general and administrative expenses, of approximately $1,222,000, depreciation expense, of approximately $2,713,000 and interest expense of approximately $643,000 resulting in a net loss of approximately $859,000.

 

12.	Other Assets

 

Other assets primarily include approximately $2,222,000 related to the Partnership’s Equipment Investment through SPV.

 

13.	Loans Payable

 

On April 22, 2016, Juliet, a third party and the third party’s affiliate amended and restated the participation agreement dated December 29, 2015. Juliet borrowed a total of approximately $14,621,000 in the form of a senior participation instruments with a third party and the third party’s affiliate consisting of the outstanding principal payable balance of approximately $2,124,000 on the Just Loans transaction, the third party also funded Juliet additional cash of approximately $8,511,000 and assigned their interests of approximately $3,986,000 in a loan facility for a wood pellet business in Texas. The senior participation instrument accrues interest at the rate of 6% per annum. The senior participation instrument also accrues PIK interest at the rate of 1.5% per annum. The senior participants, as collateral, have a first priority security interest in all of the assets acquired by Juliet as well as a senior participation interest in all of the proceeds from the assets, while Juliet has a junior participation interest until the loan is repaid in full. All of the cash proceeds received from these assets are applied as follows (1), to pay accrued and unpaid interest of the senior participant, (2), to pay any cumulative interest shortfall of the senior participant, (3), to pay accrued and unpaid interest of the junior participants, and (4), to reduce the outstanding principal balance of the senior participation with any excess distributed to the junior participants. There was no stated or agreed upon repayment term for the principal. On May 5, 2016, the third party provided additional financing, on behalf of Juliet, in the amount of approximately $2,926,000 after applicable exchange rates.

 

In connection with the Just Loans transaction, Juliet entered into a loan agreement with a third party to borrow $3,071,000 for the funding of two loan facilities. The loan accrues interest at the rate of 8.5% per annum and matures on December 29, 2016. On April 22, 2016, this loan agreement was amended and restated and this loan was included in a new loan portfolio as noted above. The loan portfolio matures on the earlier of the latest maturity date or final payment date (as the case may be) of any instrument in the Juliet portfolio, or the date on which the loan principal balance has been reduced to zero.

 

 

In connection with the CONT Feeder transaction, Marine borrowed $7,500,000 and $9,604,091 in the form of a senior participation instruments with a third party and the third party’s affiliate. The senior participation instrument accrues interest at the rate of 10% per annum and matures on December 16, 2020. The senior participants, as collateral, have a first priority security interest in all of the assets acquired by CONT Feeder as well as a senior participation interest in the proceeds from the assets, while Marine has a junior participation interest until the loan is repaid in full. All of the cash proceeds received from these assets will be applied first against the outstanding principal balance of the senior participation with any excess distributed to the junior participants. There was no stated or agreed upon repayment term for the principal.

 

In connection with the acquisition of container vessels, CONT Feeder borrowed $14,375,654 from third parties.

 

14.	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.

 

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

 

		September 30, 2016								December 31, 2015
		Carrying Value				Fair Value				Carrying Value				Fair Value
Assets:
Equipment notes receivable		$	27,835,902			$	27,835,902			$	10,874,075			$	10,791,180
Collateralized loan receivable		$	26,517,599			$	26,517,599			$	10,204,033			$	10,049,441
Liabilities:
Loans payable		$	56,991,679			$	56,991,679			$	34,550,746			$	34,550,746

 

As of September 30, 2016, the Partnership evaluated the carrying values of its financial instruments and they approximate fair values.

 

15.	Business Concentrations

 

For the nine months ended September 30, 2016, the Partnership had one lessee which accounted for approximately 100% of the Partnership’s rental income derived from operating leases. For the nine months ended September 30, 2015, the Partnership had three lessees which accounted for approximately 21%, 15% and 15% of the Partnerships rental income derived from operating leases. For the nine months ended September 30, 2016, the Partnership had four leases which accounted for approximately 38%, 16%, 15% and 14% of the Partnership’s income derived from finance leases. For the nine months ended September 30, 2016, the Partnership had three leases which accounted for approximately 16%, 16% and 10% of the Partnership’s interest income. For the nine months ended September 30, 2015, the Partnership did not have a lessee which accounted for 10% or more of the Partnerships interest income.

 

At September 30, 2016, the Partnership had five lessees which accounted for approximately 29%, 25%, 15%, 11% and 10% of the Partnership’s investment in finance leases. At September 30, 2015, the Partnership had three lessees which accounted for approximately 47%, 35% and 18% of the Partnerships investment in finance leases. At September 30, 2016, the Partnership had one lessee which accounted for approximately 100% of the Partnership’s investment in operating leases. At September 30, 2015, the Partnership had one lessee which accounted for approximately 100% of the Partnership’s investment in operating leases. At September 30, 2016, the Partnership had four lessees which accounted for approximately 27%, 25%, 15% and 11% of the Partnership’s investment in equipment notes receivable. At September 30, 2015, the Partnership had three lessees which accounted for approximately 57%, 12% and 11% of the Partnerships investment in equipment notes receivable. At September 30, 2016, the Partnership had four lessees which accounted for approximately 23%, 15%, 14% and 10% of the Partnership’s investment in collateralized loans receivable. At September 30, 2016, the Partnership had one lessee which accounted for approximately 100% of the Partnership’s investment in residual value leases. At September 30, 2015, the Partnership had one lessee which accounted for approximately 100% of the Partnership’s investment in residual value leases.

 

 

16.	Geographic Information

 

Geographic information for revenue for the three months ended September 30, 2016 and 2015 was as follows:

 

		Three Months Ended September 30, 2016
		United States				Europe				Mexico				Total
Revenue:
Rental income		$	81,115			$	—			$	—			$	81,115
Finance income		$	275,207			$	37,743			$	—			$	312,950
Interest income		$	1,238,268			$	3			$	—			$	1,238,271
Investment loss from equity method investments		$	(32,393	)		$	—			$	—			$	(32,393	)
Income from equipment investment through SPV		$	—			$	3,793,359			$	—			$	3,793,359
Other income		$	86,590			$	—			$	—			$	86,590

 

		Three Months Ended September 30, 2015
		United States				Europe				Mexico				Total
Revenue:
Rental income		$	81,116			$	—			$	—			$	81,116
Finance income		$	24,100			$	16,989			$	—			$	41,089
Interest income		$	231,343			$	14,579			$	—			$	245,922
Investment loss from equity method investments		$	(192,799	)		$	—			$	—			$	(192,799	)
Other income		$	56,550			$	—			$	—			$	56,550

 

Geographic information for revenue for the nine months ended September 30, 2016 and 2015 was as follows:

 

		Nine Months Ended September 30, 2016
		United States				Europe				Mexico				Total
Revenue:
Rental income		$	243,347			$	—			$	—			$	243,347
Finance income		$	667,455			$	109,773			$	—			$	777,228
Interest income		$	2,964,708			$	6,741			$	—			$	2,971,449
Investment loss from equity method investments		$	(124,977	)		$	—			$	—			$	(124,977	)
Income from equipment investment through SPV		$	—			$	12,465,552			$	—			$	12,465,552
Other income		$	268,008			$	—			$	—			$	268,008

 

		Nine Months Ended September 30, 2015
		United States				Europe				Mexico				Total
Revenue:
Rental income		$	1,645,019			$	—			$	—			$	1,645,019
Finance income		$	105,305			$	33,161			$	—			$	138,466
Interest income		$	989,451			$	26,403			$	—			$	1,015,854
Investment loss from equity method investments		$	(486,554	)		$	—			$	—			$	(486,554	)
Loss on sale of assets		$	(57,440	)		$	—			$	—			$	(57,440	)
Other income		$	313,223			$	—			$	—			$	313,223

 

 

Geographic information for long-lived assets at September 30, 2016 and December 31, 2015 was as follows:

 

		September 30, 2016
		United States				Europe				Mexico				Total
Long-lived assets:
Investment in finance leases, net		$	6,848,097			$	384,977			$	—			$	7,233,074
Investments in equipment subject to operating leases, net		$	828,741			$	—			$	—			$	828,741
Equipment notes receivable, including accrued interest		$	17,351,896			$	7,955,724			$	3,043,347			$	28,350,967
Equipment investment through SPV		$	—			$	39,690,711			$	—			$	39,690,711
Collateralized loan receivable, including accrued interest		$	8,106,503			$	16,700,225			$	2,336,489			$	27,143,217

 

		December 31, 2015
		United States				Europe				Mexico				Total
Long-lived assets:
Investment in finance leases, net		$	2,839,853			$	518,582			$	—			$	3,358,435
Investments in equipment subject to operating leases, net		$	1,025,127			$	—			$	—			$	1,025,127
Equipment notes receivable, including accrued interest		$	5,008,176			$	2,974,000			$	3,043,347			$	11,025,523
Equipment investment through SPV		$	—			$	42,408,395			$	—			$	42,408,395
Collateralized loan receivable, including accrued interest		$	6,030,578			$	4,340,032			$	—			$	10,370,610

 

17.	Subsequent Events

 

On October 4, 2016, the Partnership funded an additional $854,390 to the company procuring equipment leasing deals in Mexico. The loan accrues interest at rate of 10% per annum and is secured by the equipment procured in the leasing deals.

 

On October 14, 2016, Juliet received cash of $2,008,556 ($2,000,000 of principal and $8,556 of interest) as payment in full of a promissory note.

 

On October 24, 2016, the die board cutting equipment lease commenced. The lease requires 60 monthly payments of $6,329 beginning on October 24, 2016.

 

On November 2, 2016 and on November 9, 2016, the Partnership funded $1,174,560, after applicable exchange rates, toward the installment purchase of four combined heat and power units (“CHPs”) under Loan Note Instruments, to provide additional financing of the Facility which acquired shares of the SPE that previously acquired, by assignment, the rights to lease a parcel of land in Ireland on which planning permissions have been granted to construct an aerobic digestion plant. This is part of a project financing and long term lease of the aerobic digestion plant which includes the CHP’s.

 

 

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 SQN AIF IV, L.P. and its subsidiaries.

 

The following is a discussion of our current financial position and results of operations. This discussion should be read together with the financial statements and notes in our Form 10-K, filed on March 30, 2016. This discussion should also be read in conjunction with the disclosures below regarding “Forward-Looking Statements” and the “Risk Factors” set forth in Item 1A of Part II of this Quarterly Report on Form 10-Q.

 

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 were organized as a Delaware limited partnership on August 10, 2012 and are engaged in a single business segment, the ownership and investment in leased equipment and related financings which includes: (i) purchasing equipment and leasing it to third-party end users; (ii) providing equipment and other asset financing; (iii) acquiring equipment subject to lease and (iv) acquiring ownership rights (residual value interests) in leased equipment at lease expiration. We will terminate no later than December 31, 2036.

 

The General Partner of the Partnership is SQN AIF IV GP, LLC (the “General Partner”), a wholly-owned subsidiary of the Partnership’s Investment Manager, SQN Capital Management, LLC (the “Investment Manager”). Both the Partnership’s General Partner and its Investment Manager are Delaware limited liability companies. The General Partner manages and controls the day to day activities and operations of the Partnership, pursuant to the terms of the 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.

 

Our Offering period commenced on April 2, 2013 and concluded on April 2, 2016, which is three years from the commencement of our Offering Period.

 

Our 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 distributable cash will be allocated 80% to the Limited Partners and 20% to the General Partner. We are currently in the Operating and Liquidation Period. The Offering Period concluded on April 2, 2016, which is three years from the date we were declared effective by the SEC. 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 of our initial closing, which occurred on May 29, 2013 and will last for three years unless extended at the sole discretion of the General Partner. The General Partner has extended the Operating Period for an additional one year. The Liquidation Period, which follows the conclusion of the Operating Period, is the period in which we will sell our assets in the ordinary course of business and will last two years, unless it is extended, at the sole discretion of the General Partner.

 

 

SQN Securities, LLC (“Securities”), a majority-owned subsidiary of the Investment Manager, is currently acting as our exclusive selling agent. We paid 3% of the gross proceeds of the offering (excluding proceeds, if any, we receive from the sale of its Units to the General Partner or its affiliates) to its selling agent or selling agents as an underwriting fee. In addition, we paid a 7% sales commission to broker-dealers unaffiliated with our General Partner who sold our Units, on a best efforts basis. When Units were not sold by unaffiliated broker-dealers, the 7% sales commission was not required to be paid. We applied the proceeds that would otherwise be payable as Sales Commission toward the purchase of additional fractional Units at $1,000 per Unit.

 

During our Operating Period, which began on May 29, 2013, 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 project 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 payments.

 

During the nine months ended September 30, 2016, we made distributions to our Limited Partners totaling $4,221,320.

 

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 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 may invest in operating companies that use or own equipment and other assets. 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.

 

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.

 

 

Recent Significant Transactions

 

Motion Picture Production Company

 

On September 23, 2016, the Partnership, through its investment in Juliet, provided secured financing in the amount of $1,845,655 after applicable exchange rates for a motion picture production company in the United Kingdom. The loan is secured by all of the assets, including tax credits, of the borrower and all of the borrower’s rights to proceeds from the motion picture. The loan accrues interest at a rate of 12% per annum and is scheduled to mature 24 months after the funding date. For the three and nine months ended September 30, 2016, the loan facility earned interest income of $4,248.

 

Motion Picture Production Company

 

On September 12, 2016, the Partnership, through its investment in Juliet, provided secured financing in the amount of $2,215,270 after applicable exchange rates for a motion picture production company in the United Kingdom. The loan is secured by all of the assets, including tax credits, of the borrower and all of the borrower’s rights to proceeds from the motion picture. The loan accrues interest at a rate of 12% per annum and is scheduled to mature 24 months after the funding date. For the three and nine months ended September 30, 2016, the loan facility earned interest income of $13,002.

 

Equipment Leasing Company

 

On July 21, 2016, September 15, 2016, and September 30, 2016, the Partnership funded $1,817,444, $181,598 and $300,846, respectively under a wholesale financing arrangement with an international leasing company that does business between the United States and Mexico. The loans accrue interest at rate of 10% per annum and are secured by industrial and manufacturing equipment subject to equipment leases. For the three and nine months ended September 30, 2016, the loans earned interest income of $36,601.

 

Computer Networking Equipment

 

On February 29, 2016, we entered into a new finance lease transaction for computer networking equipment for $1,603,119. The finance lease requires 36 monthly payments of $48,171 commencing on March 1, 2016. On May 25, 2016, we entered into a second finance lease transaction for computer networking equipment for $656,772. The finance lease requires 36 monthly payments of $20,524 commencing on June 1, 2016.

 

Manufacturing / Solar Equipment

 

On June 29, 2016, SQN Gamma LLC, assigned its commitment interest in a loan facility, under a Credit Agreement dated November 17, 2015, to the Partnership and to Juliet in the amount of $3,893,165 and $2,500,000, respectively. On June 30, 2016, the Partnership and Juliet funded $3,893,165 and $2,500,000, respectively under this loan facility. The loan facility accrues interest at a rate of 11% per annum and matures on March 31, 2021. The borrower is required to make 51 monthly payments of principal and interest beginning on January 31, 2017 and an additional final payment due at maturity date of 8% of the aggregate principal amount of loans made. The loan facility is secured by solar products manufacturing equipment.

 

Motion Picture Production Company

 

On May 5, 2016, a third party on behalf of Juliet, provided secured financing in the amount of $2,926,342 after applicable exchange rates for a motion picture production company in the United Kingdom. The loan is secured by all of the assets, including tax credits, of the borrower and all of the borrower’s rights to proceeds from the motion picture. The loan accrues interest at a rate of 12% per annum and is scheduled to mature 18 months after the funding date.

 

 

Construction Equipment

 

On April 14, 2016, we, through our investment in Juliet, acquired an interest in loan notes from a third party leasing company for approximately $1,529,674. The loan notes are secured by a portable wash plant and a fleet of cement mixers and dump trucks which are owned by a Texas-based construction company. Under the terms of the loan agreement, the borrower is required to make 72 monthly payments of principal and interest of $28,865. The loan is scheduled to mature on March 31, 2022. On June 3, 2016 and on June 24, 2016, we, through our investment in Juliet, acquired additional interest in two loan notes from the third party leasing company for approximately $205,000 and $1,289,163, respectively. Under the terms of the loan agreements, the borrower is required to make 60 and 72 monthly payments of principal and interest of $4,450 and $24,326, respectively. The loans are scheduled to mature on June 30, 2021 and June 30, 2022, respectively.

 

Food Manufacturing Equipment

 

On April 11, 2016 (“Funding Date”), we extended a loan facility in the amount of $2,500,000 to a Minnesota-based manufacturer of a commercial low-sodium salt substitute. The loan is secured by food manufacturing equipment. Under the terms of the loan agreement, the borrower is required to make 36 monthly payments of principal and interest of $81,657. The loan is scheduled to mature on April 1, 2019. The borrower is required to make the first and last monthly payments on the Funding Date and then make 34 monthly payments of principal and interest of $76,016 commencing on June 1, 2016.

 

Manufacturing and Testing Equipment

 

On March 8, 2016 (“Funding Date”), we loaned $1,992,000 to a California-based LED lighting manufacturer located in California. The loan is secured by manufacturing and testing equipment located at one of the manufacturer’s facilities. The promissory note requires 30 monthly payments of approximately $76,016, accrues interest at a rate of 11.5% per annum and has a final balloon payment of 3% of the aggregate principal amount due on September 1, 2018. The borrower is required to make the first and last monthly payments on the Funding Date and then make 28 monthly payments of principal and interest of $76,016 commencing on May 1, 2016.

 

Transportation Equipment

 

On January 23, 2016 and on March 4, 2016, we acquired two loan notes from a third party leasing company for approximately $247,194 and $204,303, respectively. The loans are secured by transportation equipment. Under the terms of the loan agreements, the borrower is required to make 72 monthly payments of principal and interest of $4,697 and $4,045, respectively. The loans are scheduled to mature on January 23, 2022 and March 3, 2022, respectively.

 

Die Board Cutting Equipment

 

On January 22, 2016, we advanced a total of $178,403 for die board cutting equipment on lease. The promissory note accrues interest at a rate of 6.6% per annum and matures on the earlier of lease commencement date or December 31, 2016 (“Maturity Date”). The loan is secured by die board cutting equipment. Under the terms of the loan agreement, the borrower is required to make interest only monthly payments commencing on February 1, 2016 with the outstanding principal and any unpaid interest due at Maturity Date.

 

Critical Accounting Policies

 

An understanding of our critical accounting policies is necessary to understand our financial results. The preparation of condensed consolidated financial statements in accordance with U.S. 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 unaudited 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 doubtful lease, notes and loan accounts, depreciation and amortization, impairment losses and the estimated useful lives and residual values of the leased equipment we acquire. Actual results could differ from those estimates.

 

Lease Classification and Revenue Recognition

 

Each equipment lease we enter into is classified as either a finance lease or an operating lease, which is determined at lease inception, based upon the terms of each lease, or when there are significant changes to the lease terms. We capitalize initial direct costs associated with the origination and funding of lease assets. Initial direct costs include both internal costs (e.g., labor and overhead), 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.

 

 

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

 

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

 

 

Equipment Notes and Loans Receivable

 

Equipment notes and loans receivable are reported in our unaudited 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 unaudited condensed consolidated balance sheets. Unearned income, discounts and premiums, if any, are amortized to interest income in the unaudited 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.

 

Results of Operations for the three months ended September 30, 2016

 

We are currently in our Operating Period. The Offering Period ended on April 2, 2016. Through April 2, 2016, we admitted 1,508 Limited Partners with total capital contributions of $74,965,064 resulting in the sale of 74,965.07 Units. We received cash contributions of $72,504,327 and applied $2,460,737 which would have otherwise been paid as sales commission to the purchase of 2,460.74 additional Units. For the nine months ended September 30, 2016, we paid or accrued an underwriting fee to Securities totaling $1,949,907.

 

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

 

Our revenue for the three months ended September 30, 2016 as compared to three months ended September 30, 2015 is summarized as follows:

 

		Three Months Ended September 30, 2016				Three Months Ended September 30, 2015
Revenue:
Rental income		$	81,115			$	81,116
Finance income			312,950				41,089
Interest income			1,238,271				245,922
Income from equipment investment through SPV			3,793,359				—
Investment loss from equity method investments			(32,393	)			(192,799	)
Other income			86,590				56,550
Total Revenue		$	5,479,892			$	231,878

 

For the three months ended September 30, 2016, we earned $81,115 in rental income from two operating leases of aircraft rotable parts equipment. We also recognized $1,238,271 in interest income, the majority of which was generated by the equipment notes and collateralized loans receivable. We recognized $312,950 in finance income from various finance leases. We also recognized an investment loss of $32,393 from our equity method investments. We also recognized income of $3,793,359 from our equipment investment through SPV. The increase in our total revenue in 2016 as compared to 2015 is primarily a result of the income from our equipment investment through the Marine transaction which didn’t occur until the end of the fourth quarter of 2015. There was no significant change in rental income in 2016 as compared to 2015.

 

 

Our expenses for the three months ended September 30, 2016 (“2016 Quarter”) as compared to three months ended September 30, 2015 (“2015 Quarter”) are summarized as follows:

 

		Three Months Ended September 30, 2016				Three Months Ended September 30, 2015
Expenses:
Management fees — Investment Manager		$	375,000			$	375,000
Depreciation and amortization			100,500				75,628
Professional fees			33,706				33,810
Administration expense			13,313				20,499
Interest expense			875,297				73,248
Other expenses			(88	)			1,621
Expenses from equipment investment through SPV			4,485,331				—
Total Expenses		$	5,883,059			$	579,806
Foreign currency transaction losses		$	312,477			$	38,418

 

For the three months ended September 30, 2016 and 2015 we incurred $5,883,059 and $579,806 in total expenses, respectively. There was no increase in management fees paid to our Investment Manager in 2016 as compared to 2015. 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, or (ii) $125,000, payable monthly, until such time as an amount equal to at least 15% of our Limited Partners’ capital contributions have been returned to them, after which the monthly management fee will equal 100% of the management fee as initially calculated above, less 1% for each additional 1% of the Partnership’s Limited Partners’ capital contributions returned to them, such amounts to be measured on the last day of each month. We recognized $100,500 in depreciation and amortization expense. We also incurred $33,706 in professional fees, which is consistent with prior year. In conjunction with the Marine and the various Juliet transactions, we assumed approximately $17,104,000 and $17,378,000, respectively in loans payable with various third parties which resulted in $875,297 in interest expense during the three months ended September 30, 2016. We also incurred expenses of $4,485,331 from our equipment investment through SPV. The increase in depreciation and amortization in 2016 as compared to 2015 is a result of the sale by Echo and Echo II of all their portfolios of leases and equipment notes to a third party in June 2015.

 

Net Income

 

As a result of the factors discussed above, we reported a net loss for the three months ended September 30, 2016 of $715,644, prior to the allocation for non-controlling interest as compared to a net loss of $386,346 for the 2015 Quarter. The non-controlling interest represents the 67.5% investment by SQN PAC in the Alpha transaction and the 10% investment by a third party in the CONT Feeder transaction. For the three months ended September 30, 2016, the non-controlling interest recognized net income of $407 due to its interest in Alpha and a net loss of $68,997 due to its interest in CONT Feeder.

 

Results of Operations for the nine months ended September 30, 2016

 

Our revenue for the nine months ended September 30, 2016 as compared to nine months ended September 30, 2015 is summarized as follows:

 

		Nine Months Ended September 30, 2016				Nine Months Ended September 30, 2015
Revenue:
Rental income		$	243,347			$	1,645,019
Finance income			777,228				138,466
Interest income			2,971,449				1,015,854
Income from equipment investment through SPV			12,465,552				—
Investment loss from equity method investments			(124,977	)			(486,554	)
Loss on sale of assets			—				(57,440	)
Other income			268,008				313,223
Total Revenue		$	16,600,607			$	2,568,568

 

 

For the nine months ended September 30, 2016, we earned $243,347 in rental income from two operating leases of aircraft rotable parts equipment. We also recognized $2,971,449 in interest income, the majority of which was generated by the equipment notes and collateralized loans receivable. We recognized $777,228 in finance income from various finance leases. We also recognized an investment loss of $124,977 from our equity method investments. We also recognized income of $12,465,552 from our equipment investment through SPV. The increase in our total revenue in 2016 as compared to 2015 is primarily a result of the income from our equipment investment through the Marine transaction which didn’t occur until the end of the fourth quarter of 2015. The decrease in our rental income in 2016 compared to 2015 is a result of the sale by Echo and Echo II of all their portfolios of leases and equipment loan receivables to a third party in June 2015.

 

Our expenses for the nine months ended September 30, 2016 (“2016 Period”) as compared to nine months ended September 30, 2015 (“2015 Period”) are summarized as follows:

 

		Nine Months Ended September 30, 2016				Nine Months Ended September 30, 2015
Expenses:
Management fees — Investment Manager		$	1,125,000			$	1,125,000
Depreciation and amortization			315,968				1,561,227
Professional fees			178,591				166,986
Administration expense			79,142				51,342
Interest expense			2,187,412				907,818
Other expenses			285,747				55,060
Expenses from equipment investment through SPV (including depreciation expense of approx. $2,713,000)			13,325,166				—
Total Expenses		$	17,497,026			$	3,867,433
Foreign currency transaction losses		$	1,092,544			$	18,843

 

For the nine months ended September 30, 2016 and 2015 we incurred $17,497,026 and $3,867,433 in total expenses, respectively. There was no increase in management fees paid to our Investment Manager in 2016 as compared to 2015. 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, or (ii) $125,000, payable monthly, until such time as an amount equal to at least 15% of our Limited Partners’ capital contributions have been returned to them, after which the monthly management fee will equal 100% of the management fee as initially calculated above, less 1% for each additional 1% of the Partnership’s Limited Partners’ capital contributions returned to them, such amounts to be measured on the last day of each month. We recognized $315,968 in depreciation and amortization expense. We also incurred $178,591 in professional fees, which is consistent with prior year. In conjunction with the Marine and the various Juliet transactions, we assumed approximately $17,104,000 and $17,378,000, respectively in loans payable with various third parties which resulted in $2,187,412 in interest expense during the nine months ended September 30, 2016. We also incurred expenses of $13,325,166 from our equipment investment through SPV. The decrease in depreciation and amortization in 2016 as compared to 2015 is a result of the sale by Echo and Echo II of all their portfolios of leases and equipment notes to a third party in June 2015.

 

 

Net Income

 

As a result of the factors discussed above, we reported a net loss for the nine months ended September 30, 2016 of $1,988,963, prior to the allocation for non-controlling interest as compared to a net loss of $1,317,708 for the 2015 Period. The non-controlling interest represents the 67.5% investment by SQN PAC in the Alpha transaction and the 10% investment by a third party in the CONT Feeder transaction. For the nine months ended September 30, 2016, the non-controlling interest recognized net income of $1,598 due to its interest in Alpha and a net loss of $85,961 due to its interest in CONT Feeder.

 

Liquidity and Capital Resources

 

Sources and Uses of Cash

 

		Nine Months Ended September 30, 2016				Nine Months Ended September 30, 2015
Cash provided by (used in):
Operating activities		$	2,402,509			$	4,922,703
Investing activities		$	(29,762,342	)		$	(4,792,367	)
Financing activities		$	26,423,607			$	270,497

 

Sources of Liquidity

 

We are currently in our Operating Period. The Offering Period ended on April 2, 2016. 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 portion of our cash outflows will be for investing activities. We believe that the 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 nine months ended September 30, 2016 was $2,402,509 and was primarily driven by the following factors; (i) an increase in accrued interest receivable, (ii) an increase in accrued interest on loans payable from third parties as part of the Marine and Just Loans transactions, (iii) an increase in foreign currency transaction losses and (iv) an increase in minimum rents receivable for finance leases acquired during the period. Offsetting these fluctuations was a net loss for the nine months ended September 30, 2016 of approximately $1,989,000, a decrease in accrued interest income of approximately $1,774,000, a decrease in depreciation and amortization of approximately $1,245,000, and a decrease in other assets of approximately $3,495,000. 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 interest payments received from equipment notes receivable and from rental payments received from lessees.

 

Cash provided by operating activities for the nine months ended September 30, 2015 was $4,922,703 and was primarily driven by the following factors; (i) a decrease in other assets of approximately $4,527,000 due to a reclass to operating leases, (ii) an increase in accrued interest receivable, (iii) depreciation and amortization expense of approximately $1,561,000, (iv) investment loss from equity method investments of approximately $487,000, (v) a net loss on sale of assets of approximately $57,000 and (vi) an increase in minimum rents receivable for finance leases acquired during the period. Offsetting these fluctuations was a net loss of approximately $1,317,000, a decrease in accrued interest on loans payable from an unrelated insurance company as loans payable were paid in full due to the Echo and Echo II sales, as well as increases in finance accrued interest. 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.

 

 

Investing Activities

 

Cash used in investing activities was $29,762,342 for the nine months ended September 30, 2016. This was related to our equipment investment through SPV of approximately $2,717,000. We paid approximately $2,730,000 for purchases of finance leases. We received approximately $80,000 from our investment in Informage SQN Technologies. We paid approximately $10,243,000 for our collateralized loans receivable. We received approximately $1,163,000 from our collateralized loans receivable. We also paid approximately $22,294,000 for the acquisition of equipment notes receivable. The borrowers repaid approximately $1,636,000 during the period.

 

Cash used in investing activities for the nine months ended September 30, 2015 was $4,792,367. We received payments from borrowers related to our equipment loans receivable of approximately $1,129,000. We received proceeds from the sale of assets of approximately $15,432,000 primarily due to the Echo and Echo II sales. We paid approximately $1,465,000 for an investment in SQN Helo and also paid approximately $6,818,000 for an investment in H&P. We paid approximately $103,000 for our investment in Informage SQN Technologies and received proceeds of approximately $610,000 from our investment in Informage SQN Technologies. We also paid approximately $745,000 for the purchase of a residual value interest in equipment subject to operating leases. We made advances on collateralized loan receivables of approximately $10,965,000 and the borrowers repaid approximately $150,000 during the period. We also paid approximately $1,023,000 for the purchase of finance leases. We also paid approximately $1,217,000 for the acquisition of equipment notes receivable. The borrowers repaid approximately $288,000 during the period.

 

Financing Activities

 

Cash provided by financing activities for the nine months ended September 30, 2016 was $26,423,607 and was primarily due to cash proceeds received of approximately $19,147,000 from the sale of our Units to investors and cash received from loan payable of approximately $16,926,000. Offsetting this increase were principal payments of approximately $2,808,000 on loans with underwriting fees, organizational and offering costs of approximately $1,549,000 and payments for distributions totaling approximately $5,235,000.

 

Cash provided by financing activities for the nine months ended September 30, 2015 was $270,497 and was primarily due to cash proceeds received of approximately $17,950,000 for the sale of our Units to investors and cash proceeds received of approximately $1,789,000 from non-controlling interest contribution. Offsetting this increase were payments of approximately $11,305,000 for payment in full of loans payable due to the Echo and Echo II sales, $2,460,000 for equipment loans with various financial institutions in relation to the Echo and Echo II portfolios, underwriting fees, organizational and offering costs of approximately $1,928,000, payments for distributions to our limited partners totaling approximately $2,500,000 and payments for distributions to the non-controlling interest totaling approximately $1,075,000.

 

Distributions

 

During our Operating Period, we intend to pay cash distributions on a quarterly basis to our Limited Partners at 1.625% per quarter, the equivalent rate of 6.5% per annum, of each Limited Partners’ capital contribution (pro-rated to the date of admission for each Limited Partner). The amount and rate of cash distributions could vary and are not guaranteed. During the nine months ended September 30, 2016, we made quarterly distributions to our Limited Partners, at a rate of 2% per quarter, the equivalent per annum rate of 8.0% totaling $4,221,320. We did not make a cash distribution to the General Partner during the nine months ended September 30, 2016; however, we accrued $42,213 for distributions due to the General Partner which resulted in a Distributions payable to General Partner of $70,073 at September 30, 2016.

 

 

Commitments and Contingencies and Off-Balance Sheet Transactions

 

Commitment and Contingencies

 

Our income, losses and distributions are allocated 99% to our Limited Partners and 1% to our General Partner until the Limited Partners have received total distributions equal to each Limited Partners’ capital contribution plus an 8%, compounded annually, cumulative return on each Limited Partners’ capital contribution. After such time, income, losses and distributions will be allocated 80% to our Limited Partners and 20% to our General Partner.

 

We enter into contracts that contain a variety of indemnifications. Our maximum exposure under these arrangements is not known.

 

In the normal course of business, we enter into contracts of various types, including lease contracts, contracts for the sale or purchase of lease assets, and management contracts. It is prevalent industry practice for most contracts of any significant value to include provisions that each of the contracting parties, in addition to assuming liability for breaches of the representations, warranties, and covenants that are part of the underlying contractual obligations, to also assume an obligation to indemnify and hold the other contractual party harmless for such breaches, and for harm caused by such party’s gross negligence and willful misconduct, including, in certain instances, certain costs and expenses arising from the contract. Generally, to the extent these contracts are performed in the ordinary course of business under the reasonable business judgment of our General Partner and our Investment Manager, no liability will arise as a result of these provisions. Should any such indemnification obligation become payable, we would separately record and/or disclose such liability in accordance with accounting principles generally accepted in the United States of America.

 

Off-Balance Sheet Transactions

 

None.

 

Contractual Obligations

 

During our Operating Period, we pay cash distributions on a quarterly basis to our Limited Partners at 1.625% per quarter, of each Limited Partners’ capital contribution (pro-rated to the date of admission for each Limited Partner). The amount and rate of cash distributions could vary and are not guaranteed.

 

Subsequent Events

 

On October 4, 2016, the Partnership funded an additional $854,390 to the company procuring equipment leasing deals in Mexico. The loan accrues interest at rate of 10% per annum and is secured by the equipment procured in the leasing deals.

 

On October 14, 2016, Juliet received cash of $2,008,556 ($2,000,000 of principal and $8,556 of interest) as payment in full of a promissory note.

 

On October 24, 2016, the die board cutting equipment lease commenced. The lease requires 60 monthly payments of $6,329 beginning on October 24, 2016.

 

On November 2, 2016 and on November 9, 2016, the Partnership funded a total of $1,174,560, after applicable exchange rates, toward the installment purchase of four combined heat and power units (“CHPs”) under Loan Note Instruments, to provide additional financing of the Facility which acquired shares of the SPE that previously acquired, by assignment, the rights to lease a parcel of land in Ireland on which planning permissions have been granted to construct an aerobic digestion plant. This is part of a project financing and long term lease of the aerobic digestion plant which includes the CHP’s.

 

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 September 30, 2016, 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.

 

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 September 30, 2016. 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 September 30, 2016, its internal control over financial reporting is effective.

 

Changes in internal control over financial reporting

 

There were no additional material changes in our General Partner’s or our Investment Manager’s internal control over financial reporting during the quarter ended September 30, 2016, that materially affected, or are reasonably likely to materially affect, their internal control over financial reporting.

 

 

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 April 2, 2013. Our Offering Period commenced on April 2, 2013 and ended on April 2, 2016. We had our initial closing for the admission of Limited Partners in the partnership on May 29, 2013. From May 29, 2013 through March 31, 2016, we admitted 1,508 Limited Partners with total capital contributions of $74,965,064 resulting in the sale of 74,965.07 Units. We received cash contributions of $72,504,327 and applied $2,460,737 which would have otherwise been paid as sales commission to the purchase of 2,460.74 additional Units. For the nine months ended September 30, 2016, we paid or accrued an underwriting fee to Securities totaling $1,949,907.

 

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 Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of President and Chief Executive 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

 

 

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. 333-184550

SQN AIF IV GP, LLC

General Partner of the Registrant

 

November 14, 2016

 

/s/ Jeremiah Silkowski
Jeremiah Silkowski
President and CEO