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EX-32.2 - EXHIBIT 32.2 - Macquarie Equipment Leasing Fund, LLCv465882_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - Macquarie Equipment Leasing Fund, LLCv465882_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Macquarie Equipment Leasing Fund, LLCv465882_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Macquarie Equipment Leasing Fund, LLCv465882_ex31-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended March 31, 2017

 

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 26-291543
(State or Other Jurisdiction of Incorporation or Organization) (IRS Employer 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 ☒   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 ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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 Exchange Act). Yes ☐   No ☒

  

There were 9,151,031 shares of limited liability company membership interests outstanding at May 15, 2017.

  

 

 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC
Table of Contents

 

Part I. Financial Information  
     
Item 1. Financial Statements  
     
  Balance Sheets as of March 31, 2017 and December 31, 2016 (Unaudited) 3
     
  Statements of Operations for the Three Months Ended March 31, 2017 and 2016 (Unaudited) 4
     
  Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 (Unaudited) 5
     
  Statement of Changes in Members’ Equity for the Three Months Ended March 31, 2017 (Unaudited) 6
     
  Notes to Financial Statements (Unaudited) 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
     
Item 4. Controls and Procedures 21
     
Part II. Other Information  
     
Item 1. Legal Proceedings 21
     
Item 1A. Risk Factors 21
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
     
Item 3. Defaults Upon Senior Securities 22
     
Item 4. Mine Safety Disclosures 22
     
Item 5. Other Information 22
     
Item 6. Exhibits 22
     
  Signatures 23

 

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, 2017   December 31, 2016 
         
ASSETS          
Current Assets          
Cash and cash equivalents  $2,449,992   $4,762,948 
Leased equipment held for sale   -    19,046,393 
Net investment in finance lease   1,562,298    537,382 
Net investment in sales type lease   2,839,498    - 
Loan receivables less: (unamortized deferred loan origination fees and costs of $ 33,117 and $45,858 for March 31, 2017 and December 2016, respectively)   11,577,458    12,593,290 
Accrued interest receivable   97,248    114,231 
Maintenance reserve and other receivables   -    28,479 
Total Current Assets   18,526,494    37,082,723 
           
Non-current Assets          
Net investment in finance lease   698,204    1,890,442 
Leased equipment at cost (net of accumulated depreciation of  $5,677,477 and $5,384,317  as of March 31, 2017 and December 2016, respectively)   22,934,454    23,227,614 
Total Non-current Assets   23,632,658    25,118,056 
           
Total Assets  $42,159,152   $62,200,779 
           
LIABILITIES AND MEMBERS’ EQUITY          
Current Liabilities          
Fees payable (related party)  $106,580   $42,364 
Deferred finance and rental income   210,620    951,429 
Distribution payable   623,172    623,976 
Other payables   444,880    124,624 
Current portion of long-term debt   1,784,795    1,770,199 
Accrued interest payable   29,974    30,896 
Total Current Liabilities   3,200,021    3,543,488 
           
Non-current Liabilities          
Other payables   90,000    444,645 
Long-term debt, less current portion ($16,750,000 face value, less: unamortized debt discount and issuance costs of $49,232 and $50,746 as of March 31, 2017 and December 2016, respectively)   12,478,584    12,931,825 
Total Non-current Liabilities   12,568,584    13,376,470 
           
Total Liabilities  $15,768,605   $16,919,958 
           
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: 9,171,660 and 9,183,494 shares as of  March 31, 2017 and December 31, 2016 respectively, net of repurchases of 486,457 and 474,623, respectively   26,390,547    45,280,821 
Accumulated surplus   -    - 
Total Members’ Equity   26,390,547    45,280,821 
           
Total Liabilities and Members’ Equity  $42,159,152   $62,200,779 

  

See accompanying notes to Financial Statements.

 

 3 

 

  

MACQUARIE EQUIPMENT LEASING FUND, LLC
STATEMENTS OF OPERATIONS
(Unaudited)

 

   Three Months Ended 
   March 31, 2017   March 31, 2016 
REVENUE          
           
Finance and rental income   1,434,109    2,839,028 
Gain on sale of leased equipment   1,686,927    7,927 
Interest income   324,373    477,830 
Other income   20,400    25,017 
           
Total revenue   3,465,809    3,349,802 
           
EXPENSES          
           
Operating expenses (related party)   65,077    97,628 
Management fees (related party)   114,746    153,924 
Depreciation   293,160    1,149,575 
Interest expense   118,825    134,439 
Other expenses (including related party expenses of $213,100 and $18,513 for the three months ended March 31, 2017 and 2016, respectively)   396,731    176,687 
           
Total expenses   988,539    1,712,253 
           
Net income before income taxes   2,477,270    1,637,549 
           
Net income  $2,477,270   $1,637,549 
           
Basic and diluted earnings per share  $0.27   $0.18 
           
Weighted average number of shares outstanding: basic and diluted   9,171,660    9,273,855 

 

See accompanying notes to Financial Statements.

 

 4 

 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC
STATEMENTS OF CASH FLOWS
(Unaudited)

 

   Three Months Ended  
   March 31, 2017   March 31, 2016 
Cash flow from operating activities:          
Net income  $2,477,270   $1,637,549 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation   293,160    1,149,575 
Net gain on sale of leased equipment   (1,686,927)   (7,927)
Amortization of loan origination fees   (11,646)   (10,249)
Amortization of debt discount and issuance costs   -    1,460 
Changes in operating assets and liabilities:          
Fees payable (related party)   64,216    107,282 
Lease receivables   28,479    (107,950)
Accrued interest received   16,983    15,784 
Net investment in finance lease   167,322    346,904 
Net investment in sale type lease   274,917    - 
Other receivables   -    (160)
Other payables   (34,389)   (123,016)
Accrued interest paid   (922)   (889)
Deferred finance and rental income   (517,831)   (155,209)
Other assets   -    2,679 
Net cash provided by operating activities   1,070,632    2,855,833 
           
Cash flow from investing activities:          
Deposits for sale of leased equipment   -    7,050,000 
Proceeds from sale of leased equipment   17,395,927    553,025 
Participating interest - loans receivable   -    (10,868,323)
Repayment of participating interest - loans receivable   -    10,887,214 
Loan to others   -    (14,076,152)
Repayment of loan by others   1,027,478    429,587 
Restricted cash   -    (351)
Net cash provided by (used in) investing activities   18,423,405    (6,025,000)
           
Cash flow from financing activities:          
           
 Distributions paid to members   (21,310,004)   (1,851,290)
 Repurchase of shares   (58,344)   (185,068)
 Repayment of principal on long-term debt   (438,645)   (423,063)
 Maintenance reserve received   -    351 
Net cash used in financing activities   (21,806,993)   (2,459,070)
           
Net decrease in cash and cash equivalents   (2,312,956)   (5,628,237)
           
Cash and cash equivalents, beginning of the period   4,762,948    19,767,657 
           
Cash and cash equivalents, end of the period  $2,449,992   $14,139,420 
           
Supplemental disclosures of cash flow information          
           
Non cash investing and financing activities          
Maintenance reserve  $-   $57,994 
Distribution Payable  $623,172   $630,115 
Accrued loan to others  $-   $235,257 
Loan to others  $-   $620,000 
Repayment of loan by others  $-   $430,000 
Cash paid during the period for interest  $116,598   $131,850 

   

See accompanying notes to Financial Statements.

 

 5 

 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC
STATEMENT OF CHANGES IN MEMBERS’ EQUITY

 

       Membership interests   Accumulated surplus     
  

Members'

shares

  

Additional

members (1)

  

Managing

member

  

Additional

members (1)

  

Managing

member

   Total 
                         
Balance at December 31, 2016   9,183,494   $44,713,701   $567,120   $-   $-   $45,280,821 
Repurchase of shares   (11,834)   (58,344)   -              (58,344)
Distribution to members ($0.27 per share)        -    -    (2,433,570)   (43,700)   (2,477,270)
Partial-liquidating distribution ($2.05 per share)        (18,500,216)   (331,714)   -    -    (18,831,930)
Net income        -    -    2,433,570    43,700    2,477,270 
Balance at March 31, 2017   9,171,660   $26,155,141   $235,406    -    -   $26,390,547 

  

(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 equipment leased by the Fund 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. The Fund’s operating period commenced on that date and ceased on June 30, 2016. The Fund’s liquidation period commenced on July 1, 2016 and may last for up to three years. To coincide with the beginning of the Fund’s liquidation period, the Manager suspended the Fund’s share redemption program. However, the Manager reserved the right to approve member requests for redemptions in cases of death or proof of disability (as the term is defined in the Americans with Disabilities Act of 1990, as amended).

 

This report covers the three months ended March 31, 2017 and 2016, 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, 2016 as filed with the SEC on February 24, 2017.

  

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 U.S. financial institution, which at times may be in excess of the federal insurance limit of $250,000 per depositor, per FDIC-insured bank.

 

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.

 

Leased Equipment at Cost

 

If a lease meets certain requirements under U.S. GAAP Accounting Standards Codification (“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.

 

 7 

 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

NOTES TO THE FINANCIAL STATEMENTS

(Unaudited)

 

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
Smart safes   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, 2017 and 2016, 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 (being 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, 2017 and 2016, 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.

 

Lease Modifications

 

If a lease is modified, ASC 840 requires the lease to be re-evaluated as if the revised terms were in place at inception of the lease. If the revised terms result in a different classification of the lease than what existed at inception (for example, an operating lease with the revised terms qualifies as a sales type lease), then the revised lease and corresponding investment is reclassified (to either an operating lease, financing lease or sales type lease).

 

 8 

 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

NOTES TO THE FINANCIAL STATEMENTS

(Unaudited)

 

Net Investment in Sales Type 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 and the lease gives rise to a manufacturer’s or dealers profit or loss to the lessor (that is, the fair value of the lease property at lease inception is greater than or less than its cost or carrying amount), the Fund recognizes the lease as a net investment in sales type lease on its Balance Sheet and the corresponding profit or loss as a net gain on sale. While the Fund is not a manufacturer or dealer, sales type lease accounting may apply when existing lease agreements are modified and are required to be accounted for as new leases.

 

Net investment in sales type lease consists of lease receivables plus the estimated unguaranteed residual value of the leased equipment on the lease termination date, less unearned income.

 

The residual values of the Fund’s significant sales type 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.

 

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.

 

Assets Held for Sale

 

If any of the Fund’s operating lease assets meet the requirements under ASC 360-10-45-9, the asset is reclassified as leased equipment held for sale on the Fund’s Balance Sheet at the lower of its carrying amount or fair value less cost to sell.

 

If the Fund’s net investment in finance leases or loan receivables meet specific criteria under ASC 310-10-35, such that the Fund no longer has the intent or ability to hold the finance lease or loan for the foreseeable future, the loan or finance lease is reclassified as held for sale and recorded at the lower of cost or fair value, with any difference being recognized in the Statements of Operations.

 

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 gains on sales of leased equipment of $1,686,927 and $7,927 during the three months ended March 31, 2017 and 2016 respectively.

 

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 manufacturer 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 $18,750 and $18,750 related to the program development fee as other income during the three months ended March 31, 2017 and 2016, respectively.

 

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, 2017 or December 31, 2016, respectively. No allowance was recorded or reversed in the Fund’s Statement of Operations during the three months ended March 31, 2017 and 2016, 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, 2017 or December 31, 2016, 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, 2017 and 2016, 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 9 for further details.

 

 10 

 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

NOTES TO THE FINANCIAL STATEMENTS

(Unaudited)

 

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.

 

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. With the commencement of the Fund’s liquidation period and disposal of assets, the Fund has made a number of periodic additional distributions as disclosed in Note 10.

 

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. Various amendments to ASU No. 2014-09 have been issued, including;

 

·ASU No. 2016-08 (issued in March 2016) which amends principal versus agent guidance by reframing the indicators in the guidance to focus on evidence that an entity is acting as a principal rather than as an agent;

 

·ASU No. 2016-10 (issued in April 2016) which amends criteria around licensing and performance obligations;

 

·ASU No. 2016-12 (issued in May 2016); which provides guidance on assessing collectability, presentation of sales taxes, noncash consideration and completed contracts and contract modifications at transition; and

 

·ASU No. 2016-20 (issued in December 2016) which contains various technical corrections and improvements to ASU No. 2014-09.

 

The original effective date for ASU 2014-09 would have required the Fund to adopt it beginning in its first quarter of 2018. In August 2015, the FASB issued ASU 2015-14 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 January 2016, FASB issued ASU No. 2016-01, Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities, to address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The adoption of this standard is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Fund is currently evaluating the impact on the Fund’s financial statements, but does not expect the adoption of the standard to have material impact.

 

In February 2016, FASB issued ASU No. 2016-02, 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 June 2016, FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses, to provide financial statement users with more information about the expected credit losses on financial instruments and other commitments to extend credit. The adoption of this standard is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The adoption of this standard is not expected to have a material impact on the Fund’s financial statements.

 

 11 

 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

NOTES TO THE FINANCIAL STATEMENTS

(Unaudited) 

 

In August 2016, FASB issued ASU No. 2016-15, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments, to provide guidance on the presentation and classification of certain cash receipts and cash payments in the Statements of Cash Flows. The adoption of this standard is effective for fiscal years beginning after December 15, 2017. The adoption of this standard is not expected to have a material impact on the Fund’s financial statements.

 

In November 2016, FASB issued ASB No. 2016-18, Statement of Cash Flows – Restricted Cash, to provide guidance on the presentation and classification of restricted cash in the Statements of Cash Flows. The adoption of this standard is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Fund is currently evaluating the impact on the Fund’s financial statements, which may include the reclassification of cash flows relating to restricted cash on the Statements of Cash Flows for prior periods. The Fund does not expect the adoption of the standard to have material impact on its financial statements for future reporting periods.

  

3. LEASED EQUIPMENT AT COST

  

The following transactions were entered into by the Fund during the three months ended March 31, 2017:

 

Airbus A320-200 Aircraft Lease

 

In February 2017, the Fund entered into an agreement to sell its Airbus A320-200 Aircraft for a total purchase price of $17,395,927, which is net of rentals received in advance owed to the buyer. The aircraft was delivered to the buyer in March 2017, at which point the Fund recognized a gain on sale.

 

Leased equipment at cost net of accumulated depreciation consists of the following:

 

  

March 31,

2017

  

December 31,

2016

 
Aircraft engines (2 x CFM56-7B jet engines)  $25,338,321   $25,338,321 
Smart safes   3,273,610    3,273,610 
Less: Accumulated depreciation   (5,677,477)   (5,384,317)
   $22,934,454   $23,227,614 

  

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, 2017  $1,931,282 
For the year ending December 31, 2018   2,327,928 
For the year ending December 31, 2019   2,233,572 
For the year ending December 31, 2020   1,861,641 
Thereafter   - 
   $8,354,423 

 

Although there is a portion of future rentals receivable expected beyond the Fund’s liquidation period end date of July 1, 2019, the fund expects to divest these operating leases, or the underlying operating lease assets, during the liquidation period.

 

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 furniture, eight-seater aircrafts, manufacturing equipment, and smart safes.

 

 12 

 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

NOTES TO THE FINANCIAL STATEMENTS

(Unaudited)

 

Net investment in finance lease (current and non-current) consists of the following:

 

  

March 31,

2017

  

December 31,

2016

 
Minimum lease payments receivable  $756,835   $981,182 
Estimated residual values of leased property   1,688,048    1,688,048 
Less: Unearned income   (184,381)   (241,406)
Net investment in direct financing lease  $2,260,502   $2,427,824 

 

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, 2017  $538,530 
For the year ending December 31, 2018   218,305 
For the year ending December 31, 2019   - 
Thereafter   - 
   $756,835 

  

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.

 

5. NET INVESTMENT IN SALES TYPE LEASE

 

The Fund’s net investment in sales type lease relates to machine tool equipment. In January 2017, the Fund signed an agreement with the lessee to amend the original lease agreement. The amendment allows for the lessee to acquire the equipment at the end of the lease and for the Fund to retain the security deposit at the end of the lease.

 

The leased equipment was classified as held for sale as of December 31, 2016 due to the fact that the Fund had committed to a plan to sell the machine tool equipment within the year. The lease amendment resulted in a reclassification of the machine tool equipment from leased equipment held for sale to a sales type lease. The Fund has reclassified the lease from “Current assets – Leased equipment held for sale” to “Current assets – Net investment in sales-type lease” as of March 31, 2017. The Fund recognized a gain on the sale of the machine tool equipment in January 2017.

 

The future rentals receivable related to the Fund’s net investment in sales type lease as of March 31, 2017 are all due within one year.

 

6. LOANS RECEIVABLE

 

The Fund carries loans receivable at amortized cost on its Balance Sheet. The Fund recognizes interest income using the effective interest method.

 

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 finance facility 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 drilling company paid commitment fees and other upfront payments of $330,000 to the Fund. $140,000 of the fees were paid immediately upon entrance into the credit agreement underlying the finance facility between the Fund and the drilling company, 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. The fund capitalized other cost of $237,740 which were directly related to origination of 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.

 

In October 2014, the Fund entered into an agreement with an Australian aircraft manufacturer to provide a finance facility of $540,000 for a period of 12 months with an interest rate of 9.25%. The loan is secured by a GA8-TC320 aircraft. In October 2015, the Fund extended the facility for an additional 24 months. The loan is carried at amortized cost on the Fund’s Balance Sheet. The Fund recognizes interest income using the effective interest method.

 

In November 2015, the Fund entered into an agreement with the Australian aircraft manufacturer described above to provide an additional finance facility of $579,503, net of fees received, for a period of 24 months with an interest rate of 9.95%. The loan is secured by a GA8-TC320 aircraft. The loan is carried at amortized cost on the Fund’s Balance Sheet. The Fund recognizes interest income using the effective interest method.

 

For the three months ended March 31, 2017 and 2016, the Fund recognized interest income on its loans receivable of $324,373 and $318,980, respectively.

 

 13 

 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

NOTES TO THE FINANCIAL STATEMENTS

(Unaudited)

 

7. PARTICIPATING INTEREST – LOAN RECEIVABLE (ARRANGED BY A RELATED PARTY)

 

The Fund entered into a participation agreement in 2015 with Macquarie Bank Limited London Branch (“MBL UK”), a member of the Macquarie Group of companies, to provide financing to participate in an existing facility that was provided by MBL UK to a UAE information technology distribution company.

 

The Fund made additional advances to MBL UK under this participation agreement in 2016 of $28,345,392, the entire balance of which was repaid in full before the end of the year. There was no outstanding balance on the Fund’s Balance Sheet as of December 31, 2016 and the Fund did not make any additional advances during the three months ended March 31, 2017.

 

The Fund recognized interest income on its participating interest with MBL UK of $0 and $158,850 for the three months ended March 31, 2017 and 2016, respectively.

 

8. 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 $21,645,754 on the Fund’s Balance Sheet as of March 31, 2017, 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 rate 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 $118,825 and $134,439 for the three months ended March 31, 2017 and 2016, respectively.

 

As of March 31, 2017, the scheduled maturities of long-term debt, including accretion of the debt discount over the next five years are as follows:

  

For the year ending December 31, 2017  $1,331,555 
For the year ending December 31, 2018   1,830,145 
For the year ending December 31, 2019   11,101,679 
Thereafter   - 
   $14,263,379 

 

9. 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 previously entered into a participation agreement with MBL UK, a member of the Macquarie Group of companies and an affiliate of the Manager, which was fully repaid during the year ended December 31, 2016.

 

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. Since the Fund has entered its liquidation period on July 1, 2016, the Fund does not expect to incur any more acquisition fees.

 

·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;

 

 14 

 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

NOTES TO THE FINANCIAL STATEMENTS

(Unaudited)

 

·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, 2017 and 2016, 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.

 

Related party fees are invoiced as the work is performed and settled monthly. The operating expense reimbursement is generally invoiced and settled annually.

 

For the three months ended March 31, 2017 and 2016, the Fund has accrued, in fees payable (related party) on its Balance Sheet, or paid to the Manager or its affiliates the following amounts:

 

         Three Months Ended 
Entity  Capacity  Description  March 31, 2017   March 31, 2016 
               
Macquarie Asset Management Inc.  Manager  Acquisition fees (1)  $-   $222,517 
Macquarie Asset Management Inc.  Manager  Management fee (2)   97,736    132,774 
Macquarie Asset Management Inc.  Manager  Operating Expenses (3)   65,077    110,368 
Macquarie Asset Management Inc.  Manager  Outperformance fee (2)   213,100    18,513 
Macquarie Aircraft Leasing Services  Affiliate  Management fee (2)   17,010    21,150 

 

 

(1)

Amount is capitalized into the carrying value of loan receivables.

(2)

Amount charged directly to operations.

(3)

Amount for the year ended December 31, 2016 includes $12,740 allocated to carrying amount of loan receivables and remaining amount charged directly to operations.

  

10. MEMBER’S EQUITY

 

As of March 31, 2017 and December 31, 2016, the Fund had 9,171,660 and 9,183,494 shares of limited liability company membership interest outstanding, respectively (including the DRP shares and net of repurchased shares). As of March 31, 2017 and December 31, 2016, the cumulative number of shares repurchased since inception was 486,457 and 474,623, respectively.

 

The Fund declared distributions of $21,309,200 during the three months ended March 31, 2017, of which $20,686,028 were paid and $623,172 were payable as of March 31, 2017.

 

The $21,309,200 in distributions declared during the three months ended March 31, 2017 was approximately $2.32 per share of $10.00 par value membership interest ($9.00 par value for DRP shares), of which approximately $2.05 represented a partial-liquidating distribution paid from members’ equity.

 

 

 15 

 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

NOTES TO THE FINANCIAL STATEMENTS

(Unaudited)

 

11. 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, 2017 and December 31, 2016, 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, 2017 and December 31, 2016, 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 and liabilities.

 

The fair value of the Fund’s fixed rate loan receivable was estimated by discounting the future cash flows related to the loan. The discount rate was derived by adjusting the margin at inception for material changes in the counterparty’s risk and adding the applicable fixed rate based on the current interest rate curve.

 

The fair value of the Fund’s fixed-rate non-recourse long-term debt was estimated by discounting the future cash flow 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. The Fund’s fixed rate loan receivables and long-term debt 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.

  

   March 31, 2017 
   Carrying Value   Fair Value 
         
Fixed rate loan receivables  $11,577,458   $11,749,455 
           
Fixed rate long-term debt  $14,263,379   $14,139,772 

 

Fair value information with respect to certain financial instruments which are not carried on the Fund’s Balance Sheet at fair value is not separately provided given that fair value disclosures of certain kinds of lease arrangements are not required under U.S. GAAP 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.

 

12. 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, 2017 and December 31, 2016, respectively.

   

 16 

 

 

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 February 24, 2017. 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 being an equipment leasing program that acquired or originated a diversified portfolio of equipment and 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 was 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 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 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 offering period ended on March 19, 2012. The Fund’s operating period commenced on that date. The Fund acquired and disposed of equipment, entered into equipment lease and other equipment-related transactions and made loans secured by equipment collateral during the operating period. During the operating period, the Fund generated cash from equipment leases and loans. In addition, as owned equipment has come off lease, the Fund has either sold or re-leased that equipment. Thus, the Fund has also generated cash through the sale of owned equipment. The Fund reinvested equipment sale proceeds and cash generated from equipment investments into additional equipment during the operating period to the extent that the cash was not required to pay distributions and expenses or be set aside as reserves. The Fund’s revenue has been impacted by the timing of when sales proceeds can be invested in new equipment transactions. During any fiscal period, the Fund’s revenue may have been higher or lower depending on when equipment came off lease and the time it took to re-lease or sell the equipment.

 

The Fund’s operating period ceased on June 30, 2016 and its liquidation period commenced on July 1, 2016, which may last for a period of up to three years. To coincide with the beginning of the Fund’s liquidation period, the Manager suspended the Fund’s redemption program. However, the Manager reserved the right to approve member requests for redemptions in cases of death or proof of disability (as the term is defined in the Americans with Disabilities Act of 1990, as amended). During the liquidation period, the Fund will not pursue any new equipment lease and loan investment opportunities and will continue to manage end of lease options and investigate divestment opportunities for its portfolio.

 

Equipment leasing activity levels are impacted by general economic conditions in global and local economies including the level of interest rates in various jurisdictions and more specifically business appetite for investment in new and used equipment. The availability of liquidity to finance equipment for counterparties on satisfactory terms as well as business confidence to invest in equipment throughout the cycles impacts on the equipment leasing volumes and pricing that we can sell or otherwise dispose of equipment in the marketplace. Pricing in the global equipment finance market has become more competitive in recent years due to the reduction in interest rates in the U.S. and Europe and entry into the market of investors seeking income or yield.

 

 17 

 

 

First Quarter Transactions

 

Airbus model A320-200

 

In February 2017, the Fund entered into an agreement to sell its Airbus A320-200 Aircraft for a total purchase price of $17,395,927, which is net of rentals received in advance owed to the buyer. The aircraft was delivered to the buyer in March 2017, at which point the Fund recognized a gain on sale.

 

Machine Tool Equipment

 

In January 2017 the Fund signed an agreement with the lessee of its machine tool equipment which amended the original lease agreement to allow the lessee to acquire the machine tool equipment from the Fund at the end of the lease in October 2017.

 

Results of Operations for the Three Months Ended March 31, 2017 and 2016

 

The Fund entered its liquidation period on July 1, 2016. During the liquidation period, the Fund will continue to manage end of lease options and investigate divestment opportunities for its portfolio. These activities are reflected in the results of operations, balance sheet movements and liquidity analysis below.

 

Total revenue for the three months ended March 31, 2017 increased by $116,007 compared to the three months ended March 31, 2016 primarily due to;

 

·Gains on sale of leased equipment of $1,686,927 recognized during the three months ended March 31, 2017 due to the sale of the Fund’s Airbus A320-200 Aircraft and the reclassification of the machine tool equipment from held for sale to a sales-type lease, which represents an increase of $1,679,000 compared to the three months ended March 31, 2016;

 

·A decrease in finance and rental income of $1,404,919 when compared to the three months ended March 31, 2016 due to sales of leased equipment in the second and third quarters of 2016; and

 

·A decrease in interest income of $153,457 due to the repayment of the Fund’s participation agreements with MBL UK in the fourth quarter of 2016.

 

Total expenses for the three months ended March 31, 2017 decreased by $723,714 compared to the three months ended March 31, 2016 primarily due to;

 

·A decrease in depreciation by $856,415 due to the aforementioned sales of leased assets during the second and third quarters of 2016 and the classification of the Airbus A320-200 Aircraft and machine tool equipment as held for sale as of December 31, 2016; partially offset by

 

·An increase in other expenses of $220,044 due to the 1% fee paid to the Manager for each distribution. The Fund paid distributions of $21,309,200 during the three months ended March 31, 2017 compared to $1,849,684 during the three months ended Mach 31, 2016.

 

As a result, the Fund’s net income for the three months ended March 31, 2017 was $2,477,270 compared to $1,637,549 for the three months ended March 31, 2016, an increase of $839,721.

 

Inflation and changing prices have not had a material impact on the Fund’s leasing and interest revenue, net sales, and income from continuing operations for the three months ended March 31, 2017 and 2016, respectively.

 

Financial Condition

 

This section discusses the major balance sheet variances from March 31, 2017 compared to March 31, 2016.

 

Total Assets

 

Total assets decreased by $20,041,627 from $62,200,779 as of December 31, 2016 to $42,159,152 as of March 31, 2017 primarily due to:

 

·A decrease in leased equipment held for sale by $19,046,393 during the three months ended March 31, 2017 due to the sale of the Airbus A320-200;

 

·A decrease in cash of $2,312,956 due to distributions paid during the three months ended March 31, 2017 of $21,310,004 partially offset by proceeds from the sale of the Airbus A320-200 of $17,395,927.

 

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Total Liabilities

 

Total liabilities decreased by $1,151,353, from $16,919,958 as of December 31, 2016 to $15,768,605 as of March 31, 2017 primarily due to:

 

·A decrease in deferred finance and rental income of $740,809 due to the sale of the Airbus A320-200 in March 2017. The lessee paid its rentals quarterly in advance, as a result of the sale there was no advance rental received on March 31, 2017; and

 

·Repayments of principal on the Fund’s long-term debt of $438,645.

 

Members’ Equity

 

Members’ equity decreased by $18,890,274 from $45,280,821 as of December 31, 2016 to $26,390,547 as of March 31, 2017. The decrease in members’ equity is primarily due to distributions declared to investors of 21,309,200, of which 20,686,028 were paid and $ 623,172 were payable as of March 31, 2017. Additionally, 11,834 shares were redeemed for $58,344 during the three months ended March 31, 2017. This decrease was offset by net income of $2,477,270 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, 2017 and 2016.

 

   March 31, 2017   March 31, 2016 
Net cash provided by/(used in) :          
Operating activities  $1,070,632   $2,855,833 
Investing activities   18,423,405    (6,025,000)
Financing activities   (21,806,993)   (2,459,070)
Net decrease in cash and cash equivalents  $(2,312,956)  $(5,628,237)

 

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, 2017, the Fund had cash and cash equivalents of $2,449,992. The cash provided by operating activities for the three months ended March 31, 2017 consisted primarily of rentals and interest collected during the three months from equipment leases and loans partially offset by cash paid for ongoing expenses. The decrease of $1,785,202 from the three months ended March 31, 2016 is the result of sales of assets in the second and third quarters of 2016 and the first quarter of 2017.

 

The cash provided by investing activities for the three months ended March 31, 2017 of $18,423,406 is primarily attributable to the sale of the Airbus A320-200 and repayments received on the Fund’s loans receivable of $1,027,478. Cash provided by investing activities increased by $24,448,406 compared to the three months ended March 31, 2016 primarily due to sales proceeds received for the sale of the Airbus A320-200.

 

The increase in cash used in financing activities for the three months ended March 31, 2017 of $19,347,923 when compared to the three months ended March 31, 2016 is primarily attributable to distributions paid to members of $21,310,004, repayment of principal on long-term debt, and share repurchases. Distributions paid to members increased from $1,851,290 during the three months ended March 31, 2016 to $21,310,004 during the three months ended March 31, 2017, an increase of $19,458,714.

 

Cash and cash equivalents include cash in banks and highly liquid investments with original maturities of three months or less and are held in an operating account at Wells Fargo Bank, N.A.

 

Sources and Uses of Cash

 

The Fund’s main activities and our main use of cash during the offering and operating periods was to acquire a diversified portfolio of equipment, equipment leases and other equipment-related investments which are denominated in U.S. dollars and leased to corporate clients around the world. We have also made investments in other equipment-related transactions which has allowed us to directly or indirectly participate in the benefits and risks of equipment ownership or usage and make loans collateralized by equipment.

 

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As of May 15, 2017 we have used approximately $188,173,701 of the offering and equipment sale proceeds to acquire the following assets:

 

   Purchase Price 
Financing provided under participating loan arrangements (fully repaid)  $72,545,705 
Aircraft engines (2 x CFM56-7B jet engines)   25,338,321 
Aircraft (Airbus model A320-200) (sold in March 2017)   19,551,352 
Financing provided to the US drilling company   15,000,000 
Aircraft Bombardier CRJ 700 ER   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 
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 & Jan 2016)   2,184,398 
Self-serve checkout equipment (sold in September 2015)   2,097,353 
Financing provided to aircraft lessor   1,128,328 
Furniture, office and other related equipments (sold in Nov 2013, Mar 2014 & Sep 2014)   1,012,843 
Bus manufacturing equipment   854,333 
Furniture, office and other related equipments   669,010 
ETS-364B semiconductor test system (sold in May 2012)   383,898 
Smart safes (sold in July 2013)   68,989 
   $188,173,701 

 

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, and throughout the liquidation period, including distributions to our members, 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 activities and investing activities, including the sale of leased assets throughout the liquidation period. 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 $ 21,310,004 and $ 1,851,290 to our members during the three months ended March 31, 2017 and 2016, 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, 2017 and December 31, 2016, 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.

 

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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 February 24, 2017.

 

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, 2017. 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, 2017 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 
January 1 to January 31, 2017   11,834   $4.93    11,834    - 
February 1 to February 28, 2017   -    -    -    - 
March 1 to March 31, 2017   -    -    -    - 
Total   11,834   $4.93    11,834    - 

 

(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.

 

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Item 3.Defaults Upon Senior Securities

 

Not applicable.

 

Item 4.Mine Safety Disclosures

 

Not applicable.

 

Item 5.Other Information

 

None.

 

Item 6.Exhibits

 

An exhibit index has been filed as part of this Quarterly Report on Form 10-Q on page E-1.

 

 

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SIGNATURES

 

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 15, 2017  
   
     
By:

/S/ BRETT BELDNER

 
Name: Brett Beldner  
Title:

Principal Financial Officer of the Manager and

Principal Accounting Officer of Registrant

 
     
Date: May 15, 2017  

 

 

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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, 2017, filed on May 15, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) the Balance Sheets as of March 31, 2017 (Unaudited) and December 31, 2016, (ii) the Statement of Operations for the Three Months Ended March 31, 2017 and 2016 (Unaudited), (iii) the Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 (Unaudited), (iv) the Statements of Changes in Members’ Equity for the Three Months Ended March 31, 2017 (Unaudited) and, (v) the Notes to Financial Statements (Unaudited).

 

___________________

*Filed herewith.
**Furnished, rather than filed herewith.

 

 E-1