Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended March 31, 2022
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the transition period from to
Commission File number 333-203841
ATEL 17, LLC
(Exact name of registrant as specified in its charter)
California | 90-1108275 |
| |
(State or other jurisdiction of | (I. R. S. Employer |
The Transamerica Pyramid, 600 Montgomery Street, 9th Floor, San Francisco, California 94111
(Address of principal executive offices)
Registrant’s telephone number, including area code: (415) 989-8800
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: None
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: |
| Trading Symbol |
| Name of each exchange on which registered: |
N/A | | N/A | | N/A |
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.Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
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.
Large accelerated filer ☐ | Accelerated filer ☐ | Non-accelerated filer ☒ | Smaller reporting company ☒ |
Emerging growth 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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes ☐ No ☒
The number of Limited Liability Company Units outstanding as of April 30, 2022 was 2,565,749.
DOCUMENTS INCORPORATED BY REFERENCE
None.
ATEL 17, LLC
Index
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
ATEL 17, LLC
BALANCE SHEETS
MARCH 31, 2022 AND DECEMBER 31, 2021
(In Thousands)
(Unaudited)
| | | | | | |
| | March 31, | | December 31, | ||
|
| 2022 |
| 2021 | ||
| | | | | | |
ASSETS |
| |
|
| |
|
Cash and cash equivalents | | $ | 3,846 | | $ | 4,035 |
Due from Managing Member and affiliates | | | 0 | | | 32 |
Accounts receivable, net | |
| 23 | |
| 26 |
Investment in equity securities | |
| 124 | |
| 308 |
Warrants, fair value | |
| 143 | |
| 142 |
Investments in equipment and leases, net | |
| 7,722 | |
| 8,076 |
Prepaid expenses and other assets | |
| 6 | |
| 9 |
Total assets | | $ | 11,864 | | $ | 12,628 |
| | | | | | |
LIABILITIES AND MEMBERS' CAPITAL | |
|
| |
|
|
| | | | | | |
Accounts payable and accrued liabilities: | |
|
| |
|
|
Due to Managing Member and affiliates | | $ | 37 | | $ | 0 |
Accrued distributions to Other Members | | | 228 | | | 228 |
Options - short position | |
| 0 | |
| 1 |
Other | | | 71 | | | 158 |
Non-recourse debt | | | 1,506 | | | 1,633 |
Unearned operating lease income | |
| 111 | |
| 107 |
Total liabilities | |
| 1,953 | |
| 2,127 |
| | | | | | |
Members’ capital: | |
|
| |
|
|
Managing Member | |
| 1 | |
| 1 |
Other Members | |
| 9,910 | |
| 10,500 |
Total Members’ capital | |
| 9,911 | |
| 10,501 |
Total liabilities and Members’ capital | | $ | 11,864 | | $ | 12,628 |
See accompanying notes.
3
ATEL 17, LLC
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
MARCH 31, 2022 AND 2021
(In Thousands Except for Units and Per Unit Data)
(Unaudited)
| | | | | | | |
| | | | Three Months Ended | |||
| | | | March 31, | |||
| |
| 2022 |
| 2021 | ||
Operating revenues: | |
| |
|
| |
|
Leasing and lending activities: | |
| |
|
| |
|
Operating leases revenue, net | | | $ | 472 | | $ | 562 |
Notes receivable interest income | | |
| 0 | |
| 21 |
Gain on sales of lease assets | | |
| 181 | |
| 0 |
Other revenue | | |
| 19 | |
| 0 |
Total operating revenues | | |
| 672 | |
| 583 |
| | | | | | | |
Operating expenses: | | |
| | |
|
|
Depreciation of operating lease assets | | |
| 344 | |
| 377 |
Asset management fees to Managing Member | | |
| 57 | |
| 66 |
Acquisition expense | | |
| 2 | |
| 0 |
Cost reimbursements to Managing Member and/or affiliates | | |
| 80 | |
| 90 |
Amortization of initial direct costs | | |
| 7 | |
| 9 |
Interest expense | | | | 17 | | | 24 |
Professional fees | | |
| 24 | |
| 74 |
Outside services | | |
| 14 | |
| 8 |
Taxes on income and franchise fees | | |
| 1 | |
| 1 |
Bank charges | | |
| 9 | |
| 8 |
Other expense | | |
| 12 | |
| 10 |
Total operating expenses | | |
| 567 | |
| 667 |
Net income (loss) from operations | | | | 105 | | | (84) |
| | | | | | | |
Other loss: | | | | | | | |
Gain on sale of securities | | | | 0 | | | 11 |
Realized gain on sale of options | | | | 1 | | | 0 |
Unrealized loss on fair value adjustment for equity securities | | | | (184) | | | (42) |
Unrealized gain (loss) on fair value adjustment for warrants | | |
| 1 | |
| (28) |
Total other loss | | | | (182) | | | (59) |
Net loss | | | $ | (77) | | $ | (143) |
| | | | | | | |
Net loss: | | |
|
| |
|
|
Managing Member | | |
| 0 | |
| 0 |
Other Members | | | $ | (77) | | $ | (143) |
| | | $ | (77) | | $ | (143) |
| | | | | | | |
Net loss per Limited Liability Company Unit (Other Members) | | | $ | (0.03) | | $ | (0.06) |
Weighted average number of Units outstanding | | |
| 2,565,749 | |
| 2,565,749 |
See accompanying notes.
4
ATEL 17, LLC
STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL
FOR THE THREE MONTHS ENDED
MARCH 31, 2022 AND 2021
(In Thousands Except for Units and Per Unit Data)
(Unaudited)
| | | | | | | | | | | |
| | Three Months Ended March 31, 2022 | |||||||||
| | | | Amount | | | | ||||
| | | Other | | Managing | | | | |||
| | Units | | Members | | Member | | Total | |||
Balance December 31, 2021 | | 2,565,749 | | $ | 10,500 | | $ | 1 | | $ | 10,501 |
Distributions to Other Members ($0.20 per Unit) |
| - | |
| (513) | |
| - | |
| (513) |
Net loss |
| - | |
| (77) | |
| - | |
| (77) |
Balance March 31, 2022 |
| 2,565,749 | | $ | 9,910 | | $ | 1 | | $ | 9,911 |
| | | | | | | | | | | |
| | Three Months Ended March 31, 2021 | |||||||||
| | | | Amount | | | | ||||
| | | Other | | Managing | | | | |||
| | Units | | Members | | Member | | Total | |||
Balance December 31, 2020 |
| 2,565,749 | | $ | 13,212 | | $ | 1 | | $ | 13,213 |
Distributions to Other Members ($0.20 per Unit) |
| - | |
| (513) | |
| - | |
| (513) |
Net loss |
| - | |
| (143) | |
| - | |
| (143) |
Balance March 31, 2021 |
| 2,565,749 | | $ | 12,556 | | $ | 1 | | $ | 12,557 |
| | | | | | | | | | | |
See accompanying notes.
5
ATEL 17, LLC
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(In Thousands)
(Unaudited)
| | | | | | | |
| | | Three Months Ended | ||||
| | | March 31, | ||||
|
| | 2022 |
| 2021 | ||
Operating activities: |
| | |
|
| |
|
Net loss | | | $ | (77) | | $ | (143) |
Adjustment to reconcile net loss to net cash provided by operating activities: | | |
| | |
|
|
Gain on sales of lease assets | | |
| (181) | |
| 0 |
Accretion of note discount - warrants | | | | 0 | | | (10) |
Depreciation of operating lease assets | | | | 344 | | | 377 |
Amortization of initial direct costs | | | | 7 | | | 9 |
Gain on sale of securities | | | | 0 | | | (11) |
Realized gain on sale of options | | |
| (1) | |
| 0 |
Unrealized loss on fair value adjustment for securities | | | | 184 | | | 42 |
Unrealized (gain) loss on fair value adjustment for warrants | | |
| (1) | |
| 28 |
Changes in operating assets and liabilities: | | | | | | | |
Accounts receivable | | |
| 3 | |
| (9) |
Due from/to Managing Member and affiliates | | |
| (18) | |
| 12 |
Prepaid expenses and other assets | | | | 3 | | | 3 |
Accounts payable, other | | | | (87) | | | (4) |
Accrued liabilities, affiliates | | |
| 37 | |
| 72 |
Unearned operating lease income | | |
| 4 | |
| (19) |
Net cash provided by operating activities | | |
| 217 | |
| 347 |
| | | | | | | |
Investing activities: | | |
|
| |
|
|
Purchases of equipment under operating leases | | |
| (118) | |
| 0 |
Proceeds from sale of securities | | | | 0 | | | 79 |
Proceeds from sale of options | | |
| 50 | |
| 0 |
Proceeds from sales of lease assets | | | | 302 | | | 0 |
Principal payments received on notes receivable | | |
| 0 | |
| 128 |
Net cash provided by investing activities | | |
| 234 | |
| 207 |
| | | | | | | |
Financing activities: | | |
|
| |
|
|
Repayments under non-recourse debt | | | | (127) | | | (250) |
Distributions to Other Members | | |
| (513) | |
| (513) |
Net cash used in financing activities | | |
| (640) | |
| (763) |
| | | | | | | |
Net decrease in cash and cash equivalents | | |
| (189) | |
| (209) |
Cash at beginning of period | | |
| 4,035 | |
| 2,873 |
Cash at end of period | | | $ | 3,846 | | $ | 2,664 |
| | | | | | | |
Supplemental disclosures of cash flow information: | | |
|
| |
|
|
Cash paid during the period for interest | | | $ | 17 | | $ | 24 |
Cash paid during the period for taxes | | | $ | 4 | | $ | 0 |
| | | | | | | |
Schedule of non-cash investing and financing transactions: | | |
|
| |
|
|
Distributions payable to Other Members at period-end | | | $ | 228 | | $ | 228 |
Options - short position sold through due to/from affiliate | | | $ | 0 | | $ | 50 |
See accompanying notes.
6
1. Organization and Limited Liability Company matters:
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 March 31, 2022, 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 4, 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.
These unaudited interim financial statements should be read in conjunction with the financial statements and notes thereto contained in the report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission.
7
2. Summary of significant accounting policies:
Basis of presentation:
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (‘‘GAAP’’) for interim financial information and with the instructions to Form 10-Q as mandated by the Securities and Exchange Commission. The unaudited interim financial statements reflect all adjustments which are, in the opinion of the Managing Member, necessary for a fair statement of financial position and results of operations for the interim periods presented. All such adjustments are of a normal recurring nature. Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the full year.
Footnote and tabular amounts are presented in thousands, except as to Units and per Unit data.
In preparing the accompanying financial statements, the Company has reviewed, as determined necessary by the Managing Member, events that have occurred after March 31, 2022, up until the issuance of the financial statements. No events were noted which would require disclosure in the footnotes to the financial statements.
Cash and cash equivalents:
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.
Use of Estimates:
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 on accounts receivable.
Segment reporting:
The Company is organized into 1 operating segment for the purpose of making operating decisions or assessing performance. Accordingly, the Company operates in 1 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 1 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. All of the Company’s current operating revenues for the three months ended March 31, 2022 and 2021, and long-lived assets as of March 31, 2022 and December 31, 2021 relate to customers domiciled in the United States.
8
Accounts receivable:
Accounts receivable represent the amounts billed under operating lease contracts 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 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.
Investment in securities:
From time to time, the Company may receive rights to purchase equity securities of its borrowers or receive warrants in connection with its lending arrangements.
Investment in equity securities
The Company’s equity securities registered for public sale with readily determinable fair values are measured at fair value with any changes in fair value recognized in the Company’s results of operations. The Company’s equity securities that do not have readily determinable fair values are measured at cost minus impairment, and adjusted for changes in observable prices. Factors considered by the Managing Member in determining fair value include, but are not limited to, available financial information, the issuer’s ability to meet its current obligations and indications of the issuer’s subsequent ability to raise capital. The Company had $124 thousand and $308 thousand of investment in equity securities as of March 31, 2022 and December 31, 2021, respectively. All of such securities were publicly held and had readily determinable fair values. The Company recorded unrealized losses of $184 thousand and $42 thousand on its investment in equity securities for the three months ended March 31, 2022 and 2021, respectively. The Company also recorded gains of $11 thousand on sales of securities for the three-month period ended March 31, 2021. There were no such sales during the current period.
Warrants
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 estimated fair value of the Company’s portfolio of warrants was $143 thousand and $142 thousand as of March 31, 2022 and December 31, 2021, respectively. The Company recorded unrealized gains of $1 thousand and unrealized losses of $28 thousand on fair valuation of its warrants for the three months ended March 31, 2022 and 2021, respectively.
Options - short position
During the third quarter of 2021, the Company had sold options contracts on a publicly traded investment security. Such contracts were sold in two tranches as follows: 125 options at a premium of $3.00 and 75 options at $1.64 per share. Accordingly, the Company recorded a liability for the initial options value totaling $38 thousand and $12 thousand, respectively. During the year ended December 31, 2021, the Company recorded unrealized gains totaling $49 thousand related to the options. Such unrealized gains reflected changes in the fair value of the options and effectively reduced the liability related to the options. The options contracts both expired on January 21, 2022 with a strike price of $15.00 and $12.50, respectively. The Company realized gains totaling $1 thousand related to the expiration of the options.
9
Credit risk:
Financial instruments that potentially subject the Company to concentrations of credit risk include cash and cash equivalents, operating lease 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 receivable represent amounts due from lessees in various industries, related to equipment on operating leases.
Equipment on operating leases and related revenue recognition:
Equipment subject to operating leases is stated at cost. Depreciation is being 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 Accounting Standards Condification (“ASC”) 360-10-35-3, 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 (ASC 360-10-35-43).
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.
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. Provisions for credit losses relating to operating leases are included in lease income in the Company’s financial statements.
10
Initial direct costs:
Incremental costs of a lease that would not have been incurred if the lease had not been obtained are capitalized and amortized over the lease term. All other costs associated with the execution of the Company’s leases are expensed as incurred.
Asset valuation:
Recorded values of the Company’s leased asset portfolio are reviewed each 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 their 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.
Acquisition expense:
Acquisition expense represents costs which include, but are not limited to, legal fees and expenses, travel and communication expenses, cost of appraisals, accounting fees and expenses and miscellaneous expenses related to the selection and acquisition of equipment which are reimbursable to the Managing Member under the terms of the Operating Agreement and are expensed as incurred.
Fair Value:
Fair value measurements and disclosures are based on a fair value hierarchy as determined by significant inputs used to measure fair value. The three levels of inputs within the fair value hierarchy are defined as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuations in which all significant inputs are observable in the market.
Level 3 – Valuation is modeled using significant inputs that are unobservable in the market. These unobservable inputs reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability.
11
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.
Per Unit data:
Net loss and distributions per Unit are based upon the weighted average number of members Units outstanding during the period.
Recent accounting pronouncements:
In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2020-03, Codification Improvements to Financial Instruments (“ASU 2020-03”). ASU 2020-03 improves and clarifies various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016. ASU 2020-03 includes seven different issues that describe the areas of improvement and the related amendments to GAAP that are intended to make the standards easier to understand and apply by eliminating inconsistencies and providing clarifications. The amendments have different effective dates. Management is currently evaluating the effect of adopting this new accounting guidance but does not expect adoption will have a material impact on the Fund’s financial statements and disclosures.
In June 2016, the FASB issued ASU 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 equipment under operating leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, equipment under operating 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. Management is currently evaluating the standard and expects the update may potentially result in the increase in the allowance for credit losses given the change to estimated losses over the contractual life adjusted for expected prepayments.
12
In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments — Credit Losses (“ASU 2018-19”). The new standard clarifies certain aspects of the new 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. Management is currently evaluating the impact of the standard on the financial statements and related disclosure requirements.
On August 15, 2019, the FASB issued a proposed ASU that would grant certain companies additional time to implement FASB standards on CECL, and hedging. The proposed ASU defers the effective date for CECL to fiscal periods beginning after December 15, 2022, including interim periods within those fiscal years; and defers the effective dates for hedging to fiscal periods beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. The ASU was approved on October 16, 2019. In February 2020, the FASB issued ASU 2020-02 and delayed the effective date of Topic 326 until fiscal year beginning after December 15, 2022.
3. Investment in equipment and leases, net:
The Company’s investments in equipment and leases, net consists of the following (in thousands):
| | | | | | | | | | | |
| Balance | | Additions/ | | Depreciation/ | | Balance | ||||
| December 31, | | Dispositions/ | | Amortization | | March 31, | ||||
| 2021 |
| Reclassifications |
| Expense |
| 2022 | ||||
Equipment under operating leases, net | $ | 8,003 | | $ | (47) | | $ | (344) | | $ | 7,612 |
Asset held for sale or lease, net | | - | | | 44 | | | 0 | | | 44 |
Initial direct costs, net |
| 73 | |
| 0 | |
| (7) | |
| 66 |
Total | $ | 8,076 | | $ | (3) | | $ | (351) | | $ | 7,722 |
Impairment of equipment:
As a result of impairment reviews, management determined that 0 impairment losses existed for the periods ended March 31, 2022 and 2021.
The Company utilizes a straight line depreciation method over the term of the equipment lease for equipment under operating leases currently in its portfolio. Depreciation expense on the Company’s equipment totaled $344 thousand and $377 thousand for the three months ended March 31, 2022 and 2021, respectively. Total depreciation for the three-month periods ended March 31, 2022 and 2021 included $7 thousand and $31 thousand, respectively, of additional depreciation recorded to reflect year-to-date changes in estimated residual values of certain equipment generating revenue under month-to-month extensions. Such estimated residual values of equipment associated with leases on month-to-month extensions are evaluated at least semi-annually, and depreciation recorded for the change in the estimated reduction in value.
IDC amortization expense related to the Company’s operating leases totaled $7 thousand and $9 thousand for the three-month periods ended March 31, 2022 and 2021, respectively.
All of the Company’s lease asset purchases and capital improvements were made during the years from 2016 through 2022.
13
Operating leases:
Property on operating leases consists of the following (in thousands):
| | | | | | | | | | | | |
| | Balance | | | | | | | | Balance | ||
| | December 31, | | | | | Reclassifications | | March 31, | |||
|
| 2021 | | Additions | | or Dispositions | | 2022 | ||||
Transportation, rail | | $ | 1,723 | | $ | 0 | | $ | 0 | | $ | 1,723 |
Mining | |
| 2,749 | |
| 0 | |
| 0 | |
| 2,749 |
Construction | |
| 3,725 | |
| 0 | |
| (222) | |
| 3,503 |
Aviation | |
| 2,327 | |
| 0 | |
| 0 | |
| 2,327 |
Paper processing | |
| 1,058 | |
| 0 | |
| 0 | |
| 1,058 |
Agriculture | |
| 742 | |
| 0 | |
| (742) | |
| 0 |
Materials handling | |
| 1,315 | |
| 118 | |
| 0 | |
| 1,433 |
Transportation, other | |
| 97 | |
| 0 | |
| 0 | |
| 97 |
| |
| 13,736 | |
| 118 | |
| (964) | |
| 12,890 |
Less accumulated depreciation | |
| (5,733) | |
| (344) | |
| 799 | |
| (5,278) |
Total | | $ | 8,003 | | $ | (226) | | $ | (165) | | $ | 7,612 |
The average estimated residual value for assets on operating leases was 26% and 28% of the assets’ original cost at March 31, 2022 and December 31, 2021, respectively. There were 0 operating leases in non-accrual status at March 31, 2022 and December 31, 2021.
At March 31, 2022, the aggregate amounts of future minimum lease payments receivable are as follows (in thousands):
| | | |
|
| Operating | |
| | Leases | |
Nine months ending December 31, 2022 | | $ | 1,272 |
Year ending December 31, 2023 | |
| 1,637 |
2024 | |
| 1,186 |
2025 | |
| 533 |
2026 | | | 298 |
Thereafter | | | 310 |
| | $ | 5,236 |
The useful lives for each category of leases is reviewed at a minimum of once per quarter. As of March 31, 2022, 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, other |
| 7 - 10 |
14
4. Related party transactions:
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.
Pursuant to the Operating Agreement, the Managing Member and/or affiliates earned fees and billed for reimbursements during the three months ended March 31, 2022 and 2021 as follows (in thousands):
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
| | 2022 |
| 2021 | ||
Administrative costs reimbursed to Managing Member and/or affiliates | | $ | 80 | | $ | 90 |
Asset management fees to Managing Member | |
| 57 | |
| 66 |
Acquisition and initial direct costs paid to Managing Member | | | 2 | | | — |
| | $ | 139 | | $ | 156 |
5. Non-recourse debt:
At March 31, 2022, non-recourse debt consists of notes payable to financial institutions. The note payments are due in monthly installments. Interest on the notes range from 3.82% to 4.66% per annum. The notes are secured by assignments of lease payments and pledges of assets. At March 31, 2022 gross operating lease rentals totaled approximately $1.6 million over the remaining lease terms and the carrying value of the pledged assets was $2.6 million. The notes mature from 2023 through 2028.
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
15
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 | |||
Nine months ending December 31, 2022 | | $ | 391 | | $ | 44 | | $ | 435 |
Year ending December 31, 2023 | | | 522 | | | 39 | | | 561 |
2024 | | | 288 | | | 20 | | | 308 |
2025 | | | 73 | | | 13 | | | 86 |
2026 | | | 76 | | | 9 | | | 85 |
Thereafter | | | 156 | | | 8 | | | 164 |
|
| $ | 1,506 |
| $ | 133 |
| $ | 1,639 |
6. Borrowing facilities:
Effective June 30, 2021, the Company entered into an amended and restated revolving credit facility agreement (the “Credit Facility”) which replaced a previous agreement that had an expiration date of June 2021. The Company participated with ATEL Capital Group and certain subsidiaries and affiliated entities as borrowers, with a syndicate of financial institutions as lenders. The Credit Facility is comprised of a working capital sub-facility, an acquisition sub-facility, institutional leasing sub-facility, and a venture line sub-facility. The Company participates in the acquisition sub-facility and the institutional leasing sub-facility, on a several, but not joint, basis (i.e., the Company is liable only for the amount of the advances extended to the Company under those sub-facilities, and not as to amounts extended to any co-borrower).
The aggregate amount of the Credit Facility is $55 million, with sub-limits for each sub-facility, and currently expires June 30, 2023 (unless extended). 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 extended to the Company under the acquisition sub-facility or the institutional leasing sub-facility, on a several, but not joint, basis. The Credit Facility includes certain financial covenants made by the Company, as is customarily found in credit facilities of similar size and nature.
As of March 31, 2022 and December 31, 2021, borrowings under the Credit Facility were as follows (in thousands):
| | | | | | |
|
| March 31, |
| December 31, | ||
| | 2022 | | 2021 | ||
Total available under the financing arrangement | | $ | 55,000 | | $ | 55,000 |
Amount borrowed by affiliated partnerships and limited liability companies under the venture, acquisition, and warehouse facilities. | |
| (12,650) | |
| (730) |
Total remaining available under the working capital, acquisition and warehouse facilities | | $ | 42,350 | | $ | 54,270 |
The Company and its affiliates pay an annual commitment fee to have access to this line of credit. As of March 31, 2022, the aggregate amount of the Credit Facility is potentially available to the Company, subject to certain sub-facility and borrowing-base limitations. However, as amounts are drawn on the Credit Facility by each of the Company and the affiliates who are borrowers under the Credit Facility, the amount remaining available to all borrowers to draw under Credit Facility is reduced. As the Warehousing Facility is a short term bridge facility, any amounts borrowed under the
16
Warehousing Facility, and then repaid by the affiliated borrowers (including the Company) upon allocation of an acquisition to a specific purchaser, become available under the Warehouse Facility for further short term borrowing.
As of March 31, 2022, the Company’s Tangible Net Worth requirement under the Credit Facility was $10.0 million, the permitted maximum leverage ratio was not to exceed 1.25 to 1, and the required minimum interest coverage ratio was not to be less than 2 to 1. At March 31, 2022, the Company’s minimum Tangible Net Worth, leverage ratio and interest coverage ratio, as calculated per the Credit Facility agreement, were $9.9 million, 0.15 to 1, and 26.13 to 1, respectively. As such, as of March 31, 2022, the Company’s leverage ratio and interest coverage ratio were in compliance with the conditions of the Credit Facility. However, the Company’s Tangible Net Worth did not meet the requirements of the Credit Facility. Accordingly, the Fund will not be able to borrow from the Credit Facility unless all material covenants are met. The Company does not anticipate that such inability to borrow from the Credit Facility will have any material impact on future operations.
Fee and interest terms
The interest rate on the Credit Facility is based on either the LIBOR plus 2.25% or the bank’s Prime rate, which re-prices daily. Principal amounts of loans made under the Credit Facility that are prepaid may be re-borrowed on the terms and subject to the conditions set forth under the Credit Facility. There were 0 borrowings outstanding at March 31, 2022 and December 31, 2021.
Warehouse facility
To hold the assets under the Warehousing Facility prior to allocation to specific investor programs, a Warehousing Trust has been entered into by the Company, AFS, ALC, and certain of the affiliated partnerships and limited liability companies. The Warehousing Trust is used by the Warehouse Facility borrowers to acquire and hold, on a short-term basis, certain lease transactions that meet the investment objectives of each of such entities. Each of the leasing programs sponsored by AFS and ALC is a pro rata participant in the Warehousing Trust, as described below. When a program no longer has a need for short-term financing provided by the Warehousing Facility, it is removed from participation, and as new leasing investment entities are formed by AFS and ALC and commence their acquisition stages, these new entities
are added.
As of March 31, 2022, the investment program participants were the Company and ATEL 16, LLC. Pursuant to the Warehousing Trust, the benefit of the lease transaction assets, and the corresponding liabilities under the Warehouse Facility, inure to each of such entities based upon each entity’s pro-rata share in the Warehousing Trust estate. The “pro-rata share” is calculated as a ratio of the net worth of each entity over the aggregate net worth of all entities benefiting from the Warehousing Trust estate, excepting that the trustees, AFS and ALC, are both jointly and severally liable for the pro-rata portion of the obligations of each of the affiliated limited liability companies participating under the Warehouse Facility. Transactions are financed through this Warehouse Facility only until the transactions are allocated to a specific program for purchase or are otherwise disposed by AFS and ALC. When a determination is made to allocate the transaction to a specific program for purchase by the program, the purchaser repays the debt associated with the asset, either with cash or by means of proceeds of a draw under the Acquisition Facility, and the asset is removed from the Warehouse Facility collateral, and ownership of the asset and any debt obligation associated with the asset are assumed solely by the purchasing entity.
7. Commitments and contingencies:
At March 31, 2022, there was a commitment to purchase lease assets totaling $16 thousand. This amount represents contract awards which may be canceled by the prospective investee or may not be accepted by the Company.
17
8. Members’ capital:
A total of 2,565,749 Units were issued and outstanding at both March 31, 2022 and December 31, 2021, inclusive of 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 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 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 three months ended March 31, 2022 and 2021 were as follows (in thousands except Units and per Unit data):
| | | | | | |
| | | Three Months Ended | |||
| | | March 31, | |||
| | 2022 |
| 2021 | ||
Distributions | | $ | 513 | | $ | 513 |
Weighted average number of Units outstanding | |
| 2,565,749 | |
| 2,565,749 |
Weighted average distributions per Unit | | $ | 0.20 | | $ | 0.20 |
9. Fair value measurements:
Under applicable accounting standards, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
At March 31, 2022 and December 31, 2021 the Company’s warrants and investment securities were measured on a recurring basis. In addition, at December 31, 2021, the Company’s options - short position were also measured on a recurring basis. There were 0 assets or liabilities measured at fair value on a non-recurring basis as of March 31, 2022 and December 31, 2021.
18
Such fair value adjustments utilized the following methodology:
Warrants (recurring)
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 March 31, 2022 and December 31, 2021, the calculated fair value of the Fund’s warrant portfolio approximated $143 thousand and $142 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 for the three months ended March 31, 2022 and 2021 (in thousands):
| | | | | | | |
| | Three Months Ended | | ||||
| | March 31, | | ||||
| | 2022 |
| 2021 | | ||
Fair value of warrants at beginning of period | | $ | 142 | | $ | 187 | |
Unrealized gain (loss) on fair value adjustment for warrants | |
| 1 | |
| (28) | |
Fair value of warrants at end of period | | $ | 143 | | $ | 159 | |
Investment in equity securities (recurring)
The Company’s equity securities registered for public sale with readily determinable fair values are measured at fair value with any changes in fair value recognized in the Company’s results of operations. As of March 31, 2022 and December 31, 2021, the calculated fair value of the Fund’s investment securities approximated $124 thousand and $308 thousand, respectively. Such valuations are classified within Level 1 of the valuation hierarchy.
The fair value of investment securities that were accounted for on a recurring basis for the three months ended March 31, 2022 and 2021 and classified as Level 1 are as follows (in thousands):
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
| | 2022 | | 2021 | ||
Fair value of securities at beginning of period | | $ | 308 | | $ | 1,448 |
Securities sold | | | — | | | (68) |
Unrealized loss on fair value adjustment for equity securities | | | (184) | | | (42) |
Fair value of investment securities at the end of period | | $ | 124 | | $ | 1,338 |
Options – short position (recurring)
The liability associated with the Company’s options – short position contracts were measured at fair value based on the price of the publicly traded options contracts, with any changes in fair value recognized in the Company’s results of operations. During the year ended December 31, 2021, the Company recorded $49 thousand of unrealized gains on the options, which reduced the $50 thousand initial value of the options to $1 thousand at December 31, 2021. The options both expired on January 22, 2022, upon which the Company realized $1 thousand of gains on the transactions.
19
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 March 31, 2022 and December 31, 2021:
| | | | | | | | |
March 31, 2022 | ||||||||
|
| Valuation |
| Valuation |
| Unobservable |
| Range of Input Values |
Name | | Frequency | | Technique | | Inputs | | (Weighted Average) |
Warrants |
| Recurring |
| Black-Scholes formulation |
| Stock price | | $0.01 - $11.71 ($0.07) |
|
|
|
|
|
| Exercise price | | $0.02 - $9.00 ($0.07) |
|
|
|
|
|
| Time to maturity (in years) |
| 5.66 - 9.70 (5.82) |
|
|
|
|
|
| Risk-free interest rate |
| 1.58% - 2.41% (2.40%) |
|
|
|
|
|
| Annualized volatility |
| 0.00% - 115.04% (55.11%) |
| | | | | | | | |
December 31, 2021 | ||||||||
|
| Valuation |
| Valuation |
| Unobservable |
| Range of Input Values |
Name | | Frequency | | Technique | | Inputs | | (Weighted Average) |
Warrants |
| Recurring |
| Black-Scholes formulation |
| Stock price | | $0.01 - $11.71 ($0.07) |
|
|
|
|
|
| Exercise price | | $0.02 - $9.00 ($0.07) |
|
|
|
|
|
| Time to maturity (in years) | | 5.91 - 9.94 (6.06) |
|
|
|
|
|
| Risk-free interest rate | | 1.35% - 1.58% (1.37%) |
|
|
|
|
|
| Annualized volatility | | 37.90% - 115.04% (55.09%) |
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.
Cash and cash equivalents
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.
Non-recourse debt
The fair value of the Company’s non-recourse debt is estimated using discounted cash flow analyses, based upon current market borrowing rates for similar types of borrowing arrangements.
Commitments and Contingencies
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.
20
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 March 31, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | |
| | Fair Value Measurements at March 31, 2022 | |||||||||||||
|
| Carrying |
| | |
| | |
| | |
| | | |
| | Amount | | Level 1 | | Level 2 | | Level 3 | | Total | |||||
Financial assets: |
| |
|
| |
|
| |
|
| |
|
| |
|
Cash and cash equivalents | | $ | 3,846 | | $ | 3,846 | | $ | 0 | | $ | 0 | | $ | 3,846 |
Investment in equity securities | | | 124 | | | 124 | |
| 0 | | | 0 | |
| 124 |
Warrants, fair value | |
| 143 | |
| 0 | |
| 0 | |
| 143 | |
| 143 |
Financial liabilities: | | | | | | | | | | | | | | | |
Non-recourse debt | | | 1,506 | | | 0 | | | 0 | | | 1,508 | | | 1,508 |
| | | | | | | | | | | | | | | |
| | Fair Value Measurements at December 31, 2021 | |||||||||||||
|
| Carrying |
| | |
| | |
| | |
| | | |
| | Amount | | Level 1 | | Level 2 | | Level 3 | | Total | |||||
Financial assets: |
| |
|
| |
|
| |
|
| |
|
| |
|
Cash and cash equivalents | | $ | 4,035 | | $ | 4,035 | | $ | 0 | | $ | 0 | | $ | 4,035 |
Investment in equity securities | |
| 308 | | | 308 | |
| 0 | | | 0 | |
| 308 |
Warrants, fair value | | | 142 | |
| 0 | |
| 0 | |
| 142 | |
| 142 |
Financial liabilities: | | | | | | | | | | | | | | | |
Options - short position | | | 1 | | | 1 | | | 0 | | | 0 | | | 1 |
Non-recourse debt | | | 1,633 | | | 0 | | | 0 | | | 1,673 | | | 1,673 |
21
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Statements contained in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) and elsewhere in this Form 10-Q, which are not historical facts, may be forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. In particular, 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 and borrower defaults and the creditworthiness of its lessees and borrowers. 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-Q. We undertake no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events, other than as required by law.
Overview
ATEL 17, LLC (the “Company” or the “Fund”) was formed under the laws of the state of California on April 16, 2015 for the purpose of raising capital and originating equipment financing transactions 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 Company conducted a public offering of 15,000,000 Limited Liability Company Units (“Units”), at a price of $10 per Unit. 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 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. Pennsylvania subscriptions are subject to a separate escrow and will be released to the Fund only at such time as total subscription proceeds received by the Fund from all subscribers, including the escrowed Pennsylvania subscriptions, equal not less than $7.5 million in gross proceeds. Total contributions to the Fund exceeded $7.5 million on July 6, 2016. The offering was terminated on January 5, 2018.
Results of Operations
The three months ended March 31, 2022 versus the three months ended March 31, 2021
The Company had net losses of $77 thousand and $143 thousand for the three months ended March 31, 2022 and 2021, respectively. The results for the first quarter of 2022 reflect an increase in total operating revenues and a decrease in total operating expenses partially offset by an increase in other loss related to the Company’s warrants and equity securities.
Revenues
Operating revenues totaled $672 thousand and $583 thousand for three months ended March 31, 2022 and 2021, respectively. The $89 thousand, or 15%, increase in revenues was attributable to increases in gain on sales of lease assets and other revenue, partially offset by decrease in operating leases revenue, and the absence of notes receivable interest income during the current quarter.
During the current quarter, the Company realized $181 thousand of gains on the sale of recently returned equipment which were under month-to-month extensions; and recorded $19 thousand of other revenue related to deferred maintenance fees on certain returned equipment. There were no such sales or fees during the prior year period.
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The aforementioned increases in revenues were partially offset by a $90 thousand net decline in operating lease revenues, which was attributable to lease run-off and disposition of lease assets. In addition, notes receivable interest income was zero for the current period, as compared to $21 thousand for the prior year period, as all the Company’s notes receivable have been paid in full and terminated as of December 31, 2021.
Expenses
Operating expenses totaled $567 thousand and $667 thousand for the three months ended March 31, 2022 and 2021, respectively. The $100 thousand, or 15%, decline in expenses was primarily due to decreases in professional fees and depreciation expense. Professional fees declined by $50 thousand largely due to timing differences in receipt of services and billings, while depreciation expense decreased by $33 thousand due to lease portfolio run-off and dispositions of lease assets.
Other loss
During periods ended March 31, 2022 and 2021, the Company recorded other losses totaling $182 thousand and $59 thousand, respectively, to reflect both unrealized and realized gains and losses on the Fund’s investment securities and warrants portfolio. Adverse changes to prices of the Company’s publicly traded equity securities during the current quarter resulted in $184 thousand of unrealized losses. Such losses were partially offset by an unrealized gain of $1 thousand on fair valuation of the Company’s warrants and realized gains of $1 thousand on the expiration of options sold. By comparison, during the prior year period, the Company recorded unrealized losses of $70 thousand on fair valuation of its equity securities and warrants. Such losses were partially offset by realized gains of $11 thousand on sales of equity securities.
Capital Resources and Liquidity
At March 31, 2022 and December 31, 2021, the Company’s cash and cash equivalents totaled $3.8 million and $4.0 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.
Cash Flows
The following table sets forth summary cash flow data (in thousands):
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
| | 2022 | | 2021 | ||
Net cash provided by (used in): | | | | | | |
Operating activities | | $ | 217 | | $ | 347 |
Investing activities | |
| 234 | |
| 207 |
Financing activities | |
| (640) | |
| (763) |
Net decrease in cash and cash equivalents | | $ | (189) | | $ | (209) |
During the respective three months ended March 31, 2022 and 2021, the Company’s main source of liquidity were cash flows from its portfolio of operating lease contracts. During the current quarter, the Company also received $302 thousand of proceeds from sales of lease assets and $50 thousand of proceeds from the sale of options – short position contracts. By comparison, during the prior year quarter, the Company received $128 thousand of principal payments on its investments in notes receivable and $79 thousand of proceeds from sales of equity securities.
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During the respective three months ended March 31, 2022 and 2021, cash was primarily used to pay distributions, repay borrowings under non-recourse debt and acquire assets. Cash used to pay distributions totaled $513 thousand for each of the three-month periods ended March 31, 2022 and 2021; and repayments of non-recourse debt totaled $127 thousand and $250 thousand for the three months ended March 31, 2022 and 2021, respectively. In addition, cash used to acquire lease assets totaled $118 thousand for the current quarter. There were no lease asset acquisitions during the prior year quarter. Cash was also used to pay invoices related to management fees and expenses, and other payables in both three-month periods.
Distributions
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 February 2016.
Cash distributions were paid by the Fund to Unitholders of record as of February 28, 2022, and paid through March 31, 2022. The distributions may be characterized for tax, accounting and economic purposes as a return of capital, a return on capital (including escrow interest) or a portion of each. Generally, the portion of each cash distribution by a company which exceeds its net income for the fiscal period would constitute a return of capital. The Fund is required by the terms of its Operating Agreement to distribute the net cash flow generated by its investments in certain minimum amounts during the Reinvestment Period before it can reinvest its operating cash flow in additional portfolio assets; see the discussion in the Prospectus under “Income, Losses and Distributions.” Accordingly, the amount of cash flow from Fund investments distributed to Unitholders will not be available for reinvestment in additional portfolio assets.
The cash distributions were based on current and anticipated gross revenues from the loans funded and equity investments acquired. During the Fund’s acquisition and operating stages, the Fund may incur short term borrowing to fund regular distributions of such gross revenues to be generated by newly acquired transactions during their respective initial fixed terms. As such, all Fund periodic cash distributions made during these stages have been, and are expected in the future to be, based on the Fund’s actual and anticipated gross revenues to be generated from the binding initial terms of the loans and investments funded.
The following table summarizes distribution activity for the Fund from inception through March 31, 2022 (in thousands except for Units and Per Unit Data):
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | Total | | Weighted | ||||
| | | | Return of | | | | Distribution | | | | Total | | | | Distribution | | Average Units | ||||
Distribution Period (1) |
| Paid |
| Capital |
| |
| of Income |
| |
| Distribution |
| |
| per Unit (2) |
| 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 |
Dec 2018 - Nov 2019 | | Jan 2019 - Dec 2019 | | | 2,052 | | | | | — | | | | | 2,052 | | | | | 0.80 | | 2,565,749 |
Dec 2019 - Nov 2020 | | Jan 2020 - Dec 2020 | | | 2,052 | | | | | — | | | | | 2,052 | | | | | 0.80 | | 2,565,749 |
Dec 2020 - Nov 2021 | | Jan 2021 - Dec 2021 | | | 2,053 | | | | | — | | | | | 2,053 | | | | | 0.80 | | 2,565,749 |
Dec 2021 - Feb 2022 | | Jan 2022 - Mar 2022 | | | 513 | | | | | — | | | | | 513 | | | | | 0.20 | | 2,565,749 |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | $ | 10,745 | | | | $ | — | | | | $ | 10,745 | | | | $ | 4.82 | | |
Source of distributions | | | |
| | | | |
|
| | | |
| | | | |
| |
| |
Lease and loan payments and sales proceeds received | | | | $ | 10,745 | | 100.00% | | $ | — | | 0.00% | | $ | 10,745 | | 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, December 1, 2016 - November 30, 2017, December 1, 2017 - November 30, 2018, December 1, 2018 - November 30, 2019, December 1, 2019 - November 30, 2020, December 1, 2020 - November 30, 2021, and December 1, 2021- February 28, 2022, respectively. |
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Commitments and Contingencies and Off-Balance Sheet Transactions
Commitments and Contingencies
At March 31, 2022, there was a commitment to purchase lease assets totaling $16 thousand. This amount represents contract awards which may be canceled by the prospective investee or may not be accepted by the Company.
Off-Balance Sheet Transactions
None.
Recent Accounting Pronouncements
For information on recent accounting pronouncements, see Note 2 summary of significant accounting policies.
Significant Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates, which are based upon historical experiences, market trends and financial forecasts, and upon various other assumptions that management believes to be reasonable under the circumstances and at that certain point in time. Actual results may differ, significantly at times, from these estimates under different assumptions or conditions.
The Company’s significant accounting policies are described in its Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes to the Company’s significant accounting policies since December 31, 2021.
Item 4. Controls and procedures.
Evaluation of disclosure controls and procedures
The Company’s Managing Member’s Chief Executive Officer, and Executive Vice President and Chief Financial Officer and Chief 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, Management 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. 78a et 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.
Changes in internal control
There were no changes in the Managing Member’s internal control over financial reporting, as it is applicable to the Company, during the quarter ended March 31, 2022 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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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In the ordinary course of conducting business, there may be certain claims, suits, and complaints filed against the Managing Member. In the opinion of management, the outcome of such matters, if any, will not have a material impact on the Managing Member’s financial position or results of operations.
Item 2. Defaults Upon Senior Securities.
None.
Item 3. Mine Safety Disclosures.
Not Applicable.
Item 4. Other Information.
None.
Item 5. Exhibits.
| (a) | Documents filed as a part of this report |
| | | |
| | 1. | 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. |
| | | ||
| | 2. | Other Exhibits | |
| | | | |
| | | Certification of Dean L. Cash pursuant to Rules 13a-14(a)/15d-14(a) | |
| | | Certification of Paritosh K. Choksi pursuant to Rules 13a-14(a)/15d-14(a) | |
| | | Certification of Dean L. Cash pursuant to 18 U.S.C. section 1350 | |
| | | Certification of Paritosh K. Choksi pursuant to 18 U.S.C. section 1350 | |
| | | (101.INS) | Inline XBRL Instance Document |
| | | (101.SCH) | Inline XBRL Taxonomy Extension Schema Document |
| | | (101.CAL) | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| | | (101.DEF) | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| | | (101.LAB) | Inline XBRL Taxonomy Extension Label Linkbase Document |
| | | (101.PRE) | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| | | (104) | The cover page for the Company’s Quarterly Report on Form 10-Q for the quarter ended |
| | | | March 31, 2022 has been formatted in Inline XBRL |
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SIGNATURES
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: May 13, 2022
ATEL 17, LLC
(Registrant)
| | ||
By: | ATEL Managing Member, LLC Managing Member of Registrant | ||
| | | |
By: | /s/ Dean L. Cash | | |
| Dean L. Cash | | |
| Chairman of the Board, President and Chief Executive Officer of ATEL Managing Member, LLC (Managing Member) | | |
| | | |
| | | |
By: | /s/ Paritosh K. Choksi | | |
| Paritosh K. Choksi | | |
| Director, Executive Vice President and Chief Financial Officer and Chief Operating Officer of ATEL Managing Member, LLC (Managing Member) | | |
| | | |
| | | |
By: | /s/ Raymond A. Rigo | | |
| Raymond A. Rigo | | |
| Vice President, Fund Controller of ATEL Managing Member, LLC (Managing Member) | | |
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