UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
(Exact name of registrant as specified in its charter)
California | 37-1656343 | |
(State or other jurisdiction of Incorporation or organization) | (I. R. S. Employer Identification No.) |
The Transamerica Pyramid, 600 Montgomery Street, 9th Floor, San Francisco, California 94111
(Address of principal executive offices)
Registrant’s telephone number, including area code(415) 989-8800
Securities registered pursuant to section 12(b) of the Act:None
Securities registered pursuant to section 12(g) of the Act:Limited Liability Company Units
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yesx Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yesx Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer, large accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x
Emerging growth companyo
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.o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yeso Nox
The number of Limited Liability Company Units outstanding as of April 30,October 31, 2018 was 1,612,396.
None.
Part I. Financial Information | 3 | |||
Item 1. Financial Statements (Unaudited) | 3 | |||
Balance Sheets, | 3 | |||
Statements of | 4 | |||
Statements of Changes in Members’ Capital for the year ended December 31, 2017 and for the | 5 | |||
Statements of Cash Flows for the three and nine months ended | 6 | |||
Notes to the Financial Statements | 7 | |||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||
Item 4. Controls and Procedures | 23 | |||
Part II. Other Information | 24 | |||
Item 1. Legal Proceedings | 24 | |||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 24 | |||
Item 3. Defaults Upon Senior Securities | 24 | |||
Item 4. Mine Safety Disclosures | 24 | |||
Item 5. Other Information | 24 | |||
Item 6. Exhibits | 24 |
2
(in thousands)
March 31, 2018 | December 31, 2017 | September 30, 2018 | December 31, 2017 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
ASSETS | ||||||||||||||||
Cash and cash equivalents | $ | 703 | $ | 1,255 | $ | 259 | $ | 1,255 | ||||||||
Due from affiliate | 41 | 150 | ||||||||||||||
Due from affiliates | 95 | 150 | ||||||||||||||
Accounts receivable | — | 13 | 4 | 13 | ||||||||||||
Notes receivable, net | 3,155 | 3,021 | 2,709 | 3,021 | ||||||||||||
Investment in securities | 384 | 243 | 308 | 243 | ||||||||||||
Warrants, fair value | 521 | 489 | 541 | 489 | ||||||||||||
Prepaid expenses and other assets | 2 | 4 | 29 | 4 | ||||||||||||
Total assets | $ | 4,806 | $ | 5,175 | $ | 3,945 | $ | 5,175 | ||||||||
LIABILITIES AND MEMBERS’ CAPITAL | ||||||||||||||||
Accounts payable and accrued liabilities: | ||||||||||||||||
Managing Member | $ | 28 | $ | 56 | $ | 28 | $ | 56 | ||||||||
Affiliates | 98 | — | ||||||||||||||
Accrued distributions to Other Members | 248 | 248 | 249 | 248 | ||||||||||||
Other | — | 1 | — | 1 | ||||||||||||
Total liabilities | 276 | 305 | 375 | 305 | ||||||||||||
Commitments and contingencies | ||||||||||||||||
Members’ capital: | ||||||||||||||||
Managing Member | — | — | — | — | ||||||||||||
Other Members | 4,530 | 4,870 | 3,570 | 4,870 | ||||||||||||
Total Members’ capital | 4,530 | 4,870 | 3,570 | 4,870 | ||||||||||||
Total liabilities and Members’ capital | $ | 4,806 | $ | 5,175 | $ | 3,945 | $ | 5,175 |
See accompanying notes.
3
(in thousands except units and per unit data)
Three Months Ended March 31, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Lending activities: | ||||||||||||||||||||||||
Notes receivable interest income, including accretion of net note origination costs and discounts | $ | 122 | $ | 144 | $ | 128 | $ | 103 | $ | 382 | $ | 370 | ||||||||||||
Gain on early termination of notes receivable | — | 70 | — | 6 | — | 76 | ||||||||||||||||||
Gain on sales or dispositions of investment in securities | — | 1 | — | 98 | — | 99 | ||||||||||||||||||
Unrealized gain on fair value and observable price adjustments for investment in securities | 141 | — | ||||||||||||||||||||||
Unrealized gain on fair value adjustment for warrants | 10 | 29 | ||||||||||||||||||||||
Unrealized (loss) gain on fair value adjustment for warrants | (1 | ) | (86 | ) | 18 | (59 | ) | |||||||||||||||||
Unrealized (loss) gain on fair value adjustment for investment in securities | (33 | ) | — | 65 | — | |||||||||||||||||||
Other | 3 | 9 | 2 | 6 | 12 | 19 | ||||||||||||||||||
Total revenues | 276 | 253 | 96 | 127 | 477 | 505 | ||||||||||||||||||
Expenses: | ||||||||||||||||||||||||
Asset management fees to Managing Member | 13 | 18 | 13 | 11 | 38 | 43 | ||||||||||||||||||
Acquisition expense | 26 | 64 | 2 | 47 | 35 | 152 | ||||||||||||||||||
Cost reimbursements to affiliates | 44 | 72 | 19 | 60 | 95 | 195 | ||||||||||||||||||
Reversal of provision for credit losses | (24 | ) | — | — | (24 | ) | (33 | ) | (48 | ) | ||||||||||||||
Professional fees | 27 | 21 | 29 | 22 | 65 | 79 | ||||||||||||||||||
Outside services | 29 | 20 | 22 | 15 | 65 | 54 | ||||||||||||||||||
Taxes on income and franchise fees | — | 2 | — | — | 3 | 2 | ||||||||||||||||||
Printing and photocopying | 3 | 3 | 6 | 8 | ||||||||||||||||||||
Dues and subscriptions | — | 3 | 5 | 7 | ||||||||||||||||||||
Bank charges | 5 | 5 | 5 | 6 | 15 | 16 | ||||||||||||||||||
Other | 6 | 7 | 3 | — | 7 | 6 | ||||||||||||||||||
Total expenses | 126 | 209 | 96 | 143 | 301 | 514 | ||||||||||||||||||
Net income | $ | 150 | $ | 44 | ||||||||||||||||||||
Net (loss) income | $ | — | $ | (16 | ) | $ | 176 | $ | (9 | ) | ||||||||||||||
Net income (loss): | ||||||||||||||||||||||||
Managing Member | $ | 49 | $ | 49 | $ | 61 | $ | 49 | $ | 148 | $ | 148 | ||||||||||||
Other Members | 101 | (5 | ) | (61 | ) | (65 | ) | 28 | (157 | ) | ||||||||||||||
$ | 150 | $ | 44 | $ | — | $ | (16 | ) | $ | 176 | $ | (9 | ) | |||||||||||
Net income per Limited Liability Company Unit (Other Members) | $ | 0.06 | $ | (0.00 | ) | |||||||||||||||||||
Net (loss) income per Limited Liability Company Unit (Other Members) | $ | (0.04 | ) | $ | (0.04 | ) | $ | 0.02 | $ | (0.10 | ) | |||||||||||||
Weighted average number of Units outstanding | 1,612,396 | 1,617,156 | 1,612,396 | 1,615,096 | 1,612,396 | 1,615,901 |
See accompanying notes.
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(in thousands except units and per unit data)
Units | Amount | Total | Amount | |||||||||||||||||||||||||||||
Other Members | Managing Member | Units | Other Members | Managing Member | Total | |||||||||||||||||||||||||||
Balance December 31, 2016 | 1,618,296 | $ | 7,011 | $ | — | $ | 7,011 | 1,618,296 | $ | 7,011 | $ | — | $ | 7,011 | ||||||||||||||||||
Repurchase of Units | (5,900 | ) | (30 | ) | — | (30 | ) | (5,900 | ) | (30 | ) | — | (30 | ) | ||||||||||||||||||
Distributions to Other Members ($1.10 per Unit) | — | (1,774 | ) | — | (1,774 | ) | — | (1,774 | ) | — | (1,774 | ) | ||||||||||||||||||||
Distributions to Managing Member | — | — | (198 | ) | (198 | ) | — | — | (198 | ) | (198 | ) | ||||||||||||||||||||
Net (loss) income | — | (337 | ) | 198 | (139 | ) | — | (337 | ) | 198 | (139 | ) | ||||||||||||||||||||
Balance December 31, 2017 | 1,612,396 | 4,870 | — | 4,870 | 1,612,396 | 4,870 | — | 4,870 | ||||||||||||||||||||||||
Distributions to Other Members ($.27 per Unit) | — | (441 | ) | — | (441 | ) | ||||||||||||||||||||||||||
Distributions to Other Members ($0.82 per Unit) | — | (1,328 | ) | — | (1,328 | ) | ||||||||||||||||||||||||||
Distributions to Managing Member | — | — | (49 | ) | (49 | ) | — | — | (148 | ) | (148 | ) | ||||||||||||||||||||
Net income | — | 101 | 49 | 150 | — | 28 | 148 | 176 | ||||||||||||||||||||||||
Balance March 31, 2018 (unaudited) | 1,612,396 | $ | 4,530 | $ | — | $ | 4,530 | |||||||||||||||||||||||||
Balance September 30, 2018 (unaudited) | 1,612,396 | $ | 3,570 | $ | — | $ | 3,570 |
See accompanying notes.
5
(in thousands)
Three Months Ended March 31, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Operating activities: | ||||||||||||||||||||||||
Net income | $ | 150 | $ | 44 | ||||||||||||||||||||
Adjustment to reconcile net income to cash provided by (used) in operating activities: | ||||||||||||||||||||||||
Net (loss) income | $ | — | $ | (16 | ) | $ | 176 | $ | (9 | ) | ||||||||||||||
Adjustment to reconcile net (loss) income to cash provided by (used) in operating activities: | ||||||||||||||||||||||||
Accretion of note discount – warrants | (11 | ) | (13 | ) | (10 | ) | (7 | ) | (34 | ) | (30 | ) | ||||||||||||
Amortization of net note origination costs | 9 | 5 | 5 | 4 | 22 | 12 | ||||||||||||||||||
Gain on early termination of notes receivable | — | (70 | ) | — | (6 | ) | — | (76 | ) | |||||||||||||||
Gain on sales or dispositions of investment in securities | — | (1 | ) | — | (98 | ) | — | (99 | ) | |||||||||||||||
Reversal of provision for credit losses | (24 | ) | — | — | (24 | ) | (33 | ) | (48 | ) | ||||||||||||||
Unrealized gain on fair value and observable price adjustments for investment in securities | (141 | ) | — | |||||||||||||||||||||
Unrealized gain on fair value adjustment for warrants | (10 | ) | (29 | ) | ||||||||||||||||||||
Unrealized loss (gain) on fair value adjustment for warrants | 1 | 86 | (18 | ) | 59 | |||||||||||||||||||
Unrealized loss (gain) on fair value adjustment for securities | 33 | — | (65 | ) | — | |||||||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||||||||||
Accounts receivable | 13 | 7 | (4 | ) | — | 9 | 7 | |||||||||||||||||
Due from affiliates | 109 | 26 | ||||||||||||||||||||||
Due from Managing Member and affiliates | 55 | 11 | 55 | 13 | ||||||||||||||||||||
Prepaid expenses and other assets | 2 | — | (19 | ) | (1 | ) | (25 | ) | (3 | ) | ||||||||||||||
Accounts payable, Managing Member | (28 | ) | — | |||||||||||||||||||||
Accounts payable, Managing Member and affiliates | 37 | — | 70 | — | ||||||||||||||||||||
Accounts payable, other | (2 | ) | (3 | ) | (15 | ) | — | — | (3 | ) | ||||||||||||||
Unearned fee income related to notes receivable | — | (9 | ) | (1 | ) | (5 | ) | (5 | ) | (18 | ) | |||||||||||||
Net cash provided by (used) in operating activities | 67 | (43 | ) | |||||||||||||||||||||
Net cash provided by (used in) operating activities | 82 | (56 | ) | 152 | (195 | ) | ||||||||||||||||||
Investing activities: | ||||||||||||||||||||||||
Advance payments | (64 | ) | (56 | ) | — | — | (64 | ) | (56 | ) | ||||||||||||||
Proceeds from early termination of notes receivable | — | 130 | — | 91 | — | 221 | ||||||||||||||||||
Proceeds from sales or dispositions of investment in securities | — | 1 | — | — | — | 1 | ||||||||||||||||||
Payments of note origination costs | (2 | ) | — | (2 | ) | (9 | ) | (4 | ) | (9 | ) | |||||||||||||
Note receivable origination and warrants | (600 | ) | — | |||||||||||||||||||||
Note receivable advances | — | (60 | ) | (1,016 | ) | (60 | ) | |||||||||||||||||
Principal payments received on notes receivable | 537 | 780 | 424 | 443 | 1,412 | 1,777 | ||||||||||||||||||
Net cash (used in) provided by investing activities | (129 | ) | 855 | |||||||||||||||||||||
Net cash provided by investing activities | 422 | 465 | 328 | 1,874 | ||||||||||||||||||||
Financing activities: | ||||||||||||||||||||||||
Distributions to Other Members | (441 | ) | (444 | ) | (541 | ) | (445 | ) | (1,328 | ) | (1,333 | ) | ||||||||||||
Distributions to Managing Member | (49 | ) | (60 | ) | (61 | ) | (49 | ) | (148 | ) | (159 | ) | ||||||||||||
Repurchase of Units | — | (16 | ) | — | — | — | (18 | ) | ||||||||||||||||
Net cash used in financing activities | (490 | ) | (520 | ) | (602 | ) | (494 | ) | (1,476 | ) | (1,510 | ) | ||||||||||||
Net (decrease) increase in cash and cash equivalents | (552 | ) | 292 | (98 | ) | (85 | ) | (996 | ) | 169 | ||||||||||||||
Cash and cash equivalents at beginning of period | 1,255 | 1,860 | 357 | 2,114 | 1,255 | 1,860 | ||||||||||||||||||
Cash and cash equivalents at end of period | $ | 703 | $ | 2,152 | $ | 259 | $ | 2,029 | $ | 259 | $ | 2,029 | ||||||||||||
Supplemental disclosures of cash flow information: | ||||||||||||||||||||||||
Cash paid during the period for taxes | $ | — | $ | 3 | $ | — | $ | — | $ | — | $ | 3 | ||||||||||||
Schedule of non-cash investing and financing transactions: | ||||||||||||||||||||||||
Distributions payable to Other Members at period-end | $ | 248 | $ | 250 | $ | 249 | $ | 249 | $ | 249 | $ | 249 | ||||||||||||
Distributions payable to Managing Member at period-end | $ | 44 | $ | 28 | $ | — | $ | 28 | $ | — | $ | 28 |
See accompanying notes.
6
ATEL Growth Capital Fund 8, LLC (the “Company” or the “Fund”) was formed under the laws of the state of California on December 8, 2011 for the purpose of providing financing for the acquisition of equipment and other goods and services used by emerging growth companies and established privately held companies without publicly traded securities, and for providing other forms of financing for, and to acquire equity interests and warrants and rights to purchase equity interests in such companies. The Fund may continue until it is terminated in accordance with the ATEL Growth Capital Fund 8, LLC limited liability company operating agreement dated December 13, 2011 (the “Operating Agreement”). The Managing Member of the Company is AGC Managing Member, LLC (the “Managing Member” or “Manager”), the renamed AGC 8 Managing Member, LLC which was formed in December 2011 as a Nevada limited liability company. Such name change is the result of an amendment to the articles of incorporation filed with the State of Nevada effective March 18, 2014. Contributions in the amount of $500 were received as of December 31, 2011, which represented the initial Member’s capital investment. As a limited liability company, the liability of any individual member for the obligations of the Fund is limited to the extent of capital contributions to the Fund by the individual member.
The offering was terminated on August 20, 2014. Through March 31,September 30, 2018, cumulative contributions, net of rescissions and related distributions paid, totaling $16.2 million (inclusive of the $500 initial Member’s capital investment) have been received. As of March 31,September 30, 2018, a total of 1,612,396 Units were issued and outstanding.
Prior to the termination of its offering, the Fund, or Managing Member on behalf of the Fund, incurred costs in connection with the organization, registration and issuance of the Units. The amount of such costs borne by the Fund was limited by certain provisions of the Operating Agreement.
These unaudited interim financial statements should be read in conjunction with the financial statements and notes thereto contained in the report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission.
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q as mandated by the Securities and Exchange Commission. The unaudited interim financial statements reflect all adjustments which are, in the opinion of the Managing Member, necessary for a fair statement of financial position and results of operations for the interim periods presented. All such adjustments are of a normal recurring nature. Operating results for the three and nine months ended March 31,September 30, 2018 are not necessarily indicative of the results to be expected for the full year.
Certain prior period amounts may have been reclassified to conform to the current period presentation. These reclassifications had no significant effect on the reported financial position or results of operations.
Footnote and tabular amounts are presented in thousands, except as to Units and per Unit data.
In preparing the accompanying financial statements, the Company has reviewed, as determined necessary by the Managing Member, events that have occurred after March 31,September 30, 2018, up until the issuance of the financial statements. No events were noted which would require additional disclosure in the footnotes to the financial statements or adjustments thereto.
Cash and cash equivalents include cash in banks and cash equivalent investments such as U.S. Treasury instruments with original and/or purchased maturities of ninety days or less.
7
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates. Such estimates primarily relate to the determination of credit losses on notes receivable and the fair valuation of equity securities and warrants.
The Company is organized into one operating segment for the purpose of making operating decisions or assessing performance. Accordingly, the Company operates in one reportable operating segment in the United States.
The primary geographic region in which the Company seeks financing opportunities is North America. Currently, 100% of the Company’s operating revenues are from customers domiciled in the United States.
Accounts receivable represent the amounts billed under notes receivable which are currently due to the Company.
Allowances for doubtful accounts are typically established based upon their aging and historical charge off and collection experience and the creditworthiness of specifically identified borrowers, and invoiced amounts. Accounts receivable deemed uncollectible are generally charged off against the allowance on a specific identification basis. Recoveries of amounts that were previously written-off are recorded as other income in the period received.
Accounts receivable are generally placed in a non-accrual status (i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, management periodically reviews the creditworthiness of companies with note payments outstanding less than 90 days. Based upon management’s judgment, such notes may be placed in non-accrual status. Notes placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid receivable is probable. All payments received on amounts billed under notes receivable are applied only against outstanding principal balances.
In addition to the allowance established for delinquent accounts receivable, the total allowance also includes probable impairment charges on notes receivable.
Notes are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest when due according to the contractual terms of the note agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest when due. If it is determined that a loan is impaired with regard to scheduled payments, the Company will perform an analysis of the note to determine if an impairment valuation reserve is necessary. This analysis considers the estimated cash flows from the note, or the collateral value of the property underlying the note when note repayment is collateral dependent. Any required valuation reserve is charged to earnings when determined; and notes are charged off to the allowance as they are deemed uncollectible.
From time to time, the Company may purchase securities of its borrowers or receive warrants in connection with its lending arrangements.
8
The Company’s purchased securities registered for public sale with readily determinable fair values are measured at fair value with any changes in fair value recognized in the Company'sCompany’s results of operations. The Company’s purchased securities not registered for public sale that do not have readily determinable fair values are measured at cost minus impairment, and adjusted for changes in observable prices. Factors considered by the Managing Member in determining fair value include, but are not limited to, available financial information, the issuer’s ability to meet its current obligations and indications of the issuer’s subsequent ability to raise capital. As of March 31,September 30, 2018 and December 31, 2017, investments in equity securities totaled $384$308 thousand and $243 thousand, respectively. SalesDuring the respective three and nine months ended September 30, 2018, the Company recorded fair value adjustments of $33 thousand and $65 thousand on the fair valuation of investment securities, respectively. The Company recorded $98 thousand and $99 thousand of gain on sales or dispositionsdisposition of investment in securities during the respective three and nine months ended March 31, 2018 and 2017 were $0 and $1 thousand, respectively. Unrealized gains on fair value adjustment for investment in securities were $141 thousand and $0 for the respective three months ended March 31, 2018 andSeptember 30, 2017.
Warrants owned by the Company are not registered for public sale, but are considered derivatives and are reflected at an estimated fair value on the balance sheet as determined by the Managing Member. At March 31,September 30, 2018 and December 31, 2017, the Managing Member estimated the fair value of warrants to be $521$541 thousand and $489 thousand, respectively. During the three months ended March 31,September 30, 2018 and 2017, the Company recorded unrealized losses of $1 thousand and $86 thousand, respectively, on the fair valuation of its warrants. During the nine months ended September 30, 2018 and 2017, the Company recorded unrealized gains of $10$18 thousand and $29unrealized losses of $59 thousand respectively, on the fair valuation of its warrants. The Company also realized $0 and $1 thousandThere were no exercises of gains on the net exercise of certain warrants during the three and nine months ended March 31,September 30, 2018 and 2017, respectively.2017.
Financial instruments that potentially subject the Company to concentrations of credit risk include cash and cash equivalents, notes receivable and accounts receivable. The Company places the majority of its cash deposits in non-interest bearing accounts with financial institutions that have no less than $10 billion in assets. Such deposits are insured up to $250,000. The remainder of the Funds’ cash is temporarily invested in U.S. Treasury denominated instruments. The concentration of such deposits and temporary cash investments is not deemed to create a significant risk to the Company. Accounts receivable represent amounts due from various industries.
The Company issues only one class of Units, none of which are considered dilutive. Net income (loss) per Unit is based upon the weighted average number of Other Members Units outstanding during the period.
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.
9
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.
9
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 Company’s valuation policy is determined by members of the Asset Management, Credit and Accounting departments. Whenever possible, the policy is to obtain quoted market prices in active markets to estimate fair values for recognition and disclosure purposes. Where quoted market prices in active markets are not available, fair values are estimated using discounted cash flow analyses, broker quotes and third party appraisals of collateral and/or other valuation techniques. These techniques are significantly affected by certain of the Company’s assumptions, including discount rates and estimates of future cash flows. Potential taxes and other transaction costs are not considered in estimating fair values. As the Company is responsible for determining fair value, an analysis is performed on prices obtained from third parties. Such analysis is performed by asset management and credit department personnel who are familiar with the Company’s investments in notes receivable and equity securities of venture companies. The analysis may include a periodic review of price fluctuations and validation of numbers obtained from a specific third party by reference to multiple representative sources.
In August 2018, the FASB issued Accounting Standards Update 2018-13, Fair Value Measurement (“ASU 2018-13”), which amends the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. This ASU modifies disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of this Update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this Update and delay adoption of the additional disclosures until their effective date. Management is currently evaluating the impact of this standard on the financial statements and related disclosure requirements.
In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2016-15 — Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 addresses specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. This guidance is effective for the Company beginning on January 1, 2018. The adoption of ASU 2016-15 did not have a material impact on its financial statements and disclosures.
In June 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments — Credit Losses (Topic 326) (“ASU 2016-13”). The main objective of this Update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this Update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect entities holding financial
10
assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018. Management is currently evaluating the standard and expects the Update may potentially result in an increase in the allowance for credit losses given the change to estimated losses over the contractual life adjusted for expected prepayments.
In January 2016, the FASB issued Accounting Standards Update 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). The new standard provides guidance related to accounting for equity investments and financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. ASU 2016-01, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the method(s) and
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significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, and (v) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This guidance is effective for the Company beginning on January 1, 2018. The adoption of ASU 2016-01 did have an impact on its financial statements and disclosures.
The Company’s investment securities registered for public sale with readily determinable fair values are measured at fair value with any changes in fair value recognized in the Company's results of operations. The Company elected to record equity investments without readily determinable fair values at cost, less impairment, and adjusted for changes in observable prices. Any changes in the basis of these equity investments are reported in current earnings.
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. On July 9, 2015, the FASB approved the deferral of the effective date of ASU 2014-09 by one year and in August 2015, issued Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”). ASU 2015-14 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 31, 2016, including interim reporting periods within that reporting period. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. This guidance iswas effective for the Company beginning on January 1, 2018. Management’s evaluationThe adoption of theASU 2014-09 did not have a material impact of such adoption on the Company’s financial statements of the Fund indicated that such impact was immaterialand disclosures as the new revenue guideline does not affect revenuesrevenue from leases and loans, which comprise the majority of the Company’s revenues since leases and loans are not included within the scope of Topic 825.
The Company has various notes receivable from borrowers who have financed the purchase of equipment through the Company. As of March 31, 2018, the terms of the notes receivable are from 9 to 84 months and bear interest at implicit or stated rates ranging from 4.15% to 18.06% per annum. The notes are secured by the equipment financed and have maturity dates ranging from 2018 through 2021.revenues.
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At March 31,The Company has various notes receivable from borrowers who have financed the purchase of equipment through the Company. As of September 30, 2018, fourthe original terms of the Company’s notes receivable were removedare from 3 to 84 months and bear interest at implicit or stated rates ranging from 4.29% to 18.06% per annum. The notes are secured by the equipment financed and have maturity dates ranging from 2018 through 2022.
At September 30, 2018, the Company had no notes receivable on non-accrual status. As of December 31, 2017, four (Notes A and C) of the Company’s notes receivable were on non-accrual status. Details are as follows, in thousands, except for the number of notes receivable and the annual interest rate:
Notes receivable A | Notes receivable A | |||||||
December 31, 2017 | December 31, 2017 | |||||||
Number of notes | 3 | 3 | ||||||
Net investment value | $ | 33 | $ | 33 | ||||
Annual interest rate | 18.00 | % | 18.00 | % | ||||
Fair value adjustments | $ | 33 | $ | 33 | ||||
Fair value amount | $ | — | $ | — | ||||
Interest income not recorded relative to original terms | $ | 16 | $ | 16 |
Note receivable C | ||||
December 31, 2017 | ||||
Number of notes | 1 | |||
Net investment value | $ | 17 | ||
Annual interest rate | 15.88 | % | ||
Fair value adjustments | $ | — | ||
Fair value amount | $ | 17 | ||
Interest income not recorded relative to original terms | $ | 7 |
As of September 30, 2018, the future minimum payments receivable are as follows (in thousands):
Note receivable C | ||||
Non-accrual | ||||
December 31, 2017 | ||||
Number of notes | 1 | |||
Net investment value | $ | 17 | ||
Annual interest rate | 15.88 | % | ||
Fair value adjustments | — | |||
Fair value amount | $ | 17 | ||
Interest income not recorded relative to original terms | $ | 7 |
Three months ending December 31, 2018 | $ | 638 | ||
Year ending December 31, 2019 | 1,758 | |||
2020 | 673 | |||
2021 | 187 | |||
3,256 | ||||
Less: portion representing unearned interest income, net | (467 | ) | ||
2,789 | ||||
Unamortized discount on warrants received | (88 | ) | ||
Unamortized initial direct costs | 8 | |||
Notes receivable, net | $ | 2,709 |
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As of March 31, 2018, the minimum future payments receivable are as follows (in thousands):
Nine months ending December 31, 2018 | $ | 1,671 | ||
Year ending December 31, 2019 | 1,608 | |||
2020 | 524 | |||
2021 | 75 | |||
3,878 | ||||
Less: portion representing unearned interest income, net | (635 | ) | ||
3,243 | ||||
Accretion of warrants | (98 | ) | ||
Unamortized initial direct costs | 19 | |||
Less: Allowance for credit losses | (9 | ) | ||
Notes receivable, net | $ | 3,155 |
The Company’s allowance for credit losses are as follows (in thousands):
Valuation Adjustments – Notes Receivable | ||||
Balance December 31, 2016 | $ | 717 | ||
Note receivable disposal | (611 | ) | ||
Reversal of provision for credit losses | (73 | ) | ||
Balance December 31, 2017 | 33 | |||
Reversal of provision for credit losses | (24 | ) | ||
Balance March 31, 2018 | $ | 9 |
Valuation Adjustments – Notes Receivable | ||||
Balance December 31, 2016 | $ | 717 | ||
Note receivable disposal | (611 | ) | ||
Reversal of provision for credit losses | (73 | ) | ||
Balance December 31, 2017 | 33 | |||
Reversal of provision for credit losses | (33 | ) | ||
Balance September 30, 2018 | $ | — |
The Company’s allowance for credit losses and its recorded investment in notes receivable as of March 31, 2018 and December 31, 2017 were as follows (in thousands):
March 31, 2018 | Notes Receivable | |||
Allowance for credit losses: | ||||
Ending balance | $ | 9 | ||
Ending balance: individually evaluated for impairment | $ | 9 | ||
Ending balance: collectively evaluated for impairment | $ | — | ||
Financing receivables: | ||||
Ending balance | $ | 3,164 | ||
Ending balance: individually evaluated for impairment | $ | 3,164 | ||
Ending balance: collectively evaluated for impairment | $ | — |
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December 31, 2017 | Notes Receivable | Notes Receivable | ||||||
Allowance for credit losses: | ||||||||
Ending balance | $ | 33 | $ | 33 | ||||
Ending balance: individually evaluated for impairment | $ | 33 | $ | 33 | ||||
Ending balance: collectively evaluated for impairment | $ | — | $ | — | ||||
Financing receivables: | ||||||||
Ending balance | $ | 3,054 | $ | 3,054 | ||||
Ending balance: individually evaluated for impairment | $ | 3,054 | $ | 3,054 | ||||
Ending balance: collectively evaluated for impairment | $ | — | $ | — |
The Company evaluates the credit quality of its notes receivables on a scale equivalent to the following quality indicators related to corporate risk profiles:
Pass — Any account whose debtor, co-debtor or any guarantor has a credit rating on publicly traded or privately placed debt issues as rated by Moody’s or S&P for either Senior Unsecured debt, Long Term Issuer rating or Issuer rating that are in the tiers of ratings generally recognized by the investment community as constituting an Investment Grade credit rating; or, has been determined by the Manager to be an Investment Grade Equivalent or High Quality Corporate Credit per its Credit Policy or has a Not Rated internal rating by the Manager and the account is not considered by the Chief Credit Officer of the Manager to fall into one of the three risk profiles below.
Special Mention — Any traditional corporate type account with potential weaknesses (e.g. large net losses or major industry downturns) or, any growth capital account that has less than three months of cash as of the end of the calendar quarter to fund their continuing operations. These accounts deserve management’s close attention. If left uncorrected, those potential weaknesses may result in deterioration of the Fund’s receivable at some future date.
Substandard — Any account that is inadequately protected by the current worth and paying capacity of the borrower or of the collateral pledged, if any. Accounts that are so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Fund will sustain some loss as the likelihood of fully collecting all receivables may be questionable if the deficiencies are not corrected. Such accounts are on the Manager’s Credit Watch List.
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Doubtful — Any account where the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Accordingly, an account that is so classified is on the Manager’s Credit Watch List, and has been declared in default and the Manager has repossessed, or is attempting to repossess, the equipment it financed. This category includes impaired notes and leases as applicable.
At March 31,September 30, 2018 and December 31, 2017, the Company’s notes receivables by credit quality indicator and by class of financing receivables are as follows (in thousands):
Notes Receivable | Notes Receivable | |||||||||||||||
March 31, 2018 | December 31, 2017 | September 30, 2018 | December 31, 2017 | |||||||||||||
Pass | $ | 3,048 | $ | 2,547 | $ | 2,601 | $ | 2,547 | ||||||||
Special mention | 116 | 392 | 108 | 392 | ||||||||||||
Substandard | 115 | — | 115 | |||||||||||||
Doubtful | — | — | — | — | ||||||||||||
Total | $ | 3,164 | $ | 3,054 | $ | 2,709 | $ | 3,054 |
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As of March 31, 2018 and December 31, 2017, the Company’s impaired loansinvestment in financing receivables were as follows (in thousands):
Impaired Loans | ||||||||||||||||||||
March 31, 2018 | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||
With no related allowance recorded | ||||||||||||||||||||
Notes receivable | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
With an allowance recorded | ||||||||||||||||||||
Notes receivable | 9 | 9 | 9 | 9 | — | |||||||||||||||
Total | $ | 9 | $ | 9 | $ | 9 | $ | 9 | $ | — |
Impaired Loans | ||||||||||||||||||||
December 31, 2017 | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||
With no related allowance recorded | ||||||||||||||||||||
Notes receivable | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
With an allowance recorded | ||||||||||||||||||||
Notes receivable | 33 | 33 | 33 | 70 | — | |||||||||||||||
Total | $ | 33 | $ | 33 | $ | 33 | $ | 70 | $ | — |
Impaired Investment in Financing Receivables | ||||||||||||||||||||
December 31, 2017 | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||
With no related allowance recorded Notes receivable | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
With an allowance recorded Notes receivable | 33 | 33 | 33 | 70 | — | |||||||||||||||
Total | $ | 33 | $ | 33 | $ | 33 | $ | 70 | $ | — |
At March 31,September 30, 2018 and December 31, 2017, investment in financing receivables is aged as follows (in thousands):
March 31, 2018 | 31 – 60 Days Past Due | 61 – 90 Days Past Due | Greater Than 90 Days | Total Past Due | Current | Total Financing Receivables | Recorded Investment > 90 Days and Accruing | |||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2018 | 31 – 60 Days Past Due | 61 – 90 Days Past Due | Greater Than 90 Days | Total Past Due | Current | Total Financing Receivables | Recorded Investment >90 Days and Accruing | |||||||||||||||||||||||||||||||||||||||||||||||||
Notes receivable | $ | — | $ | — | $ | — | $ | — | $ | 3,164 | $ | 3,164 | $ | — | $ | — | $ | — | $ | 2,709 | $ | 2,709 | $ | — | ||||||||||||||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | 3,164 | $ | 3,164 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 2,709 | $ | 2,709 | $ | — |
December 31, 2017 | 31 – 60 Days Past Due | 61 – 90 Days Past Due | Greater Than 90 Days | Total Past Due | Current | Total Financing Receivables | Recorded Investment > 90 Days and Accruing | 31 – 60 Days Past Due | 61 – 90 Days Past Due | Greater Than 90 Days | Total Past Due | Current | Total Financing Receivables | Recorded Investment >90 Days and Accruing | ||||||||||||||||||||||||||||||||||||||||||
Notes receivable | $ | — | $ | — | $ | — | $ | — | $ | 3,054 | $ | 3,054 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 3,054 | $ | 3,054 | $ | — | ||||||||||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | 3,054 | $ | 3,054 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 3,054 | $ | 3,054 | $ | — |
As of March 31,September 30, 2018, the Company had no notes receivable on non-accrual status. As of December 31, 2017, the Company had four notes receivable on non-accrual status (See Note 3 for details).
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The terms of the Operating Agreement provide that the Managing Member and/or affiliates are entitled to receive certain fees for equipment management and resale and for management of the Company.
The Operating Agreement allows for the reimbursement of costs incurred by the Managing Member and/or affiliates for providing administrative services to the Company. Administrative services provided include Company accounting, investor relations, legal counsel and equipment financing documentation. The Managing Member is not reimbursed for services whereby it is entitled to receive a separate fee as compensation for such services, such as management of investments.
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Cost reimbursements to the Managing Member or its affiliates are based on its costs incurred in performing administrative services for the Company. These costs are allocated to each managed entity based on certain criteria such as total assets, number of investors or contributed capital based upon the type of cost incurred. The Managing Member believes that the costs reimbursed are the lower of (i) actual costs incurred on behalf of the Company or (ii) the amount the Company would be required to pay independent parties for comparable administrative services in the same geographic location. During the three and nine months ended March 31,September 30, 2018 and 2017, the Managing Member and/or affiliates earned commissions and fees, and billed for reimbursements of costs and expenses pursuant to the Operating Agreement as follows (in thousands):
Three Months Ended March 31, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Administrative costs reimbursed to Managing Member and/or affiliates | $ | 44 | $ | 72 | $ | 19 | $ | 60 | $ | 95 | $ | 195 | ||||||||||||
Asset management fees to Managing Member | 13 | 18 | 13 | 11 | 38 | 43 | ||||||||||||||||||
Acquisition costs and note origination fees paid to Managing Member | 26 | 64 | 4 | 56 | 39 | 161 | ||||||||||||||||||
$ | 83 | $ | 154 | $ | 36 | $ | 127 | $ | 172 | $ | 399 |
At March 31,September 30, 2018, there were commitments to fund investments in notes receivable totaling $1.4 million.$100 thousand. These amounts represent contract awards which may be canceled by the prospective borrower/investee or may not be accepted by the Company.
A total of 1,612,396 Units were issued and outstanding as of March 31,September 30, 2018 and December 31, 2017. The Fund is authorized to issue up to 7,500,000 Units in addition to the Units issued to the initial Member (50 Units).
Distributions to the Other Members for the three and nine months ended March 31,September 30, 2018 and 2017 are as follows (in thousands, except as to Units and per Unit data):
Three Months Ended March 31, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Distributions declared | $ | 441 | $ | 444 | $ | 541 | $ | 444 | $ | 1,328 | $ | 1,332 | ||||||||||||
Weighted average number of Units outstanding | 1,612,396 | 1,617,156 | 1,612,396 | 1,615,096 | 1,612,396 | 1,615,901 | ||||||||||||||||||
Weighted average distributions per Unit | $ | 0.27 | $ | 0.27 | $ | 0.34 | $ | 0.27 | $ | 0.82 | $ | 0.82 |
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Under applicable accounting standards, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
At March 31,September 30, 2018 and December 31, 2017, the Company’s warrants and investment securities were measured on a recurring basis. At December 31, 2017, only the Company’s warrants were measured on a recurring basis.
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The measurement methodology is as follows:
Warrants owned by the Company are not registered for public sale, but are considered derivatives and are carried on the balance sheet at an estimated fair value at the end of the period. The valuation of the warrants was determined using a Black-Scholes formulation of value based upon the volatility of respective similar publicly traded companies, a risk free interest rate, for the term(s) of the warrant exercise(s), and the respectivetime to maturity, stock prices, exercise prices and number of warrants.
As of March 31,September 30, 2018 and December 31, 2017, the calculated fair value of the Fund’s warrant portfolio totaled $521$541 thousand and $489 thousand, respectively. Such valuation is classified within Level 3 of the valuation hierarchy.
The fair value of warrants that were accounted for on a recurring basis as of the three and nine months ended March 31,September 30, 2018 and 2017 and classified as level 3 are as follows (in thousands):
Three Months Ended March 31, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Fair value of warrants at beginning of period | $ | 489 | $ | 481 | $ | 542 | $ | 508 | $ | 489 | $ | 481 | ||||||||||||
Fair value of new warrants, recorded during the year (included as a discount on notes receivable) | 22 | — | — | — | 34 | — | ||||||||||||||||||
Unrealized gain on fair value adjustment for warrants | 10 | 29 | ||||||||||||||||||||||
Unrealized gain (loss) on fair value adjustment for warrants | (1 | ) | (86 | ) | 18 | (59 | ) | |||||||||||||||||
Fair value of warrants at end of period | $ | 521 | $ | 510 | $ | 541 | $ | 422 | $ | 541 | $ | 422 |
The following table presents the fair value measurement of impaired assets measured at fair value on a non-recurring basis and the level within the hierarchy in which the fair value measurements fall at December 31, 2017 (in thousands):
December 31, 2017 | Level 1 Estimated Fair Value | Level 2 Estimated Fair Value | Level 3 Estimated Fair Value | |||||||||||||
Impaired investment securities | $ | 278 | $ | — | $ | — | $ | 278 |
December 31, 2017 | Level 1 Estimated Fair Value | Level 2 Estimated Fair Value | Level 3 Estimated Fair Value | |||||||||||||
Impaired investment securities | $ | 278 | $ | — | $ | — | $ | 278 |
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The following tables summarize the valuation techniques and significant unobservable inputs used for the Company’s recurring and non-recurring fair value calculation categorized as Level 3 in the fair value hierarchy at March 31,September 30, 2018 and December 31, 2017:
| ||||||||||||||||
Name | Valuation Frequency | Valuation Technique | Unobservable Inputs | Range of Input Values | ||||||||||||
Warrants | Recurring | Black-Scholes formulation | Stock price | $0.00 – | ||||||||||||
Exercise price | $ | |||||||||||||||
Time to maturity (in years) | ||||||||||||||||
Risk-free interest rate | ||||||||||||||||
Annualized volatility |
December 31, 2017 | ||||||||||||||||
Name | Valuation Frequency | Valuation Technique | Unobservable Inputs | Range of Input Values | ||||||||||||
Warrants | Recurring | Black-Scholes formulation | Stock price | $0.00 – $14.75 | ||||||||||||
Exercise price | $0.01 – $25.76 | |||||||||||||||
Time to maturity (in years) | 2.99 – 14.88 | |||||||||||||||
Risk-free interest rate | 1.98% – 2.49% | |||||||||||||||
Annualized volatility | 27.78% – 83.30% | |||||||||||||||
Impaired Investment Securities | Non-recurring | Market Approach | Qualitative and quantitative information (Investee Management) | Not Applicable |
The following disclosure of the estimated fair value of financial instruments is made in accordance with the guidance provided by the Financial Instruments Topic of the FASB Accounting Standards Codification. Fair value estimates, methods and assumptions, set forth below for the Company’s financial instruments, are made solely to comply with the requirements of the Financial Instruments Topic and should be read in conjunction with the Company’s financial statements and related notes.
The Company has determined the estimated fair value amounts by using market information and valuation methodologies that it considers appropriate and consistent with the fair value accounting guidance. Considerable judgment is required to interpret market data to develop the estimates of fair value. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The recorded amounts of the Company’s cash and cash equivalents approximate fair value because of the liquidity and short-term maturity of these instruments.
The fair value of the Company’s notes receivable is generally estimated based upon various methodologies deployed by financial and credit management including, but not limited to, credit analysis, third party appraisal and/or discounted cash flow analysis based upon current market valuation techniques and market rates for similar types of lending arrangements, which may consider adjustments for impaired loans as deemed necessary.
1817
The Company’s investment securities registered for public sale with readily determinable fair values are measured at fair value with any changes in fair value recognized in the Company's results of operations. The Factors considered by the Managing Member in determining fair value include, but are not limited to, available financial information, the issuer’s ability to meet its current obligations and indications of the issuer’s subsequent ability to raise capital.
The fair value of investment securities that were accounted for on a recurring basis as of the three monthand nine months ended March 31,September 30, 2018 and classified as Level 1 are as follows (in thousands):
Three months ended September 30, | Nine months ended September 30, | |||||||||||
2018 | 2018 | |||||||||||
Fair value of securities at beginning of period | $ | 92 | $ | 176 | $ | 92 | ||||||
Unrealized gain on fair value of securities | 126 | |||||||||||
Unrealized (loss) gain on fair value of securities | (33 | ) | 51 | |||||||||
Fair value of investment securities at end of period | $ | 218 | $ | 143 | $ | 143 |
The following tables present estimated fair values of the Company’s financial instruments in accordance with the guidance provided by the Financial Instruments Topic of the FASB Accounting Standards Codification at March 31,September 30, 2018 and December 31, 2017 (in thousands):
March 31, 2018 | September 30, 2018 | |||||||||||||||||||||||||||||||||||||||
Carrying Amount | Level 1 | Level 2 | Level 3 | Total | Carrying Amount | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||||||
Financial assets: | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 703 | $ | 703 | $ | — | $ | — | $ | 703 | $ | 259 | $ | 259 | $ | — | $ | — | $ | 259 | ||||||||||||||||||||
Notes receivable, net | 3,155 | — | — | 3,280 | 3,280 | 2,709 | — | — | 2,870 | 2,870 | ||||||||||||||||||||||||||||||
Investment in securities | 218 | 218 | — | — | 218 | 143 | — | — | 143 | 143 | ||||||||||||||||||||||||||||||
Warrants | 521 | — | — | 521 | 521 | 541 | — | — | 541 | 541 |
December 31, 2017 | December 31, 2017 | |||||||||||||||||||||||||||||||||||||||
Carrying Amount | Level 1 | Level 2 | Level 3 | Total | Carrying Amount | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||||||
Financial assets: | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 1,255 | $ | 1,255 | $ | — | $ | — | $ | 1,255 | $ | 1,255 | $ | 1,255 | $ | — | $ | — | $ | 1,255 | ||||||||||||||||||||
Notes receivable, net | 3,021 | — | — | 3,009 | 3,009 | 3,021 | — | — | 3,009 | 3,009 | ||||||||||||||||||||||||||||||
Investment in securities | 243 | — | — | 243 | 243 | |||||||||||||||||||||||||||||||||||
Warrants | 489 | — | — | 489 | 489 | 489 | — | — | 489 | 489 |
1918
Statements contained in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) and elsewhere in this Form 10-Q, which are not historical facts, may be forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. In particular, changes in general economic conditions, including significant rates of inflation and fluctuations in interest rates may result in reduced returns on invested capital. The Company’s performance is subject to risks relating to borrower defaults and the creditworthiness of its borrowers. Investors are cautioned not to attribute undue certainty to these forward-looking statements, which speak only as of the date of this Form 10-Q. We undertake no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events, other than as required by law.
ATEL Growth Capital Fund 8, LLC (the “Company” or the “Fund”) was formed under the laws of the state of California on December 8, 2011 for the purpose of providing financing for the acquisition of equipment and other goods and services used by emerging growth companies and established privately held companies without publicly traded securities, and for providing other forms of financing for, and to acquire equity interests and warrants and rights to purchase equity interests in such companies.
Through March 31,September 30, 2018, cumulative contributions, net of rescissions and related distributions paid, totaling $16.2 million (inclusive of the $500 initial Member’s capital investment) have been received. As of March 31,September 30, 2018, a total of 1,612,396 Units were issued and outstanding.
The Company reportedhad total revenues equal to total expenses for the three months ended September 2018, and net incomeloss of $150 thousand and $44$16 thousand for the respective three month periodsmonths ended March 31,September 2017. The results for the third quarter of 2018 reflect decreases in both total revenues and 2017. Whenincreases in total operating expenses when compared to the prior year period results, the current year quarter reflects an increase in revenues and a decrease in expenses.period.
Total revenues for the three month period ended March 31,third quarter of 2018 increaseddecreased by $23$31 thousand, or 9%24%, whenas compared to the prior year period. Such decrease was largely due to a $98 thousand unfavorable change in gain on sales or dispositions of investment in securities; and a $33 thousand unfavorable change in the fair value adjustment for investment securities; offset, in part, by an $85 thousand, or 99%, favorable change in the loss on fair value adjustment for warrants; and a $25 thousand, or 24%, increase in interest income on new investments in notes receivable.
Total expenses for the third quarter ended September 30, 2018 decreased by $47 thousand, or 33%, as compared to the prior year period. The increasenet decrease in total expenses was largely due to a $122$45 thousand, or 421%96%, decrease in acquisition expense related to the financing of equipment which was not consummated; and a $41 thousand, or 68%, decrease in cost reimbursements to affiliates, due to an adjustment in net increase in unrealized gain on fair value adjustment for warrants and investment securities;cost allocation; offset, in part, by a $70$24 thousand, or 100%, unfavorable change in the provision for credit losses, as the prior year period reflects the collection of accounts previously written down.
The Company had net income of $176 thousand and net loss of $9 thousand for the respective nine months ended September 30, 2018 and 2017. The results for the nine months ended September 30, 2018 reflect decreases in total revenues and total operating expenses when compared to the prior year period.
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Total revenues for the nine months ended September 30, 2018 decreased by $28 thousand, or 6% as compared to the prior year period. Such decrease was largely due to a $99 thousand unfavorable change in realized gains on the sales or dispositions of investment securities; a $76 thousand, or 100%, a decrease in gain on early termination of notes receivable, as there was no note termination during the current period; offset, in this period; andpart, by a $22$77 thousand, or 15%131%, decreaseincrease in notes receivable interest income largely due to run-off of the loan portfolio.gain on unrealized gain on fair value adjustment for warrants; and a $65 thousand favorable change in unrealized gain on fair value adjustment for investment securities.
Total expenses for the three month periodnine months ended March 31,September 30, 2018 decreased by $83$213 thousand, or 40%41%, as compared to the prior year period. The net decrease in operating expenses were primarilyis mostly due to a $38$117 thousand, or 59%77%, decrease in acquisition expense relativerelated to venture origination allocations during the current period;financing of equipment which was not consummated; a $28$100 thousand, or 39%51%, decrease in cost reimbursements to affiliates, relativedue to indirectan adjustment in net cost allocations;allocation; and a recognition of a $24$14 thousand, favorable changeor 18%, decrease in the reversal of provisionprofessional fees, related to year over year differences in timing and related billings for credit losses, due to customers’ payment of outstanding balances;professional audit and tax services; offset, in part, by a $9$15 thousand, or 45%31%, increaseunfavorable change in outside services, indicativethe provision for credit losses, a direct result of additional efforts required to comply with certain regulatory requirements.increases in uncollected account balances.
The Company’s cash and cash equivalents totaled $0.7 million$259 thousand and $1.3 million at March 31,September 30, 2018 and December 31, 2017, respectively. The liquidity of the Company varies, increasing to the extent cash flows from its portfolio investments exceed expenses and decreasing as portfolio investments are acquired, as distributions are made to the Members and to the extent expenses exceed cash flows from its portfolio investments.
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The Fund will acquire its investments with cash. The Fund will not borrow to acquire its portfolio assets and does not intend or expect to incur any indebtedness. The Fund anticipates that it would incur indebtedness only in the event that it is required to borrow for temporary working capital purposes.
The following table sets forth summary cash flow data (in thousands):
Three Months Ended March 31, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Net cash provided by (used in): | ||||||||||||||||||||||||
Operating activities | $ | 67 | $ | (43 | ) | $ | 82 | $ | (56 | ) | $ | 152 | $ | (195 | ) | |||||||||
Investing activities | (129 | ) | 855 | 422 | 465 | 328 | 1,874 | |||||||||||||||||
Financing activities | (490 | ) | (520 | ) | (602 | ) | (494 | ) | (1,476 | ) | (1,510 | ) | ||||||||||||
Net increase (decrease) in cash and cash equivalents | $ | (552 | ) | $ | 292 | |||||||||||||||||||
Net (decrease) increase in cash and cash equivalents | $ | (98 | ) | $ | (85 | ) | $ | (996 | ) | $ | 169 |
During the three months ended March 31,September 30, 2018 and 2017, the Company’s primary source of liquidity was cash flowreceived from its investments in notes receivable.receivable totaling $424 thousand and $443 thousand, respectively. In addition, the Company realized $0 and $131$91 thousand of proceeds from the early termination of notes and sales or dispositions of investment securitiesreceivable during the respective three months ended March 31,September 30, 2018 and 2017.
During the same respective periods, cash was primarily used to pay distributions to both the Other Members and the Managing Member, totaling $490$602 thousand and $504$494 thousand for the three months ended March 31,September 30, 2018 and 2017, respectively. Cash was also used to fund new investments in notes receivable totaling $0 and $60 thousand during the three months ended September 30, 2018 and 2017, respectively.
In addition, cash was used to pay invoices related to management fees and expenses, and other payables.
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During the nine months ended September 30, 2018 and 2017, the Company’s primary source of liquidity was cash received from its investments in notes receivable totaling $1.4 million and $1.8 million, respectively. In addition, the Company realized $0 and $221 thousand of proceeds from the early termination of notes receivable during the respective nine months ended September 30, 2018 and 2017.
During the same respective periods, cash was primarily used to pay distributions to both the Other Members and the Managing Member, totaling $1.5 million for both the nine months ended September 30, 2018 and 2017.
Cash was also used to fund new investments in notes receivable totaling $1.0 million and $60 thousand during the nine months ended September 30, 2018 and 2017, respectively. Cash was used to pay investors for the repurchase of Units totaling $0 and $18 thousand for the nine months ended September 30, 2018 and 2017 respectively.
In addition, cash was used to pay invoices related to management fees and expenses, and other payables.
The Unitholders of record are entitled to certain distributions as provided under the Operating Agreement. The Company commenced periodic distributions beginning with the month of November 2012. Additional distributions have been made through March 31,September 30, 2018.
Cash distributions were paid by the Fund to Unitholders of record as of February 28, 2018, and paid through March 31,September 30, 2018. The distributions may be characterized for tax, accounting and economic purposes as a return of capital, a return on capital (including escrow interest) or a portion of each. Generally, the portion of each cash distribution by a company which exceeds its net income for the fiscal period would constitute a return of capital. The Fund is required by the terms of its Operating Agreement to distribute the net cash flow generated by its investments in certain minimum amounts during the Reinvestment Period before it can reinvest its operating cash flow in additional portfolio assets. See the discussion in the ATEL Growth Capital Fund 8, LLC Prospectus dated August 20, 2012 (“Prospectus”) under “Income, Losses and Distributions — Reinvestment.” Accordingly, the amount of cash flow from Fund investments distributed to Unitholders will not be available for reinvestment in additional portfolio assets.
The cash distributions were based on current and anticipated gross revenues from the loans funded and equity investments acquired. During the Fund’s acquisition and operating stages, the Fund may incur short term borrowing to fund regular distributions of such gross revenues to be generated by newly acquired transactions during their respective initial fixed terms. As such, all Fund periodic cash distributions made during these stages have been, and are expected in the future to be, based on the Fund’s actual and anticipated gross revenues to be generated from the binding initial terms of the loans and investments funded.
21
The following table summarizes distribution activity for the Fund from inception through March 31,September 30, 2018 (in thousands):
Distribution Period(1) | Paid | Return of Capital | Distribution of Income | Total Distribution | Total Distribution per Unit(2) | Weighted Average Units Outstanding(3) | Paid | Return of Capital | Distribution of Income | Total Distribution | Total Distribution per Unit(2) | Weighted Average Units Outstanding(3) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Monthly and quarterly distributions | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Oct 2012 – Mar 2013 (Distribution of all escrow interest) | July 2013 | $ | — | $ | — | $ | — | n/a | n/a | July 2013 | $ | — | $ | — | $ | — | n/a | n/a | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Nov 14, 2012 – Nov 30, 2012 | Dec 2012 | 3 | — | 3 | $ | 0.43 | 6,306 | Dec 2012 | 3 | — | 3 | $ | 0.43 | 6,306 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dec 2012 – Nov 2013 | Jan – Dec 2013 | 866 | — | 866 | 1.57 | 551,608 | Jan – Dec 2013 | 866 | — | 866 | 1.57 | 551,608 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dec 2013 – Nov 2014 | Jan – Dec 2014 | 1,452 | — | 1,452 | 1.08 | 1,349,575 | Jan – Dec 2014 | 1,452 | — | 1,452 | 1.08 | 1,349,575 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dec 2014 – Nov 2015 | Jan – Dec 2015 | 1,779 | — | 1,779 | 1.10 | 1,618,296 | Jan – Dec 2015 | 1,779 | — | 1,779 | 1.10 | 1,618,296 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dec 2015 – Nov 2016 | Jan – Dec 2016 | 1,780 | — | 1,780 | 1.10 | 1,618,296 | Jan – Dec 2016 | 1,780 | — | 1,780 | 1.10 | 1,618,296 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dec 2016 – Nov 2017 | Jan – Dec 2017 | 1,776 | — | 1,776 | 1.10 | 1,615,808 | Jan – Dec 2017 | 1,776 | — | 1,776 | 1.10 | 1,615,808 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dec 2017 – Feb 2018 | Jan – Mar 2018 | 442 | — | 442 | 0.27 | 1,612,396 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dec 2017 – Aug 2018 | Jan – Sept 2018 | 1,328 | — | 1,328 | 0.82 | 1,612,396 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
$ | 8,098 | $ | — | $ | 8,098 | $ | 6.65 | $ | 8,984 | $ | — | $ | 8,984 | $ | 7.20 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Source of distributions | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Lease and loan payments/payoffs | $ | 8,098 | 100.00 | % | $ | — | 0.00 | % | $ | 8,098 | 100.00 | % | $ | 8,984 | 100.00 | % | $ | — | 0.00 | % | $ | 8,984 | 100.00 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest income | — | 0.00 | % | — | 0.00 | % | — | 0.00 | % | — | 0.00 | % | — | 0.00 | % | — | 0.00 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
$ | 8,098 | 100.00 | % | $ | — | 0.00 | % | $ | 8,098 | 100.00 | % | $ | 8,984 | 100.00 | % | $ | — | 0.00 | % | $ | 8,984 | 100.00 | % |
(1) | Investors may elect to receive their distributions either monthly or quarterly. See “Timing and Method of Distributions” on Page 46 of the Prospectus. |
(2) | Total distributions per Unit represents the per Unit distributions rate for those units which were outstanding for all of the applicable period. |
(3) | Balance shown represent weighted average units for the period from November 14 (date escrow requirement was met) – November 30, 2012, December 1, 2012 – November 30, 2013, December 1, 2013 – November 30, 2014, December 1, 2014 – November 30, 2015, December 1, 2015 – November 30, 2016, December 1, 2016 – November 30, 2017, and December 1, 2017 – |
At March 31,September 30, 2018, there were commitments to fund investments in notes receivable totaling $1.4 million.$100 thousand. These amounts represent contract awards which may be canceled by the prospective borrower/investee or may not be accepted by the Company.
None.
For detailed information on recent accounting pronouncements, see Note 2, Summary of significant accounting policies.
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates, which are based upon historical experiences, market trends and financial forecasts, and upon various other assumptions that management believes to be reasonable under the circumstances and at that certain point in time. Actual results may differ, significantly at times, from these estimates under different assumptions or conditions.
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The Company’s significant accounting policies are described in its Annual Report on Form 10-K for the year ended December 31, 2017. There have been no material changes to the Company’s significant accounting policies since December 31, 2017.
The Company’s Managing Member’s Chief Executive Officer, and Executive Vice President and Chief Financial and Operating Officer (“Management”), evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based on the evaluation of the Company’s disclosure controls and procedures, the Chief Executive Officer and Executive Vice President and Chief Financial and Operating Officer concluded that as of the end of the period covered by this report, the design and operation of these disclosure controls and procedures were effective.
The Company does not control the financial reporting process, and is solely dependent on the Management of the Managing Member, who is responsible for providing the Company with financial statements in accordance with generally accepted accounting principles in the United States. The Managing Member’s disclosure controls and procedures, as they are applicable to the Company, means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act (15 U.S.C. 78aet seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
There were no changes in the Managing Member’s internal control over financial reporting, as it is applicable to the Company, during the quarter ended March 31,September 30, 2018 that have materially affected, or are reasonably likely to materially affect, the Managing Member’s internal control over financial reporting, as it is applicable to the Company.
23
In the ordinary course of conducting business, there may be certain claims, suits, and complaints filed against the Managing Member. In the opinion of management, the outcome of such matters, if any, will not have a material impact on the Managing Member’s financial position or results of operations.
None.
None.
Not Applicable.
None.
(a) | Documents filed as a part of this report |
1. | Financial Statement Schedules |
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
2. | Other Exhibits |
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Dean L. Cash | |
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Paritosh K. Choksi | |
32.1 | Certification Pursuant to 18 U.S.C. section 1350 of Dean L. Cash | |
32.2 | Certification Pursuant to 18 U.S.C. section 1350 of Paritosh K. Choksi | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation | |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 14,November 8, 2018
By: AGC Managing Member, LLC |
By: | /s/ Dean L. Cash Dean L. Cash Chairman of the Board, President and Chief Executive Officer of AGC Managing Member, LLC (Managing Member) |
By: | /s/ Paritosh K. Choksi Paritosh K. Choksi Director, Executive Vice President and Chief Financial Officer and Chief Operating Officer of AGC Managing Member, LLC (Managing Member) |
By: | /s/ Samuel Schussler Samuel Schussler Senior Vice President and Chief Accounting Officer of AGC Managing Member, LLC (Managing Member) |
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