UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR
THE FISCAL YEAR ENDED
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
COMMISSION
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| (Address of principal executive offices) | (Zip code) |
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Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act: Units of Limited Partnership Interests
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by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
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by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
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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
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller Reporting Company | |
| Emerging growth company
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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State
the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which
the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s
most recently completed second fiscal quarter:
The number of outstanding units of limited partnership interests of the registrant on March 31, 2023 was .
DOCUMENTS INCORPORATED BY REFERENCE
Arboretum Silverleaf Income Fund, L.P.
Annual Report on Form 10-K for Year Ended December 31, 2022
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PART I
As used in this Annual Report on Form 10-K, references to “we,” “us,” “our” or similar terms or references to, “the Partnership” refer to Arboretum Silverleaf Income Fund, L.P.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) or in releases made by the Securities and Exchange Commission (the “SEC”), all as may be amended from time to time, which are subject to the safe harbor created by those sections. Forward-looking statements are those that do not relate solely to historical fact and include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by our General Partner and our Investment Manager. Forward-looking statements can be identified by, among other things, the use of forward-looking language, such as the words “plan,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “may,” “will,” “would,” “could,” “should,” “seeks,” or “scheduled to,” or other similar words, or the negative of these terms or other variations of these terms or comparable language, or by discussion of strategy or intentions. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may, and are likely to, differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors discussed from time to time in this Annual Report on Form 10-K, including the risks described in greater detail in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7. In addition, such statements could be affected by risks and uncertainties related to our ability to raise additional equity contributions, investment objectives, competition, government regulations and requirements, the ability to find suitable equipment transactions, as well as general industry and market conditions and general economic conditions. Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this report.
AVAILABILITY OF INFORMATION
You may read and copy any of our materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Copies of such materials also can be obtained free of charge at the SEC’s website, www.sec.gov, or by mail from the Public Reference Room of the SEC, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. The SEC maintains an Internet site that contains reports and information statements, and other information regarding issuers that file electronically with the SEC. This information can be accessed at the web site http://www.sec.gov.
Item 1. Business.
Our History
We were organized as a Delaware limited partnership on January 14, 2016 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, 2040.
The General Partner of the Partnership is ASIF GP, LLC (the “General Partner”), a wholly-owned subsidiary of the Partnership’s Investment Manager, Arboretum Investment Advisors, 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.
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Our income, losses and distributions are allocated 99% to the limited partners (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. We expect to conduct our activities for at least six years and divide our life into three distinct stages: (i) the Offering Period, (ii) the Operating Period and (iii) the Liquidation Period. The Offering Period began on August 11, 2016, and concluded on March 31, 2019. The Operating Period commenced on October 3, 2016 and concluded on October 3, 2021. During the Operating Period, we invested 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 Liquidation Period which commenced on October 4, 2021, is the period in which the portfolio will be liquidated in the ordinary course of business and will last two years, unless it is extended, at the sole discretion of the General Partner.
Our Business
Our principal investment strategy is to invest in business-essential, revenue-producing (or cost-saving) equipment and other physical assets with high in-place value and long, relative to the investment term, economic life and project financings. We expect to achieve our investment strategy by making investments in equipment already subject to lease or originating equipment leases in such equipment, which will include: (i) purchasing equipment and leasing it to third-party end-users; (ii) providing equipment and other asset financing; (iii) acquiring equipment subject to lease and (iv) acquiring ownership rights (residual value interests) in leased equipment at lease expiration. From time to time, we may also purchase equipment and sell it directly to our leasing customers.
Our fund operates under a structure in which we pool the capital invested by our Limited Partners. This pool of capital is then used to invest in business-essential, revenue-producing (or cost-saving) equipment and other physical assets with substantial economic lives and, in many cases, associated revenue streams. The pooled capital contributions are also used to pay fees and expenses associated with our organization and to fund a capital reserve.
Many of our investments are anticipated to be structured as full payout or operating equipment leases and loans. In addition, we invest by way of participation agreements and residual sharing agreements where we acquire an interest in a pool of equipment or other assets or rights to the equipment or other assets, at a future date. We also structure investments as project financings that are secured by, among other things, essential use equipment and/or assets. Finally, we use other investment structures, such as vendor and rental programs that our Investment Manager believes will provide us the appropriate level of security, collateralization, and flexibility to optimize our return on investment while protecting against downside risk. In most cases, the structure includes us holding title to or a priority position in the equipment or other assets.
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.
The life cycle of our fund is divided into three distinct stages: (i) the Offering Period, (ii) the Operating Period and (iii) the Liquidation Period. Our Offering period commenced on August 11, 2016 and concluded on March 31, 2019. We have been approved for sale under Blue Sky regulations in 49 states and the District of Columbia. During the Offering Period, the majority of our cash inflows were derived from financing activities and were the direct result of capital contributions from Limited Partners.
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During the Operating Period, we plan to make quarterly distributions of cash to our Limited Partners, if, in the opinion of our Investment Manager, such distributions are in our best interests. Therefore, the amount and rate of cash distributions could vary and are not guaranteed. The targeted distribution rate is 6.0% annually, paid quarterly as 1.5%, of each Limited Partner’s capital contribution (pro-rated to the date of admission for each Limited Partner). Beginning as of June 30, 2017, our distribution rate was 6.5% annually, paid quarterly at 1.625% of capital contributions. Beginning as of March 31, 2018, we increased our distribution to 7.0% annually, paid quarterly at 1.75% of capital contributions. Beginning as of June 30, 2018, we increased our distribution to 7.5%, paid quarterly at 1.875% of capital contributions. Beginning as of September 30, 2018 we increased our distribution to 8.0%, paid quarterly at 2.00% of capital contributions. Beginning as of June 30, 2020, we decreased our distribution to 4.0%, paid quarterly at 1.00% of capital contributions. In 2021 we paid one quarterly distribution at 1.00% of capital contributions, and in 2022 we did not pay any distributions.
From August 11, 2016 through March 31, 2019, we admitted 617 Limited Partners with total capital contributions of $25,371,709 resulting in the sale of 2,537,170.91 Units. We received cash contributions of $24,718,035 and applied $653,674 which would have otherwise been paid as sales commission to the purchase of 65,367.46 additional Units.
A Limited Partner may not redeem its Units without the prior written consent of our General Partner. Our General Partner has the sole discretion to approve or deny any redemption requested by a Limited Partner.
At December 31, 2022, we had total assets of $15,307,787. Of this amount, $10,073,292 was for various investments: 9,804,649 related to investments in finance leases and $268,643 related to collateralized loans receivables. We also had other assets of $5,085,005. For the year ended December 31, 2022, we had net loss of $1,580,761.
At December 31, 2021, we had total assets of $24,712,208. Of this amount, $18,719,969 was for various investments: $17,749,004 related to investments in finance leases and $970,965 related to collateralized loans receivables. We also had other assets of $5,797,559. For the year ended December 31, 2021, we had net income of $240,851.
At December 31, 2022 and 2021, our investment portfolio consisted of the following transactions:
Infrastructure Equipment
On December 4, 2017, the Partnership entered into a lease facility for $940,000 of railcar movers with a company based in Missouri. The finance lease requires 60 monthly payments of $16,468 with the first and last payments due in advance, and an additional final payment of $350,709. In July 2019, the company filed for Chapter 11 bankruptcy. The company exited bankruptcy protection in October 2019. In 2020 the Partnership amended the lease facility and temporarily reduced the monthly payments and increased the final payment to $383,465. The lessee remained current on their monthly payments until May 2022. The lease is secured by a first priority lien against the railcar movers. In June 2022, the Partnership issued a Notice of Default and Demand Notice for this lease facility. In July 2022, the Partnership received $35,000 as part of the termination agreement. The Partnership reclassified this lease to Other Assets, and is pursuing multiple options for liquidating the equipment including working with a third party to help in remarketing the equipment. As of December 31, 2022 the asset was assessed for impairment, and no impairment was required.
Medical Equipment
On June 26, 2018, the Partnership entered into a lease facility for $673,706 of electrosurgical fiber, manufacturing, and testing equipment with a company based in Massachusetts. On June 26, 2018, the Partnership advanced a total of $455,749 as equipment lease schedule 1 (“Schedule 1”) and schedule 2 (“Schedule 2”) under this lease facility. On August 2, 2018 and September 26, 2018, the Partnership advanced a total of $71,361 and $35,680 as additional funding under equipment lease Schedule 1. On December 31, 2018, the Partnership advanced a total of $110,915 as additional funding under equipment lease Schedule 2. Schedule 1 requires 42 monthly payments of $10,711 with the first and last payment due upon commencement on October 1, 2018. Schedule 2 requires 42 monthly payments of $9,513 with the first and last payment due upon commencement on January 1, 2019. The lease is secured by a first priority lien against the equipment and a corporate guarantee of the parent company of the lessee. As of December 31, 2022 all lease payments were received, and both schedules matured.
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Infrastructure Equipment
On June 29, 2018, the Partnership entered into a lease facility for $1,199,520 for water pumps based in North Dakota. The finance lease requires 48 monthly payments of $31,902 with the first and last payments due in advance. On October 31, 2018, the Partnership entered into a second lease facility for $529,239 for water pumps. The finance lease requires 36 monthly payments of $17,888 with the first and last payments due in advance. On January 29, 2019, the Partnership entered into a third lease facility for $67,500 for water pumps. On January 29, 2019, the Partnership funded $33,750 and on April 9, 2019, the Partnership funded the remaining $33,750. The finance lease requires 36 monthly payments of $2,282 with the first and last payments due in advance and commences on May 1, 2019. On June 19, 2019, the Partnership entered into and funded a fourth lease facility for $1,270,125 for water pumps and other equipment. The finance lease requires 36 monthly payments of $43,565 with the first and last payments due in advance and commences on July 1, 2019. On August 7, 2019, the Partnership entered into and funded a fifth lease facility for $27,351 for water pumps. The finance lease requires 36 monthly payments of $938 with the first and last payments due in advance and commences on August 7, 2019. On August 29, 2019, the Partnership entered into a sixth lease facility for $196,803 for water pumps, and on September 12, 2019 the lease facility was funded. The finance lease requires 36 monthly payments of $6,750 with the first and last payments due in advance and commences on August 29, 2019. In 2020 the Partnership received total cash of $1,899,149 as total payoff of five lease schedules. The five finance lease schedules had a net book value of $1,713,589 resulting in an increase in finance income of $185,560 and the customer maintained all rights to the water pumps. In October 2020, the Partnership terminated the remaining lease schedule and assumed all rights, title and interest in the equipment. The remaining lease schedule has a liquidation value of $128,500, and the Partnership reclassified this lease to Other Assets. In 2021 the Partnership received cash proceeds of $34,643 as partial payoff of this other asset, recorded an impairment of $43,605, resulting in a value of $50,252 as of December 31, 2021. In January 2022, the Partnership received cash proceeds of $50,252 as total payoff of this other asset. In December 2022, an additional piece of equipment was recovered and sold resulting in the Partnership receiving cash proceeds of $5,626, which was recorded as finance income.
Medical Equipment
On March 22, 2019, the Partnership entered into a lease facility for $493,906 of medical equipment with a hospital based in Texas. The lease is secured by a first priority lien against the medical equipment. On March 22, 2019, the Partnership advanced a total of $493,906 under this lease facility. The lease schedule requires 36 monthly payments of $16,820 with the first payment due upon commencement, April 1, 2019. As of December 31, 2022, the lease matured, all regular lease payments were received, and the lessee purchased the equipment at its fair market value at 14.5% of equipment cost.
Infrastructure Equipment
On May 30, 2019, the Partnership entered into a lease facility for $3,600,000 for industrial dryers based in Kentucky. On May 31, 2019, the Partnership advanced $3,600,000 under this lease facility. The finance lease requires 48 monthly payments of $94,802 with the first and last payments due in advance and commences on November 1, 2019. On November 18, 2019, the Partnership issued a Notice of Default letter to the company, and on November 25, 2019, the Partnership issued a Notice of Lease Commencement and Demand Notice for payment from the company. On December 31, 2019, the company paid $75,000 to the Partnership, and entered into a forbearance agreement with the Partnership. In January 2020, a group of three small creditors filed an involuntary bankruptcy petition against the company. As a result, in February 2020, the company filed for Chapter 11 bankruptcy. The lease is secured by a first priority lien against the industrial dryers. On July 20, 2020, the Partnership obtained a stay relief order from the bankruptcy court and on August 6, 2020, the Partnership entered into a settlement agreement and mutual release with the vendor and moved the equipment to its own location. The Partnership is actively remarketing the equipment, and is currently in contact with prospective buyers. The Partnership expected to receive full book value for this equipment, but during the fourth quarter of 2020, due to the continued impact of COVID-19 and based on discussions with third parties, the Partnership reassessed this lease and decided to record an impairment on this lease. In 2020, the Partnership recorded an impairment on this finance lease of $751,685, and reclassified this lease to Other Assets. As of December 31, 2022, the Partnership recorded an additional impairment of $625,000 on this asset, resulting in a value of $2,497,297 as of December 31, 2022.
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On August 23, 2019, the Partnership entered into and funded a lease facility for $3,000,000 for a welding system based in Louisiana. The finance lease requires 60 monthly payments of $62,900 and a final payment of $300,000 with the first and last payments due in advance and commenced on September 1, 2019. On March 12, 2021, the Partnership entered into another lease facility of $975,000 with the same borrower. On March 12, 2021 and on April 27, 2021, the Partnership funded $750,000 and $225,000, respectively for this facility. The finance lease requires 42 monthly payments of $29,120. The lease is secured by a first priority lien against the welding system.
On September 20, 2019, the Partnership entered into a lease facility for $865,084 for LED lighting based in Texas. On September 26, 2019, the Partnership advanced $865,084 under this lease facility. The finance lease requires 60 monthly payments of $19,472, with the first payment due in advance and commenced on September 25, 2019. The lease is secured by a first priority lien against the LED lighting.
On October 21, 2019, the Partnership entered into a lease facility for $1,137,340 for capital improvements, specifically key structural, mechanical, and electrical related equipment, based in Ohio. On October 22, 2019, the Partnership advanced $1,137,340 under this lease facility. The finance lease requires 48 monthly payments of $29,483. The lease is secured by a first priority lien against the equipment.
Computer Equipment
On November 5, 2019, the Partnership entered into and funded a lease facility for $862,087 for Apple products based in California. The finance lease requires 30 monthly payments of $32,704, with the last three months due in advance. On March 19, 2020, the Partnership entered into and funded a second lease facility for $2,486,624 for Apple products based in California. The finance lease requires 27 monthly payments of $104,948. The lease is secured by a first priority lien against the Apple products. As of December 31, 2022 all lease payments were received, and both schedules matured.
Fish Processing Equipment
On November 26, 2019, the Partnership entered into a lease facility for $1,230,754 for fish processing equipment based in Alaska. On November 26, 2019, the Partnership advanced $1,107,679 under this lease facility. On March 25, 2020, the Partnership advanced the remaining $123,075 under this lease facility. The finance lease requires 55 monthly payments of $29,218 and a final payment of $184,613, with first month due in advance and commenced on April 1, 2020. The lease is secured by a first priority lien against the fish processing equipment. On October 7, 2020, the Partnership terminated the lease facility for fish processing equipment. The Partnership is pursuing multiple options for liquidating the equipment including working with the landlord of the current processing facility to market the facility to new operators as a turnkey operation and working with the equipment manufacturer to identify interested purchasers in the surrounding region that would then transport the equipment to an alternate facility. In 2020, the Partnership recorded an impairment on this finance lease of $430,836 and reclassified this lease to Other Assets. In 2021, the Partnership recorded an impairment of $400,000 on this asset. As of December 31, 2022, the Partnership recorded an additional impairment of $250,000 on this asset, resulting in a value of $150,000 as of December 31, 2022.
Furniture and Kitchen Equipment
On December 5, 2019, the Partnership entered into a lease facility for $1,144,933 for furniture, fixtures, equipment, and vehicles based in Michigan. On December 6, 2019, the Partnership advanced $1,144,933 under this lease facility. The finance lease required 3 monthly payments of $16,987 and 39 monthly payments of $35,465, with the last payment due in advance. In April 2020, the lease facility was amended to reduce the payments starting in April 2020 to 5 monthly payments of $2,371, 1 monthly payment of $4,000, 8 monthly payments of $3,794, followed by 33 monthly payments of $45,325. In January 2022, the lease facility was amended to reduce the payments starting in January 2022 to 3 payments of $4,739, 6 payments of $14,494, 6 payments of $28,987, and a final payment of $1,379,642 due on April 1, 2023. The lease is secured by a first priority lien against the furniture, fixtures, equipment, and vehicles. In April 2022, the Partnership received notice of a court order stating that a Receiver has been appointed over all the real and personal property, and reclassified this lease to Other Assets. The Partnership is pursuing multiple options for liquidating the equipment including working with the Receiver and with a third party to help in remarketing the equipment. The lessee has continued to make all of their lease payments in accordance with the latest amendment to the payment stream and is current through February 2023. Additionally in 2022, the Partnership sold a portion of the equipment for net cash proceeds of $72,508 and in 2023 we sold some equipment for net cash proceeds of $103,739. The Partnership is in discussions with the Receiver and senior lender on a new amendment to work out a monthly payment plan for the upcoming $1,379,642 balloon payment that is due in April 2023. As of December 31, 2022 the asset was assessed for impairment, and no impairment was required.
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Infrastructure Equipment
On December 27, 2019, the Partnership entered into and funded a lease facility for $1,532,873 for hydraulic press and chiller systems based in Michigan. The finance lease requires 35 monthly payments of $51,692. The lease is secured by a first priority lien against the hydraulic press and chiller systems. As of December 31, 2022 all lease payments were received, and the schedule matured.
Telecommunication Equipment
On January 23, 2020, the Partnership entered into a finance lease for $3,720,970 of telecommunication equipment based in Illinois. On January 23, 2020, the Partnership advanced $3,192,259 as equipment lease schedule 1 (“Schedule 1”), and $528,711 as equipment lease schedule 2 (“Schedule 2”) under this finance lease. The Schedule 1 lease requires 42 monthly payments of $93,302, and Schedule 2 lease requires 42 monthly payments of $15,453. During the year ended December 31, 2020, the Partnership temporarily reduced the monthly payments of both lease schedules. The lease is secured by a first priority lien against the telecommunication equipment. In 2020 the Partnership recorded an impairment on this finance lease of $366,991 and reclassified this lease to Other Assets. In March 2021, the Partnership entered into a settlement agreement with the lessee for $2,645,000, as per the settlement agreement, on March 31, 2021, the Partnership received total cash proceeds of $2,000,000, and the remaining $645,000 is to be paid in 48 equal monthly payments of $13,437 commencing on April 1, 2022.
Collateralized Loans Receivable
On January 31, 2020, the Partnership funded a promissory note for $470,790 for micro-needling machines to a borrower based in New York. The note accrues interest at a rate of 9.5% per annum and matures 35 months after date of funding. The borrower will make 35 monthly payments of $15,336, commencing in February 2020. On June 1, 2021, the Partnership funded another promissory note for $357,166 to the same borrower. The note accrues interest at a rate of 11.5% per annum and matures 35 months after date of funding. The borrower will make 35 monthly payments of $11,946, commencing in June 2021. The notes are secured by a first priority lien against the micro-needling machines. As of December 31, 2022, the promissory note entered into on January 31, 2020 reached maturity and was fully paid off.
On March 2, 2020, the Partnership entered into a loan and facility agreement for various store front and kitchen equipment to a borrower based in Utah. Under this facility, each promissory note accrues interest at a rate of 16.2% per annum and matures 52 months after date of funding. The borrower will make 3 monthly interest only payments of $3,033, followed by 48 monthly principal and interest payments of $5,733, and a final payment of $45,000 upon maturity. On March 2, 2020, the Partnership entered into and funded a promissory note for $225,000, and interest only payments commenced in April 2020. On June 1, 2020, the Partnership funded a second promissory note for $225,000, and interest only payments commenced in July 2020. The note is secured by a first priority lien against the various store front and kitchen equipment. An affiliate of the borrower by way of common ownership has provided a guaranty with respect to the loan and security agreement. On April 26, 2022, the Partnership received cash of $330,861 as total payoff of this loan and facility agreement. The loan facility had a net book value of $322,432 resulting in additional interest income of $8,429.
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Infrastructure Equipment
From March 26, 2020 through September 22, 2020, the Partnership funded an aggregate total of $2,450,480 across seven lease schedules for infrastructure equipment based in Pennsylvania. The first finance lease schedule requires 60 monthly payments of $18,548 and commenced on August 1, 2020. The second schedule requires 48 monthly payments of $15,823 and commenced on August 1, 2020. The third schedule requires 48 monthly payments of $4,054 and commenced on May 1, 2020. The fourth schedule requires 60 monthly payments of $484 and commenced on August 1, 2020. The fifth schedule requires 60 monthly payments of $5,277 and commenced on September 1, 2020. The sixth schedule requires 60 monthly payments of $9,522 and commenced on October 1, 2020. The seventh schedule requires 60 monthly payments of $4,081 and commenced on October 1, 2020. The lease is secured by a first priority lien against the infrastructure equipment. In December 2021, the lessee defaulted on the lease facility for infrastructure equipment. The Partnership is pursuing multiple options for liquidating the equipment including working with a third party to help in remarketing the equipment. In 2021 the Partnership reclassified this lease to Other Assets. In February 2022, the Partnership sold a portion of the equipment, via a finance lease, for total monthly rental payments of $168,803. The equipment had a net book value of $166,950 resulting in additional finance income of $1,853 over the life of the lease. The finance lease requires 24 monthly payments of $7,033 and commenced on March 1, 2022. As of December 31, 2022, the Partnership As of December 31,for total net cash proceeds of $1,169,781. The equipment had a net book value of $1,113,656 resulting in a resulting in a gain of $56,125. Additionally in February 2023, the Partnership sold a portion of the equipment for total net cash proceeds of $24,170. The equipment had a net book value of $25,650 resulting in a resulting in a loss of $1,480. As of December 31, 2022 the asset was assessed for impairment, and no impairment was required.
Collateralized Loans Receivable
On May 7, 2020, the Partnership funded a promissory note for $160,156 for shot peening machines to a borrower based in New York. The note accrues interest at a rate of 14% per annum and matures 58 months after date of funding. The borrower will make 58 monthly payments of $3,808, commencing in June 2020. The note is secured by a first priority lien against the shot peening machines.
Infrastructure Equipment
On August 28, 2020, the Partnership funded a finance lease for $954,498 for infrastructure equipment based in North Carolina. The finance lease requires 60 monthly payments of $21,498 and commenced on October 1, 2020. The lease is secured by a first priority lien against the infrastructure equipment.
On June 8, 2021, the Partnership funded a finance lease for $2,916,447 for infrastructure equipment based in Missouri. The finance lease requires 36 monthly payments of $94,863 and commenced in June 2021. As of December 31, 2022, the monthly payments have been reduced to $92,919 due to small portions of the equipment being sold, but the term of the lease is unchanged. The lease is secured by a first priority lien against the infrastructure equipment.
On March 22, 2021, the Partnership funded $2,218,258 for a lease facility for glass manufacturing equipment with a company based in Kentucky. The finance lease requires 36 monthly payments of $70,912. The lease is secured by a first priority lien against the glass manufacturing equipment.
Financial Services
On September 22, 2021, the Partnership purchased a portfolio of transactions for $4,015,979 consisting of 73 finance leases. The partnership will collect 58 monthly payments of various amounts and commences on October 1, 2021.
Furniture and Fixtures
On September 30, 2021 and on November 16, 2021, the Partnership funded a finance lease for $550,950 and $259,225, respectively, for furniture and fixtures based in California. On February 9, 2022, the Partnership funded the remaining $291,725 for furniture and fixtures based in California. The finance lease requires 48 monthly payments of $28,221 and commenced on March 1, 2022. The lease is secured by a first priority lien against the furniture and fixtures.
Segment Information
We are engaged in a single business segment, the ownership and investment in leased equipment, which includes: (i) purchasing equipment and leasing it to third-party end users; (ii) providing equipment and other asset financing; (iii) acquiring equipment subject to lease; and (iv) acquiring ownership rights (residual value interests) in leased equipment at lease expiration. From time to time, we may also purchase equipment and sell it directly to our leasing customers.
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Competition
The commercial leasing and financing industry is highly competitive and is characterized by competitive factors that vary based upon product and geographic region. Our competitors are varied and include other equipment leasing and finance funds, hedge funds, private equity funds, captive and independent finance companies, commercial and industrial banks, manufacturers and vendors.
Other equipment finance companies and equipment manufacturers or their affiliated financing companies may be in a position to offer equipment to prospective customers on financial terms that are more favorable than those that we can offer. There are numerous other potential entities, including entities organized and managed similarly to us, seeking to make investments in leased equipment. Many of these potential competitors are larger and have greater financial resources than us.
We compete primarily on the basis of terms and structure, particularly on structuring flexible, responsive, and customized financing solutions for our customers. Our investments are often made directly rather than through competition in the open market. This approach limits the competition for our typical investment, which may enhance returns. We believe our investment model may represent the best way for individual investors to participate in investing in leased or financed equipment. Nevertheless, to the extent that our competitors compete aggressively on any combination of the foregoing factors, we could fail to achieve our investment objectives.
Employees
We have no direct employees. Our General Partner and/or our Investment Manager supervise and control our business affairs and service our investments.
Available Information
Our Annual Report on Form 10-K, our most recent Quarterly Reports on Form 10-Q and any amendments to those reports and our Current Reports on Form 8-K, if any, and any amendments to those reports are available free of charge on the SEC’s website at http://www.sec.gov or from our website at http://thearboretumgroup.com.
Financial Information Regarding Geographic Areas
We have long-lived assets, which include finance leases and operating leases, and we generate all our revenues in geographic areas in the United States of America. For additional information, refer to Part II. Item 8. Financial Statement and Supplementary Data, Note 13 Geographic Information in the notes to our financial statements included in this Annual Report on Form 10-K.
Item 1A. Risk Factors.
Not applicable.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
We neither own nor lease office space or any other real property in our business at the present time.
Item 3. Legal Proceedings.
We are not aware of any material legal proceedings that are currently pending against us or against any of our assets.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our Units are not publicly traded, and there is no established public trading market for our Units. It is unlikely that any such market will develop.
| Title of Class | Number of Partners at March 31, 2023 | |||
| General Partner | 1 | |||
| Limited Partners | 613 | |||
We pay, at the sole discretion of our Investment Manager and contingent upon the availability of funds, quarterly cash distributions to each Limited Partner computed at 1.5% (pro-rated to the date of admission for each Limited Partner) of each Limited Partner’s capital contribution. During the year ended December 31, 2022, we didn’t make a cash distributions to our Limited Partners. During the year ended December 31, 2021, we made quarterly cash distributions to our Limited Partners totaling approximately $323,000. At December 31, 2022 and 2021, the Partnership did not declare or accrue distributions due to the economic uncertainties from COVID-19. At December 31, 2022 and 2021 we declared and accrued a distribution of $0 and $637, respectively, for distributions due to our General Partner which resulted in distributions payable to our General Partner of $49,335 at December 31, 2022 and 2021.
We are required pursuant to Financial Industry Regulatory Authority, Inc. (“FINRA”) Rule 2310(b)(5) to disclose in each annual report distributed to our Limited Partners a per Unit estimated value of our Units, the method by which we developed the estimated value, and the date used to develop the estimated value. In addition, our Investment Manager prepares statements of our estimated Unit values to assist fiduciaries of retirement plans subject to the annual reporting requirements of ERISA in the preparation of their reports relating to an investment in our Units. For these purposes, the estimated value of our Units is $6.34 per Unit at December 31, 2022. This estimated value is provided to assist plan fiduciaries in fulfilling their annual valuation and reporting responsibilities and should not be used for any other purpose. Because this is only an estimate, we may subsequently revise this estimated value. There is no significant public trading market for our Units at this time and none is expected to develop. There can be no assurance that Limited Partners could receive $6.34 per Unit if such a market did exist and they sold their Units, or that they will be able to receive such amount for their Units in the future. At December 31, 2022, we were in our Liquidation Period which began on October 4, 2021. Our Operating Period began on October 3, 2016 and concluded on October 3, 2021. Our Offering Period began on August 11, 2016 and concluded on March 31, 2019.
Following the completion of our Offering Period, the estimated value of our Units will be based on a valuation performed at least annually. When conducting such valuation, there are currently no SEC, federal and state rules that establish requirements specifying the methodology to employ in determining an estimated per Unit value; provided, however, that the determination of the estimated per Unit value must be conducted by, or with the material assistance or confirmation of, a third-party valuation expert or service and must be derived from a methodology that conforms to standard industry practice. The valuation will be an estimate only, will be subject to various limitations and will be based on a number of assumptions and estimates that may or may not be accurate or complete. If we provide an estimated per Unit value of our Units based on a valuation prior to the conclusion of our offering, our General Partner may determine to modify the offering price to reflect the estimated value per Unit.
The redemption price we offer to repurchase our Units utilizes a different valuation methodology than that which we use to determine the current value of our Units for ERISA and FINRA purposes described above. Therefore, the $6.34 per Unit does not reflect the amount that a Limited Partner should expect to receive under our redemption plan. In addition, there can be no assurance that a Limited Partner will be able to redeem their Units under our redemption plan. A Limited Partner may not redeem their Units without the prior written consent of our General Partner. Our General Partner has the sole discretion to approve or deny any redemption requested by any of our Limited Partners.
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Item 6. [Reserved].
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
Certain statements within this Annual Report on Form 10-K 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,” “should,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “predict,” “continue,” “further,” “seek,” “plan,” or “project” and variations of these words or comparable words or phrases of similar meaning. These forward-looking statements reflect our current beliefs and expectations with respect to future events and are based on assumptions and are subject to risks and uncertainties and other factors outside our control that may cause actual results to differ materially from those projected. We undertake no obligation to update publicly or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
Overview
We are a Delaware limited partnership formed on January 14, 2016. Our fund operates under a structure which pools the capital invested by our partners. This pool of capital is then used to invest in business-essential, revenue-producing (or cost-saving) equipment and other physical assets with substantial economic lives and, in many cases, associated revenue streams and project financings. The pooled capital contributions are also used to pay fees and expenses associated with our organization and to fund a capital reserve.
Our principal investment strategy is to invest in business-essential, revenue-producing (or cost-savings) equipment with high in-place value and long, relative to the investment term, economic life and project financings. We expect to achieve our investment strategy by making investments in equipment already subject to lease or originating equipment leases in such equipment, which will include: (i) purchasing equipment and leasing it to third-party end users; (ii) providing equipment and other asset financing; (iii) acquiring equipment subject to lease; and (iv) acquiring ownership rights (residual value interests) in leased equipment at lease expiration. From time to time, we may also purchase equipment and sell it directly to our leasing customers.
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Many of our investments will be structured as full payout or operating leases. Full payout leases generally are leases under which the rent over the initial term of the lease will return our invested capital plus an appropriate return without consideration of the residual value, and where the lessee may acquire the equipment or other assets at the expiration of the lease term. Operating leases generally are leases under which the aggregate non-cancelable rental payments during the original term of the lease, on a net present value basis, are not sufficient to recover the purchase price of the equipment or other assets leased under the lease.
We also intend to invest by way of loans, participation agreements and residual sharing agreements where we would acquire an interest in a pool of equipment or other assets, or rights to the equipment or other assets, at a future date. We also may structure investments as project financings that are secured by, among other things, essential use equipment and/or assets. Finally, we may use other investment structures that our Investment Manager believes will provide us with the appropriate level of security, collateralization, and flexibility to optimize our return on our investment while protecting against downside risk, such as vendor and rental programs. In many cases, the structure will include us holding title to or a priority or controlling position in the equipment or other asset.
We invested in equipment and other assets that are considered essential use or core to a business or operation in the agricultural, energy, environmental, medical, manufacturing, technology, and transportation industries. Our Investment Manager may identify other assets or industries that meet our investment objectives. We expect to invest in equipment, other assets and project financings located primarily within the United States of America and the European Union but may also make investments in other parts of the world.
We are currently in the Liquidation Period. The Operating Period concluded on October 3, 2021. The Offering Period concluded on March 31, 2019. During the Operating Period, we invested most of the net proceeds from our offering in business-essential, revenue-producing (or cost-saving) equipment, other physical assets with substantial economic lives and, in many cases, associated revenue streams and project financings. The Operating Period began on the date we admitted our first Limited Partners, at the initial closing, which occurred on October 3, 2016 and concluded on October 3, 2021. At our initial closing, we reimbursed our Investment Manager for a portion of the fees and expenses associated with our organization and offering which they previously paid on our behalf and we funded a small capital reserve. The Liquidation Period, which began on October 4, 2021, is the period in which we will sell assets in the ordinary course of business and will last two years, unless it is extended, at the sole discretion of the General Partner.
Our General Partner, our Investment Manager and their affiliates, and certain non-affiliates (namely, Selling Dealers) receive fees and compensation from the offering of our Units, including the following, with any and all compensation paid to our General Partner solely in cash. We pay an underwriting fee of 2% of the gross proceeds of the offering (excluding proceeds, if any, we receive from the sale of our Units to our General Partner or its affiliates) to our selling agent or selling agents. From these underwriting fees, a selling agent may pay Selling Dealers, a non-accountable marketing fee based upon such factors as the volume of sales of such Selling Dealers, the level of marketing support provided by such participating dealers and the assistance of such Selling Dealers in marketing the offering, or to reimburse representatives of such Selling Dealers for the costs and expenses of attending our educational conferences and seminars. This fee will vary, depending upon separately negotiated agreements with each Selling Dealer. In addition, we pay a sales commission to Selling Dealers up to 5% of the gross proceeds of the offering (excluding proceeds, if any, we receive from the sale of our Units to our General Partner or its affiliates).
Our General Partner receives an organizational and offering expense allowance of up to 1.5% of our offering proceeds to reimburse it for expenses incurred in preparing us for registration or qualification under federal and state securities laws and subsequently offering and selling our Units. The organizational and offering expense allowance will be paid out of the proceeds of the offering. The organizational and offering expense allowance will not exceed the actual fees and expenses incurred by our General Partner and its affiliates. Because organizational and offering expenses will be paid as and to the extent they are incurred, organizational and offering expenses may be drawn disproportionately to the gross proceeds of each closing.
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During our Operating Period, our Investment Manager received a structuring fee in an amount equal to 1.5% of each cash investment made, including reinvestments, payable on the date each such investment is made.
During our Operating Period and our Liquidation Period, our Investment Manager receives a management fee in an amount equal to the greater of (i) 2.5% per annum of the aggregate offering proceeds, payable monthly in advance or (ii) $62,500 per month. Effective January 1, 2023, the Investment Manager reduced the management fee from $62,500 per month ($750,000 per annum) to $50,000 per month ($600,000 per annum).
Our General Partner will initially receive 1% of all distributed distributable cash. Our General Partner has a Promotional Interest in us equal to 20% of all distributed distributable cash after we have provided a return to our Limited Partners of their respective capital contributions plus an 8% per annum, compounded annually, cumulative return on their capital contributions.
Current Business Environment and Outlook
We believe that 2023 will present attractive opportunities for equipment lease and asset finance investments. Despite rising interest rates and the threat of an economic downturn, companies continue to invest in equipment and technology to meet demand. The U.S. economy expanded in the third quarter of 2022 after two consecutive quarters of contraction. Growth was fueled by strong net exports, solid consumer spending, and robust equipment investment. Meanwhile, residential investment and business inventories were drags on growth. Alarm bells were ringing throughout much of 2022 as the economy contracted during the first half of the year, elevating fears of an imminent recession. However, the economy bounced back in Q3 as the labor market remained strong and consumers held firm despite high inflation. In addition to strong job growth, the economy is finally benefitting from the normalization of supply chains after two years of turmoil. Meanwhile, most measures of financial stress, including consumer and business delinquencies and defaults, as well as home foreclosures and bankruptcies, remain subdued. On the other hand, inflation remains stubbornly high, and the Fed is committed to reining it in even if this leads to job losses or an outright recession. The housing market predictably suffered as the cost of borrowing increased, and the consumer savings rate has plummeted to less than half its pre-pandemic level, suggesting that a pullback in spending could be just around the corner. Though recent data offer some hope that the Fed may yet be able to achieve its desired “soft landing,” many economists and business leaders remain unconvinced. There are several factors that may make the looming downturn less severe for the equipment finance industry, including pro industrial legislation, equipment order backlogs and reshoring trends. The labor market remains a key point of strength. The economy added a consensus-beating 261k jobs in November 2022 and, despite easing slightly in October, job openings remain far above pre-pandemic levels (see chart). Further, the unemployment rate held at 3.7% in November, quelling fears that rising interest rates would lead to widespread job loss (at least for now). In short: the labor market is strong, and there are few signs that it is slowing. However, the historically strong labor market is a double edged sword for the economy given current inflation levels. Wage growth accelerated in the latest reading and is now running at a nearly 6% annualized rate over the last three months. While this pace of growth is welcome news for workers and will help households absorb high inflation, the fact that wage growth appears to be accelerating is the exact opposite of what the Fed wants to see, as it suggests that additional rate hikes are needed to slow the economy and bring inflation closer to its target level. The pandemic fundamentally altered the globally distributed, just-in-time supply chain model for manufacturing. Companies that relied on China and other east Asian countries for inputs were left scrambling as global supply chains seized up. Further, just as things seemed to be improving in early 2022, Russia’s invasion of Ukraine introduced a new geopolitical risk factor, further complicating supply chains and driving up oil prices (and, by extension, transportation costs) in the process. Going forward, many large corporations are in the process of “near-shoring” and/or “re-shoring” elements of their supply chains in order to minimize these risks. Manufacturing firms intend to move capacity to the United States or are considering it, and nearly one quarter of their Asia-originating freight is expected to shift to the Americas by 2025. Several pieces of pro-industrial legislation will help propel this historic transition. All told, the turmoil that global manufacturing firms have endured because of the pandemic and geopolitical developments have triggered a paradigm shift in global supply chains. The United States stands to benefit from these events, and equipment markets should see a boost in demand, which in turn should lead to new opportunities for the equipment fiancé industry. Congress managed to pass three major bills over the last 12 months: the Infrastructure Investment and Jobs Act (IIJA), the CHIPS and Science Act (CHIPS), and the Inflation Reduction Act (IRA). Collectively, these bills authorize at least $600 billion in new funding for a variety of industrial and infrastructure projects and should provide a sharp boost to equipment investment. The new federal funds, which will be disbursed through a combination of direct spending, grants awards, and tax credits, will be dedicated to expanding transportation infrastructure, semiconductor manufacturing plants, and energy infrastructure. After many years of the manufacturing sector shrinking as a share of the U.S. economy, these initiatives, along with increased wariness of depending on China’s manufacturing sector due to the pandemic and geopolitical concerns, could be the catalyst for reversing course. Indeed, while most of this funding has not yet been appropriated, several international manufacturers, including Intel, Micron, and GlobalFoundries, have already announced multibillion dollar investments in their U.S. manufacturing footprints. Most of the funding from these bills will be distributed over the next five years, and as such they should help backstop the U.S. manufacturing sector and increase the demand for equipment in 2023 and beyond. Overall we think that businesses have a positive outlook for growth in the latter half of 2023 and we anticipate capital asset and equipment acquisition will be an essential part of that growth.
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Current Industry Trends
According to the Equipment Leasing and Finance Foundation’s “2023 Equipment Leasing and Financing U.S. Economic Outlook” the U.S. economy’s growth in 2023 is poised to experience growth of 0.9% while equipment and software investment should expand by about 4.2%. Equipment and software investment growth boomed in the second half of 2022 with nearly 12% annualized growth in Q3, providing a solid jumping-off point for 2023. However, rising interest rates are expected to weigh on investment growth next year. The U.S. economy also saw GDP growth bounce back during the second half of 2022, although underlying conditions remain troubling. The housing market is struggling, financial markets are highly volatile, and the global economy is slowing. The manufacturing sector continues to outperform expectations given rising interest rates and the global economic slowdown. Although activity appears likely to slow in 2023 given expectations for a recession, recent pro-industrial legislation and a push for supply chain re-shoring should give the manufacturing sector a boost. For Main Street businesses, the combined effects of high inflation and tightening financial conditions are likely to contribute to turbulent operating conditions in 2023. Fortunately, financial stress is still quite low and small business lending activity remains positive for now. Monetary policy is among the biggest questions facing the equipment finance industry in 2023. The Fed has hinted at the possibility of slowing down interest rate hikes, while stressing it is committed to reining in inflation at the risk of higher unemployment or a recession. Interest rate levels are expected to rise above 5% next year, and potentially higher.
Recent Significant Transactions
Infrastructure Equipment
In January 2022, in connection with a lease facility entered into on June 29, 2018 that was later reclassified to other assets, the Partnership received cash proceeds of $50,252 as total payoff of this other asset. In December 2022, an additional piece of equipment was recovered and sold resulting in the Partnership receiving cash proceeds of $5,626, which was recorded as finance income.
Furniture and Fixtures
On February 9, 2022, in connection with lease facility entered into on September 30, 2021, the Partnership funded the remaining $291,725 for furniture and fixtures based in California. The finance lease requires 48 monthly payments of $28,221 and commenced on March 1, 2022. The lease is secured by a first priority lien against the furniture and fixtures.
Infrastructure Equipment
In February 2022, in connection with the seven lease schedules entered into between March 26, 2020 through September 22, 2020 that was later reclassified to other assets, the Partnership sold a portion of the equipment, via a finance lease, for total monthly rental payments of $168,803. The equipment had a net book value of $166,950 resulting in additional finance income of $1,853 over the life of the lease. The finance lease requires 24 monthly payments of $7,033 and commenced on March 1, 2022. As of December 31, 2022, the Partnership sold portions of the equipment for total net cash proceeds of $1,169,781. The equipment had a net book value of $1,113,656 resulting in a resulting in a gain of $56,125.
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Collateralized Loan Receivable
On April 26, 2022, in connection with a loan facility entered into on March 2, 2020, the Partnership received cash of $330,861 as total payoff of this loan and facility agreement. The loan facility had a net book value of $322,432 resulting in additional interest income of $8,429.
Infrastructure Equipment
In July 2022, in connection with a lease facility entered into on December 4, 2017 that was later reclassified to other assets, the Partnership received $35,000 as part of the termination agreement.
Furniture and Kitchen Equipment
As of December 31, 2022, in connection with a lease facility entered into on December 5, 2019 that was later reclassified to other assets, the Partnership collected cash proceeds of $251,172.
Critical Accounting Estimates
An understanding of our critical accounting policies is necessary to understand our financial results. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires our General Partner and our Investment Manager to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates will primarily include the determination of allowance for notes and leases, depreciation and amortization, impairment losses and the estimated useful lives and residual values of the leased equipment we acquire. Actual results could differ from those estimates.
Lease Classification and Revenue Recognition
Each equipment lease we enter into is classified as either a finance lease or an operating lease, which is determined at lease inception, based upon the terms of each lease, or when there are significant changes to the lease terms. We capitalize initial direct costs associated with the origination and funding of lease assets. Initial direct costs include both internal costs (e.g., labor and overhead), if any, and external broker fees incurred with the lease origination. Costs related to leases that are not consummated are not eligible for capitalization as initial direct costs and are expensed as incurred as acquisition expense. For a finance lease, initial direct costs are capitalized and amortized over the lease term using the effective interest rate method. For an operating lease, the initial direct costs are included as a component of the cost of the equipment and depreciated over the lease term.
For finance leases, we record, at lease inception, the total minimum lease payments receivable from the lessee, the estimated unguaranteed residual value of the equipment at lease termination, the initial direct costs related to the lease, if any, and the related unearned income. Unearned income represents the difference between the sum of the minimum lease payments receivable, plus the estimated unguaranteed residual value, minus the cost of the leased equipment. Unearned income is recognized as finance income over the term of the lease using the effective interest rate method.
For operating leases, rental income is recognized on the straight-line basis over the lease term. Billed operating lease receivables are included in accounts receivable until collected. Accounts receivable is stated at its estimated net realizable value. Deferred revenue is the difference between the timing of the receivables billed and the income recognized on the straight-line basis.
Our Investment Manager has an investment committee that approves each new equipment lease and other financing transaction. As part of its process, the investment committee determines the residual value, if any, to be used once the investment has been approved. The factors considered in determining the residual value include, but are not limited to, the creditworthiness of the potential lessee, the type of equipment considered, how the equipment is integrated into the potential lessee’s business, the length of the lease, the industry in which the potential lessee operates and the secondary market value of the equipment. Residual values are reviewed for impairment in accordance with our impairment review policy.
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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.
Long-lived Asset Impairments
The Partnership assesses the impairment of long-lived assets with determinable useful lives whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be recoverable (a triggering event). When such events occur, management determines whether there has been impairment by comparing the anticipated undiscounted net future cash flows to the related asset’s carrying value. If impairment exists, the asset is written down to its estimated carrying value. Impairment loss for long-lived assets was recorded in the amount of $875,000 and $443,605 for the years ending December 31, 2022 and 2021, respectively.
Collateralized Loans Receivable, net
Collateralized loans receivable are reported in our 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 balance sheets. Unearned income, discounts and premiums, if any, are amortized to interest income in the statements of operations using the effective interest rate method. Collateralized 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.
Finance Lease Receivables and Allowance for Loan and Lease 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. There was no impairment loss for collateralized loan receivable or finances leases for the years ending December 31, 2022 and 2021.
Recent Accounting Pronouncements
Refer to Note 2. Summary of Significant Accounting Policies on the accompanying notes to our financial statements for discussion about recent accounting pronouncements.
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Business Overview
Our Offering Period commenced on August 11, 2016 and concluded on March 31, 2019. We have been approved for sale under Blue Sky regulations in 49 states and the District of Columbia. During the Offering Period, the majority of our cash inflows were derived from financing activities and were the direct result of capital contributions from Limited Partners.
During our Operating Period, which began on October 3, 2016 and concluded on October 3, 2021, we used the majority of our net offering proceeds from Limited Partner capital contributions to acquire our initial investments. As our investments mature, we anticipate reinvesting the cash proceeds in additional investments in leased equipment and financing transactions, to the extent that the cash will not be needed for expenses, reserves and distributions to our Limited Partners. During this time-frame we expect both rental income and finance income to increase substantially as well as related expenses such as depreciation and amortization. During the Operating Period, we believe the majority of our cash outflows will be from investing activities as we acquire additional investments and to a lesser extent from financing activities from our paying quarterly distributions to our Limited Partners. Our cash flow from operations is expected to increase, primarily from the collection of rental and interest payments.
Results of Operations for the Years Ended December 31, 2022 and 2021
We are currently in our Liquidation Period. The Offering Period was declared effective by the SEC on August 11, 2016, and concluded on March 31, 2019. The Operating Period began on the date we admitted our first Limited Partners, at the initial closing, which occurred on October 3, 2016 and concluded on October 3, 2021. At our initial closing, we reimbursed our Investment Manager for a portion of the fees and expenses associated with our organization and offering which they previously paid on our behalf and we funded a small capital reserve. The Liquidation Period, which began on October 4, 2021, is the period in which we will sell assets in the ordinary course of business and will last two years, unless it is extended, at the sole discretion of the General Partner. Through December 31, 2022, the Partnership admitted 617 Limited Partners with total capital contributions of $25,371,709 resulting in the sale of 2,537,170.91 Units. The Partnership received cash contributions of $24,718,035 and applied $653,674 which would have otherwise been paid as sales commission to the purchase of 65,367.46 additional Units.
The Operating Period is defined as the period in which we invest the net proceeds from the Offering Period into business-essential, revenue-producing (or cost-saving) equipment and other physical assets with substantial economic lives and, in many cases, associated revenue streams. During this period we anticipate substantial cash outflows from investing activities as we acquire leased and financed equipment. We also expect our operating activities to generate cash inflows during this time as we collect rental payments from the leased and financed assets we acquire.
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Our revenue for the years ended December 31, 2022 and 2021 are summarized as follows:
Year Ended December 31, 2022 | Year Ended December 31, 2021 | |||||||
| Revenue: | ||||||||
| Finance income | $ | 2,138,947 | $ | 2,177,859 | ||||
| Interest income | 66,881 | 537,990 | ||||||
| Total Revenue | $ | 1,305,828 | $ | 2,715,849 | ||||
| Impairment and provision for loan and lease losses | (875,000 | ) | (443,605 | ) | ||||
| Revenue, net | $ | 430,828 | $ | 2,272,244 | ||||
For the year ended December 31, 2022, we received monthly lease payments of approximately $7,807,000 and recognized $2,138,947 in finance income from 20 finance leases during the same period. We also recognized $66,881 in interest income from collateralized loans receivable during the same period. We also incurred impairment on other assets of $875,000 during the year ended December 31, 2022.
For the year ended December 31, 2021, we received monthly lease payments of approximately $10,196,000 and recognized $2,177,859 in finance income from 44 finance leases during the same period. We also recognized $537,990 in interest income from collateralized loans receivable during the same period. We also incurred impairment on other assets of $443,605 during the year ended December 31, 2021.
Our expenses for the years ended December 31, 2022 and 2021 are summarized as follows:
Year Ended December 31, 2022 | Year Ended December 31, 2021 | |||||||
| Expenses: | ||||||||
| Management fees — Investment Manager | $ | 750,000 | $ | 750,000 | ||||
| Interest Expense | 281,523 | 628,870 | ||||||
| Professional fees | 801,702 | 353,578 | ||||||
| Administration expense | 171,249 | 290,137 | ||||||
| Other expenses | 7,115 | 8,808 | ||||||
| Total Expenses | $ | 2,011,589 | $ | 2,031,393 | ||||
For the year ended December 31, 2022, we incurred $2,011,589 in total expenses. We paid $750,000 in management fees to our Investment Manager during the year ended December 31, 2022. We pay our Investment Manager a management fee during the Operating Period and the Liquidation Period equal to the greater of (i) 2.5% per annum of the aggregate offering proceeds, payable monthly in advance or (ii) $62,500 per month. We recognized $171,249 in administration expense. Administration expense mainly consists of expenses paid to the fund administrator. We also incurred interest expense of $281,523 related to our loan payable. Lastly, we incurred $801,702 in professional fees, which were mostly comprised of fees related to compliance with the rules and regulations of the SEC and consulting services.
For the year ended December 31, 2021, we incurred $2,031,393 in total expenses. We paid $750,000 in management fees to our Investment Manager during the year ended December 31, 2021. We pay our Investment Manager a management fee during the Operating Period and the Liquidation Period equal to the greater of (i) 2.5% per annum of the aggregate offering proceeds, payable monthly in advance or (ii) $62,500 per month. We recognized $290,137 in administration expense. Administration expense mainly consists of expenses paid to the fund administrator. We also incurred interest expense of $628,870 related to our loan payable. Lastly, we incurred $353,578 in professional fees, which were mostly comprised of fees related to compliance with the rules and regulations of the SEC and consulting services.
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Net Income (Loss)
As a result of the factors discussed above, we reported net loss for the year ended December 31, 2022 of $1,580,761 as compared to a net income of $240,851 for the year ended December 31, 2021.
Liquidity and Capital Resources
Sources and Uses of Cash
Year Ended December 31, 2022 | Year Ended December 31, 2021 | |||||||
| Cash provided by (used in): | ||||||||
| Operating activities | $ | 811,104 | $ | 3,023,860 | ||||
| Investing activities | $ | 6,778,837 | $ | (160,734 | ) | |||
| Financing activities | $ | (7,635,131 | ) | $ | (4,507,105 | ) | ||
Sources of Liquidity
We are currently in our Liquidation Period. The Offering Period is the time frame in which we raise capital contributions from Limited Partners through the sale of our Units. As such, during our Offering Period a substantial portion of our cash inflows were from financing activities. The Operating Period is the time frame in which we acquire equipment under lease or enter into other equipment financing transactions. During this time period a substantial portion of our cash out-flows were for investing activities. We believe that cash inflows will be sufficient to finance our liquidity requirements for the foreseeable future, including quarterly distributions to our Limited Partners, general and administrative expenses and fees paid to our Investment Manager.
Operating Activities
Cash provided by operating activities for the year ended December 31, 2022 was $811,104 and was primarily driven by the following factors: impairment of $875,000, an increase in other assets of approximately $1,705,000, and an increase in accounts payable and accrued liabilities of approximately $74,000. Offsetting these fluctuations was a net loss for the year ended December 31, 2022 of approximately $1,581,000, a decrease in deferred revenue of approximately $194,000 and a decrease in accrued interest of approximately $44,000. 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 anticipate that we will generate greater net cash inflows from operations principally from rental payments received from lessees.
Cash provided by operating activities for the year ended December 31, 2021 was $3,023,860 and was primarily driven by the following factors: net income for the year ended December 31, 2021 of approximately $241,000, impairment of approximately $444,000, an increase in other assets of approximately $2,248,000, and an increase in deferred revenue of approximately $73,000. Offsetting these fluctuations was a decrease in accrued interest on loans payable of approximately $46,000 and a decrease in accounts payable and accrued liabilities of approximately $11,000. 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 anticipate that we will generate greater net cash inflows from operations principally from rental payments received from lessees.
Investing Activities
Cash provided by investing activities was $6,778,837 for the year ended December 31, 2022, which consisted of approximately $492,000 that we paid for the purchase of finance leases, finance income of approximately $1,239,000 net of receipt of approximately $7,807,000 in minimum rental payments from finance leases, and approximately $702,000 in net cash received from origination and purchases of loans receivable, prepayments and satisfactions.
| 20 |
Cash used in investing activities was $160,734 for the year ended December 31, 2021, which consisted of approximately $11,194,000 that we paid for the purchase of finance leases, finance income of approximately $2,178,000 and net of receipt of approximately $10,196,000 in minimum rental payments from finance leases, offset by approximately $3,016,000 in net cash received from origination and purchases of loans receivable, prepayments and satisfactions.
Financing Activities
Cash used in financing activities for the year ended December 31, 2022 was $7,635,131 and was primarily due to cash received from loan payable of $2,050,000, offset by payments of approximately $9,647,000 on the loan payable.
Cash used in financing activities for the year ended December 31, 2021 was $4,507,105 and was primarily due to cash received from loan payable of $12,560,000, offset by payments of approximately $16,701,000 on the loan payable, and $366,000 in distributions and redemptions to limited partners.
Distributions
During our Operating Period, we intend to pay cash distributions on a quarterly basis to our Limited Partners at 1.5% per quarter, the equivalent rate of 6.0% per annum, of each Limited Partners’ capital contribution (pro-rated to the date of admission for each Limited Partner). Beginning as of June 30, 2017, our distribution rate was 6.5% annually, paid quarterly at 1.625%, of capital contributions. Beginning as of March 31, 2018, we increased our distribution to 7.0% annually, paid quarterly at 1.75% of capital contributions. Beginning as of June 30, 2018, we increased our distribution to 7.5%, paid quarterly at 1.875% of capital contributions. Beginning as of September 30, 2018 we increased our distribution to 8.0%, paid quarterly at 2.00% of capital contributions. Beginning as of June 30, 2020, we decreased our distribution to 4.0%, paid quarterly at 1.00% of capital contributions. The amount and rate of cash distributions could vary and are not guaranteed. During the year ended December 31, 2022, we didn’t make a cash distributions to our Limited Partners. During the year ended December 31, 2021, we made quarterly cash distributions to our Limited Partners totaling approximately $323,000. At December 31, 2022 and 2021, the Partnership did not declare or accrue distributions due to the economic uncertainties from COVID-19. At December 31, 2022 and 2021 we declared and accrued a distribution of $0 and $637, respectively, for distributions due to our General Partner which resulted in distributions payable to our General Partner of $49,335 at December 31, 2022 and 2021.
Commitments and Contingencies
Commitment and Contingencies
Our income, losses and distributions are allocated 99% to our Limited Partners and 1% to our General Partner until the Limited Partners have received total distributions equal to each Limited Partners’ capital contribution plus an 8%, compounded annually, cumulative return on each Limited Partners’ capital contribution. After such time, income, losses and distributions will be allocated 80% to our Limited Partners and 20% to our General Partner.
We enter into contracts that contain a variety of indemnifications. Our maximum exposure under these arrangements is not known.
In the normal course of business, we enter into contracts of various types, including lease contracts, contracts for the sale or purchase of leased assets, loan agreements and management contracts. It is prevalent industry practice for most contracts of any significant value to include provisions that each of the contracting parties, in addition to assuming liability for breaches of the representations, warranties, and covenants that are part of the underlying contractual obligations, to also assume an obligation to indemnify and hold the other contractual party harmless for such breaches, and for harm caused by such party’s gross negligence and willful misconduct, including, in certain instances, certain costs and expenses arising from the contract. Generally, to the extent these contracts are performed in the ordinary course of business under the reasonable business judgment of our General Partner and our Investment Manager, no liability will arise as a result of these provisions. Should any such indemnification obligation become payable, we would separately record and/or disclose such liability in accordance with accounting principles generally accepted in the United States of America.
| 21 |
As of December 31, 2022 and 2021, the Partnership had unfunded commitments of $0 and $291,725 for a finance lease.
Off-Balance Sheet Transactions
None.
Contractual Obligations
None.
Subsequent Events
Effective January 1, 2023, the Investment Manager reduced the management fee from $62,500 per month ($750,000 per annum) to $50,000 per month ($600,000 per annum).
On February 1, 2023, in connection with a loan and security agreement entered into on October 18, 2019, the Partnership paid off the outstanding loan facility balance and accrued interest, and terminated the agreement with the third party.
In February 2023, in connection with a lease facility agreement that was funded between March 26, 2020 through September 22, 2020 that was later reclassified to other assets, the Partnership sold a piece of equipment for total net cash proceeds of $24,170. The equipment had a net book value of $25,650 resulting in a resulting in a loss of $1,480.
From January 2023 to March 2023, in connection with a lease facility agreement entered into on December 5, 2019 that was later reclassified to other assets, the Partnership has received $161,713 from the sale of assets and from a pre-existing payment schedule.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
We, like most other companies, are exposed to certain market risks, which include changes in interest rates and the demand for equipment owned by us. We believe that our exposure to other market risks, including commodity risk and equity price risk, are insignificant at this time to both our financial position and our results of operations.
Our Investment Manager has evaluated the impact of the condition of the credit markets on our future cash flows and we do not believe that we will experience any material adverse impact on our cash flows should credit conditions in general remain the same or deteriorate.
We manage our exposure to equipment and residual risk by monitoring the markets our equipment is in and maximizing remarketing proceeds through the re-lease or sale of equipment.
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Item 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
| Page(s) | |
| Financial Statements: | |
| Report of Independent Registered Public Accounting Firm (PCAOB ID |
24-25 |
| Balance Sheets | 26 |
| Statements of Operations | 27 |
| Statements of Changes in Partners’ Equity (Deficit) | 28 |
| Statements of Cash Flows | 29 |
| Notes to Financial Statements | 30 |
| 23 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of Arboretum Silverleaf Income Fund, L.P.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Arboretum Silverleaf Income Fund, L.P. (the “Partnership”) as of December 31, 2022 and 2021, the related statements of operations, changes in partners’ equity (deficit), and cash flows for the years ended December 31, 2022 and 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Partnership as of December 31, 2022 and 2021, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on the Partnership’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the financial statements and (ii) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
| 24 |
Allowance for Loan and Lease Losses
Critical Audit Matter Description
As described in Note 2 to the financial statements, the allowance for loan and lease losses represents management’s estimate of probable incurred credit losses in the Partnership’s loan and lease portfolio. In calculating the allowance for loan and lease losses, the Partnership assesses historical loss experience based on loan and lease type and qualitative factor adjustments for changes not reflected in the historical loss experience.
The determination of the qualitative factor adjustments involves a higher degree of management subjectivity, and includes factors such as concentrations, delinquencies, lease or loan modifications, economic conditions, and the amount of loss in the event of default.
The principal consideration for our determination that performing procedures relating to the allowance for loan and lease losses is a critical audit matter is that significant judgment and estimation is exercised by management in determining the allowance for loan and lease losses, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and in evaluating audit evidence obtained relating to the allowance for loan and lease losses, including the qualitative component.
How the Critical Audit Matter was Addressed in the Audit
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included, among others, testing management’s process for estimating the allowance for loan and lease losses, including evaluating the appropriateness of the methodology and the Partnership’s risk rating of each loan and lease in its asset portfolio, testing the completeness and accuracy of certain data used in the allowance for loan and lease losses, and evaluating the reasonableness of significant assumptions and judgments used by management to estimate the qualitative component of the allowance for loan and lease losses including those judgments related to the impact of concentrations, economic conditions and other considerations.
Long-Lived Asset Impairment
Critical Audit Matter Description
As described in Note 2 to the financial statements, the impairment of long-lived assets represents management’s estimate that probable net undiscounted future cash flows are less than carrying value.
The principal consideration for our determination that performing procedures relating to the impairment is a critical audit matter is that significant judgment and estimation is exercised by management in determining the impairment for long-lived assets, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and in evaluating audit evidence obtained relating to the long-lived asset impairment.
How the Critical Audit Matter was Addressed in the Audit
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included, among others, testing management’s process for estimating the long-lived asset impairment, including evaluating the appropriateness of the methodology, testing the completeness and accuracy of certain data used in the long-lived asset impairments, and evaluating the reasonableness of significant assumptions and judgments used by management related to the impact of concentrations, economic conditions and other considerations.
| /s/
|
|
| We have served as the Partnership’s auditor since 2016. |
March 31, 2023
| 25 |
Arboretum Silverleaf Income Fund, L.P.
(A Delaware Limited Partnership)
Balance Sheet
| December 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Investments in finance leases, net | ||||||||
| Collateralized loans receivable, including accrued interest of $ | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Partners’ Equity | ||||||||
| Liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Loan payable, including accrued interest of $ | ||||||||
| Distributions payable to General Partner | ||||||||
| Security deposit payable | ||||||||
| Deferred revenue | ||||||||
| Total Liabilities | ||||||||
| Partners’ Equity (Deficit): | ||||||||
| Limited Partners | ||||||||
| General Partner | ( | ) | ( | ) | ||||
| Total Equity | ||||||||
| Total Liabilities and Partners’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these financial statements.
| 26 |
Arboretum Silverleaf Income Fund, L.P.
Statement of Operations
For The Years Ended December 31, 2022 and 2021
| For The Year Ended | For The Year Ended | |||||||
| December 31, 2022 | December 31, 2021 | |||||||
| Revenue | ||||||||
| Finance income | $ | $ | ||||||
| Interest income | ||||||||
| Total Revenue | ||||||||
| Impairment and provision for loan and lease losses | ( | ) | ( | ) | ||||
| Revenue, net | ||||||||
| Expenses | ||||||||
| Management fees - Investment Manager | ||||||||
| Interest expense | ||||||||
| Professional fees | ||||||||
| Administration expense | ||||||||
| Other expenses | ||||||||
| Total Expenses | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Net (loss) income attributable to the Partnership | ||||||||
| Limited Partners | $ | ( | ) | $ | ||||
| General Partner | ( | ) | ||||||
| Net (loss) income attributable to the Partnership | $ | ( | ) | $ | ||||
| Weighted average number of limited partnership interests outstanding | ||||||||
| Net (loss) income attributable to Limited Partners per weighted average number of limited partnership interests outstanding | $ | ( | ) | $ | ||||
The accompanying notes are an integral part of these financial statements.
| 27 |
Arboretum Silverleaf Income Fund, L.P.
(A Delaware Limited Partnership)
Statement of Changes in Partners’ Equity (Deficit)
For The Years Ended December 31, 2022 and 2021
| Limited | ||||||||||||||||
| Partnership | Total | General | Limited | |||||||||||||
| Interests | Equity | Partner | Partners | |||||||||||||
| Balance, January 1, 2021 | $ | $ | ( | ) | $ | |||||||||||
| Net income | - | |||||||||||||||
| Distributions to partners | - | ( | ) | ( | ) | ( | ) | |||||||||
| Redemption | ( | ) | ( | ) | ( | ) | ||||||||||
| Balance, December 31, 2021 | $ | $ | ( | ) | $ | |||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||
| Distributions to partners | - | ( | ) | ( | ) | |||||||||||
| Redemption | ( | ) | ( | ) | ( | ) | ||||||||||
| Balance, December 31, 2022 | $ | $ | ( | ) | $ | |||||||||||
The accompanying notes are an integral part of these financial statements.
| 28 |
Arboretum Silverleaf Income Fund, L.P.
(A Delaware Limited Partnership)
Statement of Cash Flows
For The Years Ended December 31, 2022 and 2021
| For the Year Ended | For The Year Ended | |||||||
| December 31, 2022 | December 31, 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Impairment and provision for loan and lease losses | ||||||||
| Change in operating assets and liabilities: | ||||||||
| Other assets | ||||||||
| Accounts payable and accrued liabilities | ( | ) | ||||||
| Accrued interest on loan payable | ( | ) | ( | ) | ||||
| Security deposit payable | ( | ) | ||||||
| Deferred revenue | ( | ) | ||||||
| Net cash provided by operating activities | ||||||||
| Cash flows from investing activities: | ||||||||
| Change in leases, net | ( | ) | ||||||
| Origination and purchases of loans receivable, net of amortization, prepayments and satisfactions | ||||||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Cash received from loan payable | ||||||||
| Repayments of loan payable | ( | ) | ( | ) | ||||
| Cash paid for Limited Partner distributions | ( | ) | ( | ) | ||||
| Cash paid for Limited Partner redemptions | ( | ) | ( | ) | ||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Net decrease in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents, beginning of year | ||||||||
| Cash and cash equivalents, end of year | $ | $ | ||||||
| Supplemental disclosure of other cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Distributions payable to General Partner | $ | $ | ||||||
| Reclassification of investment in finance lease to other assets | $ | $ | ||||||
| Reclassification of other assets to investment in finance leases | $ | $ | ||||||
The accompanying notes are an integral part of these financial statements.
| 29 |
Arboretum Silverleaf Income Fund, L.P.
(A Delaware Limited Partnership)
Notes to Financial Statements
For the Years Ended December 31, 2022 and 2021
1. Organization and Nature of Operations.
Organization — Arboretum Silverleaf Income Fund, L.P. (the “Partnership”) was formed on January 14, 2016, as a Delaware limited partnership. The Partnership is engaged in a single business segment, the ownership and investment in leased equipment and related financings which includes: (i) purchasing equipment and leasing it to third-party end users; (ii) providing equipment and other asset financing; (iii) acquiring equipment subject to lease; and (iv) acquiring ownership rights (residual value interests) in leased equipment at lease expiration. The Partnership will terminate no later than December 31, 2040.
Nature of Operations — The principal investment strategy of the Partnership is to invest in business-essential, revenue-producing (or cost-saving) equipment or other physical assets with high in-place value and long, relative to the investment term, economic life and other financings. The Partnership executes its investment strategy by making investments in equipment already subject to lease or originating equipment leases and loans in such equipment, which will include: (i) purchasing equipment and leasing it to third-party end users; (ii) providing equipment and other asset financings; (iii) acquiring equipment subject to lease; and (iv) acquiring ownership rights (residual value interests) in leased equipment at lease expiration. From time to time, the Partnership may also purchase equipment and sell it directly to its leasing customers. The Partnership may use other investment structures that Arboretum Investment Advisors, LLC (the “Investment Manager”) believes will provide the Partnership with an appropriate level of security, collateralization, and flexibility to optimize its return on its investment while protecting against downside risk. In many cases, the structure will include the Partnership holding title to or a priority or controlling position in the equipment or other asset.
The
General Partner of the Partnership is ASIF GP, LLC (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 $
The
Partnership’s income, losses and distributions are allocated
During
the Operating Period,
| 30 |
From
August 11, 2016 through March 31, 2019, the Partnership admitted
2. Summary of Significant Accounting Policies.
Basis of Presentation — The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Use of Estimates — The preparation of financial statements in conformity with U.S. GAAP requires the General Partner and Investment Manager to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates primarily include the determination of allowances for doubtful lease, notes and loan accounts, depreciation and amortization, impairment losses, estimated useful lives, and residual values. Actual results could differ from those estimates.
Cash and Cash Equivalents — The Partnership considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist of funds maintained in checking and money market accounts maintained at financial institutions.
The Partnership’s cash and cash equivalents are held principally at one financial institution and at times may exceed federally insured limits. The Partnership has placed these funds in a full service commercial financial institution in order to minimize risk relating to exceeding insured limits.
Credit Risk — In the normal course of business, the Partnership is exposed to credit risk. Credit risk is the risk that the Partnership’s counterparty to an agreement either has an inability or unwillingness to make contractually required payments. The Partnership expects concentrations of credit risk with respect to lessees to be dispersed across different industry segments and different regions of the world.
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.
| 31 |
The investment committee of the Investment Manager approves each new equipment lease, financing transaction, and lease acquisition. As part of this process it determines the unguaranteed residual value, if any, to be used once the acquisition has been approved. The factors considered in determining the unguaranteed residual value include, but are not limited to, the creditworthiness of the potential lessee, the type of equipment being considered, how the equipment is integrated into the potential lessees’ business, the length of the lease the industry in which the potential lessee operates and the secondary market value of the equipment. Unguaranteed residual values are reviewed for impairment in accordance with the Partnership’s policy relating to impairment review.
The residual value assumes, among other things, that the asset will be utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the marketplace are disregarded, and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly. The residual value is calculated using information from various external sources, such as trade publications, auction data, equipment dealers, wholesalers and industry experts, as well as inspection of the physical asset and other economic indicators.
Collateralized Loans Receivable, Net — Collateralized loans receivable are reported in the 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 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 collateralized 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 statements of operations using the effective interest rate method. Collateralized 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.
Finance
Lease Receivables and Allowance for Loan and Lease 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. There was
Long-lived
Asset Impairments — The Partnership assesses the impairment of long-lived assets with determinable useful lives whenever
events or changes in business circumstances indicate that the carrying amount of an asset may not be recoverable (a triggering event).
When such events occur, management determines whether there has been impairment by comparing the anticipated undiscounted net future
cash flows to the related asset’s carrying value. If impairment exists, the asset is written down to its estimated carrying value.
At December 31, 2022, impairment was determined to exist for other assets
and an impairment loss was recorded for $
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.
The Partnership is subject to the Bipartisan Budget Act of 2015 (“BBA”), which, among other requirements, stipulates that any tax liability incurred based on an IRS tax examination will become due by the Partnership versus the partners of the Partnership. The Partnership, at its discretion, will be able to seek repayment from its partners or treat as a distribution of the individual partners’ account to satisfy this obligation. The Partnership will treat any liability incurred as a deduction to equity. As of December 31, 2022, there were no expected liabilities to be incurred under the BBA.
| 32 |
The Partnership has adopted the provisions of Financial Accounting Standards Board’s (“FASB”) Topic 740, Accounting for Uncertainty in Income Taxes. This accounting guidance prescribes recognition thresholds that must be met before a tax position is recognized in the financial statements and provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Additionally, an entity may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. The Partnership has evaluated its entity level tax positions for the years ended December 31, 2022 and 2021, and does not expect any material adjustments to be made. The tax years 2022, 2021, 2020 and 2019 remain open to examination by the major taxing jurisdictions to which the Partnership is subject.
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 statements of operations.
Recent Accounting Pronouncements
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments (“ASU 2016-13”), which requires credit losses on most financial assets measured at amortized cost and certain
other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (CECL) model).
Under this model, entities will estimate credit losses over the entire contractual term of the instrument from the date of initial recognition
of that instrument. Current US GAAP is based on an incurred loss model that delays recognition of credit losses until it is probable
the loss has been incurred. Accordingly, it is anticipated that credit losses will be recognized earlier under the CECL model than under
the incurred loss model. ASU 2016-13 was to be effective for fiscal periods beginning after December 15, 2019 and must be adopted as
a cumulative effect adjustment to retained earnings. In July 2019, the FASB decided to add a project to its technical agenda to propose
staggered effective dates for certain accounting standards, including ASU 2016-13. The FASB has approved an approach that ASU 2016-13
will be effective for Public Business Entities that are SEC filers, excluding smaller reporting companies such as the Partnership, for
fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. For all other entities, including smaller
reporting companies like the Partnership, ASU 2016-13 will be effective for fiscal years beginning after December 15, 2022, including
interim periods within those fiscal years. For all entities, early adoption will continue to be permitted; that is, early adoption is
allowed for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (that is, effective January
1, 2019, for calendar-year-end companies). On November 15, 2019, the FASB delayed the effective date of FASB ASC Topic 326 for certain
small public companies and other private companies. As amended, the effective date of ASC Topic 326 was delayed until fiscal years beginning
after December 15, 2022 for SEC filers that are eligible to be smaller reporting companies under the SEC’s definition, as well
as private companies and not-for-profit entities. Nothing in this staff interpretation 3 should be read to accelerate or delay the effective
dates of the standard as modified by the FASB. The Partnership adopted this standard using the modified retrospective approach
as of January 1, 2023. The adoption of this standard resulted in a $
During March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional expedients and exceptions for applying generally accepted accounting principles (“GAAP”) to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform, if certain criteria are met. Entities may elect the optional expedients and exceptions included in ASU 2020-04 as of March 12, 2020 and through December 31, 2022. The Partnership is currently assessing the effect that electing the optional expedients and exceptions included in ASU 2020-04 would have on its results of operations, financial position and cash flows.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the financial statements.
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3. Related Party Transactions.
The
General Partner is responsible for the operations of the Partnership and the Investment Manager makes all investment decisions and manages
the investment portfolio of the Partnership. The Partnership reimburses the General Partner for actual incurred organizational and offering
costs not to exceed
The
Partnership pays the Investment Manager during the Operating Period a structuring fee in an amount equal to
4. Investments in Finance Leases.
At December 31, 2022 and 2021, net investments in finance leases consisted of the following:
| 2022 | 2021 | |||||||
| Minimum rents receivable | $ | $ | ||||||
| Estimated unguaranteed residual value | ||||||||
| Unearned income | ( | ) | ( | ) | ||||
| $ | $ | |||||||
5. Collateralized Loans Receivable.
The Partnership has no allowance for loan losses or nonperforming loans at December 31, 2022 and 2021. The future principal maturities of the Partnership’s performing collateralized loans receivable at December 31, 2022 are as follows:
| Years ending December 31, | ||||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ | |||
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6. Other Assets.
As
of December 31, 2022, other assets of $
7. Loan Payable.
On
October 18, 2019, the Partnership entered into a loan and security agreement with a third party lender for a $
8. 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 maturities.
Fair value measurements and disclosures are based on a fair value hierarchy as determined by significant inputs used to measure fair value. The three levels of inputs within the fair value hierarchy are defined as follows:
Level 1- Quoted prices in active markets for identical assets or liabilities. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuations in which all significant inputs are observable in the market.
Level 3 - Valuation is modeled using significant inputs that are unobservable in the market. These unobservable inputs reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability.
The Partnership’s carrying values and approximate fair values of its financial instruments were as follows:
| December 31, 2022 | December 31, 2021 | |||||||||||||||||||||
| Carrying
Value | Fair
Value | Level | Carrying
Value | Fair
Value | Level | |||||||||||||||||
| Assets: | ||||||||||||||||||||||
| Collateralized loans receivable | $ | $ | 3 | $ | $ | 3 | ||||||||||||||||
| Liabilities: | ||||||||||||||||||||||
| Loan payable | $ | $ | 2 | $ | $ | 2 | ||||||||||||||||
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9. Income Tax Reconciliation.
As
of December 31, 2022 and 2021, total Partners’ Equity included in the financial statements was $
The Partnership is subject to the Bipartisan Budget Act of 2015 (“BBA”), which, among other requirements, stipulates that any tax liability incurred based on an IRS tax examination will become due by the Partnership versus the partners of the Partnership. The Partnership, at its discretion, will be able to seek repayment from its partners or treat as a distribution of the individual partners’ account to satisfy this obligation. The Partnership will treat any liability incurred as a deduction to equity. As of December 31, 2022, there were no expected liabilities to be incurred under the BBA.
The following table reconciles the net income (loss) for financial statement reporting purposes to the net income for federal income tax purposes for the years ended December 31, 2022 and 2021:
| For the Year Ended | For the Year Ended | |||||||
| December 31, 2022 | December 31, 2021 | |||||||
| Net income (loss) per financial statements | $ | ( | ) | $ | ||||
| Depreciation and amortization | ( | ) | ( | ) | ||||
| Advanced rental payments | ( | ) | ( | ) | ||||
| Gain (loss) on fixed assets | ( | ) | ||||||
| Impairment and provision for loan and lease losses | ||||||||
| Loan origination fees | ||||||||
| Amortization of loan origination fees | ( | ) | ( | ) | ||||
| Tax lease adjustments | ||||||||
| Net income (loss) for federal income tax purposes | $ | ( | ) | $ | ||||
10. Indemnifications.
The Partnership enters into contracts that contain a variety of indemnifications. The Partnership’s maximum exposure under these arrangements is not known.
In the normal course of business, the Partnership enters into contracts of various types, including lease contracts, contracts for the sale or purchase of lease assets, loan agreements and management contracts. It is prevalent industry practice for most contracts of any significant value to include provisions that each of the contracting parties, in addition to assuming liability for breaches of the representations, warranties, and covenants that are part of the underlying contractual obligations, to also assume an obligation to indemnify and hold the other contractual party harmless for such breaches, and for harm caused by such party’s gross negligence and willful misconduct, including, in certain instances, certain costs and expenses arising from the contract. Generally, to the extent these contracts are performed in the ordinary course of business under the reasonable business judgment of the General Partner and the Investment Manager, no liability will arise as a result of these provisions. The General Partner and Investment Manager knows of no facts or circumstances that would make the Partnership’s contractual commitments outside standard mutual covenants applicable to commercial transactions between businesses. Accordingly, the Partnership believes that these indemnification obligations are made in the ordinary course of business as part of standard commercial and industry practice, and that any potential liability under the Partnership’s similar commitments is remote. Should any such indemnification obligation become payable, the Partnership would separately record and/or disclose such liability in accordance with U.S. GAAP.
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11. Business Concentrations.
For
the year ended December 31, 2022, the Partnership had three leases which accounted for approximately
At
December 31, 2022, the Partnership had four lessees which accounted for approximately
12. Geographic Information.
As of December 31, 2022 and 2021, all of the Partnership’s revenue and assets are based in the United States.
13. Commitments and Contingencies.
As
of December 31, 2022, the Partnership does not have any unfunded commitments for any investments. As of December 31, 2021, the Partnership
had unfunded commitments of $
14. Subsequent Events.
Effective January 1, 2023, the Investment Manager
reduced the management fee from $
On February 1, 2023, in connection with a loan and security agreement entered into on October 18, 2019, the Partnership paid off the outstanding loan facility balance and accrued interest, and terminated the agreement with the third party.
In
February 2023, in connection with a lease facility agreement that was funded between March 26, 2020 through September 22, 2020 that
was later reclassified to other assets, the Partnership sold a piece of equipment for total net cash proceeds of $
From
January 2023 to March 2023, in connection with a lease facility agreement entered into on December 5, 2019 that was later reclassified
to other assets, the Partnership has received $
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.
None.
Item 9A. Controls and Procedures.
Evaluation of disclosure controls and procedures
In connection with the preparation of this Annual Report on Form 10-K for the year ended December 31, 2022, our General Partner carried out an evaluation, under the supervision and with the participation of the management of our General Partner, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our General Partner’s disclosure controls and procedures as of December 31, 2022. Based on the foregoing evaluation, the Chief Executive Officer and Chief Financial Officer of our General Partner concluded that our General Partner’s disclosure controls and procedures were effective as of December 31, 2022 at the reasonable assurance level.
In designing and evaluating our General Partner’s disclosure controls and procedures, our General Partner recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our General Partner’s disclosure controls and procedures have been designed to meet reasonable assurance standards. Disclosure controls and procedures cannot detect or prevent all error and fraud. Some inherent limitations in disclosure controls and procedures include costs of implementation, faulty decision-making, simple error and mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all anticipated and unanticipated future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with established policies or procedures.
Our General Partner’s Chief Executive Officer and Chief Financial Officer have determined that no weakness in disclosure controls and procedures had any material effect on the accuracy and completeness of our financial reporting and disclosure included in this Annual Report on Form 10-K.
Evaluation of internal control over financial reporting
Our General Partner is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our General Partner’s internal controls system is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Partnership; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the 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 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’s management, including the Chief Executive Officer and Chief Financial Officer of our General Partner, conducted an evaluation of the effectiveness of our General Partner’s internal control over financial reporting as of December 31, 2022 based on the “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on their assessment, our General Partner’s management concluded that, as of December 31, 2022, its internal control over financial reporting was effective at the reasonable assurance level.
Changes in internal control over financial reporting
There were no additional material changes in our internal control over financial reporting during the year ended December 31, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
Not applicable.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
Our General Partner
Our General Partner is ASIF GP, LLC, a Delaware limited liability company with offices at 100 Arboretum Drive, Suite 105, Portsmouth, New Hampshire 03801. Our General Partner was formed in January 2016. The sole member of our General Partner is Arboretum Investment Advisors, LLC, our Investment Manager. The executive officers of our General Partner are as follows:
| Name | Age | Position | ||
| Claudine Aquillon | 58 | Chief Executive Officer and Chief Operating Officer | ||
| Michael Miroshnikov | 40 | President | ||
| Joshua Yifat | 50 | Chief Financial Officer |
Biographical information regarding the officers and directors of our General Partner follows the table setting forth information regarding our Investment Manager’s current executive officers and directors.
Our Investment Manager
Our Investment Manager is Arboretum Investment Advisors, LLC, a Delaware limited liability company, with offices at 100 Arboretum Drive, Suite 105, Portsmouth, New Hampshire 03801. Our Investment Manager was formed in March 2016 to act as the manager of direct participation programs, and together with certain executive officers who are members of its investment committee, is responsible for selecting, managing and disposing of our assets, equipment, leases and loans. In this regard, after we received the minimum offering proceeds and held our initial closing, we entered into the Management, Origination and Servicing Agreement under which our Investment Manager originates leases and other investments for us and services our portfolio of leases and other investments. Our Investment Manager is responsible for all aspects of the performance by its affiliates of services necessary to our operation and for the facilities, personnel, equipment, financial and other resources used by its affiliates in the performance of those services. The executive officers and advisor of our Investment Manager are as follows
| Name | Age | Position | ||
| Claudine Aquillon | 58 | Chief Executive Officer and Chief Operating Officer | ||
| Michael Miroshnikov | 40 | President | ||
| Joshua Yifat | 50 | Chief Financial Officer |
Claudine Aquillon has served as Chief Executive Officer and Chief Operating Officer of our General Partner and our Investment Manager since inception. Ms. Aquillon brings over 25 years of operations experience, in both the public and private sectors, to our Investment Manager. During her career in the financial services industry, Ms. Aquillon has served in multiple senior management and director positions at independent leasing companies, international banks, and financial consulting and due diligence firms where her primary responsibility was to oversee and manage the administrative, financial, legal, operational and risk functions. From September 2014 through June 2016, Ms. Aquillon served as the Chief Operating Officer of SQN Capital Management, LLC. Prior to that, Ms. Aquillon was the Operations Officer for JMAC Partners, LLC from February 2014 to September 2014; prior to that time she was the Vice President – Risk for Morgan Stanley from June 2011 to February 2014. Ms. Aquillon also brings mergers & acquisition experience, having been part of a team that structured multiple successful acquisitions in the banking and financial services industry. Ms. Aquillon received her B.A. in Business Administration & Finance from Bradford College and has a Master Black Belt in Six Sigma.
Michael Miroshnikov has served as President of our General Partner and our Investment Manager since inception. Mr. Miroshnikov has spearheaded the growth and development of our Investment Manager’s acquisition and origination division. Mr. Miroshnikov began his career in the equipment leasing and finance industry in 2002. From 2007 through June 2016, Mr. Miroshnikov played an integral role at SQN Capital Management, LLC in a variety of capacities including operations, compliance, acquisitions and executive management. Mr. Miroshnikov possesses a specific expertise in technology, manufacturing, medical, marine, energy and aviation assets and the respective industries. In 2005, he graduated Cum Laude with a B.A. in Investment Finance from the Zicklin School of Business at Baruch College and in 2009 received a Juris Doctorate degree from Brooklyn Law School. He also holds Series 7, 24, and 63 licenses.
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Joshua Yifat has served as Chief Financial Officer of our General Partner and our Investment Manager since July 1, 2016. Mr. Yifat has over eighteen years of business finance, accounting, tax and corporate auditing experience, including positions at Morgan Stanley Smith Barney, KPMG LLP, along with other regional accounting firms. He has extensive experience in the alternative investments industry including hedge funds and private equity funds. From September 2014 through June 2016, Mr. Yifat served as a consultant chief financial officer with a CFO outsourcing firm, The CFO Squad, providing CFO strategies and services to various small to mid-sized publicly traded companies and alternative investments funds. Prior to that, from May 2011 through January 2014, Mr. Yifat was the chief financial officer of Infinity Augmented Reality, Inc., a publicly traded company on the OTC, where he provided multi-functional executive leadership on accounting, finances, operations and investor/shareholder relations. Prior to that, from December 2007 through April 2011, Mr. Yifat was a Vice President of the Managed Futures Group at Morgan Stanley Smith Barney, where he supervised 40 managed futures funds with assets under management in excess of $6.5 billion. Prior to Morgan Stanley Smith Barney, Mr. Yifat spent 8 years with various accounting firms as senior auditor within the financial services group. Mr. Yifat holds a B.S. from Touro College.
Code of Business Conduct and Ethics
Because we do not directly employ any persons, we rely on a Code of Business Conduct and Ethics adopted by our General Partner that applies to the principal executive officer, principal financial officer and principal accounting officer of our General Partner, as well as to persons performing services for us generally. You may request a copy of this code of ethics by mailing or request to our General Partner at ASIF GP, LLC, 100 Arboretum Drive, Suite 105, Portsmouth, New Hampshire 03801.
We are not required to and do not have an independent audit committee or a financial expert.
Item 11. Executive Compensation.
We do not pay the officers or directors of our General Partner, our Investment Manager or their affiliates any compensation. However, we will pay our General Partner, our Investment Manager and their affiliate’s fees and reimburse certain of their expenses incurred on our behalf. These expense reimbursements include reimbursing our General Partner, our Investment Manager and their affiliate’s for certain costs incurred on our behalf, including the cost of personnel, other than controlling persons of our General Partner, our Investment Manager and their affiliates, who will perform administration, accounting, investor relations, secretarial, transfer and other services required by us. These individuals also will perform similar services for our General Partner, our Investment Manager or their affiliates and other affiliated investment programs, including our Investment Manager’s prior equipment leasing and finance programs, as well as investment programs to be formed in the future by our General Partner and its affiliates. We entered into an agreement which provides that expense reimbursements paid by us to our General Partner, our Investment Manager and their affiliates must be limited to the lesser of their actual cost or the cost of comparable services from third-parties. We expect that we will allocate the cost of compensation and benefits of our General Partner’s officers, the officers and employees of our Investment Manager, and the officers and employees of their affiliates, excluding expenses allocable to their controlling persons, based on the amount of their business time spent on our business.
Our General Partner, Investment Manager and their affiliates were paid or accrued the following compensation and reimbursement for costs and expenses:
| Entity | Capacity | Description | Year Ended December 31, 2022 |
Year Ended December 31, 2021 |
||||||||
| Arboretum Investment Advisors, LLC | Investment Manager | Management fees (1) | $ | 750,000 | $ | 750,000 | ||||||
| $ | 750,000 | $ | 750,000 | |||||||||
| (1) | Amount charged directly to operations. |
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Our General Partner has a 1% interest in our income, losses and distributions until the Limited Partners have received total distributions equal to each Limited Partner’s capital contribution plus an 8%, compounded annually, cumulative return on each Limited Partner’s capital contribution. After such time, income, losses and distributions will be allocated 20% to our General Partner. We did not make a cash distribution to our General Partner during the years ended December 31, 2022 or 2021. As of December 31, 2022 and 2021, we accrued $0 and $637 for distributions payable to our General Partner. For the years ended December 31, 2022 and 2021, the General Partner’s 1% interest in our net loss was $15,808 and net income was $2,409, respectively.
Item 12. Security Ownership of Certain Beneficial Owners and the General Partner and Related Security Holder Matters.
| a. | We do not have any securities authorized for issuance under any equity compensation plan. | |
| b. | We do not have any Limited Partners who own over 5% of our Units at December 31, 2022. | |
| c. | As of March 31, 2023, no directors or officers of our General Partner or our Investment Manager own any of our equity securities. | |
| d. | Neither we nor our General Partner or our Investment Manager are aware of any arrangements with respect to our securities, the operation of which may at a subsequent date result in a change of control of us. |
Item 13. Certain Relationships and Related Transactions, and Director Independence.
For information regarding executive compensation and related party transactions refer to Part III Item 11. Executive Compensation and Part II Item. 8. Financial Statements and Supplementary Data, Note 3. Related Party Transactions in our financial statements for a discussion of our related party transactions.
Because we are not listed on any national securities exchange or inter-dealer quotation system, we have elected to use the Nasdaq Stock Market’s definition of “independent director” in evaluating whether any of our General Partner’s and Investment Manager’s directors are independent. Under this definition, the board of directors of both our General Partner and our Investment Manager has determined that they do not have any independent directors, nor are we required to have any.
Item 14. Principal Accounting Fees and Services.
During the years ended December 31, 2022 and 2021 our auditors provided audit services relating to our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q. Additionally, our auditors provided other services in the form of tax compliance work. The following table presents the fees for both audit and non—audit services rendered by Baker Tilly US, LLP, for the years ended December 31, 2022 and 2021:
| For the Year ended | For the Year ended | |||||||
| Description of fees | December 31, 2022 | December 31, 2021 | ||||||
| Audit fees (1) | 143,000 | 175,765 | ||||||
| Tax compliance fees | 73,500 | 58,275 | ||||||
| $ | 216,500 | $ | 234,040 | |||||
| (1) | Includes audits and interim quarterly reviews. |
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PART IV
Item 15. Exhibits, Financial Statement Schedules.
| 1) | Documents filed as part of this Report. |
| a) | The following financial statements are filed herewith in Part II Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K: |
| b) | Listing of Exhibits: |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacity and on the dates indicated.
File No. 333-211626
ASIF GP, LLC
General Partner of the Registrant
| March 31, 2023 | |
| /s/ Michael Miroshnikov | |
| Michael Miroshnikov | |
| President | |
| (Principal Executive Officer) |
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