 | | |
| x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. | |
| For the year ended December 31, 2018 | ||
| o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. | |
| For the transition period from to |
(Exact name of registrant as specified in its charter)
| | |
| California | 90-1108275 | |
| (State or other jurisdiction of incorporation or organization) | (I. R. S. Employer Identification No.) |
(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 check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yeso Nox
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Act of 1934.Yeso Nox
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| | | | |||
| Large accelerated filero | Accelerated filero | Non-accelerated filero | Smaller reporting companyx | |||
| Emerging growth companyx | (Do not check if a smaller reporting company) | |||||
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 Exchange Act).Yeso Nox
State the aggregate market value of voting stock held by non-affiliates of the registrant: Not applicable
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange Act.) Not applicable
The number of Limited Liability Company Units outstanding as of February 28, 2019 was 2,565,749.
None.
ATEL 17, LLC (the “Company” or the “Fund”) was formed under the laws of the state of California on April 16, 2015 (“Date of Inception”) for the purpose of equipment financing and acquiring equipment to engage in equipment leasing and sales activities. The Managing Member of the Company is ATEL Managing Member, LLC (the “Managing Member” or “Manager”), a Nevada limited liability company. The Managing Member is controlled by ATEL Financial Services, LLC (“AFS”), a wholly-owned subsidiary of ATEL Capital Group. The Fund may continue as provided in the ATEL 17, LLC limited liability company operating agreement dated April 24, 2015 (the “Operating Agreement”). Contributions in the amount of $500 were received as of April 28, 2015, 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 of the Company was granted effectiveness by the Securities and Exchange Commission as of January 5, 2016. The offering will continue until the earlier of a period of two years from that date or until sales of the limited liability company units (Units) to the public reach $150 million. As of February 2, 2016, subscriptions for the minimum number of Units (120,000, representing $1.2 million), excluding subscriptions from Pennsylvania investors, had been received and the Fund requested subscription proceeds to be released from escrow. On that date, the Company commenced initial operations and continued in its development stage activities until transitioning to an operating enterprise during the first quarter of 2016. Pennsylvania subscriptions are subject to a separate escrow and are released to the Fund only when aggregate subscriptions for all investors equal to at least $7.5 million. Total contributions to the Fund exceeded $7.5 million on July 6, 2016, at which time a request was processed to release the Pennsylvania escrowed amounts. The offering will terminate not later than January 5, 2018.
As of December 31, 2018, cumulative gross contributions less rescissions and repurchases (net of distributions paid and allocated syndication costs, as applicable) totaling $25.7 million (inclusive of the $500 initial Member’s capital investment) have been received. As of the same date, 2,565,749 Units were issued and outstanding.
The Company’s principal objectives are to invest in a diversified portfolio of investments that will generate a favorable overall return to investors and (i) preserve, protect and return the Fund’s invested capital; (ii) generate regular cash distributions to Unit holders during the Offering Stage and Operating Stage of the Fund, with any balance remaining after required minimum distributions, equal to not less than 8% nor more than 10% per annum on investors’ Original Invested Capital, to be used to purchase additional investments during the first six years after the year the offering terminates; and (iii) provide additional cash distributions during the Liquidating Stage, commencing with the end of the six year reinvestment period and continuing until all investment portfolio assets have been sold or otherwise disposed.
Pursuant to the terms of the Operating Agreement, the Managing Member and/or its affiliates receives compensation for services rendered and reimbursements for costs incurred on behalf of the Company. (See Note 7, Related party transactions, as set forth in Part II, Item 8, Financial Statements and Supplementary Data.) The Company is required to maintain reasonable cash reserves for working capital, for the repurchase of Units and for contingencies. The repurchase of Units is solely at the discretion of the Managing Member.
The Company has acquired and intends to acquire various types of new and used equipment subject to leases and to make loans secured by equipment acquired by its borrowers. The Company’s primary investment objective is to acquire investments primarily in low-technology, low-obsolescence capital equipment such as the core operating equipment used by companies in the manufacturing, mining and transportation industries. A portion of the portfolio will include some more technology-dependent equipment such as certain types of communications equipment, medical equipment, manufacturing equipment and office equipment.
The Company only purchases equipment under pre-existing leases or for which a lease will be entered into concurrently at the time of the purchase. Through December 31, 2018, the Company has purchased equipment with a total acquisition price of $12.5 million. The Company has also funded investments in notes receivable totaling $6.2 million through December 31, 2018.
As of the date of the final commitment of its proceeds from the sale of Units, the Company’s objective is to have at least 75% of its investment portfolio (by cost) consist of equipment leased to lessees that the Manager deems to be
1
high quality corporate credits and/or leases guaranteed by such high quality corporate credits. High quality corporate credits are lessees or guarantors who have a credit rating by Moody’s Investors Service, Inc. of “Baa3” or better, or the credit equivalent as determined by the Manager, or are public and private corporations with substantial revenues and histories of profitable operations, as well as established hospitals with histories of profitability or municipalities. The remaining 25% of the initial investment portfolio may include equipment lease transactions and other debt or equity financing for companies which, although deemed creditworthy by the Manager, would not satisfy the specific credit criteria for the portfolio described above. Included in this 25% of the portfolio may be growth capital financing investments. No more than 25% of the initial portfolio, by cost, will consist of these growth capital financing investments.
The equipment financing industry is highly competitive. Equipment manufacturers, corporations, partnerships and others offer users an alternative to the purchase of most types of equipment with payment terms that vary widely depending on the type of financing, the lease or loan term and type of equipment. The ability of the Company to keep the equipment leased and the terms of purchase, lease and sale of equipment depends on various factors (many of which neither the Managing Member nor the Company can control), such as general economic conditions, including the effects of inflation or recession, and fluctuations in supply and demand for various types of equipment resulting from, among other things, technological and economic obsolescence.
The Managing Member will use its best efforts to diversify lessees by geography and industry and to maintain an appropriate balance and diversity in the types of equipment acquired and the types of leases entered into by the Company, and will apply the following policies: (i) The Managing Member will seek to limit the amount invested in equipment or property leased to any single lessee to not more than 20% of the aggregate purchase price of investments as of the final commitment of net offering proceeds; (ii) in no event will the Company’s equity investment in equipment or property leased to a single lessee exceed an amount equal to 20% of the maximum capital from the sale of Units (or $30,000,000); and (iii) the Managing Member will seek to invest not more than 20% of the aggregate purchase price of equipment in equipment acquired from a single manufacturer. However, this last limitation is a general guideline only, and the Company may acquire equipment from a single manufacturer in excess of the stated percentage during the offering period and before the offering proceeds are fully invested, or if the Managing Member deems such a course of action to be in the Company’s best interest.
The primary geographic region in which the Company seeks leasing opportunities is North America. All of the Company’s current operating revenues and long-lived assets relate to customers domiciled in North America.
The business of the Company is not seasonal. The Company has no full time employees. Employees of the Managing Member and affiliates provide the services the Company requires to effectively operate. The cost of these services is reimbursed by the Company to the Managing Member and affiliates per the Operating Agreement.
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For further information refer to the financial statements and footnotes.
The Company has acquired a diversified portfolio of equipment. The equipment, all currently located in the U.S., has been leased to lessees in various industries. The following tables set forth the types of equipment acquired by the Company through December 31, 2018 and the industries to which the assets have been leased:
| | | ||||||
| Asset Types | Purchase Price Excluding Acquisition Fees | Percentage of Total Acquisitions | ||||||
| Railroad | $ | 3,679 | 29.52 | % | ||||
| Mining | 1,728 | 13.86 | % | |||||
| Construction | 1,243 | 9.97 | % | |||||
| Paper processing | 1,058 | 8.49 | % | |||||
| Marine | 1,041 | 8.35 | % | |||||
| Containers | 860 | 6.90 | % | |||||
| Agriculture | 742 | 5.95 | % | |||||
| Material handling | 711 | 5.70 | % | |||||
| Aviation | 1,306 | 10.49 | % | |||||
| Transportation | 96 | 0.77 | % | |||||
| $ | 12,464 | 100.00 | % | |||||
| | | ||||||
| Industry of Lessee | Purchase Price Excluding Acquisition Fees | Percentage of Total Acquisitions | ||||||
| Transportation, rail | $ | 3,679 | 29.52 | % | ||||
| Construction | 1,728 | 13.86 | % | |||||
| Agriculture | 1,345 | 10.79 | % | |||||
| Paper and allied products | 1,058 | 8.49 | % | |||||
| Utilities | 1,041 | 8.35 | % | |||||
| Refuse systems | 860 | 6.90 | % | |||||
| Chemical | 844 | 6.77 | % | |||||
| Transportation, air | 1,306 | 10.48 | % | |||||
| Industrial machinery | 306 | 2.46 | % | |||||
| Transportation services, other | 297 | 2.38 | % | |||||
| $ | 12,464 | 100.00 | % | |||||
From inception to December 31, 2018, the Company has not disposed of any leased assets.
For further information regarding the Company’s equipment lease portfolio as of December 31, 2018, see Note 5, Investments in equipment and leases, net, as set forth in Part II, Item 8, Financial Statements and Supplementary Data.
The Company finances assets in diverse industries. The following tables set forth the types of assets financed by the Company through December 31, 2018 and the industries to which the assets have been financed:
| | | ||||||
| Asset Types | Amount Financed Excluding Acquisition Fees | Percentage of Total Acquisitions | ||||||
| Research | $ | 1,599 | 25.89 | % | ||||
| Manufacturing | 871 | 14.10 | % | |||||
| Agriculture | 706 | 11.43 | % | |||||
| Miscellaneous | 3,000 | 48.58 | % | |||||
| $ | 6,176 | 100.00 | % | |||||
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| | | ||||||
| Industry of Lessee | Amount Financed Excluding Acquisition Fees | Percentage of Total Acquisitions | ||||||
| Business services | $ | 1,500 | 24.29 | % | ||||
| Electrical | 1,125 | 18.22 | % | |||||
| Health services | 1,000 | 16.19 | % | |||||
| Computer engines | 871 | 14.10 | % | |||||
| Agriculture | 706 | 11.43 | % | |||||
| Manufacturing | 500 | 8.10 | % | |||||
| Research & development | 474 | 7.67 | % | |||||
| $ | 6,176 | 100.00 | % | |||||
From inception to December 31, 2018, assets financed by the Company that are associated with terminated loans are as follows (in thousands):
| | | | |||||||||
| Asset Types | Amount Financed Excluding Acquisition Fees | Early Termination of Notes Proceeds | Total Payments Received | |||||||||
| Miscellaneous | $ | 500 | $ | 359 | $ | 219 | ||||||
For further information regarding the Company’s notes receivable portfolio as of December 31, 2018, see Note 4, Notes receivable, net, as set forth in Part II, Item 8, Financial Statements and Supplementary Data.
The Company does not own or lease any real property, plant or material physical properties other than the equipment held for lease as set forth in Item 1.
In the ordinary course of conducting business, there may be certain claims, suits, and complaints filed against the Company. In the opinion of management, the outcome of such matters, if any, will not have a material impact on the Company’s financial position or results of operations. No material legal proceedings are currently pending against the Company or against any of its assets.
Not applicable.
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| Item 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
There are certain material conditions and restrictions on the transfer of Units imposed by the terms of the Operating Agreement. Consequently, there is no public market for Units and it is not anticipated that a public market for Units will develop. In the absence of a public market for the Units, there is no currently ascertainable fair market value for the Units.
As of December 31, 2018, a total of 411 investors were Unitholders of record in the Company.
The Financial Industry Regulatory Authority (“FINRA”), in conjunction with the Securities and Exchange Commission (“SEC”) updated rules for the presentation of account statement values relative to pricing of Direct Placement Program (“DPP”) shares. Under FINRA Notice 15-02 (the “Notice”) the SEC approved amendments to National Association of Securities Dealers (“NASD”) Rule 2340, Customer Account Statements, and FINRA rule 2310, which address a FINRA member firm’s participation in a public offering of a DPP. In summary, the amendments require a FINRA member firm to include in the account statements for customers holding DPP securities a per share value for the DPP. This per share value must be prepared by, or with the material assistance or confirmation of, a third-party valuation expert or service. The results of this valuation must be disclosed in the issuer’s reports filed under the Securities Exchange Act of 1934. A valuation in compliance with the Notice must be undertaken and published on at least an annual basis.
The effective date of the Notice was April 11, 2016.
Broker dealers are required to provide a per share estimated value on the customer account statements for each non-listed DPP security held by their customers. Such estimated value must have been developed in a manner reasonably designed to provide a reliable value. Two valuation methodologies have been defined by FINRA, which by such designation are presumed to be reliable.
The amendments to NASD Rule 2340(c)(1)(A) require “net investment” to be based on the “amount available for investment” percentage disclosed in the “Estimated Use of Proceeds” section of the issuer’s offering prospectus. In essence, such value is equal to the offering price less selling commissions, other offering and organization expenses, and capital reserves. This method may be used for up to 150 days following the second anniversary of a Fund breaking escrow.
As amended, Rule NASD 2340(c)(1)(B) requires that the per share estimated value disclosed in an issuer’s most recent periodic or current report be based upon an appraisal of the assets and liabilities of the program by, or with the material assistance or confirmation of, a third-party valuation expert or service, in conformity with standard industry valuation practice as it relates to both the aforementioned assets and liabilities. No later than 150 days following the second anniversary of the issuer’s break of escrow for its minimum offering, this methodology must be used to establish the required estimated values.
The per Unit valuation estimate forATEL 17, LLC has been conducted, and the results disclosed herein, in compliance with the mandates of the Notice.
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ForATEL 17, LLC, its estimated value per Unit reflects the Manager’s estimate of current portfolio valuation of all assets and liabilities of the Fund, calculated on a per Unit basis, and as such, does not represent a market value for the Units and may not accurately reflect the value of the Fund Units to the Unit holders if held over time to Fund maturity.
In connection with any estimate of per Unit value, Unit holders and all parties are reminded that no public market for the Units exists. Additionally, in order to preserve the Fund’s pass-through status for federal income tax purposes, the Fund will not permit a secondary market or the substantial equivalent of a secondary market for the Units. In the absence of a public market for the Units, there is no currently ascertainable fair market value for the Units.
The estimate of per Unit value does not take into account any extraordinary potential future business activity of the Fund; rather the valuation represents a snapshot view of the Fund’s portfolio as of the valuation date. In addition, the Fund does not include any analysis of the distributions that have already been paid by the Fund, nor the anticipated returns to Unit holder over the full course of the Fund life cycle, which will be dependent on many factors.
The estimated value per Unit reported in this Form 10-K has been calculated using the “Appraised Value Methodology” described above under “Methodologies” above, as of December 31, 2018.
ATEL 17, LLC, will satisfy the disclosure requirements for providing estimated per Unit values pursuant to the Notice as follows:
For these disclosure, subsequent to the Fund's initial compliance with FINRA 15-02, annual disclosures of estimated per unit values, through the termination of the Fund, will be accomplished and included on an annual basis in a document filed with the Securities and Exchange Commission available to the public.
| A. | Fund Assets and Liabilities (other than as specifically identified below): The estimated values for non-interest bearing items such as current assets and liabilities are assumed to equal their reported GAAP balances as an appropriate approximation of their fair values. Debt (interest bearing) is assumed to equal the fair values of the debt as disclosed in the footnotes of the financial statements. |
| B. | Investments in Leases (net of fees and expenses): The estimated values for Investments in Leases are based on calculating the present value of the projected future cash flows. Projected future cash flows include both the remaining contractual lease payments, plus assumptions on lease renewals and sale value of the residuals. Projected future cash flows are net of projected future fees and expenses including: |
| • | management fees applicable for the Fund (1.25% of the aggregate original equipment cost of Portfolio Assets during offering stage, 1.75% of the aggregate net Portfolio Assets during operating stage and 1.75% of the Book Value of the Fund Assets less total cash reported as of the end of the most recent prior fiscal quarter or year, as the case may be) |
| • | carried interest applicable for the Fund (0.01% of distributions) |
| • | Operating expenses which are assumed to be 3% of original equipment costs for the Fund |
Projected future cash flows have been discounted back to present value at discount rates based on like-term U.S. Treasury yields (as of the valuation date) plus a 400 basis point spread, to account for the credit risk differentials between the instrument being valued and U.S. Treasury security yields.
Residual values assumptions used in the cash flow projections are as follows:
For On-Lease and Month-to-Month Lease: Considers realized residual as a percent of book residual of 166%, based on ATEL’s historical track record as of December 31, 2018.
For Off-Lease: A current fair market value of off-lease equipment is based upon estimates from ATEL’s seasoned Asset Management Group.
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Special Situation Leases: The valuation of certain leases has been performed outside of the above noted protocol based upon specific lease assumptions different than the macro assumptions above, due to the specific situations of those leases.
| C. | Investments in Notes Receivable: The estimated values for Investments in Notes Receivable are assumed to approximate the reported GAAP balances. |
| D. | Warrants Outstanding: The estimated values for Warrants Outstanding considers the reported GAAP balances to be an appropriate approximation of their fair values. |
| E. | Accrued distributions: Accrued distributions, which are payable to the Unit holders have been removed from the balance sheet liability section because they are not a liability to a third party. |
The Manager’s estimated per Unit value of ATEL 17, LLC at December 31, 2018 as determined, and derived under the guidelines of the Appraised Value Methodology, and pursuant to the above specific enumerated component valuation methodologies and calculations, equals $7.50. An independent national public accounting firm with valuation expertise was retained to examine, attest and confirm ATEL 17, LLC’s per Unit valuation and its component methodologies and calculation as it relates to compliance with the regulatory mandate defined in the Notice. In this regard, they examined the components of the valuation methodologies and determined them to be reasonable and within industry standards. Other component attributes, including the bases and related key assumptions of the calculation were tested for their completeness, underlying documentation support and mathematical accuracy. Upon completion of their efforts, their attestation report confirmed that the per unit valuation of ATEL 17, LLC, and the related notes, in all material respects, was based upon industry practice as described in the Manager’s valuation approach.
The foregoing Fund valuation has been performed solely for the purpose of providing an estimated value per Unit in accordance with a regulatory mandate, in order to provide the broker dealer and custodian community with a valuation on a reasonable basis for use in assigning an estimation of a Unit holder’s account value. Any statement of such valuation is to be accompanied by statements that the value so calculated does not represent an estimate of the amount a Unit holder would receive if the Unit holder were to seek to sell the Units, and that the Fund intends to liquidate its assets in the ordinary course of its business and over the Fund’s term. Further, each Fund Valuation is to be accompanied by a disclosure that there can be no assurance as to (1) when the Fund will be fully liquidated, (2) the amount the Fund may actually receive if and when the Fund seeks to liquidate its assets, (3) the amount of lease or loan payments the Fund will actually receive over the remaining term, (4) the amount of asset disposition proceeds the Fund will actually receive over the remaining term, and (5) the amounts that may actually be received in distributions by Unit holders over the course of the remaining term.
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 April 2016. Additional distributions have been consistently made through December 31, 2018.
Cash distributions were paid by the Fund to Unitholders of record as of November 30, 2018, and paid through December 31, 2018. 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 17, LLC Prospectus dated January 5, 2016 (“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.
Cash distributions were based on current and anticipated gross revenues from the leases and loans acquired. During the Fund’s acquisition and operating stages, the Fund may incur short term borrowing to fund regular distributions of such
7
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 leases and loans acquired.
The following table summarizes distribution activity for the Fund from inception through December 31, 2018 (in thousands except for Units and Per Unit Data):
| | | | | | | | | | |||||||||||||||||||||||||||
| | | | | | | | | | |||||||||||||||||||||||||||
| Distribution Period(1) | Paid | Return of Capital | Distribution of Income | Total Distribution | Total Distribution per Unit(2) | Weighted Average Units Outstanding(3) | ||||||||||||||||||||||||||||||
| Monthly and quarterly distributions | ||||||||||||||||||||||||||||||||||||
| Feb 2016 – Nov 2016 | Apr 2016 – Dec 2016 | $ | 492 | $ | — | $ | 492 | 0.64 | 770,832 | |||||||||||||||||||||||||||
| Dec 2016 – Nov 2017 | Jan 2017 – Dec 2017 | 1,540 | — | 1,540 | 0.78 | 1,967,313 | ||||||||||||||||||||||||||||||
| Dec 2017 – Nov 2018 | Jan 2018 – Dec 2018 | 2,043 | — | 2,043 | 0.80 | 2,562,088 | ||||||||||||||||||||||||||||||
| $ | 4,075 | $ | — | $ | 4,075 | 2.22 | ||||||||||||||||||||||||||||||
| Source of distributions | ||||||||||||||||||||||||||||||||||||
| Lease and loan payments and sales proceeds received | $ | 4,075 | 100.00 | % | $ | — | 0.00 | % | $ | 4,075 | 100.00 | % | ||||||||||||||||||||||||
| $ | 4,075 | 100.00 | % | $ | — | 0.00 | % | $ | 4,075 | 100.00 | % | |||||||||||||||||||||||||
| (1) | Investors may elect to receive their distributions either monthly or quarterly. See “Timing and Method of Distributions” on Page 67 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) | Balances shown represent weighted average units for the period from February 2 – November 30, 2016, from December 1, 2016 – November 30, 2017, and from December 1, 2017 – November 30, 2018, respectively. |
Use of Proceeds from Registered Securities
Information provided pursuant to § 229.701 (Item 701(f)) (formerly included in Form SR):
| (1) | Effective date of the offering: January 5, 2016; File Number: 333-203841 |
| (2) | Offering commenced: January 5, 2016 |
| (3) | The offering did not terminate before any securities were sold. |
| (4) | The managing underwriter is ATEL Securities Corporation. |
| (5) | The title of the registered class of securities is “Units of Limited Liability Company Interest.” |
| (6) | Aggregate amount and offering price of securities registered and sold as of December 31, 2018 (dollars in thousands): |
| | | | | ||||||||||||
| Title of Security | Amount Registered | Aggregate price of offering amount registered | Units sold | Aggregate price of offering amount sold | ||||||||||||
| Units of Limited Company Interest | 15,000,000 | $ | 150,000 | 2,565,749 | $ | 25,850 | ||||||||||
8
| (7) | Costs incurred for the issuers’ account in connection with the issuance and distribution of the securities registered for each category listed below: |
| | | | |||||||||
| Direct or indirect payments to directors, officers, Managing Members of the issuer or their associates, to persons owning ten percent or more of any class of equity securities of the issuer; and to affiliates of the issuer | Direct or indirect payments to others | Total | ||||||||||
| Underwriting discounts and commissions | $ | 516 | $ | 1,807 | $ | 2,323 | ||||||
| Other syndication costs | — | 1,548 | 1,548 | |||||||||
| Total expenses | $ | 516 | $ | 3,355 | $ | 3,871 | ||||||
(8) Net offering proceeds to the issuer after the total expenses in item 7: | $ | 21,979 | ||||||||||
| (9) | The amount of the net offering proceeds to the issuer used for each of the purposes listed below: |
| | | | |||||||||
| Direct or indirect payments to directors, officers, Managing Members of the issuer or their associates, to persons owning ten percent or more of any class of equity securities of the issuer; and to affiliates of the issuer | Direct or indirect payments to others | Total | ||||||||||
| Purchase and installation of machinery and equipment | $ | 332 | $ | 12,465 | $ | 12,797 | ||||||
| Investment in notes receivable | 24 | 6,177 | 6,201 | |||||||||
| Distributions paid and accrued | — | 4,302 | 4,302 | |||||||||
| Other expenses | — | 2,941 | 2,941 | |||||||||
| $ | 356 | $ | 25,885 | $ | 26,241 | |||||||
(10) Net offering proceeds to the issuer after the total investments and distributions in item 9: | $ | (4,262 | ) | |||||||||
| Item 6. | SELECTED FINANCIAL DATA |
A smaller reporting company is not required to present selected financial data in accordance with item 301(c) of Regulation S-K.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Statements contained in this Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) and elsewhere in this Form 10-K, 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, economic recession and changes in general economic conditions, including fluctuations in demand for equipment, lease rates, and interest rates, may result in delays in investment and reinvestment, delays in leasing, re-leasing, and disposition of equipment, and reduced returns on invested capital. The Company’s performance is subject to risks relating to lessee defaults and the creditworthiness of its lessees. The Company’s performance is also subject to risks relating to the value of its equipment at the end of its leases, which may be affected by the condition of the equipment, technological obsolescence and the markets for new and used equipment at the end of lease terms. Investors are cautioned not to attribute undue certainty to these forward-looking statements, which speak only as of the date of this Form 10-K. 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-K or to reflect the occurrence of unanticipated events, other than as required by law.
ATEL 17, LLC (the “Company” or the “Fund”) was formed under the laws of the state of California on April 16, 2015 (“Date of Inception”) for the purpose of equipment financing and acquiring equipment to engage in equipment leasing and sales activities.
The offering of the Company was granted effectiveness by the Securities and Exchange Commission as of January 5, 2016. The offering will continue until the earlier of a period of two years from that date or until sales of the Limited Liability Company Units (“Units”) to the public reach $150 million. As of February 2, 2016, subscriptions for the
9
minimum number of Units (120,000, representing $1.2 million), excluding subscriptions from Pennsylvania investors, had been received and the Fund requested subscription proceeds to be released from escrow. On that date, the Company commenced initial operations and continued in its development stage activities until transitioning to an operating enterprise during the first quarter of 2016. Pennsylvania subscriptions are subject to a separate escrow and are released to the Fund only when aggregate subscriptions for all investors equal to at least $7.5 million. Total contributions to the Fund exceeded $7.5 million on July 6, 2016, at which time a request was processed to release the Pennsylvania escrowed amounts. The offering was terminated on January 5, 2018. As of December 31, 2018, 2,565,749 Units were issued and outstanding.
During 2016, the Company initiated its initial acquisition stage with the investment of the net proceeds from the public offering of Units. Subsequently, during the reinvestment period (“Reinvestment Period”) (defined as six full years following the year the offering was terminated), the Company has reinvested and will reinvest cash flow in excess of certain amounts required to be distributed to the members and/or utilized its credit facilities to acquire additional equipment. Throughout the Reinvestment Period, which ends December 31, 2022, the Company anticipates continued reinvestment of cash flow in excess of minimum distributions and other obligations. The Company is governed by its Operating Agreement.
The Company may continue until terminated as provided in the Operating Agreement. Periodic distributions are paid at the discretion of the Managing Member.
It is the Company’s objective to maintain a 100% utilization rate for all equipment purchased in any given year. All equipment transactions are acquired subject to binding lease commitments, so equipment utilization is expected to remain high during the funding period and throughout the reinvestment stage. Initial lease terms of these leases are generally from 36 to 120 months, and as they expire, the Company will attempt to re-lease or sell the equipment. All of the Company’s equipment on lease was purchased in the years 2016 through 2018. The utilization percentage of existing assets under lease was 100% at both December 31, 2018 and 2017.
Cost reimbursements to the Managing Member and/or 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 Company had net loss of $170 thousand and $481 thousand for the years ended December 31, 2018 and 2017, respectively. Results for 2018 reflect increases in both total revenues and total expenses when compared to prior year.
Total revenues for 2017 increased by $796 thousand, or 52%, as compared to prior year. Such increase was largely due to a $462 thousand, or 291%, increase in interest income on notes receivable related to funding of new notes receivable investments; and a $343 thousand, or 26%, increase in operating lease revenues, mainly the result of new operating lease equipment contracts and related acquisitions; offset in part, by an $18 thousand, or 100%, decrease in gain on sales of lease assets and early termination of notes receivable due to a change in the volume and mix of assets sold.
Total expenses for 2018 increased by $485 thousand, or 24%, as compared to prior year. The increase in total expenses was largely a result of a $290 thousand, or 31%, increase in depreciation expense, the result of approximately $1.3 million in purchase of lease assets in year 2018; a $141 thousand, or 50%, increase in cost reimbursements to Manager Member, pursuant to incremental operations and support efforts; a $101 thousand, or 60%, increase in asset management fees paid to the Manager, primarily due to increased managed assets and related revenue; a $73 thousand, or 155%, increase in bank charges due to line of credit fees; offset in part, by a $128 thousand, or 54%, decrease in acquisition expenses related to lower period over period acquisitions of operating lease assets and a $36 thousand, or 200%, favorable adjustment due to the reversal of provision for credit losses, a result of timely collections on customer accounts.
10
At December 31, 2018 and 2017, the Company’s cash and cash equivalents totaled $6.5 million and $7.1 million, respectively. The liquidity of the Company varies, increasing to the extent cash flows from leases and proceeds of asset sales exceed expenses and decreasing as leases and other assets are acquired, as distributions are made to the Members and to the extent expenses exceed cash flows from leases and proceeds from asset sales.
The Company currently believes it has adequate reserves available to meet its immediate cash requirements and those of the next twelve months, but in the event those reserves are found to be inadequate, the Company would likely be in a position to borrow against its current portfolio to meet such requirements. The Managing Member envisions no such requirements for operating purposes.
The following table sets forth summary cash flow data (in thousands):
| | | ||||||
| 2018 | 2017 | |||||||
| Net cash provided by (used in): | ||||||||
| Operating activities | $ | 864 | $ | 633 | ||||
| Investing activities | (3,098 | ) | (4,563 | ) | ||||
| Financing activities | 1,626 | 7,592 | ||||||
| Net (decrease) increase in cash and cash equivalents | $ | (608 | ) | $ | 3,662 | |||
During 2018 and 2017, the Company’s primary sources of liquidity were from its portfolio of operating lease contracts, investments in notes receivable, Members’ capital contributions from the sale of Units and from borrowings under non-recourse debt. The net cash provided by the Company’s operating activities were $864 thousand and $633 thousand for 2018 and 2017, respectively. Cash received from Members for the offering of Units totaled $340 thousand and $10.7 million for the respective years 2018 and 2017. During the years ended December 31, 2018 and 2017, cash received from borrowings under non-recourse debt totaled $3.7 million and $0, respectively. The Company also received $1.7 million and $458 thousand from principal payments on notes receivable for the respective years 2018 and 2017. In addition, the Company realized $0 and $359 thousand of proceeds from early termination of certain notes receivable during 2018 and 2017, respectively.
During 2018 and 2017, cash was primarily used to acquire lease assets, invest in notes receivable, pay distributions and syndication costs. Cash used to acquire lease assets totaled $1.3 million and $4.1 million for 2018 and 2017, respectively. Cash used to invest in notes receivable totaled $3.6 million and $1.1 million for the respective years 2018 and 2017. Distributions paid to Other Members totaled $2.0 million and $1.5 million for 2018 and 2017, respectively. During the respective years ended December 31, 2018 and 2017, the payment of selling commissions and syndication costs associated with the Company’s offering totaled $51 thousand and $1.6 million. Cash used for the repurchase of Units totaled $151 thousand and $0 for 2018 and 2017, respectively.
Effective June 30, 2017, the Company participated with ATEL Capital Group and certain subsidiaries and affiliated funds in a $75 million revolving credit facility (the “Credit Facility”) with a syndicate of financial institutions as lenders. The Credit Facility is comprised of a working capital facility, an acquisition facility (the “Acquisition Facility”) and a warehouse facility (the “Warehouse Facility”), the Company and affiliates, and a venture facility. As of December 31, 2018, the Credit Facility is for an amount of $75 million and has been extended to June 30, 2019. The lending syndicate providing the Credit Facility has a blanket lien on all of the Company’s assets as collateral for any and all borrowings under the Acquisition Facility, and on a pro-rata basis under the Warehouse Facility. Such Credit Facility includes certain financial covenants. The interest rate on the Credit Facility is based on either the LIBOR/Eurocurrency rate of 1-, 2-, 3- or 6-month maturity plus a lender designated spread, or the bank’s Prime rate, which re-prices daily. At December 31, 2018, approximately $72.9 million was available under the facility, and the Company had no outstanding borrowings under the facility.
The Company commenced periodic distributions beginning with the month of February 2016. Additional distributions have been consistently made through December 31, 2018. See Item 5, Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, for additional information regarding the distributions.
11
At December 31, 2018, there were no commitments to purchase lease assets and fund investments in notes receivable.
None.
See the Report of Independent Registered Public Accounting Firm, Financial Statements and Notes to Financial Statements attached hereto at pages 13 through 34.
12
The Member
ATEL 17, LLC
We have audited the accompanying balance sheets of ATEL 17, LLC (the “Company”) as of December 31, 2018 and 2017, the related statements of operations, changes in members’ capital, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Management of the Company’s Managing Member. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Moss Adams LLP
San Francisco, California
March 15, 2019
We have served as the Company’s auditor since 2015.
13
| | | ||||||
| 2018 | 2017 | |||||||
| ASSETS | ||||||||
| Cash and cash equivalents | $ | 6,484 | $ | 7,092 | ||||
| Due from affiliates | 44 | — | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $0 at December 31, 2018 and $18 at December 31, 2017 | 60 | 66 | ||||||
| Notes receivable, net of unearned interest income of $496 at December 31, 2018 and $359 at December 31, 2017 | 3,455 | 1,794 | ||||||
| Warrants, fair value | 302 | 62 | ||||||
| Investments in equipment and leases, net of accumulated depreciation of $2,463 at December 31, 2018 and $1,242 at December 31, 2017 | 10,186 | 10,200 | ||||||
| Prepaid expenses and other assets | 13 | 12 | ||||||
| Total assets | $ | 20,544 | $ | 19,226 | ||||
| LIABILITIES AND MEMBERS’ CAPITAL | ||||||||
| Accounts payable and accrued liabilities: | ||||||||
| Managing Member | $ | — | $ | 34 | ||||
| Affiliates | — | 74 | ||||||
| Accrued distributions to Other Members | 228 | 217 | ||||||
| Other | 51 | 30 | ||||||
| Non-recourse debt | 3,531 | — | ||||||
| Unearned operating lease income | 113 | 164 | ||||||
| Total liabilities | 3,923 | 519 | ||||||
| Commitments and contingencies | ||||||||
| Members’ capital: | ||||||||
| Managing Member | 1 | 1 | ||||||
| Other Members | 16,620 | 18,706 | ||||||
| Total Members’ capital | 16,621 | 18,707 | ||||||
| Total liabilities and Members’ capital | $ | 20,544 | $ | 19,226 | ||||
See accompanying notes.
14
| | | ||||||
| 2018 | 2017 | |||||||
| Revenues: | ||||||||
| Leasing and lending activities: | ||||||||
| Operating leases | $ | 1,683 | $ | 1,340 | ||||
| Notes receivable interest income | 621 | 159 | ||||||
| Gain on sales of lease assets and early termination of notes receivable | — | 18 | ||||||
| Unrealized gain on fair value adjustment for warrants | 16 | 11 | ||||||
| Other | 12 | 8 | ||||||
| Total revenues | 2,332 | 1,536 | ||||||
| Expenses: | ||||||||
| Depreciation of operating lease assets | 1,221 | 931 | ||||||
| Asset management fees to Managing Member | 268 | 167 | ||||||
| Acquisition expense | 108 | 236 | ||||||
| Cost reimbursements to Managing Member and/or affiliates | 421 | 280 | ||||||
| (Reversal of) provision for credit losses | (18 | ) | 18 | |||||
| Amortization of initial direct costs | 77 | 58 | ||||||
| Interest expense | 24 | — | ||||||
| Professional fees | 98 | 122 | ||||||
| Outside services | 99 | 83 | ||||||
| Taxes on income and franchise fees | (5 | ) | 7 | |||||
| Bank charges | 120 | 47 | ||||||
| Other | 89 | 68 | ||||||
| Total expenses | 2,502 | 2,017 | ||||||
| Net loss | $ | (170 | ) | $ | (481 | ) | ||
| Net loss: | ||||||||
| Managing Member | $ | — | $ | — | ||||
| Other Members | (170 | ) | (481 | ) | ||||
| $ | (170 | ) | $ | (481 | ) | |||
| Net loss per Limited Liability Company Unit (Other Members) | $ | (0.07 | ) | $ | (0.23 | ) | ||
| Weighted average number of Units outstanding | 2,567,041 | 2,058,512 | ||||||
See accompanying notes.
15
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(In Thousands Except for Units and Per Unit Data)
| | | | | ||||||||||||
| Amount | ||||||||||||||||
| Units | Other Members | Managing Member | Total | |||||||||||||
| Balance December 31, 2016 | 1,475,864 | $ | 11,695 | $ | 1 | $ | 11,696 | |||||||||
| Capital contributions | 1,075,885 | 10,740 | — | 10,740 | ||||||||||||
| Syndication costs | — | (1,608 | ) | — | (1,608 | ) | ||||||||||
| Distributions to Other Members ($0.80 per Unit) | — | (1,640 | ) | — | (1,640 | ) | ||||||||||
| Net loss | — | (481 | ) | — | (481 | ) | ||||||||||
| Balance December 31, 2017 | 2,551,749 | $ | 18,706 | $ | 1 | $ | 18,707 | |||||||||
| Capital contributions | 34,000 | 340 | — | 340 | ||||||||||||
| Repurchase of units | (20,000 | ) | (151 | ) | — | (151 | ) | |||||||||
| Syndication costs | — | (51 | ) | — | (51 | ) | ||||||||||
| Distributions to Other Members ($0.80 per Unit) | — | (2,054 | ) | — | (2,054 | ) | ||||||||||
| Net loss | — | (170 | ) | — | (170 | ) | ||||||||||
| Balance December 31, 2018 | 2,565,749 | $ | 16,620 | $ | 1 | $ | 16,621 | |||||||||
See accompanying notes.
16
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(In Thousands)
| | | ||||||
| 2018 | 2017 | |||||||
| Operating activities: | ||||||||
| Net loss | $ | (170 | ) | $ | (481 | ) | ||
| Adjustment to reconcile net loss to net cash provided by operating activities: | ||||||||
| Accretion of note discount – warrants | (71 | ) | (18 | ) | ||||
| Gain on sales of assets and early termination of notes | — | (18 | ) | |||||
| Depreciation of operating lease assets | 1,221 | 931 | ||||||
| Amortization of initial direct costs | 77 | 58 | ||||||
| (Reversal of) provision for credit losses | (18 | ) | 18 | |||||
| Unrealized gain on fair value adjustment for warrants | (16 | ) | (11 | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 24 | 25 | ||||||
| Due from Managing Member and affiliates | (44 | ) | — | |||||
| Prepaid expenses and other assets | (1 | ) | 4 | |||||
| Accounts payable, Managing Member and affiliates | (108 | ) | 49 | |||||
| Accounts payable, other | 21 | 15 | ||||||
| Unearned operating lease income | (51 | ) | 61 | |||||
| Net cash provided by operating activities | 864 | 633 | ||||||
| Investing activities: | ||||||||
| Proceeds from early termination of notes receivable | — | 359 | ||||||
| Purchases of equipment on operating leases | (1,252 | ) | (4,135 | ) | ||||
| Payments of initial direct costs | (38 | ) | (120 | ) | ||||
| Note receivable advances | (3,551 | ) | (1,125 | ) | ||||
| Principal payments received on notes receivable | 1,743 | 458 | ||||||
| Net cash used in investing activities | (3,098 | ) | (4,563 | ) | ||||
| Financing activities: | ||||||||
| Borrowings under non-recourse debt | 3,685 | — | ||||||
| Repayments under non-recourse debt | (154 | ) | — | |||||
| Syndication costs paid to Managing Member and affiliates | (51 | ) | (1,608 | ) | ||||
| Distributions to Other Members | (2,043 | ) | (1,540 | ) | ||||
| Capital contributions | 340 | 10,740 | ||||||
| Repurchase/Rescissions of Units | (151 | ) | — | |||||
| Net cash provided by financing activities | 1,626 | 7,592 | ||||||
| Net (decrease) increase in cash and cash equivalents | (608 | ) | 3,662 | |||||
| Cash at beginning of year | 7,092 | 3,430 | ||||||
| Cash at end of year | $ | 6,484 | $ | 7,092 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the year for interest | $ | 19 | $ | — | ||||
| Cash paid during the year for taxes | $ | 1 | $ | 1 | ||||
| Schedule of non-cash investing and financing transactions: | ||||||||
| Distributions payable to Other Members at year-end | $ | 228 | $ | 217 | ||||
| Distributions payable to Managing Member at year-end | $ | — | $ | — | ||||
See accompanying notes.
17
ATEL 17, LLC (the “Company” or the “Fund”) was formed under the laws of the state of California on April 16, 2015 (“Date of Inception”) for the purpose of equipment financing and acquiring equipment to engage in equipment leasing and sales activities. The Managing Member of the Company is ATEL Managing Member, LLC (the “Managing Member” or “Manager”), a Nevada limited liability company. The Managing Member is controlled by ATEL Financial Services, LLC (“AFS”), a wholly-owned subsidiary of ATEL Capital Group. The Fund may continue as provided in the ATEL 17, LLC limited liability operating agreement dated April 24, 2015 (the “Operating Agreement”). Contributions in the amount of $500 were received as of April 28, 2015, 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 of the Company was granted effectiveness by the Securities and Exchange Commission as of January 5, 2016. The offering will continue until the earlier of a period of two years from that date or until sales of the limited liability company units (Units) to the public reach $150 million. As of February 2, 2016, subscriptions for the minimum number of Units (120,000, representing $1.2 million), excluding subscriptions from Pennsylvania investors, had been received and the Fund requested subscription proceeds to be released from escrow. On that date, the Company commenced initial operations and continued in its development stage activities until transitioning to an operating enterprise during the first quarter of 2016. Pennsylvania subscriptions are subject to a separate escrow and are released to the Fund only when aggregate subscriptions for all investors equal to at least $7.5 million. Total contributions to the Fund exceeded $7.5 million on July 6, 2016, at which time a request was processed to release the Pennsylvania escrowed amounts. The offering terminated on January 5, 2018.
As of December 31, 2018, cumulative gross contributions, less rescissions and repurchases (net of distributions paid and allocated syndication costs, as applicable), totaling $25.7 million (inclusive of the $500 initial Member’s capital investment) have been received. As of the same date, 2,565,749 Units were issued and outstanding.
The Company’s principal objectives are to invest in a diversified portfolio of investments that will (i) preserve, protect and return the Company’s invested capital; (ii) generate regular cash distributions to members, with any balance remaining after required minimum distributions to be used to purchase additional investments during the Reinvestment Period (ending six calendar years after the completion of the Company’s public offering of Units) and (iii) provide additional cash distributions following the Reinvestment Period and until all investment portfolio assets have been sold or otherwise disposed.
Pursuant to the terms of the Operating Agreement, the Managing Member and/or its affiliates receives compensation for services rendered and reimbursements for costs incurred on behalf of the Company. (See Note 7, Related party transactions.) The Company is required to maintain reasonable cash reserves for working capital, for the repurchase of Units and for contingencies. The repurchase of Units is solely at the discretion of the Managing Member.
The accompanying balance sheets as of December 31, 2018 and 2017, and the related statements of operations, changes in members' capital, and cash flows for the years then ended, have been prepared in accordance with accounting principles generally accepted in the United States of America (‘GAAP’) and the rules and regulations of the Securities and Exchange Commission. Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no significant effect on the reported financial position or results from operations.
Footnote and tabular amounts are presented in thousands, except as to Units and per data.
In preparing the accompanying financial statements, the Company has reviewed, as determined necessary by the Managing Member, events that have occurred after December 31, 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, and adjustments thereto.
18
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.
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 residual values at the end of the lease term and expected future cash flows used for impairment analysis purposes and for determination of the allowance for doubtful accounts and reserve for credit losses on notes receivable.
Accounts receivable represent the amounts billed under operating lease contracts, and notes receivable which are currently due to the Company. Allowances for doubtful accounts are typically established based on historical charge off and collection experience and the collectability of specifically identified lessees and 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.
Financial instruments that potentially subject the Company to concentrations of credit risk include cash and cash equivalents, operating lease receivable, notes receivable and accounts receivable. The Company places the majority of its cash deposits in noninterest-bearing accounts with financial institutions that have no less than $10 billion in assets. Such deposits are insured up to $250 thousand. 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 and notes receivable represent amounts due from lessees or borrowers in various industries, related to equipment on operating leases or notes receivable.
Equipment subject to operating leases is stated at cost. Depreciation is recognized on a straight-line method over the terms of the related leases to the equipment’s estimated residual values. Off-lease equipment is generally not subject to depreciation. The Company depreciates all lease assets, in accordance with guidelines consistent with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 840-20-35-3, over the periods of the lease terms contained in each asset’s respective lease contract to the estimated residual value at the end of the lease contract. All lease assets are purchased only concurrent with the execution of a lease commitment by the lessee. Thus, the original depreciation period corresponds with the term of the original lease. Once the term of an original lease contract is completed, the subject property is typically sold to the existing user, re-leased to the existing user, or, when off-lease, is held for sale. Assets which are re-leased continue to be depreciated using the terms of the new lease agreements and the estimated residual values at the end of the new lease terms, adjusted downward as necessary. Assets classified as held-for-sale are carried at the lower of carrying amount, or the fair value less cost to sell.
The Company does not use the equipment held in its portfolio, but holds it solely for lease and ultimate sale. In the course of marketing equipment that has come off-lease, management may determine at some point that re-leasing the assets may provide a superior return for investors and would then execute another lease. Upon entering into a new lease contract, management will estimate the residual value once again and resume depreciation. If and when the Company, at any time, determines that depreciation in value may have occurred with respect to an asset held-for-sale, the Company would review the value to determine whether a material reduction in value had occurred and recognize any appropriate impairment. All lease assets, including off-lease assets, are subject to the Company’s quarterly impairment analysis, as described below. Maintenance costs associated with the Fund’s portfolio of leased assets are expensed as incurred. Major additions and betterments are capitalized.
19
Operating lease revenue is recognized on a straight-line basis over the term of the underlying leases. The initial lease terms will vary as to the type of equipment subject to the leases, the needs of the lessees and the terms to be negotiated, but initial leases are generally on terms from 36 to 120 months. The difference between rent received and rental revenue recognized is recorded as unearned operating lease income on the balance sheet.
Operating leases 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 considers the equipment underlying the lease contracts for impairment and periodically reviews the credit worthiness of all operating lessees with payments outstanding less than 90 days. Based upon management’s judgment, the related operating leases may be placed on non-accrual status. Leases 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 lease payments is probable. Until such time, revenues are recognized on a cash basis.
The Company records all future payments of principal and interest on notes as notes receivable, which are then offset by the amount of any related unearned interest income. For financial statement purposes, the Company reports only the net amount of principal due on the balance sheet. The unearned interest is recognized over the term of the note and the income portion of each note payment is calculated so as to generate a constant rate of return on the net balance outstanding. Any fees or costs related to notes receivable are recorded as part of the net investment in notes receivable and amortized over the term of the loan.
Allowances for losses on notes receivable are typically established based on historical charge off and collection experience and the collectability of specifically identified borrowers and billed and unbilled receivables. 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 payments 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.
Notes 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, the related notes may be placed on 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. Until such time, all payments received are applied only against outstanding principal balances.
The Company capitalizes initial direct costs (“IDC”) associated with the origination and funding of lease assets and investments in notes receivable. IDC includes both internal costs (e.g., the costs of employees’ activities in connection with successful lease and loan originations) and external broker fees incurred with such originations. The costs are amortized on a lease by lease (or note by note) basis based on actual lease term using a straight-line method for operating leases and the effective interest rate method for notes receivable. Upon disposal of the underlying lease assets and notes receivable, both the initial direct costs and the associated accumulated amortization are relieved. Costs related to leases or notes receivable that are not consummated are not eligible for capitalization as initial direct costs and are expensed as acquisition expense.
20
Acquisition expense represents costs which include, but are not limited to, legal fees and expenses, travel and communication expenses, cost of appraisals, accounting fees and expenses and miscellaneous expenses related to the selection and acquisition of equipment which are reimbursable to the Managing Member under the terms of the Operating Agreement. As the costs are not eligible for capitalization as initial direct costs, such amounts are expensed as incurred.
Recorded values of the Company’s leased asset portfolio are reviewed each quarter to confirm the reasonableness of established residual values and to determine whether there is indication that an asset impairment might have taken place. The Company uses a variety of sources and considers many factors in evaluating whether the respective book values of its assets are appropriate. In addition, the Company may direct a residual value review at any time if it becomes aware of issues regarding the ability of a lessee to continue to make payments on its lease contract. An impairment loss is measured and recognized only if the estimated undiscounted future cash flows of the asset are less than the net book value. The estimated undiscounted future cash flows are the sum of the residual value of the asset at the end of the asset’s lease contract and undiscounted future rents from the existing lease contract. The residual value assumes, among other things, that the asset is utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the marketplace are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly. Impairment is measured as the difference between the fair value (as determined by a valuation method using discounted estimated future cash flows, third party appraisals or comparable sales of similar assets as applicable based on asset type) of the asset and its carrying value on the measurement date. Upward adjustments for impairments recognized in prior periods are not made in any circumstances.
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 Company’s principal decision makers are the Managing Member’s Chief Executive Officer and its Chief Financial Officer and Chief Operating Officer. The Company believes that its equipment leasing business operates as one reportable segment because: a) the Company measures profit and loss at the equipment portfolio level as a whole; b) the principal decision makers do not review information based on any operating segment other than the equipment leasing transaction portfolio; c) the Company does not maintain discrete financial information on any specific segment other than its equipment financing operations; d) the Company has not chosen to organize its business around different products and services other than equipment lease financing; and e) the Company has not chosen to organize its business around geographic areas.
The primary geographic region in which the Company seeks leasing opportunities is North America. For the year ended December 31, 2018, all of the Company’s current operating revenues and long-lived assets relate to customers domiciled in the United States.
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. The Company recorded unrealized gains of $16 thousand and $11 thousand on fair valuation of its warrants during 2018 and 2017, respectively. The estimated fair value of the Company’s portfolio of warrants was $302 thousand and $62 thousand for the years ended December 31, 2018 and 2017, respectively.
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The Company records prepayments on operating leases as a liability under the caption of unearned operating lease income. The liability is recorded when prepayments are received and recognized as operating lease revenue over the period to which the prepayments relate using a straight-line method.
The Company is treated as a partnership for federal income tax purposes. Pursuant to the provisions of Section 701 of the Internal Revenue Code, a partnership is not subject to federal income taxes. Accordingly, the Company has provided current franchise income taxes for only those states which levy income taxes on partnerships. For the year ended December 31, 2017, the related provision for state income taxes was approximately $7 thousand and for the year ended December 31, 2018, the Company received $5 thousand income tax credit adjustments. The Company does not have any entity level uncertain tax positions. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions and is generally subject to examination by U.S. federal (or state and local) income tax authorities for three years from the filing of a tax return.
The tax bases of the Company’s net assets and liabilities vary from the amounts presented in these financial statements at December 31, 2018 and 2017 as follows (in thousands):
| | |||||||
| 2018 | 2017 | |||||||
| Financial statement basis of net assets | $ | 16,621 | $ | 18,707 | ||||
| Tax basis of net assets (unaudited) | 16,525 | 20,689 | ||||||
| Difference | $ | 96 | $ | (1,982 | ) | |||
The primary differences between the tax bases of net assets and the amounts recorded in the financial statements are the result of differences in accounting for syndication costs and differences between the depreciation methods used in the financial statements and the Company’s tax returns.
The following reconciles the net loss reported in these financial statements to the loss reported on the Company’s federal tax return (unaudited) for the years ended December 31, 2018 and 2017 (in thousands):
| | |||||||
| 2018 | 2017 | |||||||
| Net loss per financial statements | $ | (170 | ) | $ | (481 | ) | ||
| Tax adjustments (unaudited): | ||||||||
| Adjustment to depreciation expense | (2,049 | ) | (1,550 | ) | ||||
| Provision for losses and doubtful accounts | (18 | ) | 18 | |||||
| Adjustments to revenues | (68 | ) | 50 | |||||
| Other | (5 | ) | 7 | |||||
| Loss per federal tax return (unaudited) | $ | (2,310 | ) | $ | (1,956 | ) | ||
Section 107 of the Jumpstart Our Business Startups Act (the “JOBS Act”) provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have chosen to “opt out” of such extended transition period and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
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Net loss and distributions per Unit are based upon the weighted average number of members Units outstanding during the year.
In November 2018, the FASB issued Accounting Standards Update 2018-19, Codification Improvements to Topic 326, Financial Instruments — Credit Losses (“ASU 2018-19”). The new standard clarifies certain aspects of the new current expected credit losses (CECL) impairment model in ASU 2016-13. The amendment clarifies that receivables arising from operating leases are within the scope of ASC 842, rather than ASC 326. The effective date and transition requirements in this Update are the same as the effective dates and transition requirements in Update 2016-13, as amended by this Update, which is for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Management is currently evaluating the impact of the standard on the financial statements and related disclosure requirements.
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 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 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 February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (Topic 842) (“ASU 2016-02”). The new standard will require lessees to recognize lease assets and lease liabilities arising from operating leases with lease terms greater than 12 months in the statement of financial position. Lessor accounting per ASU 2016-02 is mostly unchanged from the previous lease accounting under GAAP. Certain changes were made to the lessor accounting
23
guidance in order to align the lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. Similar to the previous guidance, lessors will classify leases as operating, direct financing, or sales-type. Lessors in operating leases will continue to recognize the underlying asset and recognize income on a straight-line basis. Lessors determine whether a lease is a sale of the underlying asset based on whether the lessee effectively obtains control of the underlying assets. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. While early adoption is permitted, the Company does not expect to elect that option. The Company expects to adopt the guidance in the first quarter 2019 using the modified retrospective method. Management is currently evaluating the impact of this standard on the financial statements and its operational and related disclosure requirements, including the impact on the Company’s current lease portfolio from a lessor perspective. As part of the adoption of the standard, the Company has selected and is in the process of implementing new lease accounting software. The Company is in the process of identifying and designing appropriate changes to its business processes, systems and controls to support the new standard. Given the limited changes to lessor accounting, Management does not expect material changes to recognition or measurement.
In July 2018, the FASB issued Accounting Standards Update 2018-11, Leases (Topic 842) Targeted Improvements (“ASU 2018-11”). The new standard provides a new transition method and practical expedient to simplify the application of the new leasing standard. Under the new transition method, comparative periods presented in the financial statements in the period of adoption will not need to be restated. Instead, a Company would initially apply the new lease requirements at the effective date, and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company would continue to report comparative periods presented in the financial statements in the period of adoption under current GAAP and provide the applicable required disclosures for such periods. The new practical expedient allows lessors to avoid separating lease and associated nonlease components within a contract if certain criteria are met. If elected, lessors will be able to aggregate nonlease components that otherwise would be accounted for under the new revenue standard with the associated lease component if the following conditions are met (1) the timing and pattern of transfer of the nonlease component and the associated lease component are the same and (2) the stand-alone lease component would be classified as an operating lease if accounted for separately. For entities that have not adopted Topic 842 before the issuance of this Update, the effective date and transition requirements for the amendments in this Update related to separating components of a contract are the same as the effective date and transition requirements in Update 2016-02. The practical expedient may be elected either in the first reporting period following the issuance of this Update or at the original effective date of Topic 842 for that entity. The practical expedient may be applied either retrospectively or prospectively. Management is currently evaluating the impact of the standard on the financial statements and related disclosure requirements. The Company plans to adopt this guidance on January 1, 2019 and will prospectively apply the new lease requirements and recognize a cumulative effect adjustment upon adoption. As part of the adoption, the Company has elected to apply the package of transitional practical expedients under which the Company will not reassess prior conclusions about lease identification, lease classification, and initial direct costs of existing leases as of the date of adoption. Under Topic 842, initial direct costs include only those incremental costs of a lease that would not have been incurred if the lease had not been executed. Therefore, only certain costs that the Company capitalized as initial direct costs under ASC Topic 840: Leases may be expensed as incurred under Topic 842. The Company expects an immaterial cumulative effect adjustment upon adoption. The Company plans to elect the lessor practical expedient to combine the lease and non-lease components. The Company expects that the lease components are the predominant component in the majority of its leasing arrangements and will account for the combined component as an operating lease under Topic 842. The Company currently does not believe the adoption will significantly affect the timing of the recognition of its combined lease and non-lease components.
In December 2018, the FASB issued Accounting Standards Update 2018-20, Narrow-Scope Improvements for Lessors (“ASU 2018-20”). The new standard includes amendments related to sales taxes and other similar taxes collected from lessees, lessor costs paid by a lessee and recognition of variable payments for contracts with lease and non-lease components. The effective date in this Update is the same as that of ASU 2016-02, which is for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company plans to adopt this guidance on January 1, 2019. The Company expects the adoption of ASU 2018-20 will have an immaterial impact on the Company’s financial statements and disclosures.
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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 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 not have a material impact on its financial statements and disclosures.
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 was effective for the Company beginning on January 1, 2018. The adoption of ASU 2014-09 did not have a material impact on the Company’s financial statements and disclosures as revenues calculated under the new guidelines were substantially the same as had previously been determined.
The Company leases equipment to lessees and provides debt financing to borrowers in diversified industries. Leases and notes receivable are subject to the Managing Member’s credit committee review. The leases and notes receivable provide for the return of the equipment to the Company upon default.
As of December 31, 2018 and 2017, there were concentrations (greater than or equal to 10% as a percentage of total equipment cost) of equipment leased to lessees and/or financed for borrowers in certain industries as follows:
| | | ||||||
| Percentage of Total Equipment Cost | ||||||||
| Industry | 2018 | 2017 | ||||||
| Transportation, rail | 30 | % | 33 | % | ||||
| Construction | 14 | % | 12 | % | ||||
| Agriculture | 11 | % | 12 | % | ||||
| Transportation, air | 10 | % | * | |||||
| * | Less than 10% |
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During 2018 and 2017, certain lessees and/or financial borrowers generated significant portions (defined as greater than or equal to 10%) of the Company’s total leasing and lending revenues, excluding gains or losses on disposition of assets, as follows:
| | | | |||||||||
| Percentage of Total Leasing and Lending Revenues | ||||||||||||
| Lessee | Type of Equipment | 2018 | 2017 | |||||||||
| Union Pacific Railroad Company | Railroad | 22 | % | 26 | % | |||||||
| Cargill, Inc. | Agriculture/Construction | 11 | % | 16 | % | |||||||
| Aggregate Industries Management, Inc. | Mining | 11 | % | * | ||||||||
| Indiana Michigan Power Company | Marine | * | 10 | % | ||||||||
| Waste Management of New York, LLC | Containers/Refuse systems | * | 10 | % | ||||||||
| * | Less than 10% |
These percentages are not expected to be comparable in future periods due to anticipated changes in the mix of investments and/or lessees as a result of normal business activities.
The Company has various notes receivable from borrowers who have financed the purchase of equipment through the Company. As of December 31, 2018, the original terms of the notes are from 24 to 42 months with interest rates ranging from 11.55% to 16.49% per annum. The notes are secured by the equipment financed and have maturity dates ranging from 2020 to 2022.
As of December 31, 2018, the minimum future payments receivable are as follows (in thousands):
| | |||
| Year ending December 31, 2019 | $ | 2,376 | ||
| 2020 | 1,241 | |||
| 2021 | 493 | |||
| 2022 | 9 | |||
| 4,119 | ||||
| Less: portion representing unearned interest income | (496 | ) | ||
| 3,623 | ||||
| Less: warrants – notes receivable discount | (178 | ) | ||
| Unamortized initial direct costs | 10 | |||
| Notes receivable, net | $ | 3,455 | ||
IDC amortization expense related to notes receivable and the Company’s operating leases for the years ended December 31, 2018 and 2017 are as follows (in thousands):
| | | ||||||
| 2018 | 2017 | |||||||
| IDC amortization – notes receivable | $ | 11 | $ | 4 | ||||
| IDC amortization – lease assets | 66 | 54 | ||||||
| Total | $ | 77 | $ | 58 | ||||
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The Company’s investment in leases consists of the following (in thousands):
| | | | | ||||||||||||
| Balance December 31, 2017 | Additions | Depreciation/ Amortization Expense | Balance December 31, 2018 | |||||||||||||
| Net investment in operating leases | $ | 9,970 | $ | 1,252 | $ | (1,221 | ) | $ | 10,001 | |||||||
| Initial direct costs, net of accumulated amortization of $148 at December 31, 2018 and $82 at December 31, 2017 | 230 | 21 | (66 | ) | 185 | |||||||||||
| Total | $ | 10,200 | $ | 1,273 | $ | (1,287 | ) | $ | 10,186 | |||||||
The Company utilizes a straight line depreciation method over the term of the equipment lease for equipment on operating leases currently in its portfolio. Depreciation expense on the Company’s equipment totaled $1.2 million and $931 thousand for the respective years ended December 31, 2018 and 2017. IDC amortization expense related to the Company’s operating leases totaled $66 thousand and $54 thousand for 2018 and 2017, respectively.
All of the Company’s lease asset purchases and capital improvements were made during the years from 2016 through 2018.
Property on operating leases consists of the following (in thousands):
| | | | | ||||||||||||
| Balance December 31, 2017 | Additions | Reclassifications or Dispositions | Balance December 31, 2018 | |||||||||||||
| Transportation, rail | $ | 3,679 | $ | — | $ | — | $ | 3,679 | ||||||||
| Mining | 1,320 | 408 | — | 1,728 | ||||||||||||
| Construction | 1,242 | — | — | 1,242 | ||||||||||||
| Paper processing | 1,058 | — | — | 1,058 | ||||||||||||
| Marine vessels | 1,041 | — | — | 1,041 | ||||||||||||
| Containers | 860 | — | — | 860 | ||||||||||||
| Agriculture | 742 | — | — | 742 | ||||||||||||
| Materials handling | 711 | — | — | 711 | ||||||||||||
| Aviation | 462 | 844 | — | 1,306 | ||||||||||||
| Transportation, other | 97 | — | — | 97 | ||||||||||||
| 11,212 | 1,252 | — | 12,464 | |||||||||||||
| Less accumulated depreciation | (1,242 | ) | (1,221 | ) | — | (2,463 | ) | |||||||||
| Total | $ | 9,970 | $ | 31 | $ | — | $ | 10,001 | ||||||||
The average estimated residual value for assets on operating leases was 38% and 39% of the assets’ original cost at December 31, 2018 and 2017, respectively. There were no operating leases in non-accrual status at both December 31, 2018 and 2017.
At December 31, 2018, the aggregate amounts of future minimum lease payments receivable are as follows (in thousands):
| | |||
| Operating Leases | ||||
| Year ending December 31, 2019 | $ | 1,776 | ||
| 2020 | 1,595 | |||
| 2021 | 1,110 | |||
| 2022 | 897 | |||
| 2023 | 842 | |||
| 2024 and thereafter | 882 | |||
| $ | 7,102 | |||
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The useful lives for each category of leases is reviewed at a minimum of once per quarter. As of December 31, 2018, the respective useful lives of each category of lease assets in the Company’s portfolio are as follows (in years):
| | |||
| Equipment category | Useful Life | |||
| Transportation, rail | 35 – 50 | |||
| Marine vessel | 20 – 30 | |||
| Containers | 15 – 20 | |||
| Aviation | 15 – 20 | |||
| Mining | 10 – 15 | |||
| Paper processing | 10 – 15 | |||
| Agriculture | 7 – 10 | |||
| Construction | 7 – 10 | |||
| Materials handling | 7 – 10 | |||
| Transportation | 7 – 10 | |||
The Company's allowance for credit losses are as follows (in thousands):
| | |||
| Accounts Receivable Allowance for Doubtful Accounts | ||||
| Operating Leases | ||||
| Balance December 31, 2017 | $ | 18 | ||
| Reversal of provision for credit losses | (18 | ) | ||
| Balance December 31, 2018 | $ | — | ||
The Company evaluates the credit quality of its financing receivables on a scale equivalent to the following quality indicators related to corporate risk profiles:
Pass — Any account whose lessee/debtor, co-lessee/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.
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.
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At December 31, 2018 and 2017, the Company's financing receivables by credit quality indicator and by class of financing receivables are as follows (excludes initial direct costs) (in thousands):
| | | ||||||
| Notes Receivable | ||||||||
| December 31, 2018 | December 31, 2017 | |||||||
| Pass | $ | 3,623 | $ | 1,813 | ||||
| Special mention | — | — | ||||||
| Substandard | — | — | ||||||
| Doubtful | — | — | ||||||
| Total | $ | 3,623 | $ | 1,813 | ||||
At December 31, 2018 and December 31, 2017, investment in financing receivables is aged as follows (in thousands):
| | | | | | | | |||||||||||||||||||||
| December 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 | |||||||||||||||||||||
| Notes receivable | $ | — | $ | — | $ | — | $ | — | $ | 3,623 | $ | 3,623 | $ | — | ||||||||||||||
| Total | $ | — | $ | — | $ | — | $ | — | $ | 3,623 | $ | 3,623 | $ | — | ||||||||||||||
| | | | | | | | |||||||||||||||||||||
| 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 | |||||||||||||||||||||
| Notes receivable | $ | — | $ | — | $ | — | $ | — | $ | 1,813 | $ | 1,813 | $ | — | ||||||||||||||
| Total | $ | — | $ | — | $ | — | $ | — | $ | 1,813 | $ | 1,813 | $ | — | ||||||||||||||
The Company had no financing receivables on non-accrual or impaired status at December 31, 2018 and 2017.
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 lease and equipment 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.
Each of AFS and ATEL Leasing Corporation (“ALC”) is a wholly-owned subsidiary of ATEL Capital Group, Inc. and performs services for the Company on behalf of the Managing Member. Acquisition services, equipment management, lease administration and asset disposition services are performed by ALC; investor relations, communications and general administrative services are performed by AFS.
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.
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The Managing Member and/or affiliates earned fees and billed for reimbursements, pursuant to the Operating Agreement, during the years ended December 31, 2018 and 2017 are as follows (in thousands):
| | | ||||||
| For the Year Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Selling commissions, equal to 9% of the selling price of the Limited Liability Company Units, deducted from Other Members capital | $ | 31 | $ | 965 | ||||
| Reimbursement of other syndication costs to Managing Member and/or affiliates, deducted from Other Members capital | 20 | 643 | ||||||
| Special discounts | — | 19 | ||||||
| Administrative costs reimbursed to Managing Member and/or affiliates | 421 | 280 | ||||||
| Asset management fees to Managing Member | 268 | 167 | ||||||
| Acquisition and initial direct costs paid to Managing Member | 145 | 339 | ||||||
| $ | 885 | $ | 2,413 | |||||
At December 31, 2018, non-recourse debt consists of notes payable to financial institutions. The note payments are due in monthly installments. Interest on the notes range from 3.72% to 4.66% per annum. The notes are secured by assignments of lease payments and pledges of assets. At December 31, 2018, gross operating lease rentals totaled approximately $3.8 million over the remaining lease terms and the carrying value of the pledged assets was $5.8 million. The notes mature from 2020 through 2024.
The non-recourse debt does not contain any material financial covenants. The debt is secured by a lien granted by the Company to the non-recourse lenders on (and only on) the discounted lease transactions. The lenders have recourse only to the following collateral: the specific leased equipment; the related lease chattel paper; the lease receivables; and proceeds of the foregoing items. The non-recourse obligation is payable solely out of the respective specific security and the Company does not guarantee (nor is the Company otherwise contractually responsible for) the payment of the non-recourse debt as a general obligation or liability of the Company. Although the Company does not have any direct or general liability in connection with the non-recourse debt apart from the security granted, the Company is directly and generally liable and responsible for certain representations, warranties, and covenants made to the lenders, such as warranties as to genuineness of the transaction parties’ signatures, as to the genuineness of the respective lease chattel paper or the transaction as a whole, or as to the Company’s good title to or perfected interest in the secured collateral, as well as similar representations, warranties and covenants typically provided by non-recourse borrowers and customary in the equipment finance industry, and are viewed by such industry as being consistent with non-recourse discount financing obligations. Accordingly, as there are no financial covenants or ratios imposed on the Company in connection with the non-recourse debt, the Company has determined that there are no material covenants with respect to the non-recourse debt that warrant footnote disclosure.
Future minimum payments of non-recourse debt are as follows (in thousands):
| | | | |||||||||
| Principal | Interest | Total | ||||||||||
| Year ending December 31, 2019 | $ | 948 | $ | 125 | $ | 1,073 | ||||||
| 2020 | 846 | 90 | 936 | |||||||||
| 2021 | 608 | 59 | 667 | |||||||||
| 2022 | 455 | 39 | 494 | |||||||||
| 2023 | 456 | 19 | 475 | |||||||||
| 2024 | 218 | 4 | 222 | |||||||||
| $ | 3,531 | $ | 336 | $ | 3,867 | |||||||
30
Syndication costs are reflected as a reduction to Members' capital, as such costs are netted against the capital raised. The amount shown is primarily comprised of selling commissions, well as fees pertaining to the organization of the Fund, document preparation, regulatory filing fees, and accounting and legal costs. Syndication costs totaled $51 thousand and $1.6 million for the respective years ended December 31, 2018 and 2017.
The Operating Agreement places a limit for cost reimbursements to the Managing Member and/or affiliates. When added to selling commissions, such cost reimbursements may not exceed a total equal to 15% of all offering proceeds. As of December 31, 2018, the Company had not recorded any syndication costs in excess of the limitation. The limitation on the amount of syndication costs pursuant to the Operating Agreement is determined on the date of termination of the offering. At such time, the Manager guarantees repayment of any excess syndication costs (above the limitation) which it may have collected from the Company, which guarantee is without recourse or reimbursement by the Fund.
Effective June 30, 2017, the Company participated with ATEL Capital Group and certain subsidiaries and affiliated funds in a $75 million revolving credit facility (the “Credit Facility”) with a syndicate of financial institutions as lenders. The Credit Facility is comprised of a working capital facility, an acquisition facility (the “Acquisition Facility”) and a warehouse facility (the “Warehouse Facility”), the Company and affiliates, and a venture facility As of December 31, 2018, the Credit Facility is for an amount of $75 million and has been extended to June 30, 2019. The lending syndicate providing the Credit Facility has a blanket lien on all of the Company's assets as collateral for any and all borrowings under the Acquisition Facility, and on a pro-rata basis under the Warehouse Facility. Such Credit Facility includes certain financial covenants. The interest rate on the Credit Facility is based on either the LIBOR/Eurocurrency rate of 1-, 2-, 3- or 6-month maturity plus a lender designated spread, or the bank's Prime rate, which re-prices daily. At December 31, 2018, and 2017, approximately $72.9 million and $69.2 million, respectively, were available under the facility, and the Company had no outstanding borrowing under the facility.
At December 31, 2018, there were no commitments to purchase lease assets and fund investments in notes receivable.
The Company enters into contracts that contain a variety of indemnifications. The Company’s maximum exposure under these arrangements is unknown. However, the Company has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
The Managing Member knows of no facts or circumstances that would make the Company’s contractual commitments outside standard mutual covenants applicable to commercial transactions between businesses. Accordingly, the Company believes that these indemnification obligations are made in the ordinary course of business as part of standard commercial and industry practice, and that any potential liability under the Company’s similar commitments is remote. Should any such indemnification obligation become payable, the Company would separately record and/or disclose such liability in accordance with GAAP.
A total of 2,565,749 Units were issued and outstanding at December 31, 2018, including the 50 Units issued to the initial Member (Managing Member). The Fund was authorized to issue up to 15,000,000 Units in addition to the Units issued to the initial Member.
The Company has the right, exercisable at the Managing Member’s discretion, but not the obligation, to repurchase Units of a Unitholder who ceases to be a U.S. Citizen, for a price equal to 100% of the holder’s capital account. The Company is otherwise permitted, but not required, to repurchase Units upon a holder’s request. The repurchase of Fund Units is made in accordance with Section 13 of the Amended and Restated Limited Liability Company Operating Agreement. The repurchase would be at the discretion of the Managing Member on terms it determines to be appropriate under given circumstances, in the event that the Managing Member deems such repurchase to be in the
31
best interest of the Company; provided, the Company is never required to repurchase any Units. Upon the repurchase of any Units by the Fund, the tendered Units are cancelled. Units repurchased in prior periods were repurchased at amounts representing the original investment less cumulative distributions made to the Unitholder with respect to the Units. All Units repurchased during a quarter are deemed to be repurchased effective the last day of the preceding quarter, and are not deemed to be outstanding during, or entitled to allocations of net income, net loss or distributions for the quarter in which such repurchase occurs.
The Fund’s net income or net losses are to be allocated 100% to the members. From the commencement of the Fund until the initial closing date, net income and net loss were allocated 99% to the Managing Member and 1% to the initial members. Commencing with the initial closing date, net income and net loss are to be allocated 99.99% to the Other Members and 0.01% to the Managing Member.
Fund distributions are to be allocated 0.01% to the Managing Member and 99.99% to the Other Members. The Company commenced periodic distributions in February 2016.
Distributions to the Other Members for the years ended December 31, 2018 and 2017 were as follows (in thousands except Units and per Unit data):
| | | ||||||
| 2018 | 2017 | |||||||
| Distributions | $ | 2,054 | $ | 1,640 | ||||
| Weighted average number of Units outstanding | 2,567,041 | 2,058,512 | ||||||
| Weighted average distributions per Unit | $ | 0.80 | $ | 0.80 | ||||
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.
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, generally on a national exchange.
Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuations in which all significant inputs are observable in the market.
Level 3 — Valuation is modeled using significant inputs that are unobservable in the market. These unobservable inputs reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability.
At December 31, 2018 and 2017, only the Company’s warrants were measured on a recurring basis. 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, information from third party remarketing agents, 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 equipment, 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.
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Such fair value adjustments utilized the following methodology:
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 are determined using a Black-Scholes formulation of value based upon the stock price(s), the exercise price(s), the volatility of comparable venture companies, the time to maturity, and a risk free interest rate for the term(s) of the warrant exercise(s). As of December 31, 2018 and 2017, the calculated fair value of the Fund’s warrant portfolio approximated $302 thousand and $62 thousand, respectively. Such valuations are classified within Level 3 of the valuation hierarchy.
The following table reconciles the beginning and ending balances of the Company’s Level 3 recurring assets (in thousands):
| | | ||||||
| 2018 | 2017 | |||||||
| Fair value of warrants at beginning of year | $ | 62 | $ | 51 | ||||
| Fair value of new warrants, recorded during the year (included as a discount on notes receivable) | 224 | — | ||||||
| Unrealized gain on fair valuation of warrants | 16 | 11 | ||||||
| Fair value of warrants at end of year | $ | 302 | $ | 62 | ||||
The following table summarizes the valuation techniques and significant unobservable inputs used for the Company’s recurring and non-recurring fair value calculation/adjustments categorized as Level 3 in the fair value hierarchy at December 31, 2018 and 2017:
| | | | | ||||
| December 31, 2018 | ||||||||
| Name | Valuation Frequency | Valuation Technique | Unobservable Inputs | Range of Input Values | ||||
| Warrants | Recurring | Black-Scholes formulation | Stock price | $0.18 – $14.50 | ||||
| Exercise price | $0.02 – $9.00 | |||||||
| Time to maturity (in years) | 7.63 – 12.95 | |||||||
| Risk-free interest rate | 2.61% – 2.74% | |||||||
| Annualized volatility | 34.20% – 292.35% | |||||||
| | | | | ||||
| December 31, 2017 | ||||||||
| Name | Valuation Frequency | Valuation Technique | Unobservable Inputs | Range of Input Values | ||||
| Warrants | Recurring | Black-Scholes formulation | Stock price | $3.88 – $4.59 | ||||
| Exercise price | $2.54 – $3.98 | |||||||
| Time to maturity (in years) | 8.63 – 13.95 | |||||||
| Risk-free interest rate | 2.37% – 2.47% | |||||||
| Annualized volatility | 37.63% – 42.49% | |||||||
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 determines 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.
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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.
Management has determined that no recognition for the fair value of the Company’s loan commitments is necessary because their terms are made on a market rate basis and require borrowers to be in compliance with the Company’s credit requirements at the time of funding.
The fair value of contingent liabilities (or guarantees) is not considered material because management believes there has been no event that has occurred wherein a guarantee liability has been incurred or will likely be incurred.
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 December 31, 2018 and 2017 (in thousands):
| | | | | | |||||||||||||||
| December 31, 2018 | ||||||||||||||||||||
| Carrying Amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 6,484 | $ | 6,484 | $ | — | $ | — | $ | 6,484 | ||||||||||
| Notes receivable, net | 3,455 | — | — | 3,370 | 3,370 | |||||||||||||||
| Warrants, fair value | 302 | — | — | 302 | 302 | |||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Non-recourse debt | 3,531 | — | — | 3,539 | 3,539 | |||||||||||||||
| | | | | | |||||||||||||||
| December 31, 2017 | ||||||||||||||||||||
| Carrying Amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 7,092 | $ | 7,092 | $ | — | $ | — | $ | 7,092 | ||||||||||
| Notes receivable, net | 1,794 | — | — | 1,794 | 1,794 | |||||||||||||||
| Warrants, fair value | 62 | — | — | 62 | 62 | |||||||||||||||
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| Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES |
None.
| Item 9A. | CONTROLS AND PROCEDURES |
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)) 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.
The Management of the Managing Member is responsible for establishing and maintaining adequate internal control over financial reporting as that term is defined in Exchange Act Rule 13a-15(f) for the Company, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2018. The internal control process of the Managing Member, as it is applicable to the Company, was designed to provide reasonable assurance to Management regarding the preparation and fair presentation of published financial statements, and includes those policies and procedures that:
| (1) | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States, and that the Company’s receipts and expenditures are being made only in accordance with authorization of the Management of the Managing Member; and |
| (2) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
All internal control processes, no matter how well designed, have inherent limitations. Therefore, even those processes determined to be effective can provide only reasonable assurance with respect to the reliability of financial statement preparation and presentation. Further, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management of the Managing Member assessed the effectiveness of its internal control over financial reporting, as it is applicable to the Company, as of December 31, 2018. In making this assessment, it used the criteria set forth inInternal Control — Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on its assessment, Management of the Managing Member concluded that the Managing Member’s internal control over financial reporting, as it is applicable to the Company, was effective as of December 31, 2018.
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This annual report does not include an audit report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s internal control over financial reporting was not subject to audit by the Company’s independent registered public accounting firm pursuant to Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which exempts non-accelerated filers from Section 404(b) of the Sarbanes-Oxley Act of 2002.
There were no changes in the Managing Member’s internal control over financial reporting, as it is applicable to the Company, during the year ended December 31, 2018 that has materially affected, or is reasonably likely to materially affect, the Managing Member’s internal control over financial reporting, as it is applicable to the Company.
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| Item 10. | DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT |
The registrant is a Limited Liability Company and has no officers or directors.
ATEL Managing Member, LLC (the “Managing Member” or “Manager”) is the Company’s Managing Member. The Managing Member is controlled by ATEL Financial Services, LLC (“AFS”), a wholly-owned subsidiary of ATEL Capital Group (“ACG” or “ATEL”). The outstanding voting capital stock of ATEL is owned 100% by Dean L. Cash.
Each of AFS and ATEL Leasing Corporation (“ALC”) is a wholly-owned subsidiary of ACG and performs services for the Company on behalf of the Managing Member. Acquisition services, equipment management, lease administration and asset disposition services are performed by ALC; investor relations and communications services, and general administrative services are performed by AFS. ATEL Securities Corporation (“ASC”), a wholly-owned subsidiary of AFS, performs distribution services in connection with the Company’s public offering of its Units.
The officers and directors of ATEL and its affiliates are as follows:
| | |
| Dean L. Cash | Chairman of the Board, President and Chief Executive Officer of ATEL Managing Member, LLC (Managing Member) | |
| Paritosh K. Choksi | Director, Executive Vice President and Chief Financial Officer and Chief Operating Officer of ATEL Managing Member, LLC (Managing Member) | |
| Vasco H. Morais | Executive Vice President, Secretary and General Counsel of ATEL Managing Member, LLC (Managing Member) |
Dean L. Cash, age 68, became chairman, president and chief executive officer of ATEL in April 2001. Mr. Cash joined ATEL as director of marketing in 1980 and served as a vice president since 1981, executive vice president since 1983 and a director since 1984. Prior to joining ATEL, Mr. Cash was a senior marketing representative for Martin Marietta Corporation, data systems division, from 1979 to 1980. From 1977 to 1979, he was employed by General Electric Corporation, where he was an applications specialist in the medical systems division and a marketing representative in the information services division. Mr. Cash was a systems engineer with Electronic Data Systems from 1975 to 1977, and was involved in maintaining and developing software for commercial applications. Mr. Cash received a B.S. degree in psychology and mathematics in 1972 and an M.B.A. degree with a concentration in finance in 1975 from Florida State University. Mr. Cash is an arbitrator with the American Arbitration Association and is qualified as a registered principal with the Financial Industry Regulatory Authority.
Paritosh K. Choksi, age 65, joined ATEL in 1999 as a director, senior vice president and its chief financial officer. He became its executive vice president and CFO/COO in April 2001. Prior to joining ATEL, Mr. Choksi was chief financial officer at Wink Communications, Inc. from 1997 to 1999. From 1977 to 1997, Mr. Choksi was with Phoenix American Incorporated, a financial services and management company, where he held various positions during his tenure, and was senior vice president, chief financial officer and director when he left the company. Mr. Choksi was involved in all corporate matters at Phoenix and was responsible for Phoenix’s capital market needs. He also served on the credit committee overseeing all corporate investments, including its venture lease portfolio. Mr. Choksi was a part of the executive management team which caused Phoenix’s portfolio to increase from $50 million in assets to over $2 billion. Mr. Choksi is a member of the board of directors of Syntel, Inc. Mr. Choksi received a bachelor of technology degree in mechanical engineering from the Indian Institute of Technology, Bombay; and an M.B.A. degree from the University of California, Berkeley.
Vasco H. Morais, age 60, joined ATEL in 1989 as general counsel. Mr. Morais manages ATEL’s legal department, which provides legal and contractual support in the negotiating, documenting, drafting, reviewing and funding of lease transactions. In addition, Mr. Morais advises on general corporate law matters, and assists on securities law issues. From 1986 to 1989, Mr. Morais was employed by the BankAmeriLease Companies, Bank of America’s equipment leasing subsidiaries, providing in-house legal support on the documentation of tax-oriented and non-tax oriented direct and leveraged lease transactions, vendor leasing programs and general corporate matters. Prior to the BankAmeriLease Companies, Mr. Morais was with the Consolidated Capital Companies in the Corporate and Securities Legal Department involved in drafting and reviewing contracts, advising on corporate law matters and securities law issues. Mr. Morais received a B.A. degree in 1982 from the University of California in Berkeley, a J.D. degree in 1986 from
37
Golden Gate University Law School; and an M.B.A. (Finance) degree from Golden Gate University in 1997. Mr. Morais, an active member of the State Bar of California since 1986, served as co-chair of the Uniform Business Law Section of the State Bar of California and was inducted as a fellow of the American College of Commercial Finance Lawyers in 2010.
The board of directors of the Managing Member acts as the audit committee of the Company. Dean L. Cash and Paritosh K. Choksi are members of the board of directors of the Managing Member and are deemed to be financial experts. They are not independent of the Company.
Based solely on a review of Forms 3, 4, and 5, the Company is not aware of any failures to file reports of beneficial ownership required to be filed during or for the year ended December 31, 2018.
A Code of Ethics that is applicable to the Company, including the Chief Executive Officer and Chief Financial Officer and Chief Operating Officer of its Manager, ATEL Managing Member, LLC, or persons acting in such capacity on behalf of the Company, is included as Exhibit 14.1 to this report.
The registrant has no officers or directors.
Set forth hereinafter is a description of the nature of remuneration paid and to be paid to the Manager and its affiliates. The amount of such remuneration paid for the years ended December 31, 2018 and 2017 is set forth in Item 8 of this report under the caption “Financial Statements and Supplementary Data — Notes to Financial Statements — Related party transactions,” at Note 7 thereof, which information is hereby incorporated by reference.
The Company pays the Manager an annual Asset Management Fee in an amount equal to 1.25% of the aggregate Purchase Price of Portfolio Assets acquired by the Fund through the end of each month during the period. Upon commencement of the Operating State; the period starting with the final sale of Units and ending six calendar years after the final sale of units, and the first two years of the Liquidating Stage; the period occurring after the Operating Stage until the final sale of units, the Company will pay the Manager an annual Asset Management Fee in an amount equal to an annualized 1.75% of the aggregate net Portfolio Assets, calculated for each month during the period as the aggregate Purchase Price of Portfolio Assets as of the end of the month, less the amount of the aggregate Purchase Price of Portfolio Assets attributable to Portfolio Assets which have been sold or otherwise disposed by the Fund through the end of the month. The Asset Management Fee payable for services rendered during the reminder of the Liquidating Stage will be equal to an annualized 1.75% of the Book Value of Fund Assets less total cash reported as of the end of the most recent prior fiscal quarter or year, as the case may be. The Asset Management Fee is paid on a monthly basis.
The Manager supervises performance of all management activities, including, among other activities: the acquisition and financing of the investment portfolio, collection of lease and loan revenues, monitoring compliance by lessees borrowers with their contract terms, assuring that investment assets are being used in accordance with all operative contractual arrangements, paying operating expenses and arranging for necessary maintenance and repair of equipment and property in the event a lessee fails to do so, monitoring property, sales and use tax compliance and preparation of operating financial data. The Manager intends to delegate all or a portion of its duties and the Asset Management Fee to one or more of its affiliates who are in the business of providing such services.
The Manager also receives, as its Carried Interest, an amount equal to 0.01% of all Company Distributions.
The Fund has adopted a single Asset Management Fee plus the Carried Interest as a means of compensating the Manager for sponsoring the Fund and managing its operations. While this compensation structure is intended to simplify management compensation for purposes of investor’s understanding, state securities administrators use a more
38
complicated compensation structure in their review of equipment program offerings in order to assure that those offerings are fair under the states’ merit review guidelines. The total of all Front End Fees, the Carried Interest and the Asset Management Fee will be subject to the Asset Management Fee Limit in order to assure these state administrators that the Fund will not bear greater fees than permitted under the state merit review guidelines. The North American Securities Administrators Association, Inc. (“NASAA”) is an organization of state securities administrators, those state government agencies responsible for qualifying securities offerings in their respective states. NASAA has established standards for the qualification of a number of different types of securities offerings and investment products, including its Statement of Policy on Equipment Programs (the “NASAA Equipment Leasing Guidelines”). Article IV, Sections C through G of the NASAA Equipment Leasing Guidelines establish the standards for payment of reasonable carried interests, promotional interests and fees for equipment acquisition, management, resale and releasing services to equipment leasing program sponsors. Article IV, Sections C through G of the NASAA Equipment Leasing Guidelines set the maximum compensation payable to the sponsor and its affiliates from an equipment leasing program such as the Fund. The Asset Management Fee Limit will equal the maximum compensation payable under Article IV, Sections C through G of the NASAA Equipment Leasing Guidelines as in effect on the date of the Fund’s prospectus (the “NASAA Fee Limitation”). Under the Asset Management Fee Limit, the Fund will calculate the maximum fees payable under the NASAA Fee Limitation and guarantee that the Asset Management Fee it will pay the Manager and its Affiliates, when added to its Carried Interest, will never exceed the fees and interest payable to a sponsor and its affiliates under the NASAA Fee Limitation.
Asset Management Fee Limit. The Asset Management Fee Limit will be calculated each year during the Fund’s term by calculating the maximum amount of fees that would be payable to the Manager from the Initial Closing Date though the end of the year in question under Article IV, Sections C through G, and Article V, Section F, of the North American Securities Administrators Association Statement of Policy on Equipment Programs in effect as of the initial effective date of the Fund’s Registration Statement on Form S-1 for the initial public offering of its Units (the “NASAA Guidelines”). For purposes of the application of the NASAA Guidelines, all Portfolio Assets will be deemed “Equipment” as defined in the NASAA Guidelines. To the extent that the total amount paid to the Manager through the end of such year as the Asset Management Fee and the Carried Interest would cause the total compensation to exceed the aggregate amount of fees that would have been payable a calculated under the NASAA Guidelines through the end of that year, the Asset Management Fee and/or Carried Interest for the year will be reduced to equal the maximum aggregate fees that would have been payable under the NASAA Guidelines through the end of that year. The limitations set forth in this Section 8.3 will be subject to adjustment pursuant to the limitations imposed under Section 15.7 relating to the Minimum Investment in Equipment.
Minimum Investment in Equipment/Maximum Front-End Fees. The Manager must commit not less than 85.875% of the Gross Proceeds to Investment in Equipment, with the balance thereof available to pay Organization and Offering Expenses and Front End Fees, however designated. Under the North American Securities Administrators Association, Inc. (“NASAA”) Statement of Policy concerning Equipment Programs in effect as of the initial effective date of the Fund’s Registration Statement on Form S-1 for the initial public offering of its Units (referred to herein as the “NASAA Guidelines”), the Fund is required to commit a minimum percentage of the Gross Proceeds to Investment in Equipment, which shall be deemed to be Portfolio Assets for the purposes of this Agreement, calculated as the greater of: (i) 80% of the Gross Proceeds reduced by 0.0625% for each 1% of indebtedness encumbering the Fund’s Portfolio Assets; or (ii) 75% of such Gross Proceeds. The maximum amounts to be paid under the terms of this Agreement are subject to the application of the Asset Management Fee Limit provided in Section 8.3, which limits the annual amount payable to the Manager and its Affiliates as the Asset Management Fee and the Carried Interest to an aggregate not to exceed the maximum amount of fees that would be payable to the Manager under specified provisions of the NASAA Guidelines. Upon completion of the offering of Units, final commitment of Net Proceeds to acquisition of Portfolio Assets and establishment of final levels of permanent portfolio debt encumbering such Portfolio Assets, the Manager shall calculate the maximum carried interest and promotional interest payable to the Manager and its Affiliates under the NASS Guidelines and compare such total permitted fees to the total of the Asset Management Fee and Carried Interest. If and to the extent that the fees exceed the Asset Management Fee Limit provided in Section 8.3, the fees payable to the Manager and its Affiliates shall be reduced as described herein. In such event, Section 8.3 of this Agreement shall be amended immediately to reduce the amounts calculated as the Carried Interest by an amount sufficient to cause the total of such compensation to comply with the limitations in the NASAA Guidelines on the aggregate of promotional interests and carried interests. A comparison of the Front End Fees actually paid by the End and the NASAA Guideline maximums fixed as set forth above shall be repeated, and any required adjustments shall be made, at least annually thereafter.
See Note 7 to the financial statements as set forth in Part II, Item 8, Financial Statements and Supplementary Data, for amounts paid.
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| Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
At December 31, 2018, no investor is known to hold beneficially more than 5% of the issued and outstanding Units.
The parent of ATEL Managing Member, LLC is the beneficial owner of Limited Liability Company Units as follows:
| | | | |||
| (1) Title of Class | (2) Name and Address of Beneficial Owner | (3) Amount and Nature of Beneficial Ownership | (4) Percent of Class | |||
| Limited Liability Company Units | ATEL Financial Services, LLC The Transamerica Pyramid 600 Montgomery Street, 9th Floor San Francisco, CA 94111 | Initial Limited Liability Company Units 50 Units ($500) | 0.0020% |
See Item 8 of this report under the caption “Financial Statements and Supplementary Data — Notes to Financial Statements — Related party transactions” at Note 7 thereof.
During the years ended December 31, 2018 and 2017, the Company incurred audit fees with its principal auditors totaling $78 thousand and $111 thousand, respectively.
Audit fees consist of the aggregate fees and expenses billed in connection with the audit of the Company’s annual financial statements and the review of the financial statements included in the Company’s quarterly reports on Form 10-Q.
The board of directors of the Managing Member acts as the audit committee of the registrant. Engagements for audit services, audit related services and tax services are approved in advance by the Chief Financial Officer of the Managing Member acting on behalf of the board of directors of the Managing Member in its role as the audit committee of the Company.
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| (a) | Financial Statements and Schedules |
| 1. | Financial Statements |
| 2. | Financial Statement Schedules |
All 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.
| (b) | Exhibits |
(3) and (4) Amended and Restated Limited Liability Company Operating Agreement, included as exhibit B to the Prospectus effective January 5, 2016 as filed on December 15, 2015 (File Number 333-203841) is hereby incorporated herein by reference
| | |
| (14.1) | Code of Ethics | |
| (31.1) | Certification of Dean L. Cash pursuant to Rules 13a-14(a)/15d-14(a) | |
| (31.2) | Certification of Paritosh K. Choksi pursuant to Rules 13a-14(a)/15d-14(a) | |
| (32.1) | Certification of Dean L. Cash pursuant to 18 U.S.C. section 1350 | |
| (32.2) | Certification of Paritosh K. Choksi pursuant to 18 U.S.C. section 1350 | |
| (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 Linkbase Document |
41
Pursuant to the requirements of Section 13 or 15(d) 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: March 15, 2019
ATEL 17, LLC (Registrant)
| | |
By: ATEL Managing Member, LLC |
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By: /s/ Dean L. Cash |
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By: /s/ Paritosh K. Choksi |
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By: /s/ Samuel Schussler |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the persons in the capacities and on the dates indicated.
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| SIGNATURE | CAPACITIES | DATE | ||
/s/ Dean L. Cash Dean L. Cash | Chairman of the Board, President and Chief Executive Officer of ATEL Managing Member, LLC, (Managing Member) | March 15, 2019 | ||
| /s/ Paritosh K. Choksi Paritosh K. Choksi | Director, Executive Vice President and Chief Financial Officer and Chief Operating Officer of ATEL Managing Member, LLC (Managing Member) | March 15, 2019 | ||
| /s/ Samuel Schussler Samuel Schussler | Senior Vice President and Chief Accounting Officer of ATEL Managing Member, LLC (Managing Member) | March 15, 2019 |
No proxy materials have been or will be sent to security holders. An annual report will be furnished to security holders subsequent to the filing of this report on Form 10-K, and copies thereof will be furnished supplementally to the Commission when forwarded to the security holders.
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