Attached files

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EX-32.2 - EX-32.2 - ATEL 16, LLCatel-20200331ex3226b8db9.htm
EX-32.1 - EX-32.1 - ATEL 16, LLCatel-20200331ex32134d006.htm
EX-31.2 - EX-31.2 - ATEL 16, LLCatel-20200331ex312519765.htm
EX-31.1 - EX-31.1 - ATEL 16, LLCatel-20200331ex311d226a2.htm

 

Form 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

☒              Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended March 31, 2020

☐         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 000‑55417

 

ATEL 16, LLC

(Exact name of registrant as specified in its charter)

 

 

 

California

90‑0920813

(State or other jurisdiction of

(I. R. S. Employer

incorporation or organization)

Identification No.)

 

The Transamerica Pyramid, 600 Montgomery Street, 9th Floor, San Francisco, California 94111

(Address of principal executive offices)

 

Registrant’s telephone number, including area code:  (415) 989‑8800

 

Securities registered pursuant to section 12(b) of the Act:  None

 

Securities registered pursuant to section 12(g) of the Act:  Limited Liability Company Units

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

N/A

 

N/A

 

N/A

 

Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b‑2 of the Exchange Act. (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 ☒

 

The number of Limited Liability Company Units outstanding as of April 30, 2020 was 4,274,486.

 

DOCUMENTS INCORPORATED BY REFERENCE

None.

 

 

 

ATEL 16, LLC

Index

 

 

 

 

PART I 

FINANCIAL INFORMATION

3

 

 

 

Item 1. 

Financial Statements (Unaudited)

3

 

Balance Sheets, March 31, 2020 and December 31, 2019

3

 

Statements of Operations for the three months ended March 31, 2020 and 2019

4

 

Statements of Changes in Members’ Capital for the three months ended March 31, 2020 and 2019

5

 

Statements of Cash Flows for the three months ended March 31, 2020 and 2019

6

 

Notes to the Financial Statements

7

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

 

 

 

Item 4. 

Controls and Procedures

30

 

 

 

PART II. 

OTHER INFORMATION

32

 

 

 

Item 1. 

Legal Proceedings

32

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

32

 

 

 

Item 3. 

Defaults Upon Senior Securities

32

 

 

 

Item 4. 

Mine Safety Disclosures

32

 

 

 

Item 5. 

Other Information

32

 

 

 

Item 6. 

Exhibits

32

 

2

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).

ATEL 16, LLC

BALANCE SHEETS

MARCH 31, 2020 AND DECEMBER 31, 2019
(In Thousands)

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

2020

 

2019

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,499

 

$

7,992

Accounts receivable, net

 

 

98

 

 

99

Notes receivable, net

 

 

1,091

 

 

1,384

Investment in securities

 

 

47

 

 

41

Warrants, fair value

 

 

688

 

 

730

Equipment under operating leases, net

 

 

16,200

 

 

15,831

Prepaid expenses and other assets

 

 

16

 

 

13

Total assets

 

$

24,639

 

$

26,090

 

 

 

 

 

 

 

LIABILITIES AND MEMBERS’ CAPITAL

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities:

 

 

 

 

 

 

Due to Managing Member and affiliates

 

$

87

 

$

52

Accrued distributions to Other Members

 

 

289

 

 

289

Due to Other

 

 

105

 

 

108

Non-recourse debt

 

 

4,548

 

 

5,265

Unearned operating lease income

 

 

398

 

 

244

Total liabilities

 

 

5,427

 

 

5,958

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Members’ capital:

 

 

 

 

 

 

Managing Member

 

 

 —

 

 

 —

Other Members

 

 

19,212

 

 

20,132

Total Members’ capital

 

 

19,212

 

 

20,132

Total liabilities and Members’ capital

 

$

24,639

 

$

26,090

 

See accompanying notes.

3

ATEL 16, LLC

STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED

MARCH 31, 2020 AND 2019
(In Thousands Except for Units and Per Unit Data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2020

    

2019

 

Revenues:

 

 

 

 

 

 

 

Leasing and lending activities:

 

 

 

 

 

 

 

Operating lease revenue

 

$

945

 

$

1,276

 

Notes receivable interest income

 

 

59

 

 

123

 

(Loss) gain on sales of equipment under operating leases and early termination of notes receivable

 

 

(39)

 

 

27

 

Unrealized loss on fair value adjustment for warrants

 

 

(42)

 

 

(3)

 

Interest income

 

 

 1

 

 

 —

 

Other

 

 

36

 

 

 2

 

Total revenues

 

 

960

 

 

1,425

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

Depreciation of operating lease assets

 

 

611

 

 

837

 

Asset management fees to Managing Member

 

 

121

 

 

132

 

Acquisition expense

 

 

70

 

 

 —

 

Cost reimbursements to Managing Member and/or affiliates

 

 

131

 

 

156

 

Provision for losses on notes receivable

 

 

 —

 

 

13

 

Amortization of initial direct costs

 

 

14

 

 

 1

 

Interest expense

 

 

48

 

 

82

 

Professional fees

 

 

60

 

 

74

 

Outside services

 

 

21

 

 

24

 

Taxes on income and franchise fees

 

 

 9

 

 

 —

 

Other

 

 

46

 

 

66

 

Total expenses

 

 

1,131

 

 

1,385

 

Net (loss) income

 

$

(171)

 

$

40

 

 

 

 

 

 

 

 

 

Net (loss) income:

 

 

 

 

 

 

 

Other Members

 

 

(171)

 

 

40

 

 

 

$

(171)

 

$

40

 

 

 

 

 

 

 

 

 

Net (loss) income per Limited Liability Company Unit (Other Members)

 

$

(0.04)

 

$

0.01

 

Weighted average number of Units outstanding

 

 

4,274,486

 

 

4,274,486

 

 

See accompanying notes.

4

ATEL 16, LLC

STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL

FOR THE THREE MONTHS ENDED

MARCH 31, 2020 AND 2019
(In Thousands Except for Units and Per Unit Data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2020

 

 

 

 

Amount

 

 

 

 

 

 

 

Other

 

Managing

 

 

 

 

 

Units

    

Members

    

Member

    

Total

Balance December 31, 2019

 

4,274,486

 

$

20,132

 

$

 —

 

$

20,132

Distributions to Other Members ($0.18 per Unit)

 

 —

 

 

(749)

 

 

 —

 

 

(749)

Net loss

 

 —

 

 

(171)

 

 

 —

 

 

(171)

Balance March 31, 2020

 

4,274,486

 

$

19,212

 

$

 —

 

$

19,212

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2019

 

 

 

 

Amount

 

 

 

 

 

 

 

Other

 

Managing

 

 

 

 

    

Units

    

Members

    

Member

    

Total

Balance December 31, 2018

 

4,274,486

 

$

22,243

 

$

 —

 

$

22,243

Distributions to Other Members ($0.17 per Unit)

 

 —

 

 

(748)

 

 

 —

 

 

(748)

Net income

 

 —

 

 

40

 

 

 —

 

 

40

Balance March 31, 2019

 

4,274,486

 

$

21,535

 

$

 —

 

$

21,535

 

See accompanying notes.

5

ATEL 16, LLC

STATEMENTS OF CASH FLOWS

 

FOR THE THREE MONTHS ENDED

 MARCH 31, 2020 AND 2019
(In Thousands) 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2020

    

2019

 

Operating activities:

 

 

 

 

 

 

 

Net (loss) income

 

$

(171)

 

$

40

 

Adjustment to reconcile net (loss) income to cash provided by operating activities:

 

 

 

 

 

 

 

Accretion of note discount-warrants

 

 

(13)

 

 

(20)

 

Depreciation of operating lease assets

 

 

611

 

 

837

 

Loss (gain) on sales of equipment under operating leases and early termination
of notes receivable

 

 

39

 

 

(27)

 

Amortization of initial direct costs

 

 

14

 

 

 1

 

Provision for (reversal of) credit losses

 

 

 5

 

 

(39)

 

Unrealized loss on fair value adjustment for warrants

 

 

42

 

 

 3

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(4)

 

 

55

 

Due from Managing Members and affiliates

 

 

 —

 

 

(30)

 

Prepaid expenses and other assets

 

 

(3)

 

 

(32)

 

Accounts payable, Managing Member and affiliates

 

 

35

 

 

35

 

Accounts payable, other

 

 

(3)

 

 

(1)

 

Unearned operating lease income

 

 

154

 

 

138

 

Net cash provided by operating activities

 

 

706

 

 

960

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

Purchases of equipment on operating leases

 

 

(1,099)

 

 

 —

 

Purchase of securities

 

 

(7)

 

 

 —

 

Proceeds from sales of equipment under operating leases and early termination of notes receivable

 

 

68

 

 

228

 

Note receivable advances

 

 

 —

 

 

(13)

 

Principal payments received on notes receivable

 

 

306

 

 

422

 

Net cash (used in) provided by investing activities

 

 

(732)

 

 

637

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

Borrowings under non-recourse debt

 

 

 —

 

 

1,514

 

Repayments under non-recourse debt

 

 

(718)

 

 

(678)

 

Distributions to Other Members

 

 

(749)

 

 

(748)

 

Net cash (used in) provided by financing activities

 

 

(1,467)

 

 

88

 

 

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

 

(1,493)

 

 

1,685

 

Cash and cash equivalents at beginning of period

 

 

7,992

 

 

4,368

 

Cash and cash equivalents at end of period

 

$

6,499

 

$

6,053

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash paid during period for interest

 

$

66

 

$

64

 

Cash paid during period for taxes

 

$

 5

 

$

 2

 

 

 

 

 

 

 

 

 

Schedule of non-cash investing and financing transactions:

 

 

 

 

 

 

 

Distributions payable to Other Members at period-end

 

$

289

 

$

289

 

See accompanying notes.

 

 

 

6

Table of Contents

ATEL 16, LLC

 

NOTES TO FINANCIAL STATEMENTS

 

(Unaudited)

1.  Organization and Limited Liability Company matters:

ATEL 16, LLC (the “Company” or the “Fund”) was formed under the laws of the state of California on December 27, 2012 (“Date of Inception”) for the purpose of equipment financing and acquiring equipment to engage in equipment leasing and sales activities. The Managing Member of the Company is ATEL Managing Member, LLC (the “Managing Member” or “Manager”), a Nevada limited liability company. The Managing Member is controlled by ATEL Financial Services, LLC (“AFS”), a wholly-owned subsidiary of ATEL Capital Group. The Fund may continue until terminated as provided in the ATEL 16, LLC Limited Liability Company Operating Agreement dated March 1, 2013 (the “Operating Agreement”). Contributions in the amount of $500 were received as of December 31, 2012, which represented the initial member’s capital investment. As a limited liability company, the liability of any individual member for the obligations of the Fund is limited to the extent of capital contributions to the Fund by the individual member.

The Company conducted a public offering of 15,000,000 Limited Liability Company Units (“Units”), at a base price of $10 per Unit. As of March 6, 2014, subscriptions for the minimum number of Units (120,000, representing $1.2 million), excluding subscriptions from Pennsylvania investors, had been received and the Fund requested subscription proceeds to be released from escrow. On that date, the Company commenced initial operations and continued in its development stage activities until transitioning to an operating enterprise during the second quarter of 2014.  Pennsylvania subscriptions are subject to a separate escrow and are released to the Fund only when aggregate subscriptions for all investors equal to at least $7.5 million. Total contributions to the Fund exceeded $7.5 million on June 19, 2014, at which time a request was processed to release the Pennsylvania escrowed amounts. The offering was terminated on November 5, 2015.

As of March 31, 2020, cumulative gross contributions, less rescissions and repurchases (net of distributions paid and allocated syndication costs, as applicable), totaling $42.9 million (inclusive of the $500 initial Member’s capital investment) have been received. As of the same date, 4,274,486 Units were issued and outstanding.

The Company’s principal objectives are to invest in a diversified portfolio of investments that will (i) preserve, protect and return the Company’s invested capital; (ii) generate regular cash distributions to Unit holders, with any balance remaining after required minimum distributions to be used to purchase additional investments during the Reinvestment Period (the first six years after the year the offering terminates); and (iii) provide additional cash distributions following the Reinvestment Period and until all investment portfolio assets have been sold or otherwise disposed. The Company is governed by the Operating Agreement.

Pursuant to the terms of the Operating Agreement, the Managing Member and/or its affiliates receives compensation for services rendered and reimbursements for costs incurred on behalf of the Company (See Note 6, Related party transactions).  The Company is required to maintain reasonable cash reserves for working capital, the repurchase of Units and contingencies. The repurchase of Units is solely at the discretion of the Managing Member.

These unaudited interim financial statements should be read in conjunction with the financial statements and notes thereto contained in the report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission.

7

Table of Contents

ATEL 16, LLC

 

NOTES TO FINANCIAL STATEMENTS

 

(Unaudited)

2.  Summary of significant accounting policies:

Basis of presentation:

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (‘‘GAAP’’) for interim financial information and with the instructions to Form 10-Q as mandated by the Securities and Exchange Commission. The unaudited interim financial statements reflect all adjustments which are, in the opinion of the Managing Member, necessary for a fair statement of financial position and results of operations for the interim periods presented. All such adjustments are of a normal recurring nature. Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the full year.

 

Footnote and tabular amounts are presented in thousands, except as to Units and per Unit data.

 

In preparing the accompanying financial statements, the Company has reviewed, as determined necessary by the Managing Member, events that have occurred after March 31, 2020, up until the issuance of the financial statements. No events were noted which would require disclosure in the footnotes to the financial statements.

 

Cash and cash equivalents:

Cash and cash equivalents include cash in banks and cash equivalent investments such as U.S. Treasury instruments with original and/or purchased maturities of ninety days or less.

Use of Estimates:

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates. Such estimates primarily relate to the determination of residual values at the end of the lease term and expected future cash flows used for impairment analysis purposes and for determination of the allowance for doubtful accounts and reserve for credit losses on notes receivable.    

Segment reporting:

The Company is organized into one operating segment for the purpose of making operating decisions or assessing performance. Accordingly, the Company operates in one reportable operating segment in the United States with activities in the United States and Costa Rica.

The Company’s principal decision makers are the Managing Member’s Chief Executive Officer and its Chief Financial Officer and Chief Operating Officer. The Company believes that its equipment leasing business operates as one reportable segment because: a) the Company measures profit and loss at the equipment portfolio level as a whole; b) the principal decision makers do not review information based on any operating segment other than the equipment leasing transaction portfolio; c) the Company does not maintain discrete financial information on any specific segment other than its equipment financing operations; d) the Company has not chosen to organize its business around different products and services other than equipment lease financing; and e) the Company has not chosen to organize its business around geographic areas.

8

Table of Contents

ATEL 16, LLC

 

NOTES TO FINANCIAL STATEMENTS

 

(Unaudited)

The table below summarize geographic information relating to the sources, by nation, of the Company’s total revenues for the three months ended March 31, 2020 and 2019 and long-lived assets as of March 31, 2020 and December 31, 2019 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For The Three Months Ended March 31, 

 

 

    

2020

    

% of Total

    

 

2019

    

% of Total 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

738

 

77

%  

 

$

1,193

 

84

%

Costa Rica

 

 

222

 

23

%  

 

 

232

 

16

%

Total

 

$

960

 

100

%  

 

$

1,425

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 

 

As of December 31, 

 

 

    

2020

    

% of Total

    

2019

    

% of Total

 

Long-lived assets

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

13,341

 

82

%  

$

12,972

 

84

%

Costa Rica

 

 

2,859

 

18

%  

 

2,859

 

16

%

Total

 

$

16,200

 

100

%  

$

15,831

 

100

%

 

Accounts receivable:

Accounts receivable represent the amounts billed under operating lease contracts and notes receivable which are currently due to the Company. Allowances for doubtful accounts are typically established based on historical charge off and collection experience and the collectability of specifically identified lessees and borrowers, and invoiced amounts. Accounts receivable deemed uncollectible are generally charged off against the allowance on a specific identification basis. Recoveries of amounts that were previously written-off are recorded as other income in the period received.

Financing receivables:

In addition to the allowance established for delinquent accounts receivable, the total allowance related solely to financing receivables also includes anticipated impairment charges on notes receivable.

Notes are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest when due according to the contractual terms of the note agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest when due. If it is determined that a loan is impaired with regard to scheduled payments, the Company will perform an analysis of the note to determine if an impairment valuation reserve is necessary. This analysis considers the estimated cash flows from the note, or the collateral value of the property underlying the note when note repayment is collateral dependent. Any required valuation reserve is charged to earnings when determined; and notes are charged off to the allowance as they are deemed uncollectible.

9

Table of Contents

ATEL 16, LLC

 

NOTES TO FINANCIAL STATEMENTS

 

(Unaudited)

Investment in securities:

From time to time, the Company may purchase securities of its borrowers or receive warrants in connection with its lending arrangements.

Purchased securities 

The Company’s purchased securities do not have readily determinable fair values and are measured at cost minus impairment, and adjusted for changes in observable prices. Factors considered by the Managing Member in determining fair value include, but are not limited to, available financial information, the issuer’s ability to meet its current obligations and indications of the issuer’s subsequent ability to raise capital. The Company’s investment securities totaled $47 thousand and $41 thousand at March 31, 2020 and December 31, 2019, respectively. There were no fair value adjustments on investment securities for the respective three months ended March 31, 2020 and 2019. Cumulatively, there has been no fair value adjustment recorded on such securities. There were neither impairment losses nor sales or disposition of securities during the three months ended March 31, 2020 and 2019.

 

Warrants

Warrants owned by the Company are not registered for public sale, but are considered derivatives and are reflected at an estimated fair value on the balance sheet as determined by the Managing Member. The Company recorded unrealized losses of $42 thousand and $3 thousand on fair valuation of its warrants for the quarters ended March 31, 2020 and 2019, respectively. The estimated fair value of the Company’s warrants were $688 thousand and $730 thousand at March 31, 2020 and December 31, 2019, respectively. The Company realized no gains or losses from the net exercise of warrants during the three months ended March 31, 2020 and 2019.

Credit risk:

Financial instruments that potentially subject the Company to concentrations of credit risk include cash and cash equivalents, operating lease receivables, notes receivable and accounts receivable. The Company places the majority of its cash deposits in noninterest-bearing accounts with financial institutions that have no less than $10 billion in assets. Such deposits are insured up to $250 thousand. The remainder of the Fund’s cash is temporarily invested in U.S. Treasury denominated instruments. The concentration of such deposits and temporary cash investments is not deemed to create a significant risk to the Company. Accounts and notes receivable represent amounts due from lessees or borrowers in various industries, are related to equipment on operating lease contracts and notes receivable.

Equipment on operating leases and related revenue recognition:

Equipment subject to operating leases is stated at cost. Depreciation is recognized on a straight-line method over the terms of the related leases to the equipment’s estimated residual values. Off-lease equipment is generally not subject to depreciation. The Company depreciates all lease assets, in accordance with guidelines consistent with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360‑10‑35‑3, over the periods of the lease terms contained in each asset’s respective lease contract to the estimated residual value at the end of the lease contract. All lease assets are purchased only concurrent with the execution of a lease commitment by the lessee. Thus, the original depreciation period corresponds with the term of the original lease. Once the term of an original lease contract is completed, the subject property is typically sold to the existing user, re-leased to the existing user, or, when off-lease, is held for sale. Assets which are re-leased continue to be depreciated using the terms of the new lease agreements and the estimated residual values at the end of the new lease terms, adjusted downward as necessary. Assets classified as held-for-sale are carried at the lower of carrying amount, or the fair value less cost to sell (ASC 360-10-35-43).

10

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ATEL 16, LLC

 

NOTES TO FINANCIAL STATEMENTS

 

(Unaudited)

The Company does not use the equipment held in its portfolio, but holds it solely for lease and ultimate sale. In the course of marketing equipment that has come off-lease, management may determine at some point that re-leasing the assets may provide a superior return for investors and would then execute another lease. Upon entering into a new lease contract, management will estimate the residual value once again and resume depreciation. If, and when, the Company, at any time, determines that depreciation in value may have occurred with respect to an asset held-for-sale, the Company would review the value to determine whether a material reduction in value had occurred and recognize any appropriate impairment. All lease assets, including off-lease assets, are subject to the Company’s quarterly impairment analysis, as described below. Maintenance costs associated with the Fund’s portfolio of leased assets are expensed as incurred. Major additions and betterments are capitalized.

Operating lease revenue is recognized on a straight-line basis over the term of the underlying leases. The initial lease terms will vary as to the type of equipment subject to the leases, the needs of the lessees and the terms to be negotiated, but initial leases are generally on terms from 36 to 120 months. The difference between rent received and rental revenue recognized is recorded as unearned operating lease income on the balance sheet.

Operating leases are generally placed in a non-accrual status (i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, management considers the equipment underlying the lease contracts for impairment and periodically reviews the credit worthiness of all operating lessees with payments outstanding less than 90 days. Based upon management’s judgment, the related operating leases may be placed on non-accrual status. Leases placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid lease payments is probable. Until such time, revenues are recognized on a cash basis. Upon adoption of Accounting Standards Update (“ASU”) 2016-02, provisions for credit losses relating to operating leases are now included in lease income in the Company’s financial statements. Provisions for credit losses prior to January, 1, 2019 were previously included in operating expenses in the Company’s financial statements.

Notes receivable, unearned interest income and related revenue recognition:

The Company records all future payments of principal and interest on notes as notes receivable, which are then offset by the amount of any related unearned interest income. For financial statement purposes, the Company reports only the net amount of principal due on the balance sheet. The unearned interest is recognized over the term of the note and the income portion of each note payment is calculated so as to generate a constant rate of return on the net balance outstanding. Any fees or costs related to notes receivable are recorded as part of the net investment in notes receivable and amortized over the term of the loan.

Allowances for losses on notes receivable are typically established based on historical charge off and collection experience and the collectability of specifically identified borrowers and billed and unbilled receivables. Notes are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest when due according to the contractual terms of the note agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. If it is determined that a loan is impaired with regard to scheduled payments, the Company will perform an analysis of the note to determine if an impairment valuation reserve is necessary. This analysis considers the estimated cash flows from the note, or the collateral value of the property underlying the note when note repayment is collateral dependent. Any required valuation reserve is charged to earnings when determined; and notes are charged off to the allowance as they are deemed uncollectible.

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ATEL 16, LLC

 

NOTES TO FINANCIAL STATEMENTS

 

(Unaudited)

Notes receivable are generally placed in a non-accrual status (i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, management periodically reviews the creditworthiness of companies with note payments outstanding less than 90 days. Based upon management’s judgment, the related notes may be placed on non-accrual status. Notes placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid receivable is probable. Until such time, all payments received are applied only against outstanding principal balances.

Initial direct costs:

With the adoption of ASU 2016-02 certain costs associated with the execution of the Company’s leases, which were previously capitalized and amortized over the life of their respective leases, are expensed as incurred effective January 1, 2019. In 2018 and prior, the Company capitalized initial direct costs (“IDC”) associated with the origination of lease assets.  IDC includes both internal costs (e.g., the costs of employees’ activities in connection with successful lease originations) and external broker fees incurred with such originations. The costs are amortized on a lease by lease (or note by note) basis based on actual lease term using a straight-line method for operating leases and the effective interest rate method for notes receivable. Upon disposal of the underlying lease assets and notes receivable, both the initial direct costs and the associated accumulated amortization are relieved. Costs related to leases or notes receivable that are not consummated are not eligible for capitalization as initial direct costs and are expensed as acquisition expense.

Acquisition expense:

Acquisition expense represents costs which include, but are not limited to, legal fees and expenses, travel and communication expenses, cost of appraisals, accounting fees and expenses and miscellaneous expenses related to the selection and acquisition of equipment which are reimbursable to the Managing Member under the terms of the Operating Agreement. As the costs are not eligible for capitalization as initial direct costs, such amounts are expensed as incurred.

Fair Value:

Fair value measurements and disclosures are based on a fair value hierarchy as determined by significant inputs used to measure fair value. The three levels of inputs within the fair value hierarchy are defined as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuations in which all significant inputs are observable in the market.

Level 3 – Valuation is modeled using significant inputs that are unobservable in the market. These unobservable inputs reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability.

12

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ATEL 16, LLC

 

NOTES TO FINANCIAL STATEMENTS

 

(Unaudited)

The Company’s valuation policy is determined by members of the Asset Management, Credit and Accounting departments. Whenever possible, the policy is to obtain quoted market prices in active markets to estimate fair values for recognition and disclosure purposes. Where quoted market prices in active markets are not available, fair values are estimated using discounted cash flow analyses, broker quotes, information from third party remarketing agents, third party appraisals of collateral and/or other valuation techniques. These techniques are significantly affected by certain of the Company’s assumptions, including discount rates and estimates of future cash flows. Potential taxes and other transaction costs are not considered in estimating fair values. As the Company is responsible for determining fair value, an analysis is performed on prices obtained from third parties. Such analysis is performed by asset management and credit department personnel who are familiar with the Company’s investments in equipment, notes receivable and equity securities of venture companies. The analysis may include a periodic review of price fluctuations and validation of numbers obtained from a specific third party by reference to multiple representative sources.

Asset valuation:

Recorded values of the Company’s leased asset portfolio are reviewed each quarter to confirm the reasonableness of established residual values and to determine whether there is indication that an asset impairment might have taken place. The Company uses a variety of sources and considers many factors in evaluating whether the respective book values of its assets are appropriate. In addition, the Company may direct a residual value review at any time if it becomes aware of issues regarding the ability of a lessee to continue to make payments on its lease contract. An impairment loss is measured and recognized only if the estimated undiscounted future cash flows of the asset are less than the net book value. The estimated undiscounted future cash flows are the sum of the residual value of the asset at the end of the asset’s lease contract and undiscounted future rents from the existing lease contract. The residual value assumes, among other things, that the asset is utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the marketplace are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly. Impairment is measured as the difference between the fair value (as determined by a valuation method using discounted estimated future cash flows, third party appraisals or comparable sales of similar assets as applicable based on asset type) of the asset and its carrying value on the measurement date. Upward adjustments for impairments recognized in prior periods are not made in any circumstances.

Per Unit data:

Net loss and distributions per Unit are based upon the weighted average number of Other Members Units outstanding during the period.

Emerging growth company:

Section 107 of the Jumpstart Our Business Startups Act (the “JOBS Act”) provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have chosen to “opt out” of such extended transition period and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

13

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ATEL 16, LLC

 

NOTES TO FINANCIAL STATEMENTS

 

(Unaudited)

Recent accounting pronouncements:

In March 2020, the FASB issued ASU No. 2020-03, Codification Improvements to Financial Instruments (“ASU 2020-03”). ASU 2020-03 improves and clarifies various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016. ASU 2020-03 includes seven different issues that describe the areas of improvement and the related amendments to GAAP that are intended to make the standards easier to understand and apply by eliminating inconsistencies and providing clarifications. The amendments have different effective dates. Management is currently evaluating the effect of adopting this new accounting guidance but does not expect adoption will have a material impact on the Fund’s financial statements and disclosures.

 

In June 2016, the FASB issued Accounting Standards Update 2016‑13, Financial Instruments — Credit Losses (Topic 326) (“ASU 2016‑13”). The main objective of this Update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this Update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect entities holding financial assets and equipment under operating leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, equipment under operating leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. Management is currently evaluating the standard and expects the update may potentially result in the increase in the allowance for credit losses given the change to estimated losses over the contractual life adjusted for expected prepayments.

In November 2018, the FASB issued Accounting Standards Update 2018-19, Codification Improvements to Topic 326, Financial Instruments — Credit Losses (“ASU 2018-19”). The new standard clarifies certain aspects of the new CECL impairment model in ASU 2016-13. The amendment clarifies that receivables arising from operating leases are within the scope of ASC 842, rather than ASC 326. Management is currently evaluating the impact of the standard on the financial statements and related disclosure requirements.

On August 15, 2019, the FASB issued a proposed ASU that would grant certain companies additional time to implement FASB standards on CECL and hedging. The proposed ASU defers the effective date for CECL to fiscal periods beginning after December 15, 2022, including interim periods within those fiscal years; and defers the effective date for hedging to fiscal periods beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. The ASU was approved on October 16, 2019. In February 2020, the FASB issued ASU 2020-02 and delayed the effective date of Topic 326 until fiscal year beginning after December 15, 2022.

 

In August 2018, the FASB issued Accounting Standards Update 2018-13, Fair Value Measurement (“ASU 2018-13”), which amends the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. This ASU modifies disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Fund adopted ASU 2018-13 on January 1, 2020. Such adoption did not have a significant impact on the Fund’s financial statements and related disclosure requirements.

 

 

14

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ATEL 16, LLC

 

NOTES TO FINANCIAL STATEMENTS

 

(Unaudited)

3. Notes receivable, net:

The Company has various notes receivable from borrowers who have financed the purchase of equipment through the Company. As of March 31, 2020, the original terms of the notes are from 30 to 42 months with interest at rates ranging from 11.68% to 16.87% per annum. The notes are secured by the equipment financed and have maturity dates ranging from 2020 through 2022.

As of March 31, 2020, the minimum future payments receivable are as follows (in thousands):

 

 

 

 

Nine months ending December 31, 2020

 

$

619

Year ending December 31, 2021

 

 

555

2022

 

 

115

 

 

 

1,289

Less: portion representing unearned interest income

 

 

(144)

 

 

 

1,145

Less: warrants - notes receivable discount

 

 

(56)

Unamortized initial direct costs

 

 

 2

Notes receivable, net

 

$

1,091

 

IDC expenses related to notes receivable and the Company’s operating leases for the three months ended March 31, 2020 and 2019 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2020

    

2019

 

IDC amortization - notes receivable

 

$

 1

 

$

 —

 

IDC amortization - lease assets

 

 

13

 

 

 1

 

Total

 

$

14

 

$

 1

 

 

 

4. Equipment under operating leases, net:

The Company’s equipment under operating leases, net consists of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Balance

    

Additions/

    

Depreciation/

    

Balance

 

 

December 31, 

 

Dispositions/

 

Amortization

 

March 31, 

 

 

2019

 

Reclassifications

 

Expense

 

2020

Equipment under operating leases, net

 

$

15,704

 

$

1,036

 

$

(611)

 

$

16,129

Assets held for sale or lease, net

 

 

43

 

 

(43)

 

 

 —

 

 

 —

Initial direct costs, net of accumulated amortization of $263

   at March 31, 2020 and $291 at December 31, 2019

 

 

84

 

 

 —

 

 

(13)

 

 

71

Total

 

$

15,831

 

$

993

 

$

(624)

 

$

16,200

 

The Company utilizes a straight line depreciation method over the term of the equipment lease for equipment on operating leases currently in its portfolio. Depreciation expense on the Company’s equipment totaled $611 thousand and $837 thousand for the respective three months ended March 31, 2020 and 2019.  

IDC amortization expense related to the Company’s operating leases totaled $13 thousand and $1 thousand for the three months ended March 31, 2020 and 2019, respectively.

15

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ATEL 16, LLC

 

NOTES TO FINANCIAL STATEMENTS

 

(Unaudited)

All of the Company’s lease asset purchases and capital improvements were made during the years from 2014 through 2020.

Operating leases:

Property on operating leases consists of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Balance

    

 

 

    

 

 

    

Balance

 

 

December 31, 

 

 

 

 

 

 

 

March 31, 

 

 

2019

 

Additions

 

Dispositions

 

2020

Aviation

 

$

4,587

 

$

 —

 

$

 —

 

$

4,587

Containers

 

 

6,545

 

 

 —

 

 

 —

 

 

6,545

Coal terminal

 

 

5,000

 

 

 —

 

 

 —

 

 

5,000

Railroad

 

 

4,017

 

 

 —

 

 

 —

 

 

4,017

Mining

 

 

2,766

 

 

 —

 

 

 —

 

 

2,766

Materials handling

 

 

1,287

 

 

 —

 

 

(280)

 

 

1,007

Marine vessels

 

 

2,291

 

 

 —

 

 

 —

 

 

2,291

Trucks and trailers

 

 

1,103

 

 

 —

 

 

 —

 

 

1,103

Manufacturing

 

 

1,243

 

 

 —

 

 

 —

 

 

1,243

Construction

 

 

 —

 

 

1,099

 

 

 —

 

 

1,099

Other

 

 

414

 

 

 —

 

 

 —

 

 

414

 

 

 

29,253

 

 

1,099

 

 

(280)

 

 

30,072

Less accumulated depreciation

 

 

(13,549)

 

 

(611)

 

 

217

 

 

(13,943)

Total

 

$

15,704

 

$

488

 

$

(63)

 

$

16,129

 

The average estimated residual value for assets on operating leases was 35% and 34% of the assets’ original cost at March 31, 2020 and December 31, 2019 respectively.  There were no operating leases in non-accrual status at March 31, 2020 and 2019.

At March 31, 2020, the aggregate amounts of future minimum lease payments receivable are as follows (in thousands):

 

 

 

 

 

    

Operating 

 

 

Leases

Nine months ending December 31, 2020

 

$

1,807

Year ending December 31, 2021

 

 

1,833

2022

 

 

1,452

2023

 

 

648

2024

 

 

486

Thereafter

 

 

572

 

 

$

6,798

 

16

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ATEL 16, LLC

 

NOTES TO FINANCIAL STATEMENTS

 

(Unaudited)

The useful lives for each category of leases is reviewed at a minimum of once per quarter. As of March 31, 2020, the respective useful lives of each category of lease assets in the Company’s portfolio are as follows (in years):

 

 

 

Equipment category

    

Useful Life

Coal terminal

 

50 - 60

Railroad

 

35 - 50

Marine vessel

 

20 - 30

Aviation

 

20 - 30

Containers

 

15 - 20

Manufacturing

 

10 - 15

Mining

 

10 - 15

Materials handling

 

7 - 10

Trucks and trailers

 

7 - 10

 

 

5. Allowance for credit losses:

The Company’s allowance for credit losses are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for

 

Valuation

 

 

 

 

 

Doubtful

 

Adjustments on

 

 

 

 

 

Accounts

 

Financing Receivables

 

 

 

 

 

Operating 

 

Notes

 

 

 

 

    

Leases

    

Receivable

    

Total

Balance December 31, 2018

 

$

65

 

$

133

 

$

198

Provision for credit losses

 

 

(52)

 

 

13

 

 

(39)

Balance March 31, 2019

 

$

13

 

$

146

 

$

159

 

 

 

 

 

 

 

 

 

 

Allowance for

 

Valuation

 

 

 

 

 

Doubtful

 

Adjustments on

 

 

 

 

 

Accounts

 

Financing Receivables

 

 

 

 

 

Operating 

 

Notes

 

 

 

 

    

Leases

    

Receivable

    

Total

Balance December 31, 2019

 

$

 8

 

$

 —

 

$

 8

Provision for credit losses

 

 

 5

 

 

 —

 

 

 5

Balance March 31, 2020

 

$

13

 

$

 —

 

$

13

 

The Company evaluates the credit quality of its financing receivables on a scale equivalent to the following quality indicators related to corporate risk profiles:

Pass — Any account whose lessee/debtor, co-lessee/debtor or any guarantor has a credit rating on publicly traded or privately placed debt issues as rated by Moody’s or S&P for either Senior Unsecured debt, Long Term Issuer rating or Issuer rating that are in the tiers of ratings generally recognized by the investment community as constituting an Investment Grade credit rating; or, has been determined by the Manager to be an Investment Grade Equivalent or High Quality Corporate Credit per its Credit Policy or has a Not Rated internal rating by the Manager and the account is not considered by the Chief Credit Officer of the manager to fall into one of the three risk profiles below.

17

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ATEL 16, LLC

 

NOTES TO FINANCIAL STATEMENTS

 

(Unaudited)

Special Mention — Any traditional corporate type account with potential weaknesses (e.g. large net losses or major industry downturns) or, any growth capital account that has less than three months of cash as of the end of the calendar quarter to fund their continuing operations. These accounts deserve management’s close attention. If left uncorrected, those potential weaknesses may result in deterioration of the Fund’s receivable at some future date.

Substandard — Any account that is inadequately protected by the current worth and paying capacity of the borrower or of the collateral pledged, if any. Accounts that are so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Fund will sustain some loss as the likelihood of fully collecting all receivables may be questionable if the deficiencies are not corrected. Such accounts are on the Manager’s Credit Watch List.

Doubtful — Any account where the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Accordingly, an account that is so classified is on the Manager’s Credit Watch List, and has been declared in default and the Manager has repossessed, or is attempting to repossess, the equipment it financed. This category includes impaired notes and leases as applicable.

At March 31, 2020 and December 31, 2019, the Company’s financing receivables by credit quality indicator and by class of financing receivables are as follows (excludes initial direct costs) (in thousands):

 

 

 

 

 

 

 

 

 

Notes Receivable

 

 

March 31, 

 

December 31, 

 

    

2020

    

2019

Pass

 

$

1,145

 

$

1,451

Special mention

 

 

 —

 

 

 —

Substandard

 

 

 —

 

 

 —

Doubtful

 

 

 —

 

 

 —

Total

 

$

1,145

 

$

1,451

 

There were no impaired investments in financing receivables at March 31, 2020 and December 31, 2019.  

At March 31, 2020 and December 31, 2019, the investment in financing receivables (excludes IDC) is aged as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Recorded

 

 

 

 

 

 

 

 

Greater

 

 

 

 

 

 

 

Total

 

Investment>90

 

 

31‑60 Days

 

61‑90 Days

 

 Than

 

Total

 

 

 

 

Notes

 

Days and

March 31, 2020

    

Past Due

    

Past Due

    

90 Days

    

Past Due

    

Current

    

Receivable

    

Accruing

Notes receivable

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

1,145

 

$

1,145

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Recorded

 

 

 

 

 

 

 

 

Greater

 

 

 

 

 

 

 

Total

 

Investment>90

 

 

31‑60 Days

 

61‑90 Days

 

 Than

 

Total

 

 

 

 

Notes

 

Days and

December 31, 2019

    

Past Due