Attached files
file | filename |
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EX-32.2 - EXHIBIT 32.2 - Macquarie Equipment Leasing Fund, LLC | v439160_ex32-2.htm |
EX-31.1 - EXHIBIT 31.1 - Macquarie Equipment Leasing Fund, LLC | v439160_ex31-1.htm |
EX-31.2 - EXHIBIT 31.2 - Macquarie Equipment Leasing Fund, LLC | v439160_ex31-2.htm |
EX-32.1 - EXHIBIT 32.1 - Macquarie Equipment Leasing Fund, LLC | v439160_ex32-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
____________________
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2016
OR
¨ | 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: 000-53904
MACQUARIE EQUIPMENT LEASING FUND, LLC
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 26-3291543 | |||
(State or Other Jurisdiction of | (IRS Employer | |||
Incorporation or Organization) | Identification No.) |
225 Franklin St, 17th Floor, Suite 1740
Boston, Massachusetts 02110
(Address of Principal Executive Offices) (Zip Code)
(617) 457-0645
(Registrant’s Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year if Changed Since Last Report): N/A
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange 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 x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer | ¨ | Accelerated Filer | ¨ |
Non-accelerated Filer | ¨ | Smaller Reporting Company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
There were 9,241,411 shares of limited liability company membership interests outstanding at May 16, 2016.
MACQUARIE EQUIPMENT
LEASING FUND, LLC
Table of Contents
Part I. | Financial Information | ||
Item 1. | Financial Statements | ||
Balance Sheets as of March 31, 2016 and December 31, 2015 (Unaudited) | 3 | ||
Statements of Operations for the Three Months Ended March 31, 2016 and 2015 (Unaudited) | 4 | ||
Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015 (Unaudited) | 5 | ||
Statement of Changes in Members’ Equity for the Three Months Ended March 31, 2016 (Unaudited) | 6 | ||
Notes to Financial Statements (Unaudited) | 7 | ||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 16 | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 19 | |
Item 4. | Controls and Procedures | 20 | |
Part II. | Other Information | ||
Item 1. | Legal Proceedings | 20 | |
Item 1A. | Risk Factors | 20 | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 20 | |
Item 3. | Defaults Upon Senior Securities | 20 | |
Item 4. | Mine Safety Disclosures | 20 | |
Item 5. | Other Information | 20 | |
Item 6. | Exhibits | 21 | |
Signatures | 22 |
Macquarie Equipment Leasing Fund, LLC is not an authorized deposit-taking institution for the purposes of the Banking Act 1959 (Commonwealth of Australia) and its obligations do not represent deposits or other liabilities of Macquarie Bank Limited ABN 46 008 583 542 (MBL). MBL does not guarantee or otherwise provide assurance in respect of the obligations of Macquarie Equipment Leasing Fund, LLC.
2
Part I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
MACQUARIE EQUIPMENT LEASING FUND, LLC
BALANCE SHEETS
(Unaudited)
March 31, 2016 | December 31, 2015 | |||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 14,139,420 | $ | 19,767,657 | ||||
Restricted cash | 1,445,621 | 1,445,270 | ||||||
Leased equipment held for sale | 6,583,410 | - | ||||||
Net investment in finance lease | 989,063 | 1,246,922 | ||||||
Loan receivables | 3,383,854 | 1,070,702 | ||||||
Participating interest - loan receivable | 7,957,062 | 7,975,953 | ||||||
Accrued interest receivable | 37,645 | 53,429 | ||||||
Lease receivables | 423,750 | 315,800 | ||||||
Maintenance reserve and other receivables | 112,312 | 54,156 | ||||||
Other assets | 893 | 3,572 | ||||||
Total Current Assets | 35,073,030 | 31,933,461 | ||||||
Non-current Assets | ||||||||
Net investment in finance lease | 2,321,720 | 2,955,863 | ||||||
Loan receivables | 11,577,459 | - | ||||||
Leased equipment at cost (net of accumulated depreciation of $13,888,044 as of March 31, 2016 and $15,941,614 as of December 31, 2015) | 51,585,172 | 59,318,157 | ||||||
Total Non-current Assets | 65,484,351 | 62,274,020 | ||||||
Total Assets | $ | 100,557,381 | $ | 94,207,481 | ||||
LIABILITIES AND MEMBERS’ EQUITY | ||||||||
Current Liabilities | ||||||||
Fees payable (related party) | $ | 366,452 | $ | 23,913 | ||||
Deferred finance and rental income | 977,540 | 1,132,749 | ||||||
Deposit for sale of leased equipment | 7,300,000 | 250,000 | ||||||
Distribution payable | 630,116 | 631,721 | ||||||
Other payables | 465,324 | 588,340 | ||||||
Maintenance reserve | 1,503,967 | 1,445,621 | ||||||
Current portion of long-term debt | 1,726,335 | 1,710,754 | ||||||
Accrued interest payable | 33,602 | 34,491 | ||||||
Total Current Liabilities | 13,003,336 | 5,817,589 | ||||||
Non-current Liabilities | ||||||||
Other payables | 444,645 | 444,645 | ||||||
Long-term debt, less current portion ($16,750,000 face value, less: unamortized debt discount and issuance costs $55,191) | 14,263,379 | 14,702,023 | ||||||
Total Non-current Liabilities | 14,708,024 | 15,146,668 | ||||||
Total Liabilities | $ | 27,711,360 | $ | 20,964,257 | ||||
Commitments and Contingencies (Note 11) | ||||||||
Members' Equity | ||||||||
Shares of membership interests, $10.00 par value as may be reduced (i) under a distribution reinvestment plan, (ii) for volume discounts, or (iii) for reductions in selling commissions | ||||||||
Authorized: 15,800,500 shares; | ||||||||
Issued and outstanding: 9,273,855 shares as of March 31, 2016 and 9,297,489 | ||||||||
shares as of December 31, 2015, net of repurchases of 384,262 and 360,628, respectively | 62,396,797 | 62,581,865 | ||||||
Accumulated surplus | 10,449,224 | 10,661,359 | ||||||
Total Members’ Equity | 72,846,021 | 73,243,224 | ||||||
Total Liabilities and Members’ Equity | $ | 100,557,381 | $ | 94,207,481 |
See accompanying notes to Financial Statements.
3
MACQUARIE EQUIPMENT
LEASING FUND, LLC
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended | ||||||||
March 31, 2016 | March 31, 2015 | |||||||
REVENUE | ||||||||
Finance and rental income | 2,839,028 | 3,090,834 | ||||||
Net gain on sale of leased equipment | 7,927 | - | ||||||
Interest income | 477,830 | 35,617 | ||||||
Other income | 25,017 | 23,854 | ||||||
Total revenue | 3,349,802 | 3,150,305 | ||||||
EXPENSES | ||||||||
Operating expenses (related party) | 97,628 | 123,568 | ||||||
Management fees (related party) | 153,924 | 160,044 | ||||||
Depreciation | 1,149,575 | 1,128,521 | ||||||
Interest expense | 134,439 | - | ||||||
Other expenses (including related party expenses of $18,513 and $18,517 for the quarters ended March 31, 2016 and 2015, respectively) | 176,687 | 113,800 | ||||||
Total expenses | 1,712,253 | 1,525,933 | ||||||
Net income | $ | 1,637,549 | $ | 1,624,372 | ||||
Basic and diluted earnings per share | $ | 0.18 | $ | 0.17 | ||||
Weighted average number of shares outstanding: basic and diluted | 9,273,855 | 9,382,122 |
See accompanying notes to Financial Statements.
4
MACQUARIE EQUIPMENT
LEASING FUND, LLC
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended | ||||||||
March 31, 2016 | March 31, 2015 | |||||||
Cash flow from operating activities: | ||||||||
Net income | $ | 1,637,549 | $ | 1,624,372 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 1,149,575 | 1,128,521 | ||||||
Net gain on sale of leased equipment | (7,927 | ) | - | |||||
Amortization of loan origination fees | (10,249 | ) | - | |||||
Amortization of debt discount and issuance costs | 1,460 | - | ||||||
Changes in operating assets and liabilities: | ||||||||
Fees payable (related party) | 107,282 | 140,595 | ||||||
Lease receivables | (107,950 | ) | (150,050 | ) | ||||
Accrued interest received | 15,784 | 15,246 | ||||||
Net investment in finance lease | 346,904 | 178,178 | ||||||
Other receivables | (160 | ) | 10,039 | |||||
Other payables | (123,016 | ) | (44,105 | ) | ||||
Accrued interest paid | (889 | ) | - | |||||
Deferred finance and rental income | (155,209 | ) | 12,989 | |||||
Other assets | 2,679 | 3,778 | ||||||
Net cash provided by operating activities | 2,855,833 | 2,919,563 | ||||||
Cash flow from investing activities: | ||||||||
Deposits for sale of leased equipment | 7,050,000 | - | ||||||
Proceeds from sale of capital leased equipment | 553,025 | - | ||||||
Participating interest - loans receivable | (10,868,323 | ) | (4,995,979 | ) | ||||
Repayment of participating interest - loans receivable | 10,887,214 | 3,290,219 | ||||||
Loan to others | (14,076,152 | ) | - | |||||
Repayment of loan by others | 429,587 | 10,724 | ||||||
Restricted cash | (351 | ) | (43,925 | ) | ||||
Net cash used in investing activities | (6,025,000 | ) | (1,738,961 | ) | ||||
Cash flow from financing activities: | ||||||||
Distributions paid to members | (1,851,290 | ) | (1,851,679 | ) | ||||
Repurchase of shares | (185,068 | ) | (112,083 | ) | ||||
Repayment of principal on long-term debt | (423,063 | ) | - | |||||
Maintenance reserve received | 351 | 43,925 | ||||||
Net cash used in financing activities | (2,459,070 | ) | (1,919,837 | ) | ||||
Net decrease in cash and cash equivalents | (5,628,237 | ) | (739,235 | ) | ||||
Cash and cash equivalents, beginning of the period | 19,767,657 | 5,707,071 | ||||||
Cash and cash equivalents, end of the period | $ | 14,139,420 | $ | 4,967,836 | ||||
Supplemental disclosures of cash flow information | ||||||||
Non cash investing and financing activities | ||||||||
Maintenance reserve | $ | 57,994 | $ | 13,571 | ||||
Accrued loan to others | 235,257 | - | ||||||
Loan to others | 620,000 | - | ||||||
Repayment of loan by others | 430,000 | - | ||||||
Distribution Payable | 630,115 | 637,472 | ||||||
Interest and taxes paid | ||||||||
Cash paid during the year for interest | $ | 131,850 | $ | - |
See accompanying notes to Financial Statements.
5
MACQUARIE EQUIPMENT
LEASING FUND, LLC
STATEMENT OF CHANGES IN MEMBERS’ EQUITY
(Unaudited)
Membership interests | Accumulated surplus | |||||||||||||||||||||||
Members' shares | Additional members (1) | Managing member | Additional members (1) | Managing member | Total | |||||||||||||||||||
Balance at December 31, 2015 | 9,297,489 | $ | 61,630,733 | $ | 951,132 | $ | 10,568,114 | $ | 93,245 | $ | 73,243,224 | |||||||||||||
Repurchase of shares | (23,634 | ) | (185,068 | ) | - | (185,068 | ) | |||||||||||||||||
Distribution to members | - | - | (1,817,415 | ) | (32,269 | ) | (1,849,684 | ) | ||||||||||||||||
Net income | - | - | 1,608,981 | 28,568 | 1,637,549 | |||||||||||||||||||
Balance at March 31, 2016 | 9,273,855 | $ | 61,445,665 | $ | 951,132 | $ | 10,359,680 | $ | 89,544 | $ | 72,846,021 |
(1) | Additional members represent all members other than the Managing member. |
See accompanying notes to Financial Statements.
6
MACQUARIE EQUIPMENT LEASING FUND, LLC
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BUSINESS OPERATIONS
Macquarie Equipment Leasing Fund, LLC, a Delaware limited liability company (the “Fund”), was formed on August 21, 2008 for the purpose of being an equipment leasing program that acquires or originates a diversified portfolio of equipment, equipment leases and loans, and other equipment-related investments. The majority of the Fund’s equipment is leased to corporate clients. The Fund’s objective is to generate income through the collection of lease rentals, interest income, and other revenues, as well as through the sale of leased and off lease equipment and other portfolio investments. The Fund’s fiscal year end is December 31.
The manager of the Fund is Macquarie Asset Management Inc. (the “Manager”), a member of the Macquarie Group of Companies which is comprised of Macquarie Group Limited and its subsidiaries and affiliates worldwide (the “Macquarie Group”). Macquarie Group Limited is headquartered in Australia and is listed on the Australian Stock Exchange. The Manager has made a total of $1,505,000 in capital contributions to the Fund. The Manager and its affiliates earn fees by providing or arranging all services necessary and desirable for the operations of the Fund, including those relating to equipment acquisitions and disposals, equipment loans, asset management and administrative, reporting and regulatory services. The Fund reimburses the Manager for costs incurred for managing the Fund and the Fund’s portfolio of equipment, equipment lease and loans, and other equipment-related investments. The Fund has one reportable segment; all information and disclosures herein are related to that segment.
The initial closing date for the Fund was March 5, 2010, the date at which the Fund raised over $2,500,000 and reached the minimum offering amount. The Fund’s offering period ceased on March 19, 2012 and the Fund’s operating period commenced on that date. The Fund’s liquidation period is scheduled to begin on July 1, 2016 and may last for up to three years.
This report covers the three months ended March 31, 2016 and 2015, respectively.
The accompanying unaudited financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions for Form 10-Q and the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). In the opinion of management, all material adjustments, consisting only of normal recurring adjustments, considered necessary for a fair statement of the interim period financial statements have been made. Interim period results are not necessarily indicative of results for a full-year period. These financial statements and the notes thereto should be read in conjunction with the Fund’s financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2015 as filed with the SEC on March 2, 2016.
The prior period amounts for deposit for sale of leased equipment and other payables on the Fund’s balance sheet have been reclassified to conform to the current period presentation.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting and Use of Estimates
The accompanying financial statements were prepared in accordance with U.S. GAAP. This 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. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Fund considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents are maintained with one financial institution, which at times may be in excess of federal insurance limits.
Restricted Cash
Restricted cash consists of cash collected from the lessee of the Fund’s Bombardier CRJ 700 ER aircraft for maintenance costs.
Income Taxes
The Fund is treated as a partnership for federal and state income tax purposes. As a partnership, the Fund is not subject to federal and state income taxes, while each member will be individually liable for income taxes, if any, on its share of net taxable income from the Fund. Interest, dividends and other income realized by the Fund may be subject to withholding tax in the jurisdiction in which the income is sourced.
7
MACQUARIE EQUIPMENT LEASING FUND, LLC
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
Leased Equipment at Cost
If a lease meets certain requirements under ASC 840 at its inception, such that the Fund retains ownership in the underlying equipment, the lease is accounted for as an operating lease. Investment in leased equipment is stated at cost less accumulated depreciation. Leased equipment is depreciated on a straight-line basis over the lease term to the assets’ residual value. Initial direct costs (such as freight, installation, acquisition fees and expenses, legal fees and inspection fees) associated with the leases are capitalized as part of the cost of the leased equipment and depreciated over the lease term.
The lease term from the acquisition date or most recent lease renewal date by the Fund of each item of equipment is as follows:
Lease | ||||
term (in years) | ||||
Aircraft engines (2 x CFM56-7B jet engines) | 9 | |||
Aircraft Bombardier CRJ 700 ER | 2 | |||
Aircraft (Airbus model A320-200) | 2.5 | |||
Flat bed rail cars | 5 | |||
Racetrack equipment | 4 | |||
Smart safes | 5 | |||
Machine tool equipment | 5 |
The residual value and useful life are determined by the Manager and are calculated using information from both internal (i.e. from affiliates) and external sources, such as trade publications, industry valuers, auction data, internal and external sales data, equipment dealers, wholesalers and industry experts, as well as inspection of the physical assets. Once an asset comes off lease or is re-leased, the Fund reassesses its useful life and residual value.
Costs incurred in extending the useful life and/or increasing the resale value of leased equipment are capitalized into the cost of an asset. No such costs have been incurred to date.
If the equipment is returned at the end of a lease term and the lessee has not met the return conditions as set out in the lease, the Fund is entitled, in certain cases, to additional compensation from the lessee. The Fund’s accounting policy for recording such payments is to treat the payments as revenue when received. No such payments were received for the three months ended March 31, 2016 and 2015, respectively.
The lessee is generally responsible for the ongoing maintenance costs of the equipment under net lease arrangements.
The significant operating lease assets in the Fund’s portfolio are reviewed for impairment at least annually or when indicators of impairment exist. An impairment loss will be recognized only if the carrying value of a long-lived asset is not recoverable and exceeds its fair market value. The Manager’s assessment for impairment (i.e. undiscounted cash flows used in the recoverability assessment) includes review of residual values based on published values for similar assets, recent transactions for similar assets, lease terms, asset condition, adverse changes in market conditions for specific asset types and the occurrence of significant adverse changes in general industry and market conditions that could affect the fair value of the asset.
If no impairment is deemed to exist and if the current assessment of the residual value is determined to be lower than the current value, the Fund adjusts the residual value downward and prospectively adjusts depreciation expense over the remaining life of the lease. No impairment charges were recorded for the three months ended March 31, 2016 and 2015, respectively.
Net Investment in Finance Lease
If a lease meets specific criteria under ASC 840 at its inception, such that ownership of the underlying asset is effectively transferred to the lessee, the Fund recognizes the lease as a net investment in finance lease on its Balance Sheet. Net investment in finance leases consist of lease receivables plus the estimated unguaranteed residual value of the leased equipment on the lease termination date, less the unearned income.
The residual values of the Fund’s significant finance lease assets are reviewed at least annually. If the review results in a lower estimate than had been previously established, the Fund will determine whether the decline in the estimated residual value is other than temporary. If the decline in estimated residual value is judged to be other than temporary, the accounting for the transaction shall be revised using the changed estimate and the resulting reduction in the net investment shall be recognized as a loss in the period in which the estimate is changed. An upward adjustment of a leased asset’s estimated residual value shall not be made.
8
MACQUARIE EQUIPMENT LEASING FUND, LLC
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
Loans Receivable and Participating Interests – Loans Receivable
Loans receivable are reported on the Fund’s Balance Sheet at the outstanding principal balance, plus costs incurred to originate the loans. Unearned income, discounts and premiums are amortized to interest income in the Statement of Operations using the effective interest method. Upon the repayment of a loan receivable, any prepayment penalties and unamortized loan origination, closing and commitment fees are recorded as part of interest income in the Statement of Operations.
Participating interests – loans receivable are arranged by related parties and are disclosed separately in the Fund’s financial statements. See Note 6 for disclosures relating the Fund’s participating interests in loans receivable.
Maintenance Reserve
Under the lease agreement for the Fund’s Bombardier CRJ 700 ER aircraft, the lessee is responsible for the costs of major maintenance on the components of the aircraft, including the engines, airframe, auxiliary power unit and landing gear at an approved maintenance facility in accordance with the manufacturer’s recommended maintenance guidelines. The lessee is required to pay reserves to the Fund for maintenance, calculated monthly, which is based on the prior month’s flight hours and flight cycles. These payments are set aside for future maintenance costs and are recognized as restricted cash on the Fund’s Balance Sheet when paid by lessee. As maintenance is performed, and to the extent that the lessee has met all of its obligations under the lease, the lessee is reimbursed for costs incurred up to, but not exceeding, the related payments the Fund receives from the lessee for maintenance. At the completion of each major maintenance event, the difference between the liability for the cost of the aircraft’s maintenance and the reimbursement paid to the lessee is recorded as revenue if management is satisfied that the remaining reserve is considered sufficient to cover future maintenance or repairs. There were no reimbursement payments made or revenue recognized during the three months ended March 31, 2016 and 2015, respectively.
Cash is only collected for maintenance costs on the Fund’s Bombardier CRJ 700 ER aircraft.
Revenue Recognition
At inception of a finance lease the Fund records the total minimum lease payments receivable from the lessee, the estimated unguaranteed residual value of the equipment at lease termination, the initial direct costs related to the lease, and the related unearned income. Unearned income represents the total minimum lease payments receivable plus the estimated unguaranteed residual value minus the cost of the leased equipment. Unearned income is recognized as finance income over the term of the lease using the effective interest rate method.
For operating leases, rental income is recognized on a straight-line basis over the lease term. From time to time, the Fund receives rental payments in advance. These advance payments are recognized on the Fund's Balance Sheet as deferred revenue and recognized as income in the month they are earned.
Gains or losses from sales of leased and off lease equipment are recorded on a net basis in the Fund’s Statements of Operations. The Fund recognized a gain on the sale of leased equipment of $7,927 during the three months ended March 31, 2016. There were no such sales during the three month ended March 31, 2015.
Certain of the Fund’s leases contain provisions for late fees on past due rent. The Fund recognizes late fees as income when they become chargeable and collection is reasonably assured.
During 2015, the Fund developed a vendor finance program for an Australian aircraft manufacturer. Under the program, the Australian aircraft manufacture refers the Fund to potential customers seeking aircraft finance. In consideration for the Fund’s time and expense incurred in developing the vendor finance program, the Australian aircraft manufacturer agreed to pay a program development fee of $150,000 to the Fund in installments. The Fund will recognize the program development fee as income over the life of the agreement. The Fund recognized $17,850 and $0 related to the program development fee as other income during the three months ended March 31, 2016 and 2015, respectively.
In January 2015, the Fund received a shortfall fee of $20,253 from MBL UK related to its finance facility entered in the fourth quarter of 2014 (see Note 6). The fee was recognized as revenue when received and classified as other income in the Fund’s Statement of Operations.
The Fund recognizes interest income on its loans receivable using the effective interest method.
9
MACQUARIE EQUIPMENT LEASING FUND, LLC
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
Credit Quality of Loans Receivable and Finance Leases
The Fund monitors the ongoing credit quality of its financing receivables by (i) reviewing and analyzing a borrower’s financial performance on a regular basis, including reviewing financial statements when provided as prescribed in the loan or lease agreement, (ii) tracking the relevant credit metrics of each loan receivable and a borrower’s compliance with financial and non-financial covenants, and (iii) monitoring a borrower’s payment history and public credit rating, if available. As part of the monitoring process, the Fund may physically inspect the collateral and meet with a borrower’s management to better understand the borrower’s financial performance and its future plans on an as-needed basis.
Allowance for Doubtful Accounts and Provision for Credit Losses
The Fund is exposed to risks under its leasing transactions, including risk associated with a lessee’s creditworthiness, repossession and remarketing and the future market value of the equipment. The Fund evaluates the collectability of its lease receivables by analyzing the counterparties’ payment history, general credit worthiness and current economic trends. Although the Fund currently has no reason to believe that the lessees will fail to meet their contractual obligations, a risk of loss to the Fund exists should a lessee fail to meet its payment obligations under a lease. The Fund records an allowance when the analysis indicates that the probability of full collection is unlikely. No allowance was recorded on the Fund’s Balance Sheet as of March 31, 2016 or December 31, 2015, respectively. No allowance was recorded or reversed in the Fund’s Statement of Operations during the three months ended March 31, 2016 and 2015, respectively.
An allowance or provision for credit losses is established if there is evidence that the Fund will be unable to collect all amounts due according to the original contractual terms of the loan or finance lease receivable. The allowance for credit losses is reported as a reduction of the loan receivable’s carrying value on the Fund’s Balance Sheet. Additions to the allowance and provision for credit losses are recorded in the Statement of Operations. Allowances and provisions for credit losses are evaluated periodically and on an individual asset and customer level. Loans receivable are considered impaired when the Fund determines that it is probable that it will not be able to collect all amounts due according to the original contractual terms. Individual credit exposures are evaluated based on the realizable value of any collateral, and payment history. The estimated recoverable amount is the value of the expected future cash flows, including amounts that may be realized with the repossession of the collateral.
The accrual of interest income based on the original terms of the loan receivable may be discontinued based on the facts and circumstances of the individual credit exposure, and any future interest income is recorded based on cash receipts. Any subsequent changes to the amounts and timing of the expected future cash flows compared with the prior estimates result in a change in the allowance for credit losses and are charged or credited to the Statement of Operations. An allowance is generally reversed only when cash is received in accordance with the original contractual terms of the note.
The Fund does not provision for credit losses on a collective basis.
All loans are performing and there are no delinquent loans on the Fund’s Balance Sheet. Due to the credit rating of the counterparties, the short-term nature of loans, insurance arrangements, and borrower payment history, the Fund has not recorded a provision for credit losses on its loans receivable as of March 31, 2016 or December 31, 2015, respectively.
Long-Term Debt
Long-term debt is reported on the Fund’s balance sheet at cost. Interest expense is recognized using the effective interest method. Expenses associated with the incurrence of debt are capitalized and amortized to interest expense over the term of the debt instrument using the effective interest rate method. These costs are included in the carrying value of long-term debt.
Write Offs
The Fund takes write offs when it determines that a receivable is uncollectible and when all economically sensible means of recovery have been exhausted. No write offs were recorded for the three months ended March 31, 2016 and 2015, respectively.
Operating Expenses and Management Fees
The Manager charges the Fund management fees and the Fund reimburses the Manager for certain operating expenses directly related to the Fund. These fees are recognized on accrual basis. See Note 8 for further details.
Comprehensive Income
The Fund follows the requirements of ASC 220 Comprehensive Income, for the reporting and presentation of comprehensive income and its components. The Fund does not have any components of other comprehensive income, thus it is not presented separately in the Fund’s financial statements.
10
MACQUARIE EQUIPMENT LEASING FUND, LLC
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
Distributions
The Manager has sole discretion to determine what portion, if any, of cash on hand will be distributed to the members. Distributions are made on a monthly basis and accrued at the end of each month. Cash distributions are paid on the 15th day of the following month and reflected in the Statement of Changes in Members’ Equity. Distributions accrued but not paid are recorded as a distribution payable on the Fund’s Balance Sheet.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, requiring revenue to be recognized in an amount that reflects the consideration expected to be received in exchange for goods and services. The original effective date for ASU 2014-09 would have required the Fund to adopt it beginning in its first quarter of 2018. In July 2015, the FASB voted to amend ASU 2014-09 by approving a one-year deferral of the effective date as well as providing the option to early adopt the standard on the original effective date. Accordingly, the Fund may adopt the standard in either its first quarter of 2018 or 2019. 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. The Fund is currently evaluating the timing of its adoption of ASU 2104-09. The adoption of this standard is not expected to have an impact on the Fund's financial statements.
In August 2014, FASB issued ASU No. 2014-15, Preparation of Financial Statements – Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This standard provides guidance about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The adoption of this standard becomes effective for the fiscal year ended December 31, 2016, and all subsequent annual and interim periods. Early adoption is permitted. The Fund is currently in the process of evaluating the impact of the adoption of this standard on its financial statements.
In June 2015, FASB issued ASU No. 2015-10 to clarify the codification, correct unintended application of guidance, eliminate inconsistencies, and to improve the codification's presentation of guidance for a wide range of topics in the codification. Transition guidance varies based on the amendments included. The amendments that require transition guidance are effective for annual periods, and interim periods within those fiscal periods, beginning after December 15, 2015. All other amendments will be effective upon the issuance. The adoption of this standard did not have an impact on the Fund's financial statements.
In February 2016, FASB issued ASU No. 2016-2, Leases, to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The guidance primarily affects lessees and requires that all leases create an asset and a liability for a leasing arrangement greater than 12 months; although there are some modifications to lessor accounting. The adoption of this standard becomes effective for fiscal years beginning after December 15, 2018. The Fund is evaluating the implications of the adoption of this standard.
In March 2016, FASB issued ASU No. 2016-08, Revenue from Contracts with Customers in order to amend principal versus agent guidance in the new revenue standard contemplated in ASU 2014-09. The amendment reframes the indicators in the guidance to focus on evidence that an entity is acting as a principal rather than as an agent. The effective date and transition requirements are the same as ASU 2014-09. The Fund is currently evaluating the timing of its adoption of ASU 2104-09. The adoption of this standard is not expected to have an impact on the Fund's financial statements.
In April 2016, FASB issued ASU No. 2016-10, Revenue from Contracts with Customers - Identifying Performance Obligations and Licensing, to amend certain aspects of ASU 2014-09 around licensing and performance obligations. The effective date and transition requirements are the same as ASU 2014-09. The Fund is currently evaluating the timing of its adoption of ASU 2104-09. The adoption of this standard is not expected to have an impact on the Fund's financial statements.
3. LEASED EQUIPMENT AT COST
The following transaction was entered into by the Fund during the three months ended March 31, 2016:
Bombardier CRJ 700 ER Aircraft Lease
In March 2016, the Fund entered into a purchase and sales agreement (“PSA”) to sell its Bombardier CRJ 700 ER aircraft. The Fund received a payment of $7,050,000 for the sale in addition to a $250,000 deposit received in October 2015. Upon execution of the PSA, beneficial interest in the aircraft passed to the buyer. However, the aircraft has not yet been delivered and legal title has not yet been transferred to the buyer, therefore the Fund did not recognize a sale during the three months ended March 31, 2016. The proceeds received were recognized as a deposit on the Fund’s Balance Sheet as of March 31, 2016. The aircraft was reclassified on the Fund’s Balance Sheet as Leased equipment held for sale as of March 31, 2016. The Fund expects to realize a gain in the second quarter upon delivery of the aircraft.
11
MACQUARIE EQUIPMENT LEASING FUND, LLC
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
Leased equipment at cost net of accumulated depreciation consists of the following:
March 31, 2016 | December 31, 2015 | |||||||
Aircraft engines (2 x CFM56-7B jet engines) | $ | 25,338,321 | $ | 25,338,321 | ||||
Aircraft Bombardier CRJ 700 ER | - | 9,786,555 | ||||||
Aircraft (Airbus model A320-200) | 19,551,352 | 19,551,352 | ||||||
Flat bed rail cars | 7,777,356 | 7,777,356 | ||||||
Racetrack equipment | 3,763,611 | 3,763,611 | ||||||
Smart safes | 3,273,610 | 3,273,610 | ||||||
Machine tool equipment | 5,768,966 | 5,768,965 | ||||||
Less: Accumulated depreciation | (13,888,044 | ) | (15,941,614 | ) | ||||
$ | 51,585,172 | $ | 59,318,157 |
Annual minimum future rentals receivable related to the Fund’s operating leases over the next five years consist of the following:
For the period April 1 to December 31, 2016 | $ | 6,315,734 | ||||||
For the year ending December 31, 2017 | 7,823,715 | |||||||
For the year ending December 31, 2018 | 3,812,928 | |||||||
For the year ending December 31, 2019 | 2,280,822 | |||||||
Thereafter | 1,861,641 | |||||||
$ | 22,094,840 |
A risk of loss or lower than expected returns exists if the market value of the equipment at the end of the lease term is lower than anticipated.
4. NET INVESTMENT IN FINANCE LEASES
The Fund’s net investments in finance leases primarily relate to motor racing track equipment, furniture, eight-seater aircrafts, manufacturing equipment, and smart safes. The following transaction was entered by the Fund during quarter ended March 31, 2016:
GA8-TC320 Airvan Aircraft
In January 2016, the lessee exercised the early buyout option on its lease and repurchased one of the GA8-TC320 Airvan aircraft it had been leasing from the Fund. The lessee paid a purchase price of $553,025 and the Fund recognized a gain of $7,927 on the sale.
Net investment in finance lease (current and non-current) consists of the following:
March 31, 2016 | December 31, 2015 | |||||||
Minimum lease payments receivable | $ | 1,747,705 | $ | 2,414,051 | ||||
Estimated residual values of leased property (unguaranteed) | 2,027,111 | 2,436,311 | ||||||
Less: Unearned income | (464,033 | ) | (647,577 | ) | ||||
Net investment in finance lease | $ | 3,310,783 | $ | 4,202,785 |
Annual minimum future rentals receivable related to the Fund’s finance leases over the next 5 years consist of the following:
For the period April 1 to December 31, 2016 | $ | 773,162 | ||||||
For the year ending December 31, 2017 | 756,239 | |||||||
For the year ending December 31, 2018 | 218,304 | |||||||
For the year ending December 31, 2019 | - | |||||||
$ | 1,747,705 |
A risk of loss or lower than expected returns exists if the market value of the equipment at the end of the lease term is lower than the asset’s residual value.
12
MACQUARIE EQUIPMENT LEASING FUND, LLC
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
5. LOANS RECEIVABLE
In January 2016, the Fund entered into an agreement with a U.S. drilling company to provide a finance facility of up to $15,000,000. The Fund provided funding under the facility of $14,834,454 during the three months ended March 31, 2016. The financing has a term of two years and an interest rate of 10%. The loan is secured by one of the drilling company’s land-based rigs and a three year drilling rig operating contract. The loan is recorded as a loan receivable and carried at amortized cost on the Fund’s Balance Sheet. The Fund recognizes interest income using the effective interest method.
The drilling company paid commitment fees and other upfront payments of $330,000 to the Fund. $140,000 of the fees were paid upon execution of the term sheet, and the remaining $190,000 in fees were paid from the amount funded by the Fund under the terms of the finance facility. The commitment and upfront fees are included as a reduction to the carrying value of the loan and are amortized to interest income using the effective interest rate method. The Fund capitalized other costs directly related to the origination of the facility. These costs are included as an increase to the amount due under the facility and are recognized to income using the effective interest method.
For the three months ended March 31, 2016 and 2015, the Fund recognized interest income on its loans receivable of $318,980 and $12,067, respectively.
6. PARTICIPATING INTEREST (ARRANGED BY A RELATED PARTY)
In 2015, the Fund entered into a participation agreement with Macquarie Bank Limited London Branch (“MBL UK”), a member of the Macquarie Group. During the three months ended March 31, 2016 the Fund provided additional financing of $10,868,323 to participate in an existing facility previously provided by MBL UK to a UAE information technology distribution company. The Fund’s advance was paid to MBL UK and the Fund receives principal and interest payments from MBL UK. Repayment is predicated on MBL UK receiving principal and interest payments from the underlying counterparty. The transaction was recorded as a participating interest – loan receivable on the Fund’s Balance Sheet and recognized at amortized cost. The Fund recognizes interest income using the effective interest method. The loan is unsecured with the Fund being entitled to a pro-rata portion of MBL UK’s credit insurance in the event of a default. The Fund received repayments of $10,887,214 during the three months ended March 31, 2016, which included the outstanding receivable as of December 31, 2015. The balance outstanding on the Fund’s Balance Sheet as of March 31, 2016 was $7,957,062. In April and May 2016, the Fund received repayments totalling $3,732,560, with the remaining balance due in May 2016.
The Fund recognized interest income on participating interests of $158,850 and $23,550 for the three months ended March 31, 2016 and 2015, respectively.
7. LONG-TERM DEBT
In September 2015, the Fund entered into a limited recourse loan agreement with a Japanese bank. The loan has a credit limit of $16,750,000 and an interest rate of 3.192% per year. The full amount of the loan was drawn down in October 2015. The Fund’s leased CFM56-7B jet engines, which had a carrying value of $22,334,691 on the Fund’s Balance Sheet as of March 31, 2016, are pledged as collateral. The loan matures in October 2019 and can be repaid prior to maturity. The loan is recorded as long-term debt and carried at amortized cost on the Fund’s Balance Sheet. The Fund recognizes interest expense using the effective interest method.
The Fund paid an upfront fee to the lender of $50,750 and incurred legal fees of $6,866 directly related to obtaining the loan. These costs are included as a reduction to the carrying value of the loan and are amortized to interest expense using the effective interest rate method.
The Fund recognized interest expense, including the amortization of debt financing costs, of $134,439 and $0 for the three months ended March 31, 2016 and 2015, respectively.
As of March 31, 2016, the scheduled maturities of long-term debt, including accretion of the debt discount over the next five years are as follows:
For the period April 1 to December 31, 2016 | $ | 1,287,691 | ||
For the year ending December 31, 2017 | 1,770,199 | |||
For the year ending December 31, 2018 | 1,830,145 | |||
For the year ending December 31, 2019 | 11,101,679 | |||
Thereafter | - | |||
$ | 15,989,714 |
13
MACQUARIE EQUIPMENT LEASING FUND, LLC
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
8. TRANSACTIONS WITH AFFILIATES
As discussed in Note 1, the Fund is required to pay fees to the Manager and its affiliates for providing or arranging all services necessary for its operations, including those relating to equipment acquisitions and disposals, asset management and administrative, reporting and regulatory services. As discussed in Note 6, the Fund entered into a participation agreement with MBL UK, a member of the Macquarie Group of companies and an affiliate of the Manager.
The Fund pays the Manager and its affiliates’ fees for operating services performed including:
• | Acquisition fees of 3% of the purchase price that the Fund pays for each item of equipment or direct or indirect interest in equipment acquired, including under lease agreements, trading transactions, residual value guarantees, pay per use agreements, forward purchase agreements, total lease return swaps, participation agreements, equipment purchase options, other equipment-related transactions, joint ventures, special purpose vehicles and other Fund arrangements; |
• | Asset management fees equal to the lesser of: (a) (i) 5% of gross rental payments from non-full payout leases (except that 1% of gross rental payments shall be payable with respect to non-full payout leases for which management services are performed by non-affiliates under the Manager’s supervision); (ii) 2% of gross rental payments from full payout leases which contain net lease provisions; and (iii) 7% of gross rental payments from equipment for which the Fund provides services in addition to equipment management relating to the continued and active operation of the Fund’s equipment such as, but not limited to, ongoing marketing and re-leasing of equipment and hiring or arranging for the hiring of crews or operating personnel for the Fund’s equipment and similar services; or (b) the amount of fees which are competitive for similar services; |
• | Remarketing fees equal to the lesser of (i) 3% of the purchase price paid to the Fund by the purchaser of the investment, or (ii) one-half of reasonable, customary and competitive brokerage fees paid for services rendered in connection with the sale of equipment of similar size, type and location. Payment of remarketing fees shall be subordinated until such time when investor return has been achieved. “Investor Return” means such time when the aggregate amount of distributions to the members equals, as of any determination date, an amount equal to a pre-tax 8.0% per annum internal rate of return compounded daily on all capital contributions of members; |
• | Out-performance fees depending upon the extent to which Investor Return has been achieved. Prior to the time that Investor Return is achieved, cash distributions will be made 99.0% to the Fund’s members and 1.0% to the Manager. After the time that Investor Return is achieved, cash distributions will be made 81.0% to the Fund’s members and 19.0% to the Manager; and |
• | Reimbursement of operating expenses depending upon the scope and volume of services the Manager provides to the Fund. |
For the three months ended March 31, 2016 and 2015, the Fund paid management fees to Macquarie Aircraft Leasing Services (“MALS”), an affiliate of the Manager, for management services related to the aircraft lease for the Airbus model A320-200. The fees paid by the Fund to MALS are 3% of gross rental receipts and are expensed as incurred and included in the Fund’s Statements of Operations.
For the three months ended March 31, 2016 and 2015, the Fund has accrued, in fees payable (related party) on the Fund’s Balance Sheet, or paid to the Manager or its affiliates the following amounts:
Three Months Ended | ||||||||||||
Entity | Capacity | Description | March 31, 2016 | March 31, 2015 | ||||||||
Macquarie Asset Management Inc. | Manager | Acquisition fees (1) | $ | 222,517 | $ | - | ||||||
Macquarie Asset Management Inc. | Manager | Management fee (2) | 132,774 | 138,894 | ||||||||
Macquarie Asset Management Inc. | Manager | Operating Expenses (3) | 110,368 | 123,568 | ||||||||
Macquarie Asset Management Inc. | Manager | Outperformance fee (2) | 18,513 | 18,517 | ||||||||
Macquarie Aircraft Leasing Services | Affiliate | Management fee (2) | 21,150 | 21,150 |
(1) | Amount is capitalized into the carrying value of loans receivable. |
(2) | Amount charged directly to operations. |
(3) | Amount includes $97,628 charged directly to operations and $12,740 allocated to the carrying amount of loans receivable. |
14
MACQUARIE EQUIPMENT LEASING FUND, LLC
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
9. EQUITY
As of March 31, 2016 and December 31, 2015, the Fund had 9,273,855 and 9,297,489 shares of limited liability company membership interest outstanding, respectively (including the DRP shares and net of repurchased shares). As of March 31, 2016 and December 31, 2015, the cumulative number of shares repurchased since inception was 384,262 and 360,628, respectively.
The Fund declared distributions of $1,849,684 during the three months ended March 31, 2016, of which $1,219,569 were paid and $630,115 were payable as of March 31, 2016.
10. FAIR VALUE MEASUREMENTS
The Fund is required to disclose the fair value of financial instruments, as defined below. None of the Fund’s assets and liabilities are carried at fair value on the Fund’s Balance Sheet on a recurring basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are not adjusted for transaction costs. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
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 Fund’s own estimates of assumptions that market participants would use in pricing the asset or liability.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Non-Recurring Fair Value Measurements
As of March 31, 2016 and December 31, 2015, there were no assets or liabilities measured using non-recurring fair value measurements.
Fair Value of Financial Instruments
The Fund’s financial instruments, which are not carried on the Fund’s Balance Sheet at fair value on a recurring basis, are carried at contracted amounts which approximate fair value. As of March 31, 2016 and December 31, 2015, they consist of cash and cash equivalents and restricted cash, which are classified as Level 1 under the hierarchy defined above, and loans receivable, loans payable and participating interests - loans receivable, which are classified as Level 3, based on the fact that they were valued using inputs that are generally unobservable and are supported by little or no market data. The Fund uses projected cash flows to estimate the fair value of these financial assets. The fair value of the Fund’s long-term loan receivable approximates its carrying value due to the fact that that there were no significant changes to interest rates or the borrower’s credit risk between closing in January 2016 and March 31, 2016.
Fair value information with respect to certain financial instruments which are not carried on the Balance Sheet at fair value is not separately provided given that fair value disclosures of lease arrangements are not required and the carrying value of the Fund’s other financial instruments approximates fair value due to the fact that they have short term maturities (all less than one year) and credit risk is deemed low.
The estimated fair value of the Fund’s fixed-rate non-recourse long-term debt was $16,169,712 as of March 31, 2016. Fair value was estimated by discounting the future cash flows related to the debt. The discount rate was derived by adjusting the margin at inception for material changes in the Company’s risk and adding the applicable fixed rate based on the current interest rate curve.
Fees payable, distributions payable, and other payables are short term in nature and therefore their carrying value approximates their fair value, which would be classified as Level 3.
11. COMMITMENTS AND CONTINGENCIES
Other than obligations associated with investing activities or as set forth in the Fund’s operating agreement, there were no contractual obligations, commitments or contingencies as of March 31, 2016 and December 31, 2015, respectively.
15
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following is a discussion of our current financial position and results of operations. This discussion should be read together with our unaudited financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as the audited financial statements and related notes included in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 2, 2016. This discussion should also be read in conjunction with the disclosures below regarding “Forward-Looking Statements.”
As used in this Quarterly Report on Form 10-Q, references to “we,” “us,” “our” or similar terms refer to Macquarie Equipment Leasing Fund, LLC (the “Fund”).
Forward-Looking Statements
Certain statements within this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). These statements are being made pursuant to the PSLRA, with the intention of obtaining the benefits of the “safe harbor” provisions of the PSLRA, and, other than as required by law, we assume no obligation to update or supplement such statements. Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. You can identify these statements by the use of words such as “may,” “will,” “could,” “anticipate,” “believe,” “estimate,” “expect,” “continue,” “further,” “plan,” “seek,” “intend,” “predict” or “project” and variations of these words or comparable words or phrases of similar meaning. These forward-looking statements reflect our current beliefs and expectations with respect to future events and are based on assumptions and are subject to risks and uncertainties and other factors outside our control that may cause actual results to differ materially from those projected. We undertake no obligation to update publicly or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
Overview
Macquarie Equipment Leasing Fund, LLC, a Delaware limited liability company, was formed on August 21, 2008 for the purpose of acquiring or originating a diversified portfolio of equipment and equipment leases. The Fund also makes investments in loans collateralized by equipment, and other equipment-related transactions which will allow it to directly or indirectly participate in the benefits and risks of equipment ownership or usage.
The Fund’s offering was for a total of 15,000,000 shares at a price of $10.00 per share, subject to certain reductions. The Fund also offered up to 800,000 shares pursuant to its Distribution Reinvestment Plan (“DRP”) at a public offering price of $9.00 per share. The Manager made capital contributions to the Fund totaling $1,505,000. The Fund’s fiscal year end is December 31.
The Fund’s offering period ended on March 19, 2012 and the Fund’s operating period commenced on that date. The Fund will continue to make investments in equipment, equipment leases and other equipment-related transactions during its operating period. The Fund’s liquidation period is scheduled to begin on July 1, 2016 and may last for up to three years. As of March 31, 2016, the Fund had 9,273,855 shares of limited liability company interest outstanding (including the DRP shares and net of repurchase of shares).
As of May 16, 2016, the Fund had 9,241,411 shares of limited liability company interest outstanding (including the DRP shares and net of repurchase of shares).
First Quarter Transactions
Bombardier CRJ 700 ER Aircraft Lease
In March 2016, the Fund entered into a purchase and sales agreement (“PSA”) to sell its Bombardier CRJ 700 ER aircraft. The Fund received a payment of $7,050,000 for the sale in addition to a $250,000 deposit received in October 2015. Upon execution of the PSA, beneficial interest in the aircraft passed to the buyer. However, the aircraft was not delivered and legal title was not transferred to the buyer, therefore the Fund did not recognize a sale at signing of the PSA. The proceeds received were recognized as a deposit on the Fund’s Balance Sheet as of March 31, 2016.
Finance Facility
In January 2016, the Fund entered into an agreement with a U.S. drilling company to provide a finance facility of up to $15,000,000. The Fund provided funding under the facility of $14,834,454 during the three months ended March 31, 2016. The financing has a term of two years and an interest rate of 10%. The loan is secured by one of the drilling company’s land based rigs and a three year drilling rig operating contract. The loan is recorded as a loan receivable and carried at amortized cost on the Fund’s Balance Sheet.
16
GA8-TC320 Airvan Aircraft
In January 2016, the lessee exercised the early buyout option on its lease and repurchased one of the GA8-TC320 Airvan aircraft it had been leasing from the Fund. The lessee paid a purchase price of $553,025 and the Fund recognized a gain of $7,927 on the sale.
Participating Interests in Finance Facilities
In 2015, the Fund entered into a participation agreement with Macquarie Bank Limited London Branch (“MBL UK”), a member of the Macquarie Group. During the three months ended March 31, 2016 the Fund provided additional financing of $10,868,323 to participate in an existing facility previously provided by MBL UK to a UAE information technology distribution company. The Fund’s advance was paid to MBL UK and the Fund receives principal and interest payments from MBL UK. Repayment is predicated on MBL UK receiving principal and interest payments from the underlying counterparty. The transaction was recorded as a participating interest – loan receivable on the Fund’s Balance Sheet and recognized at amortized cost. The Fund recognizes interest income using the effective interest method. The loan is unsecured with the Fund being entitled to a pro-rata portion of MBL UK’s credit insurance in the event of a default. The Fund received repayments of $10,887,214 during the three months ended March 31, 2016, which included the outstanding receivable as of December 31, 2015. The balance outstanding on the Fund’s Balance Sheet as of March 31, 2016 was $7,957,062. In April and May 2016, the Fund received repayments totalling $3,732,560, with the remaining balance due in May 2016.
Results of Operations for the Three Months Ended March 31, 2016 and 2015
Total revenue for the three months ended March 31, 2016 increased by $199,497 compared to the three months ended March 31, 2015 primarily due to an increase in interest income of $442,213. $293,108 of the increase in interest income was due to the Fund’s loan agreement with a US drilling company which was funded in January 2016. The remaining increase was due to participation agreements entered with MBL UK in the fourth quarter of 2015 and first quarter of 2016. The increase in revenue is partially offset by a decrease in rental income of $251,806, driven by the decrease in rentals on the Fund’s extended lease for the Fund’s Airbus A320-200 aircraft and the sale of all of the Fund’s self-service checkout equipment in September 2015.
Total expenses for the three months ended March 31, 2016 increased by $186,320 compared to the three months ended March 31, 2015 primarily due to an increase in interest expense of $134,439 related to the Fund’s loan facility with a Japanese bank entered during the fourth quarter of 2015.
As a result, the Fund’s net income for the three months ended March 31, 2016 was $1,637,549 compared to $1,624,372 for the three months ended March 31, 2015, an increase of $13,177.
The Fund evaluated a number of equipment and loan transactions during the first three months of 2016 and closed some of these transactions. The Fund continues to pursue additional equipment lease and loan investment opportunities, as well as leverage opportunities on the Fund’s existing equipment portfolio.
Financial Condition
This section discusses the major balance sheet variances from March 31, 2016 compared to March 31, 2015.
Total Assets
Total assets increased by $6,349,900, from $94,207,481 as of December 31, 2015 to $100,557,381 as of March 31, 2016. The increase in total assets is the result of an increase in loans receivable of $13,890,611, primarily due to the Fund providing a finance facility to a U.S. drilling company in January 2016. This increase was partially offset by a decrease in cash and cash equivalents of $5,628,237, operating lease assets and leased equipment held for sale of $1,149,575 and net investment in finance leases of $892,002. The decrease in cash was driven by funding for the loan facility with a U.S. drilling company of $14,074,692, funding new participation agreements of $10,868,323 and cash distributions to members of $1,851,290. The aforementioned decreases in cash were offset by increases for rents collected during the period, loan principal repayments of $10,887,214 by MBL UK and $397,379 by the U.S. drilling company, and a deposit of $7,050,000 received for the sale of Bombardier CRJ 700 ER aircraft. Operating lease assets decreased due to depreciation expense and net investment in finance leases decreased due to the sale of a GA8-TC320 Airvan aircraft during the three months ended March 31, 2016.
Total Liabilities
Total liabilities increased by $6,747,103, from $20,964,257 as of December 31, 2015 to $27,711,360 as of March 31, 2016. The increase in total liabilities is the result of an increase in deposits for sale of leased equipment of $7,050,000, fees payable to related party of $342,539, and maintenance reserve payable of $58,346. Deposits for sales of leased equipment increased due to a deposit of $7,050,000 received for the sale of Bombardier CRJ 700 ER aircraft. Fees payable to related parties increased due to acquisition fees, asset management fees, and operating expenses incurred during the quarter which are payable to the Manager. Fees payable to the Manager other than acquisition fees are settled on an annual basis in December. This increase is partially offset by a decrease in long-term debt of $423,063 due to principal repayments made by the borrower and a decrease in deferred finance and rental income of $155,209.
17
Equity
Equity decreased by $397,203, from $73,243,224 as of December 31, 2015 to $72,846,021 as of March 31, 2016. The decrease in equity is primarily due to distributions declared to investors of $1,849,684, of which $1,219,569 were paid and $630,115 were payable as of March 31, 2016. Additionally, 23,634 shares were redeemed for $185,068 during the three months ended March 31, 2016. This decrease was partially offset by net income of $1,637,549 for the same period.
Liquidity and Capital Resources
Cash Flows Summary
The following table sets forth summary cash flow data for the three months ended March 31, 2016 and 2015.
March 31, 2016 | March 31, 2015 | |||||||
Net cash provided by (used in) : | ||||||||
Operating activities | $ | 2,855,833 | $ | 2,919,563 | ||||
Investing activities | (6,025,000 | ) | (1,738,961 | ) | ||||
Financing activities | (2,459,070 | ) | (1,919,837 | ) | ||||
Net decrease in cash and cash equivalents | $ | (5,628,237 | ) | $ | (739,235 | ) |
See the Statements of Cash Flows included in “Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for additional information.
As of March 31, 2016, the Fund had cash and cash equivalents of $14,139,420. The amount of cash provided by operating activities for the three months ended March 31, 2016 of $2,855,833 consisted primarily of rentals and interest collected during the three months from equipment leases and loans.
The cash used in investing activities for the three months ended March 31, 2016 is primarily attributable to a new loan facility of $14,076,152, and participation in new finance facilities of $10,868,323. These cash outflows were partially offset by the principal repayments of $10,887,214 by MBL UK and $397,379 by the U.S. drilling company and deposits of $7,050,000 received for the sale of the Fund’s Bombardier CRJ 700 ER aircraft.
The cash used in financing activities for the three months ended March 31, 2016 is primarily attributable to distributions to members, repayment of principal on long-term debt and share repurchases.
Cash and cash equivalents include cash in banks and highly liquid investments with original maturities of three months or less and are held in operating and money market accounts at Wells Fargo Bank, N.A.
Sources and Uses of Cash
The Fund’s main activities and our main use of cash has been to acquire a diversified portfolio of equipment, equipment leases, loans and other equipment-related investments which are denominated in U.S. dollars and are on lease to corporate clients around the world. We will also continue to make investments in other equipment-related transactions which will allow us to directly or indirectly participate in the benefits and risks of equipment ownership or usage and make loans collaterized by equipment.
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As of May 16, 2016 we have used approximately $171,546,687 of the offering and equipment sale proceeds to acquire the following assets:
Asset Type | Purchase Price | |||
Participating interest in finance facilities arranged by an affiliate (fully repaid) | $ | 50,844,134 | ||
Aircraft engines (2 x CFM56-7B jet engines) | 25,338,321 | |||
Airbus A320-200 aircraft | 19,551,352 | |||
Financing provided to a U.S. drilling company | 14,834,454 | |||
Bombardier CRJ 700 ER aircraft | 9,786,555 | |||
Flat bed rail cars | 7,777,356 | |||
Participation interest in commercial jet aircraft engines (sold in March 2012) | 6,500,000 | |||
Semiconductor manufacturing tools (sold in June 2012) | 6,400,800 | |||
Machine tool equipment | 5,768,966 | |||
Financing provided to an affiliate (Mar 2015) | 5,719,557 | |||
Racetrack equipment | 5,311,507 | |||
Smart safes | 3,294,695 | |||
GA8-TC320 Airvan aircraft | 2,499,292 | |||
GA8-TC320 Airvan aircraft (sold in May 2014, Aug 2014, Dec 2014, and Jan 2016) | 2,184,398 | |||
Self-service checkout equipment | 2,097,353 | |||
Financing provided to an aircraft lessor | 1,128,328 | |||
Furniture, office and other related equipment (sold in Nov 2013, Mar 2014 and, Sep 2014) | 1,012,843 | |||
Bus manufacturing equipment | 854,333 | |||
Furniture, office and other related equipment | 669,010 | |||
ETS-364B semiconductor test system (sold in May 2012) | 383,898 | |||
Smart safes (sold in July 2013) | 68,989 | |||
$ | 171,546,687 |
Sources of Liquidity
We believe that cash generated from our operating activities and from debt borrowings will be sufficient to finance our liquidity requirements for the foreseeable future, including distributions to our members, funding of new investment opportunities, payment of management fees, equipment maintenance events, and administrative expense reimbursements. Our ability to generate cash in the future is subject to general economic, financial, competitive, regulatory and other factors that affect us and our lessees’ businesses that are beyond our control.
The Fund’s liquidity may be adversely affected by unanticipated or greater than anticipated operating costs or losses, including the inability of a client of the Fund to make timely lease payments or costs associated with off lease assets or assets available for sale. The Fund anticipates that it will fund its operations from cash flow generated by operating and financing activities. The Manager has no intent to permanently fund any cash flow deficit of the Fund or provide other financial assistance to the Fund.
Distributions
The Fund paid total cash distributions of $1,851,290 and $1,851,679 to our members during the three months ended March 31, 2016 and 2015, respectively.
While the Fund anticipates making monthly cash distributions, it may vary the amount of, or completely suspend making distributions at any time and without notice.
Commitments, Contingencies and Off-Balance Sheet Transactions
Other than obligations associated with our investing activities or as set forth in our operating agreement, we have no contractual obligations and commitments, contingencies or off-balance sheet transactions as of March 31, 2016 and December 31, 2015, respectively.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Accounting Policies, Accounting Changes and Future Application of Accounting Standards
See Note 2, “Significant Accounting Policies”, in our financial statements in “Financial Statements and Supplementary Data” in Part I, Item 1, of this Quarterly Report on Form 10-Q for financial information and further discussions, for a summary of the Company’s significant accounting policies, including a discussion of recently adopted and issued accounting pronouncements.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Although this information is not required to be disclosed for smaller reporting companies, we believe that there have been no material changes to the disclosures reported in our Annual Report on Form 10-K, dated as filed with the Securities and Exchange Commission on March 12, 2016.
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Item 4. | Controls and Procedures |
Under the direction and with the participation of our Manager’s President and Principal Financial Officer, we evaluated our disclosure controls and procedures (as such term is defined under Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our Manager’s President and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2016. There has been no change in our internal controls over financial reporting (as defined in Rule 13a-15(f) or Rule 15d-15(f) of the Exchange Act) that occurred during the three months ended March 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1. | Legal Proceedings |
In the ordinary course of conducting our business, there may be certain claims, suits and complaints filed against us. In the opinion of management, the outcome of such matters, if any, will not have a material impact on our financial position. No material legal proceedings are currently pending or threatened, to our knowledge, against us or against any of our assets.
Item 1a. | Risk Factors |
Not applicable.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
(a) | None. |
(b) | None. |
(c) | A summary of the share repurchases during the quarter is as follows: |
Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs (1) | |||||||||||||
January 1 to January 31, 2016 | 23,634 | $ | 7.83 | 23,634 | - | |||||||||||
February 1 to February 29, 2016 | - | - | - | - | ||||||||||||
March 1 to March 31, 2016 | - | - | - | - | ||||||||||||
Total | 23,634 | $ | 7.83 | 23,634 | - |
(1) Our operating agreement, dated June 19, 2009, and which does not have an expiration date, allows for the repurchase of shares according to a specified repurchase formula set forth therein. Our operating agreement limits the number of shares that can be repurchased in any one year, but there is no maximum number of shares that may be repurchased over time. Repurchased shares may not be reissued.
Item 3. | Defaults Upon Senior Securities |
Not applicable.
Item 4. | Mine Safety Disclosures |
Not applicable.
Item 5. | Other Information |
None.
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Item 6. | Exhibits |
An exhibit index has been filed as part of this Report on page E-1.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MACQUARIE EQUIPMENT LEASING FUND, LLC | ||
By: | /S/ DAVID FAHY | |
Name: | David Fahy | |
Title: | President of the Manager and Principal Executive | |
Officer of Registrant | ||
Date: May 16, 2016 | ||
By: | /S/ JOHN PAPATSOS | |
Name: | John Papatsos | |
Title: | Principal Financial Officer of the Manager and Principal | |
Accounting Officer of Registrant | ||
Date: May 16, 2016 |
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Exhibit Index
Exhibit | ||
Number | Description | |
31.1* | Rule 13a-14(a)/15d-14(a) Certification of President of the Manager and Principal Executive Officer of Registrant. | |
31.2* | Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer of the Manager and Principal Accounting Officer of Registrant. | |
32.1** | Section 1350 Certification of President of the Manager and Principal Executive Officer of Registrant. | |
32.2** | Section 1350 Certification of Principal Financial Officer of the Manager and Principal Accounting Officer of Registrant. | |
101.0* | The following materials from the Quarterly Report on Form 10-Q of Macquarie Equipment Leasing Fund, LLC for the three months ended March 31, 2016, filed on May 16, 2016, formatted in Extensible Business Reporting Language (XBRL): (i) the Balance Sheets as of March 31, 2016 (Unaudited) and December 31, 2015, (ii) the Statement of Operations for the Three Months Ended March 31, 2016 and 2015 (Unaudited), (iii) the Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015 (Unaudited), (iv) the Statements of Changes in Members’ Equity for the Three Months Ended March 31, 2016 (Unaudited) and, (v) the Notes to Financial Statements (Unaudited). |
___________________
* Filed herewith.
** Furnished, rather than filed herewith.
E-1