Exhibit C
INDEX TO FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page No.
Independent Auditor’s Report | 2 |
Balance Sheet | 3 |
Statement of Income and Changes in Member’s Equity | 4 |
Statement of Cash Flows | 5 |
Notes to Financial Statements | 6-13 |
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INDEPENDENT AUDITOR'S REPORT
To the Member of
Circle of Wealth Fund III LLC
Coeur D'Alene, Idaho
We have audited the accompanying financial statements of Circle of Wealth Fund III LLC (an Idaho limited liability company), which comprise the balance sheet as of December 31, 2018, and the related statements of operations and changes in member's equity, and cash flows for the period from December 3, 2018 (inception) through December 31, 2018, and the related notes to the financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Circle of Wealth Fund III LLC as of December 31, 2018, and the results of its operations and its cash flows for the period from December 3, 2018 (inception) through December 31, 2018, in accordance with accounting principles generally accepted in the United States of America.
ArmaninoLLP
San Ramon, California
February 4, 2019
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Circle of Wealth Fund III LLC
Balance Sheet
December 31, 2018
_________________________
ASSETS | ||||
Cash and cash equivalents | $ | 25,000 | ||
Prepaid expenses | 3,000 | |||
Total assets | $ | 28,000 | ||
LIABILITIES AND MEMBER'S EQUITY | ||||
Liabilities | ||||
Accounts payable | $ | 3,000 | ||
Total liabilities | 3,000 | |||
Member's equity | 25,000 | |||
Total liabilities and member's equity | $ | 28,000 |
The accompanying notes are an integral part of these financial statements.
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Circle of Wealth Fund III LLC
Statement of Income and Changes in Member's Equity
For the Period from December 3, 2018 (Inception) through December 31, 2018
_________________________
Revenues | $ | — | ||
Total revenues | — | |||
Operating expenses | — | |||
Total operating expenses | — | |||
Net income | — | |||
Member's equity, beginning of period | — | |||
Member's contributions | 25,000 | |||
Member's equity, end of period | $ | 25,000 |
The accompanying notes are an integral part of these financial statements.
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Circle of Wealth Fund III LLC
Statement of Cash Flows
For the Period from December 3, 2018 (Inception) through December 31, 2018
_________________________
Cash flows from operating activities | ||||
Net income | $ | — | ||
Adjustment to reconcile net income to | ||||
net cash provided by operating activities | ||||
Prepaid expenses | (3,000 | ) | ||
Accounts payable | 3,000 | |||
Net cash provided by operating activities | — | |||
Cash flows from financing activities | ||||
Member's contributions | 25,000 | |||
Net cash provided by financing activities | 25,000 | |||
Net increase in cash | 25,000 | |||
Cash and cash equivalents at beginning of period | — | |||
Cash and cash equivalents at end of period | $ | 25,000 |
The accompanying notes are an integral part of these financial statements.
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Circle of Wealth Fund III LLC
Notes to Financial Statements
December 31, 2018
1. | NATURE OFOPERATIONS |
Circle ofWealth Fund III, LLC (the"Fund") is anIdaho limitedliability company thatwas organized tomake, fund,originate, refinance, purchase, selland/or otherwise acquire loans secured byfirstorjunior position deeds oftrust ormortgages onnon-owner occupied residential andcommercial properties located throughout the United States; and acquire, develop, rehabilitate, and/or hold and/or sellnon-owneroccupied real estate locatedthroughout theUnited States.TheFund ismanaged bySecured Investment Corp., aWyoming corporation (the "Manager"). TheFund receives certain operating andadministrative services from theManager,some ofwhich are notreimbursed to theManager. TheFund'sfinancial position andresults ofoperations would likely bedifferent absent this relationship with theManager.
TheFundwasorganized tocontinue indefinitely unless dissolved and terminated pursuant to theprovisionsofthe Fund's operating agreement.
As ofDecember 31, 2018,the Fund has not commenced planned principal operations norgenerated revenue. The Fund's activities since inceptionhave consisted offormation activities and preparations for raising capital.Oncethe Fund commences planned principal operations, itwillincur significant additional expenses. TheFund isdependent upon additional capital resources for thecommencement of itsplanned principal operations and issubject tosignificant risks and uncertainties; including failing tosecure funding tooperationalize theFund'splanned operations orfailing toprofitably operate thebusiness.
2. | SUMMARY OF SIGNIFICANTACCOUNTINGPOLICIESCashandcash equivalents |
TheFund considers all highly liquidfinancial instrumentswithmaturitiesofthree months orless at thetime ofpurchase to becash equivalents. Cash ondeposit occasionally exceeds federally insured limits. TheFund believes that it mitigates this risk bymaintaining deposits withmajorfinancial institutions.
Risks anduncertainties
TheFund hasnooperating history and hasnot generated revenue from operations. TheFund's business and operations are sensitive togeneral business andeconomic conditions in theU.S. along withlocal, state, andfederal governmental policy decisions. Ahost offactors beyond theFund's control could cause fluctuations in these conditions, including but notlimited to: its ability toraise sufficient fundsfrom investors to fundloans andacquire real estate aswell aspotential changes to Regulation A. Adverse developments inthese general business and economic conditions could have amaterial adverse effect on theFund'sfinancial conditions and theresultsofoperations.
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Circle of Wealth Fund III LLC
Notes to Financial Statements
December 31, 2018
Management estimates andrelated risks
Thepreparation offinancial statements inconformity withaccounting principles generally accepted inthe United StatesofAmerica requiresmanagement tomakeestimates andassumptions aboutthereported amountsofassets andliabilities, anddisclosuresofcontingent assets andliabilities, atthe date of thefinancial statements andthe reported amounts ofrevenues andexpenses during thereported period. Such estimates willrelate principally to thedeterminationofthe allowancefor loanlosses, interest-only stripreceivables onloans sold andfair value ofreal estate held andserving ascollateral forFund loans. Although these estimates will reflect management's bestestimate, it is atleast reasonably possible that amaterial change tothese estimates could occur in thenear term.
Thefair valueofreal estate, in general, is impacted bycurrent real estate andfinancialmarketconditions. Should these markets experience any significant declines, theresulting collateral values of theFund's loans, ifany, will likely benegatively impacted. Theimpact tosuch values could besignificant andas aresult, the Fund's actual loanlosses could differ significantly frommanagement's current estimates.
Mortgage loansreceivable
Mortgage loans, themajority ofwhich theFund intends tomakeavailable for sale toprospective investors, will generallybestated atthe lowerofcost orfair value. Subordinate mortgage loans willrepresent the Fund's retained portion of anymortgage loans sold tothird-party buyers after having beenoriginated by theFund. The subordinatemortgage loans,which the Fund has theintent andability tohold for the foreseeable future orto maturity, will generallybestated at theiroutstanding principal balance withinterest thereon beingaccrued asearned. Mortgage loansreceivable are expected tomake up the only classoffinancing receivables within the Fund's lendingportfolio. As aresult, further segmentationofthe loan portfoliowillnot beconsidered necessary.
If theprobable ultimate recovery ofthe carrying amountof aloan, with dueconsideration for thefair value ofcollateral, is less than amounts dueaccording tothe contractualterms of the loanagreement andthe shortfall inthe amounts due arenotinsignificant, thecarrying amount of theinvestment shall bereduced tothe present valueofestimated future cash flows discounted at theloan's effective interest rate.If a loan iscollateral dependent, itis valued at theestimated fairvalue ofthe related collateral.
Interest isaccrued daily on theprincipal ofthe loans.Ifevents andorchanges in circumstances causemanagement tohave serious doubts about the further collectability of thecontractual payments, aloanmay becategorized asimpaired andinterest is nolonger accrued. Any subsequent payments onimpaired loans are applied toreduce theoutstanding loanbalances including accrued interest and advances.
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Circle of Wealth Fund III LLC
Notes to Financial Statements
December 31, 2018
Allowance for loanlosses
Loans and the related accrued interest are analyzed on aperiodic basis for recoverability. Delinquencies are identified andfollowed aspartofthe loansystem. Aprovision ismade forlosses onloans toadjust the allowance for loanlosses toan amount considered bymanagement to beadequate, with dueconsideration tocollateral value, toprovide for unrecoverable loans and receivables, including impaired loans, accrued interest and advances onloans. As acollateral-based lender, the Fund does notconsider credit risks whichmay beinherent in afurther segmented loanportfolio as abasis for determining the adequacy ofits allowance for loan losses butrather focuses solely on theunderlying collateral valueof theloans inits portfolio to do so.As aresult, theFund does not consider further segmentation of itsloan portfolio andrelated disclosures necessary. The Fund writes off uncollectible loans andrelated receivables directly to theallowance for loan losses once it isdetermined that thefull amount is not collectible.
Interest-only stripreceivables
Interest-only stripreceivables represent the present value ofresidual cash flows the Fund expects toreceive onmortgageloans receivable sold tothird-party investors after having beenoriginated by theFund. The valueofthese receivables isdetermined by estimating thefuture cash flows usingassumptions ofkey factors, suchas prepayment anddefault rates and discount rates appropriate forthe type of assetand risk. The value ofinterest-only stripreceivables could beaffected byexternal factors, such aschanges in thebehavior patternsofcustomers andchanges in thestrengthofthe economy; therefore, actual performance coulddiffer fromthese assumptions. TheFund evaluates theperformanceof thereceivables relative tothese assumptions on aregular basis. The Manager negotiates theparticipation interest to beearned bythe Fund for loans sold on acase-by-case basis.
Real estate owned
Real estate purchased is recorded at cost. Costs ofreal estate improvements arecapitalized, whereas costs relating toholding real estate are expensed. The portion ofinterest costs relating todevelopment ofreal estate is capitalized.
Impairment lossesofreal estate held andheld forsale aremeasured asthe amount bywhich thecarrying amount of aproperty exceeds its fair value less estimated costs tosell. Impairment losses ofreal estate held for useare determined bycomparing theexpected future undiscounted cashflows ofthe property, including any coststhat must beincurred toachieve those cash flows, to thecarrying amount of theproperty.If those cashflows areless than the carrying amount of theproperty, impairment ismeasured asthe amount by whichthe carrying amount ofthe asset exceeds itsfair value. Valuations areperiodically performed bymanagement, and anysubsequent write downs are recorded as acharge tooperations.
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Circle of Wealth Fund III LLC
Notes to Financial Statements
December 31, 2018
Fairvalue measurements
Fairvalue isdefined asthe exchange price that would bereceived for anassetor paid totransfer aliability (anexit price) inthe principalormost advantageous market forthe asset orliability in anorderly transaction betweenmarketparticipants onthemeasurement date. The Fund determines thefair values ofits assets andliabilities based on afair value hierarchy that includes three levels ofinputs thatmay be usedto measure fair value (Level 1,Level 2and Level 3).
Level 1inputs are quoted prices (unadjusted) inactive markets foridentical assets orliabilities that theFund hasthe ability toaccess atthe measurement date. An activemarketis amarketinwhich transactionsoccurwith sufficient frequency andvolume toprovide pricing informationon anongoing basis.Level 2inputs are inputs other thanquoted prices that areobservable for the asset orliability, either directly orindirectly. Level 3inputs are unobservable inputs for theassetorliability. Unobservable inputs reflect theFund's own assumptions about the assumptionsmarketparticipants would use in pricing theasset orliability (including assumptions about risk). Unobservable inputs are developed based on thebest information available in thecircumstances andmay include theFund'sown data.
TheFund does notrecord loans at fair value on arecurring basis butuses fair value measurements ofcollateral security inthe determination ofits allowance for loan losses. The fair value for impaired secured loans is determined using thesale comparison, income andother commonly usedvaluation approaches.
Thefollowing methods and assumptions were used toestimate thefair value offinancial instruments:
· | Secured loans (Level 2orLevel 3).Forloans inwhich aspecific allowance isestablished basedonthe fair valueofthe collateral, theFund records theloan asnonrecurring Level 2if the fair valueof thecollateral is based on anobservable market price or acurrent appraised value.If anappraised value isnot available or thefair value ofthe collateral is considered impaired below theappraised value and there is noobservablemarketprice, the Fund records theloan asnonrecurring Level 3. |
· | Interest-only stripreceivables (Level 3).Forinterest-only strip receivables, the Fund estimates thefair value using internal valuation models. Thefair valueofthese receivables is determined by estimating thefuture cash flows using assumptions ofkey factors,such as prepayment and default rates anddiscount rates appropriate for thetype ofasset and risk. |
Deferred loan origination fees
Loan origination fees represent amounts charged bythe Fund tothe borrowers for such things aspoints, loanprocessing fees, underwriting fees and other similar charges. As the majority of theFund's loansare expected to beheld forsale, the Fund defers recognition ofthe fees until theloan issold.
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Circle of Wealth Fund III LLC
Notes to Financial Statements
December 31, 2018
Subscription liabilities andsubscription funds intransit
TheFund accepts subscription agreements andfunds fromprospective investors who wish tobecome members ofthe Fund.If thesubscription funds areneeded inthe normal course of theFund's operations on any day otherthan the first day of themonth, thesubscription fundswill beborrowed at anannual rate of6%for the odddays within the month the borrowing tookplace.
Income taxes
TheFund is a limitedliability company forfederal and stateincome tax purposes. Under thelaws pertaining toincome taxation oflimited liability companies, nofederal income tax ispaid bythe Fund as anentity. Each individual member reportsontheir federal andstateincome taxreturns theirdistributive shareofFund income, gains, losses, deductions and credits, whetherornot anyactual distribution ismade to suchmemberduring ataxable year.
TheFund hasevaluated its current taxpositions andhasconcluded that asofDecember 31, 2018, theFund doesnothave anysignificant uncertain tax positions for which areserve wouldbenecessary.
Subsequent events
TheFund has evaluated subsequent events through February 4,2019, thedate the financial statements were available to beissued. No subsequent events have occurredthatwouldhave amaterial impact onthe presentation ofthe Fund's financial statements.
3. | FUNDPROVISIONS |
TheFund is anIdaho limited liability company. Therights, duties and powers of themembers of theFund aregoverned bythe operating agreement and theIdaho Limited Liability Company Act. Thefollowing description of theFund'soperating agreement provides only general information. Members should refer to the Fund's operating agreement and offering circular for amore complete descriptionof theprovisions. TheManager is incomplete control ofthe Fund business, subject to thevoting rightsofthemembers onspecified matters. TheManager acting alone has thepower andauthority toact for and bind theFund.
Members representing amajority ofthe outstanding Fund membership interests may approve ordisapprove any of thefollowing matters: (i) theFund'smerger with orconversion into another entity; (ii) causing theFund toincur debt which would exceed theamount provided for inthe offering circular; (iii) atransaction, not expressly permitted bythe operating agreement oroffering circular, involving aconflict ofinterest between theManager and theFund; (iv)remove theManager if: (1) the Manager isconvictedor found liablefor anact ofgross negligence orfraud which materially lowers the net asset value oftheFund, and(2) the holders ofat least amajority of theoutstanding membership interests vote infavor ofsuch removal; (v) election of asuccessor manager; (vi) amendments tothe operating agreement.
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Circle of Wealth Fund III LLC
Notes to Financial Statements
December 31, 2018
3. | FUNDPROVISIONS (continued)Profits andlosses |
Profits andlosses accrued during anyaccounting period shall beallocated among themembers inaccordance with their respective membership interests maintained throughout that accounting period.
Fund expenses
TheFund shall bear all costs and expenses associated with theoperationofthe Fund, including, butnot limited to, theannual tax preparationof theFund's taxreturns, anystate and federal income taxdue, legal fees, accounting fees,filing fees, and anyrequired independent audit reports required byagencies governing thebusiness activities of theFund,foreclosure costs and expenses associated withthe foreclosing onassets, costs associated with force placed insurance, and costs and expenses associated with thedispositionofassets.For theperiod ended December31,2018, theManager elected toabsorb all operating andadministrative expensesofthe Fund.
Distributions
Memberswill beeligible for monthly distributions ofthe Fund's net profits. The Fund willmake alldistributions tothe members inproportion to the membership interest they held during theperiod forwhich thedistribution is declared until each member hasreceived sixpercent (6%) cumulative annual preferred return. If returns are higher than 6% cumulative annual preferred return,theremaining funds will bedistributed 50% to themembers inproportion tothe membership interest and50% tothe Manager as aperformance fee.In theevent that theFund is unable to pay tothe members thefull preferred return in anyaccounting period, the shortfall shall neither cumulate norcompound into thefollowing accounting period, and theFund shall not berequired to pay theshortfall in anysucceeding accounting period.
Liquidity, capital withdrawals andearly withdrawals
There is nopublicmarket forinterests of theFund and none isexpected todevelop inthe foreseeable future. There aresubstantial restrictions ontransferability of membership interests. Any transferee must be a personthat wouldhave beenqualified topurchase amember unit inthe offering and atransfereemay notbecome asubstituted member without theconsentof theManager.
Amembermay withdrawas amember of theFund andmayreceive areturnofcapital if approved by theManager, andprovided that the following conditions have been met: (i) themember has been amember of theFund for aperiodofat least twelve (12) months; and(ii) the member provides the Manager with awritten request forreturn ofcapital at least90days prior tosuch withdrawal.Ifawithdrawal isapproved bythe Manager, themembermay onlywithdraw up to25%of thetotal withdrawal amount eachfollowing calendar quarter until the full amount iswithdrawn. TheFund willuse its best efforts to honorrequests for areturn ofcapital subject to,among other things, the Fund's thencash flow, the amount ofFund reserves andtheFund'sthen-current financial condition.
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Circle of Wealth Fund III LLC
Notes to Financial Statements
December 31, 2018
4. | RELATED PARTYTRANSACTIONSLoan servicing fees |
Fund loans are servicedby athird-party servicer and arelated party servicer selected bythe Manager. Theloan servicing companies will receive compensation from theFund forperforming these loan servicing activities. The loan servicing companies may also beentitled toretain up to 50% of any latefees andallfees for payoffdemandstatements and related documents andreturn checkcharges.
Loan origination fees
At the closing of aloan, aborrowerwill payorigination points. The origination points shall bedisbursed at theclosing of a loan inthe following manner: 80% tothe Manageror anaffiliated company and 20%to the Fund.
Assetmanagementfees
TheManager earns asset management fees of1.75% perannum based on theFund's net assets undermanagement, calculated andpayable monthly. Theassetmanagement fee willtypicallybe paid onthe last day ofeach calendar month with respect tothe net assets undermanagement asoflast day of suchmonth.
Performance fees
As described in Note 3,after payment tomembers of apriority return, theManager iseligible to receive performance fees.
Operating expenses
TheManager shall beentitled toreimbursement by theFund for all reasonable andcustomary expenses incurred in the formation of theFund and inthe ongoing management of theFund.
Loan fees
Theoperating agreement provides forother loan fees, suchas loanprocessing anddocumentation fees, tobecharged bythe Manager. These fees are paiddirectly by theborrowers andarenotexpensesofthe Fund.
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Circle of Wealth Fund III LLC
Notes to Financial Statements
December 31, 2018
4. | RELATED PARTYTRANSACTIONS(continued)Rehabilitation services |
In theevent that theFundacquires ownership ofdistressed real property, whether through foreclosureorotherwise, the Fundmay decide torehabilitate theproperty tolease or sell. Torehabilitate the property, theFund will primarily retain theservicesof ArnoldProfessional Holdings, Inc. ("APH"), anIdaho corporation, owned by the ChiefExecutive Officer ("CEO")of theManager. APH is alicensed, bonded andinsured general contractor in the state ofWashington. APH willreceive compensation for its services equal to a feebased on theprevailing industryrate, asagreed between theManager andAPH.
Real estate commissions
TheManager orits affiliatesmay earnreal estate commissions tolist andsell real estate that the Company hasacquired through foreclosure orotherwise. The Manager oritsaffiliatesmaygenerally earn up to sixpercent (6%) for such asale.Inaddition, the Manager may pay areferral feeranging from twentypercent (20%) toforty percent (40%)ofthe real estate commissions paid to theManager tothird party sales agents for properties where the Manager does not presently operate in.
Property management fee
In theevent that the Fund acquires anyreal property, the Managermay cause theFund toengage athird party toprovide property management services withrespect to suchreal property, ormayelect toprovide property management services itself.In theevent that the Managerorits affiliates provides anysuch property management services, theFund will pay theManager orits affiliate amarket rateproperty management fee.
Member contributions
TheManager made member's equitycontributions totaling $25,000for theperiod ended December 31,2018.
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