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EX-32.2 - EXHIBIT 32.2 - Macquarie Equipment Leasing Fund, LLCv472042_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - Macquarie Equipment Leasing Fund, LLCv472042_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Macquarie Equipment Leasing Fund, LLCv472042_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Macquarie Equipment Leasing Fund, LLCv472042_ex31-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

(Mark One)

 

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

 

For the Quarterly Period Ended June 30, 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   26-3291543
(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, 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 x
   
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 x

 

There were 9,132,126 shares of limited liability company membership interests outstanding at August 14, 2017.

 

 

 

 

 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

Table of Contents

 

Part I. Financial Information  
     
Item 1. Financial Statements  
     
  Balance Sheets as of June 30, 2017 and December 31, 2016 (Unaudited) 3
     
  Statements of Operations for the three and six Months Ended June 30, 2017 and 2016 (Unaudited) 4
     
  Statements of Cash Flows for the six Months Ended June 30, 2017 and 2016 (Unaudited) 5
     
  Statement of Changes in Members’ Equity for the six Months Ended June 30, 2017 (Unaudited) 6
     
  Notes to Financial Statements (Unaudited) 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
     
Item 4. Controls and Procedures 22
     
Part II. Other Information  
     
Item 1. Legal Proceedings 23
     
Item 1A. Risk Factors 23
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
     
Item 3. Defaults Upon Senior Securities 23
     
Item 4. Mine Safety Disclosures 23
     
Item 5. Other Information 23
     
Item 6. Exhibits 23
     
  Signatures 24

 

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)

 

   June 30, 2017   December 31, 2016 
         
ASSETS          
Current Assets          
Cash and cash equivalents  $2,494,874   $4,762,948 
Leased equipment held for sale   21,473,520    19,046,393 
Net investment in finance lease   2,119,530    537,382 
Net investment in sales type lease   2,596,436    - 
Loan receivables less: (unamortized deferred loan origination fees and costs of   $21,105 and $45,858 for June 30, 2017 and December 2016, respectively)   10,548,707    12,593,290 
Accrued interest receivable   85,164    114,231 
Maintenance reserve and other receivables   -    28,479 
Total Current Assets   39,318,231    37,082,723 
           
Non-current Assets          
Net investment in finance lease   -    1,890,442 

Leased equipment at cost (net of accumulated depreciation of  $2,685,897 and $5,384,317  as of June 30, 2017 and December 2016, respectively) 

   587,713    23,227,614 
           
Total Non-current Assets   587,713    25,118,056 
           
Total Assets  $39,905,944   $62,200,779 
           
LIABILITIES AND MEMBERS’ EQUITY          
Current Liabilities          
Fees payable (related party)  $176,149   $42,364 
Deferred finance and rental income   182,904    951,429 
Distribution payable   601,708    623,976 
Other payables   570,607    124,624 
Current portion of long-term debt   1,799,840    1,770,199 
Accrued interest payable   27,787    30,896 
Total Current Liabilities   3,358,995    3,543,488 
           
Non-current Liabilities          
Other payables   -    444,645 
Long-term debt, less current portion ($16,750,000 face value, less: unamortized debt discount and issuance costs of $47,714 and $50,746 as of June 30, 2017 and December 2016, respectively)   12,023,814    12,931,825 
Total Non-current Liabilities   12,023,814    13,376,470 
           
Total Liabilities  $15,382,809   $16,919,958 
           
Commitments and Contingencies (Note 12)          
           
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: 9,151,031 and 9,183,494 shares as of  June 30, 2017 and December 31, 2016 respectively, net of repurchases of 507,086 and 474,623, respectively   24,523,135    45,280,821 
Accumulated surplus   -    - 
Total Members’ Equity   24,523,135    45,280,821 
           
Total Liabilities and Members’ Equity  $39,905,944   $62,200,779 

 

See accompanying notes to Financial Statements.

 

 3 

 

 

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

 

   Three Months Ended   Six Months Ended 
   June 30, 2017   June 30, 2016   June 30, 2017   June 30, 2016 
REVENUE                    
                     
Finance and rental income   972,110    2,432,966    2,406,219    5,271,994 
Gain on sale of leased equipment   -    -    1,686,927    7,927 
Interest income   299,557    590,488    623,930    1,068,318 
Other income   19,635    44,491    40,035    69,508 
                     
Total revenue   1,291,302    3,067,945    4,757,111    6,417,747 
                     
EXPENSES                    
                     
Operating expenses (related party)   70,598    103,704    135,675    201,332 
Management fees (related party)   88,285    152,485    203,031    306,409 
Depreciation   293,160    994,903    586,320    2,144,478 
Impairment loss   584,590    -    584,590    - 
Interest expense   116,480    130,903    235,305    265,342 
Other expenses (including related party expenses of $18,466; $58,657; $231,567; and $77,170 for the three and six months ended June 30, 2017 and 2016, respectively)   121,004    275,746    517,735    452,433 
Total expenses   1,274,117    1,657,741    2,262,656    3,369,994 
                     
Net income before income taxes   17,185    1,410,204    2,494,455    3,047,753 
                     
Net income  $17,185   $1,410,204   $2,494,455   $3,047,753 
                     
Basic and diluted earnings per share  $0.00   $0.15   $0.27   $0.33 
                     
Weighted average number of shares outstanding: basic and diluted   9,151,031    9,241,411    9,161,288    9,257,663 

 

See accompanying notes to Financial Statements.

 

 4 

 

 

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

 

   Six Months Ended 
   June 30, 2017   June 30, 2016 
Cash flow from operating activities:          
Net income  $2,494,455   $3,047,753 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation   586,320    2,144,478 
Impairment loss   584,590    - 
Net gain on sale of leased equipment   (1,686,927)   (7,927)
Amortization of loan origination fees   (22,567)   (24,233)
Amortization of debt discount and issuance costs   3,032    2,928 
Changes in operating assets and liabilities:          
Fees payable (related party)   133,785    189,448 
Lease receivables   28,479    207,800 
Accrued interest received   29,067    (145,473)
Net investment in finance lease   303,766    487,425 
Net investment in sale type lease   517,980    - 
Other receivables   -    (35,280)
Other payables   1,337    (93,874)
Accrued interest paid   (3,109)   (3,205)
Deferred finance and rental income   (545,548)   (155,534)
Other assets   -    (5,359)
Net cash provided by operating activities   2,424,660    5,608,947 
           
Cash flow from investing activities:          
Deposits for sale of leased equipment   -    7,300,000 
Proceeds from sale of leased equipment   17,395,927    553,025 
Participating interest - loans receivable   -    (20,129,621)
Repayment of participating interest - loans receivable   -    20,339,331 
Loan to others   -    (14,467,928)
Repayment of loan by others   2,067,149    1,057,080 
Restricted cash   -    (4,674)
Net cash provided by (used in) investing activities   19,463,076    (5,352,787)
           
Cash flow from financing activities:          
           
Distributions paid to members   (23,156,654)   (7,716,966)
Repurchase of shares   (117,755)   (437,769)
Repayment of principal on long-term debt   (881,401)   (848,236)
Maintenance reserve received   -    4,674 
Net cash used in financing activities   (24,155,810)   (8,998,297)
           
Net decrease in cash and cash equivalents   (2,268,074)   (8,742,137)
           
Cash and cash equivalents, beginning of the period   4,762,948    19,767,657 
           
Cash and cash equivalents, end of the period  $2,494,874   $11,025,520 
           
Supplemental disclosures of cash flow information          
           
Non cash investing and financing activities          
Maintenance reserve  $-   $56,692 
Distribution Payable  $601,708   $607,651 
Accrued loan to others  $-   $12,740 
Loan to others  $-   $620,000 
Repayment of loan by others  $-   $430,000 
Cash paid during the period for interest  $232,128   $261,628 

 

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, 2016   9,183,494   $44,713,701   $567,120   $-   $-   $45,280,821 
Repurchase of shares   (32,463)   (117,755)   -              (117,755)
Distribution to members ($0.27 per share)        -    -    (2,450,452)   (44,003)   (2,494,455)
Partial-liquidating distribution ($2.26 per share)        (20,276,250)   (363,681)   -    -    (20,639,931)
Net income        -    -    2,450,452    44,003    2,494,455 
Balance at June 30, 2017   9,151,031   $24,319,696   $203,439    -    -   $24,523,135 

 

(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 leases 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 and six months ended June 30, 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 and the notes thereto 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.

 

 7 

 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

NOTES TO THE FINANCIAL STATEMENTS

(Unaudited)

 

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.

 

Lease terms from the acquisition date or most recent lease renewal date by the Fund of each item of equipment are as follows:

 

  Lease terms (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 and six months ended June 30, 2017 and 2016, respectively. 

 

The lessees are 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.

 

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 on its Balance Sheet as a net investment in finance lease. 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)

 

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).

 

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 Statements 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 Statements of Operations.

 

Assets Held for Sale

 

If any of the Fund’s assets held under operating leases 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.

 

At inception of a sales type lease, or upon reclassification of an operating lease or direct finance lease to a sales type 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 (including reclassifications of operating or financing leases to sales type leases) are recorded on a net basis in the Fund’s Statements of Operations. The Fund recognized gains on sales of leased equipment of $0 and $1,686,927 during the three and six months ended June 30, 2017 and $0 and $7,927 during the three and six months ended June 30, 2016 respectively.

 

 9 

 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

NOTES TO THE FINANCIAL STATEMENTS

(Unaudited)

 

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 $37,500 related to the program development fee as other income during the three and six months ended June 30, 2017, respectively and $18,750 and $37,500 during the three and six months ended June 30, 2016, respectively.

 

The Fund recognizes interest income on its loans receivable using the effective interest method.

 

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 June 30, 2017 or December 31, 2016, respectively. No allowance was recorded or reversed in the Fund’s Statements of Operations during the three and six months ended June 30, 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 Statements 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 Statements 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 June 30, 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.

 

 10 

 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

NOTES TO THE FINANCIAL STATEMENTS

(Unaudited)

 

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 and six months ended June 30, 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.

 

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 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. 2016-2, 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.

 

 11 

 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

NOTES TO THE FINANCIAL STATEMENTS

(Unaudited)

 

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.

 

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 ASU 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 AND HELD FOR SALE

 

The following transactions were entered into by the Fund during the six months ended June 30, 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.

 

Classification of Aircraft Engines as Leased Equipment Held for Sale

 

The Fund’s leases for two CFM56-7B aircraft engines were recorded at lease inception as operating leases in “Leased equipment at cost” on the Fund’s Balance Sheet, with rental income recognized on a straight-line basis over the lease term. In June 2017, the Fund committed to a plan to sell the aircraft engines to a third party. The aircraft engines have been reported as “Leased equipment held for sale” on the Fund’s Balance Sheet as of June 30, 2017. The Fund’s accounting for the depreciation on the equipment ceased on June 30, 2017.

 

Impairment of Smart Safes

 

In June 2017, the Fund reassessed the residual value of its operating leases for smart safes. Due to a decline in the market value of this type of equipment the residual value was adjusted downward. The adjustment of the smart safes’ residual value resulted in the recoverable amount being lower than the assets’ carrying amount and an impairment charge of $584,590 was recognized for the three and six months ended June 30, 2017. There were no impairment charges recorded during the three and six months ended June 30, 2016.

 

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

 

   June 30, 2017   December 31, 2016 
Aircraft engines (2 x CFM56-7B jet engines)  $-   $25,338,321 
Smart safes   3,273,610    3,273,610 
Less: Accumulated depreciation   (2,685,897)   (5,384,317)
   $587,713   $23,227,614 

 

 12 

 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

NOTES TO THE FINANCIAL STATEMENTS

(Unaudited)

 

Leased equipment held for sale consists of the following:

 

   June 30, 2017   December 31, 2016 
Aircraft engines (2 x CFM56-7B jet engines)  $25,338,321   $- 
Aircraft ( Airbus model A320-200)   -    19,551,352 
Machine Tools   -    5,768,966 
Less: Accumulated depreciation   (3,864,801)   (6,273,925)
   $21,473,520   $19,046,393 

 

Annual minimum future rentals receivable related to the Fund’s operating leases over the next five years consist of the following:

 

For the period July 1 to December 31, 2017  $1,188,011 
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   - 
   $7,611,152 

 

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.

 

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

 

   June 30, 2017   December 31, 2016 
Minimum lease payments receivable  $567,101   $981,182 
Estimated residual values of leased property   1,683,520    1,688,048 
Less: Unearned income   (131,091)   (241,406)
Net investment in direct financing lease  $2,119,530   $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 July 1 to December 31, 2017  $348,796 
For the year ending December 31, 2018   218,305 
For the year ending December 31, 2019   - 
Thereafter   - 
   $567,101 

 

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.

 

 13 

 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

NOTES TO THE FINANCIAL STATEMENTS

(Unaudited)

 

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.

 

As of June 30, 2017, the net investment in sales type lease of $2,596,436 comprises minimum lease payments of $2,729,645 less unearned income of $133,209. There were no sales type lease balances as of December 31, 2016.

 

The future rentals receivable related to the Fund’s net investment in sales type lease as of June 30, 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 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.

 

The Fund recognized interest income on its portfolio of loans receivable of $299,557 and $623,930 for the three and six months ended June 30, 2017, respectively, and $407,332 and $726,312 for the three and six months ended June 30, 2016, respectively.

 

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 United Arab Emirates 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 six months ended June 30, 2017.

 

The Fund did not recognize interest income on participating interests for the three and six months ended June 30, 2017 and 2016. The Fund recognized interest income on participating interests of $183,156 and $342,006 for the three and six months ended June 30, 2016, respectively.

 

 14 

 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

NOTES TO THE FINANCIAL STATEMENTS

(Unaudited)

 

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 aircraft engines, which had a carrying value of $21,473,520 on the Fund’s Balance Sheet as of June 30, 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 method.

 

As described in Note 3, during the second quarter the Fund committed to a plan to sell its two CFM56-7B aircraft engines. When the Fund completes the sale of its aircraft engines, it will use a portion of the gross proceeds to repay the Fund’s loan with the Japanese bank.

 

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 $116,480 and $235,305 for the three and six months ended June 30, 2017, respectively and $130,903 and $265,342 for the three and six months ended June 30, 2016, respectively.

 

As of June 30, 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  $891,830 
For the year ending December 31, 2018   1,830,145 
For the year ending December 31, 2019   11,101,679 
Thereafter   - 
   $13,823,654 

 

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 7, 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 from this date going forward.

 

·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 (a) 3% of the purchase price paid to the Fund by the purchaser of the investment or (b) 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

 

 15 

 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

NOTES TO THE FINANCIAL STATEMENTS

(Unaudited)

 

·Reimbursement of operating expenses depending upon the scope and volume of services the Manager provides to the Fund.

 

The Fund paid management fees to Macquarie Aircraft Leasing Services (“MALS”), for management services related to the aircraft lease for the Airbus model A320-200. The fees paid by the Fund to MALS were 3% of gross rental receipts and were expensed as incurred and included in the Fund’s Statements of Operations. The Fund sold the Airbus model A320-200 in March 2017, and as such, no longer pays management fees to MALS.

 

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

 

For the three and six months ended June 30, 2017 and 2016, 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   Six Months Ended 
Entity  Capacity  Description  June 30, 2017   June 30, 2016   June 30, 2017   June 30, 2016 
                       
Macquarie Asset Management Inc.  Manager  Acquisition fees (1)  $-   $-   $-   $222,517 
Macquarie Asset Management Inc.  Manager  Management fee (2)   88,285    131,120    186,021    263,894 
Macquarie Asset Management Inc.  Manager  Operating Expenses (2)(3)   70,598    103,704    135,675    214,073 
Macquarie Asset Management Inc.  Manager  Outperformance fee (2)   18,466    58,657    231,567    77,170 
Macquarie Aircraft Leasing Services  Affiliate  Management fee (2)   -    21,150    17,010    42,300 

 

 

 

(1) Amount is capitalized into the carryingvalue of loan receivables.

(2) Amount charged directly to operations.

(3) Amount for the six months ended June 30, 2016 includes $12,740 allocated to carrying amount of loan receivables and remaining amount charged directly to operations.

 

10. MEMBER’S EQUITY

 

As of June 30, 2017 and December 31, 2016, the Fund had 9,151,031 and 9,183,494 shares of limited liability company membership interest outstanding, respectively (including the DRP shares and net of repurchased shares). As of June 30, 2017 and December 31, 2016, the cumulative number of shares repurchased since inception was 507,086 and 474,623, respectively.

 

The Fund declared distributions of $1,825,186 during the three months ended June 30, 2017, of which $1,223,478 were paid and $601,708 were payable as of June 30, 2017.

 

The $1,825,186 in distributions declared during the three months ended June 30, 2017 was approximately $0.20 per share of $10.00 par value membership interest ($9.00 par value for DRP shares), of which approximately $0.20 represented a partial-liquidating distribution paid from members’ equity.

 

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.

 

 16 

 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

NOTES TO THE FINANCIAL STATEMENTS

(Unaudited)

 

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

 

On June 30, 2017, the Fund measured its operating lease assets for smart safes at a fair value of $589,213 as part of its impairment analysis in order to determine the impairment charge of $584,590 recognized in the Fund’s Statements of Operations for the three and six months ended June 30, 2017 (Note 3). The smart safes were measured at fair value on a non-recurring basis, which the Fund considers a Level 3 measurement. In determining the value of the smart safes the Fund utilized information derived from the current status of negotiations around the buyout price with the lessee.

 

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 June 30, 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, and loans payable, 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 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. 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.

 

   June 30, 2017 
   Carrying Value   Fair Value 
         
Fixed rate loan receivables  $10,548,707   $10,682,489 
Fixed rate long-term debt  $13,823,654   $13,766,110 

 

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 June 30, 2017 and December 31, 2016, respectively.

 

 17 

 

 

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 acquires or originates 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 leases 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 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.

 

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Results of Operations for the Three and Six Months Ended June 30, 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 June 30, 2017 was $1,291,302 compared to $3,067,945 for the three months ended June 30, 2016, a decrease of $1,776,643. The decrease was driven by following;

 

·A decrease in finance and rental income of $1,460,856 when compared to the three months ended June 30, 2016 due to sales of leased equipment in first quarter of 2017 and the second and third quarters of 2016; and

 

·A decrease in interest income of $290,931 due a decrease in interest income from participating interests with MBL UK. The participating interests with MBL UK were fully repaid in the fourth quarter of 2016 and no further advances were made during the six months ended June 30, 2017.

 

Total expenses for the three months ended June 30, 2017 was $1,274,117 compared to $1,657,741 for the three months ended June 30, 2016, a decrease of $383,624. Movements in expenses were comprised of the following;

 

·A decrease in depreciation by $701,743 due to the sale of leased assets during first quarter of 2017 and second and third quarters of 2016 and reclassification of machine tool equipment to held for sale in the fourth quarter of 2016; and

 

·A decrease in other expenses of $154,742 primarily due to a decrease in outperformance fees paid to the Manager. The Fund pays the Manager 1% of each distribution. The Fund paid distributions of $1,825,186 during the three months ended June 30, 2017 compared to $5,843,212 during the three months ended June 30, 2016; partially offset by

 

·Impairment loss recognized on the Fund’s smart safes of $584,590 during the three months ended June 30, 2017 due to a decline in the market value of the safes.

 

As a result, the Fund’s net income for the three months ended June 30, 2017 was $17,185 compared to $1,410,204 for the three months ended June 30, 2016, a decrease of $1,393,019.

 

Total revenue for the six months ended June 30, 2017 was $4,757,111 compared to $6,417,747 for the six months ended June 30, 2016, a decrease of $1,660,636. The decrease was driven by following;

 

·A decrease in finance and rental income of $2,865,775 when compared to the six months ended June 30, 2016 due to sale of leased equipment in first quarter of 2017 and second and third quarters of 2016; and

 

·A decrease in interest income of $444,388 due a decrease in interest income from participating interests with MBL UK. The participating interests with MBL UK were fully repaid in the fourth quarter of 2016 and no further advances were made during the six months ended June 30, 2017; partially offset by

 

·Gains on sale of leased equipment of $1,686,927 recognized during the six months ended June 30, 2017 from 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, an increase of $1,679,000 compared to the six months ended June 30, 2016;

 

Total expenses for the six months ended June 30, 2017 was $2,262,656 compared to $3,369,994 for the six months ended June 30, 2016, a decrease of $1,107,338. Movements in expenses were comprised of the following;

 

·A decrease in depreciation of $1,558,158 due to sale of leased assets during first quarter of 2017 and second and third quarters of 2016 and the reclassification of machine tool equipment to held for sale in the fourth quarter of 2017; and

 

·A decrease in management fees of $103,378 due to the aforementioned sales of leased equipment; partially offset by

 

·An increase in other expenses of $65,302 primarily due to an increase in outperformance fees paid to the Manager. The Fund pays the Manager 1% of each distribution. The Fund paid distributions of $23,134,386 during the six months ended June 30, 2017 compared to $7,692,896 during the six months ended June 30, 2016. The increase in outperformance was fees was partially offset by a decrease in professional fees during the six months ended June 30, 2017.

 

·Impairment loss recognized on the Fund’s smart safes of $584,590 during the six months ended June 30, 2017 due to a decline in the market value of the safes.

 

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As a result, the Fund’s net income for the six months ended June 30, 2017 was $2,494,455 compared to $3,047,753 for the six months ended June 30, 2016, a decrease of $553,298.

 

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 and six months ended June 30, 2017 and 2016, respectively.

 

Financial Condition

 

This section discusses the major balance sheet variances from June 30, 2017 compared to December 31, 2016.

 

Total Assets  

 

Total assets decreased by $22,294,835 from $62,200,779 as of December 31, 2016 to $39,905,944 as of June 30, 2017 primarily due to:

 

·A decrease in leased equipment at cost and held for sale by $20,212,774 during the six months ended June 30, 2017 due to the sale of the Fund’s Airbus A320-200, reclassification of the Fund’s machine tool equipment to a sales-type lease, and an impairment loss recorded on the smart safes during the second quarter of 2017and;

 

·A decrease in loan receivable by $2,044,583 during the six months ended June 30, 2017 due to principal repayments received; and

 

·A decrease in cash of $2,268,074 due to distributions paid during the six months ended June 30, 2017 of $23,156,654 partially offset by proceeds from the sale of the Airbus A320-200 of $17,395,927 and other cash flows from operating activities during the period; partially offset by

 

·An increase in net investment in sales-type lease of $2,596,436 due to the aforementioned reclassification of the Fund’s machine tool equipment.

 

Total Liabilities

 

Total liabilities decreased by $1,537,149, from $16,919,958 as of December 31, 2016 to $15,382,809 as of June 30, 2017 primarily due to:

 

·A decrease in deferred finance and rental income of $768,525 due to the sale of the Airbus A320-200 in June 30 2017. The lessee paid its rentals quarterly in advance, and as a result of the sale there was no advance rental received on June 30, 2017; and

 

·Repayments of principal on the Fund’s long-term debt of $878,370.

 

Equity

 

Total members’ equity decreased by $20,757,686, from $45,280,821 as of December 31, 2016 to $24,523,135 as of June 30, 2017. The decrease in equity is primarily due to distributions declared to investors of $23,134,386, of which $22,532,678 were paid and $601,708 were payable as of June 30, 2017. Additionally, 32,463 shares were redeemed during the six months ended June 30, 2017 resulting in a decrease in equity of $117,755.

 

Liquidity and Capital Resources

 

Cash Flows Summary

 

The following table sets forth summary cash flow data for the six months ended June 30, 2017 and 2016.

 

   June 30, 2017   June 30, 2016 
Net cash provided by/(used in) :          
Operating activities  $2,424,660   $5,608,947 
Investing activities   19,463,076    (5,352,787)
Financing activities   (24,155,810)   (8,998,297)
Net decrease in cash and cash equivalents  $(2,268,074)  $(8,742,137)

 

See the Statements of Cash Flows included in “Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for additional information. 

 

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As of June 30, 2017, the Fund had cash and cash equivalents of $2,494,874. The amount of cash provided by operating activities for the six months ended June 30, 2017 of 2,424,660 consisted primarily of rentals and interest collected during the period from equipment leases and loans. The decrease of $3,184,287 from the six months ended June 30, 2016 is primarily due to sales of leased equipment in the first quarter of 2017 and the second and third quarters of 2016.

 

The cash used in investing activities for the six months ended June 30, 2017 is primarily attributable to proceeds of $17,395,927 from the sale of Airbus A320-200, and loan repayments of $2,067,149. There were no cash outflows during the six months ended June 30, 2017 from investing activities. Cash provided by investing increased by $24,815,863 when compared to the six months ended June 30, 2016, primarily due to sales proceeds received for the Airbus A320-200 in the first quarter of 2017 and funding of a finance facility for a U.S. drilling company in the first quarter of 2016.

 

The cash used in financing activities for the six months ended June 30, 2017 is primarily attributable to distributions to members, repayment of principal on long-term debt, and share repurchases. The increase in cash used in financing activities of $15,157,513 compared to the six months ended June 30, 2016 is due to the fact that the Fund paid distributions of $23,156,654 during the six months ended June 30, 2017 compared to $7,716,966 paid during the six months ended June 30, 2016.

 

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 have also made investments in other equipment-related transactions which allowed us to directly or indirectly participate in the benefits and risks of equipment ownership or usage and make loans collateralized by equipment.

 

As of August14, 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 

 

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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 $1,846,650 and $5,865,676 to our members during the three months ended June 30, 2017 and 2016, respectively and cash distributions of $23,156,654 and $7,716,966 to our members during the six months ended June 30, 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 June 30, 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.

 

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 June 30, 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 June 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

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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:

 

Period  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)

 
April 1 to April 30, 2017   -    -    -    - 
May 1 to May 31, 2017   20,629   $2.88    20,629    - 
June 1 to June 30, 2017   -    -    -    - 
Total   20,629   $2.88    20,629    - 

 

(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.

 

Item 6.Exhibits

 

An exhibit index has been filed as part of this Report 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: August 14, 2017

 

By: /S/ BRETT BELDNER  
Name: Brett Beldner  
Title: Principal Financial Officer of the Manager and Principal  
  Accounting Officer of Registrant  

 

Date: August 14, 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 June 30, 2017, filed on Aug 14, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) the Balance Sheets as of June 30, 2017 (Unaudited) and December 31, 2016, (ii) the Statements of Operations for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited), (iii) the Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016 (Unaudited), (iv) the Statements of Changes in Members’ Equity for the Six Months Ended June 30, 2017 (Unaudited) and, (v) the Notes to Financial Statements (Unaudited).

 

 

 

*Filed herewith.

 

**Furnished, rather than filed herewith.

 

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