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 September 30, 2017March 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 333-178629
ATEL GROWTH CAPITAL FUND 8, LLC
(Exact name of registrant as specified in its charter)
California | 37‑1656343 | |
(State or other jurisdiction of | (I. R. S. Employer |
The Transamerica Pyramid, 600 Montgomery Street, 9th Floor, San Francisco, California 94111
(Address of principal executive offices)
Registrant’s telephone number, including area codecode: (415) 989-8800989‑8800
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.Yesdays. Yes x☒ Noo☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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. Yes x☒ Noo☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company.filer. See definition of “accelerated filer and large accelerated filer and smaller reporting company”filer” in Rule 12b-212b‑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.o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-212b‑2 of the Exchange Act).Yes. Yes o☐ Nox☒
The number of Limited Liability Company Units outstanding as of October 31, 2017April 30, 2020 was 1,615,096 Units.1,612,396.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Part I. | 3 | ||||
Item 1. | 3 | ||||
Balance Sheets, | 3 | ||||
4 | |||||
5 | |||||
6 | |||||
7 | |||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21 | |||
Item 4. | 24 | ||||
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| 25 | ||||
25 | |||||
25 | |||||
Item 3. | 25 | ||||
Item 4. | 25 | ||||
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25 | |||||
| 25 |
2
Item 1. Financial Statements (Unaudited).
ATEL GROWTH CAPITAL FUND 8, LLC
BALANCE SHEETSSEPTEMBER 30, 2017
MARCH 31, 2020 AND DECEMBER 31, 20162019
(in thousands)
In Thousands)
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| March 31, |
| December 31, | |||||||||||
September 30, 2017 | December 31, 2016 |
| 2020 |
| 2019 | |||||||||
(Unaudited) |
| (Unaudited) |
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ASSETS |
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Cash and cash equivalents | $ | 2,029 | $ | 1,860 |
| $ | 91 |
| $ | 70 | ||||
Accounts receivable | 98 | 7 |
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| 11 |
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| 11 | ||||||
Notes receivable, net | 2,717 | 4,430 |
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| 331 |
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| 514 | ||||||
Investment in securities | 521 | 521 |
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| 352 |
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| 314 | ||||||
Warrants, fair value | 422 | 481 |
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| 577 |
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| 588 | ||||||
Prepaid expenses and other assets | 7 | 4 |
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| 5 |
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| 4 | ||||||
Total assets | $ | 5,794 | $ | 7,303 |
| $ | 1,367 |
| $ | 1,501 | ||||
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LIABILITIES AND MEMBERS’ CAPITAL |
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Accounts payable and accrued liabilities: |
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Managing Member | $ | 28 | $ | 39 | ||||||||||
Affiliates | 13 | — | ||||||||||||
Due to Managing Member and affiliates |
| $ | 17 |
| $ | 14 | ||||||||
Accrued distributions to Other Members | 249 | 250 |
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| 81 |
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| 99 | ||||||
Other | — | 3 |
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| 16 |
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| 6 | ||||||
Total liabilities | 290 | 292 |
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| 114 |
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| 119 | ||||||
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Commitments and contingencies |
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Members’ capital: |
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Managing Member | — | — |
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| — |
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| — | ||||||
Other Members | 5,504 | 7,011 |
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| 1,253 |
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| 1,382 | ||||||
Total Members’ capital | 5,504 | 7,011 |
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| 1,253 |
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| 1,382 | ||||||
Total liabilities and Members’ capital | $ | 5,794 | $ | 7,303 |
| $ | 1,367 |
| $ | 1,501 |
See accompanying notes.
3
ATEL GROWTH CAPITAL FUND 8, LLC
FOR THE THREE AND NINE MONTHS ENDEDSEPTEMBER 30, 2017
MARCH 31, 2020 AND 2016
2019
(in thousands except unitsIn Thousands Except for Units and per unit data)Per Unit Data)
(Unaudited)
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| Three Months Ended | |||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, |
| March 31, | |||||||||||||||||||
2017 | 2016 | 2017 | 2016 |
| 2020 |
| 2019 | |||||||||||||||
Revenues: |
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Notes receivable interest income, including accretion of net note origination costs and discounts | $ | 103 | $ | 127 | $ | 370 | $ | 433 |
| $ | 19 |
| $ | 104 | ||||||||
Gain on early termination of notes receivable | 6 | — | 76 | — |
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| — |
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| 48 | ||||||||||||
Gain on sales or dispositions of investment in securities | 98 | 218 | 99 | 218 |
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| — |
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| 161 | ||||||||||||
Unrealized (loss) gain on fair value adjustment for warrants | (86 | ) | 2 | (59 | ) | (17 | ) | |||||||||||||||
Unrealized gain on fair value adjustment for investment in securities |
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| 32 |
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| — | ||||||||||||||||
Unrealized loss on fair value adjustment for warrants |
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| (11) |
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| (102) | ||||||||||||||||
Other | 6 | 6 | 19 | 22 |
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| — |
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| 1 | ||||||||||||
Total revenues | 127 | 353 | 505 | 656 |
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| 40 |
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| 212 | ||||||||||||
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Expenses: |
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Acquisition expense | 47 | 163 | 152 | 201 | ||||||||||||||||||
Asset management fees to Managing Member |
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| 4 |
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| 9 | ||||||||||||||||
Cost reimbursements to affiliates | 60 | 63 | 195 | 178 |
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| 23 |
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| 36 | ||||||||||||
(Reversal of) provision for credit losses | (24 | ) | — | (48 | ) | 620 | ||||||||||||||||
Asset management fees to Managing Member | 11 | 19 | 43 | 59 | ||||||||||||||||||
Provision for credit losses |
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| — |
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| 13 | ||||||||||||||||
Professional fees | 22 | 20 | 79 | 80 |
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| 26 |
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| 33 | ||||||||||||
Outside services | 15 | 2 | 54 | 21 |
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| 7 |
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| 22 | ||||||||||||
Taxes on income and franchise fees | — | — | 2 | 3 | ||||||||||||||||||
Dues and subscriptions |
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| 4 |
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| 3 | ||||||||||||||||
Bank charges | 6 | 5 | 16 | 14 |
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| 8 |
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| 5 | ||||||||||||
Printing and photocopying |
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| 1 |
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| 3 | ||||||||||||||||
Other | 6 | 5 | 21 | 19 |
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| 8 |
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| 4 | ||||||||||||
Total expenses | 143 | 277 | 514 | 1,195 |
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| 81 |
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| 128 | ||||||||||||
Net (loss) income | $ | (16 | ) | $ | 76 | $ | (9 | ) | $ | (539 | ) |
| $ | (41) |
| $ | 84 | |||||
Net income (loss): | ||||||||||||||||||||||
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Net (loss) income: |
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Managing Member | $ | 49 | $ | 50 | $ | 148 | $ | 149 |
| $ | 7 |
| $ | 60 | ||||||||
Other Members | (65 | ) | 26 | (157 | ) | (688 | ) |
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| (48) |
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| 24 | |||||||||
$ | (16 | ) | $ | 76 | $ | (9 | ) | $ | (539 | ) |
| $ | (41) |
| $ | 84 | ||||||
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Net (loss) income per Limited Liability Company Unit (Other Members) | $ | (0.04 | ) | $ | 0.02 | $ | (0.10 | ) | $ | (0.43 | ) |
| $ | (0.03) |
| $ | 0.01 | |||||
Weighted average number of Units outstanding | 1,615,096 | 1,618,296 | 1,615,901 | 1,618,296 |
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| 1,612,396 |
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| 1,612,396 |
See accompanying notes.
4
ATEL GROWTH CAPITAL FUND 8, LLC
STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2016AND FOR THE NINETHREE MONTHS ENDEDSEPTEMBER 30, 2017
MARCH 31, 2020 AND 2019
(in thousands except unitsIn Thousands Except for Units and per unit data)Per Unit Data)
(Unaudited)
Amount | ||||||||||||||||
Units | Other Members | Managing Member | Total | |||||||||||||
Balance December 31, 2015 | 1,618,296 | $ | 9,756 | $ | — | $ | 9,756 | |||||||||
Distributions to Other Members ($1.10 per Unit) | — | (1,780 | ) | — | (1,780 | ) | ||||||||||
Distributions to Managing Member | — | — | (198 | ) | (198 | ) | ||||||||||
Net (loss) income | — | (965 | ) | 198 | (767 | ) | ||||||||||
Balance December 31, 2016 | 1,618,296 | 7,011 | — | 7,011 | ||||||||||||
Repurchase of Units | (3,200 | ) | (18 | ) | — | (18 | ) | |||||||||
Distributions to Other Members ($0.82 per Unit) | — | (1,332 | ) | — | (1,332 | ) | ||||||||||
Distributions to Managing Member | — | — | (148 | ) | (148 | ) | ||||||||||
Net (loss) income | — | (157 | ) | 148 | (9 | ) | ||||||||||
Balance September 30, 2017 (Unaudited) | 1,615,096 | $ | 5,504 | $ | — | $ | 5,504 |
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| Three Months Ended March 31, 2020 | |||||||||
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| Other |
| Managing |
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| Units |
| Members |
| Member |
| Total | |||
Balance December 31, 2019 |
| 1,612,396 |
| $ | 1,382 |
| $ | — |
| $ | 1,382 |
Distributions to Other Members ($0.05 per unit) |
| — |
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| (81) |
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| — |
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| (81) |
Distributions to Managing Member |
| — |
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| — |
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| (7) |
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| (7) |
Net (loss) income |
| — |
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| (48) |
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| 7 |
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| (41) |
Balance March 31, 2020 |
| 1,612,396 |
| $ | 1,253 |
| $ | — |
| $ | 1,253 |
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| Three Months Ended March 31, 2019 | |||||||||
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| Other |
| Managing |
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| Units |
| Members |
| Member |
| Total | |||
Balance December 31, 2018 |
| 1,612,396 |
| $ | 2,973 |
| $ | — |
| $ | 2,973 |
Distributions to Other Members ($0.28 per unit) |
| — |
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| (444) |
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| — |
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| (444) |
Distributions to Managing Member |
| — |
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| — |
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| (60) |
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| (60) |
Net income |
| — |
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| 24 |
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| 60 |
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| 84 |
Balance March 31, 2019 |
| 1,612,396 |
| $ | 2,553 |
| $ | — |
| $ | 2,553 |
See accompanying notes.
5
ATEL GROWTH CAPITAL FUND 8, LLC
FOR THE THREE AND NINE MONTHS ENDEDSEPTEMBER 30, 2017
MARCH 31, 2020 AND 20162019
(in thousands)In Thousands)
(Unaudited)
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| Three Months Ended | |||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, |
| March 31, | |||||||||||||||||||
2017 | 2016 | 2017 | 2016 |
| 2020 |
| 2019 | |||||||||||||||
Operating activities: |
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Net (loss) income | $ | (16 | ) | $ | 76 | $ | (9 | ) | $ | (539 | ) |
| $ | (41) |
| $ | 84 | |||||
Adjustment to reconcile net (loss) income to cash (used in) provided by operating activities: | ||||||||||||||||||||||
Accretion of note discount – warrants | (7 | ) | (12 | ) | (30 | ) | (38 | ) | ||||||||||||||
Amortization of net note origination costs | 4 | 3 | 12 | 13 | ||||||||||||||||||
Adjustment to reconcile net (loss) income to cash used in operating activities: |
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Accretion of note discount - warrants |
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| (7) |
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| (17) | ||||||||||||||||
Gain on early termination of notes receivable | (6 | ) | — | (76 | ) | — |
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| — |
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| (48) | ||||||||||
Gain on sales or dispositions of investment in securities | (98 | ) | (218 | ) | (99 | ) | (218 | ) |
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| — |
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| (161) | ||||||||
(Reversal of) provision for credit losses | (24 | ) | — | (48 | ) | 620 | ||||||||||||||||
Unrealized loss (gain) on fair value adjustment for warrants | 86 | (2 | ) | 59 | 17 | |||||||||||||||||
Provision for credit losses |
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| — |
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| 13 | ||||||||||||||||
Unrealized gain on fair value adjustment for investment in securities |
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| (32) |
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| — | ||||||||||||||||
Unrealized loss on fair value adjustment for warrants |
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| 11 |
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| 102 | ||||||||||||||||
Changes in operating assets and liabilities: |
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Accounts receivable | — | 12 | 7 | (24 | ) | |||||||||||||||||
Due from affiliates | 11 | 80 | 13 | 207 |
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| — |
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| (35) | ||||||||||||
Prepaid expenses and other assets | (1 | ) | 100 | (3 | ) | (3 | ) |
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| (1) |
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| 5 | |||||||||
Accounts payable, Managing Member | — | (1 | ) | — | (2 | ) | ||||||||||||||||
Due to Managing Member and affiliates |
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| 7 |
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| 2 | ||||||||||||||||
Accounts payable, other | — | — | (3 | ) | 1 |
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| 11 |
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| — | |||||||||||
Unearned fee income related to notes receivable | (5 | ) | 4 | (18 | ) | (11 | ) |
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| (12) |
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| (1) | |||||||||
Net cash (used in) provided by operating activities | (56 | ) | 42 | (195 | ) | 23 | ||||||||||||||||
Net cash used in operating activities |
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| (64) |
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| (56) | ||||||||||||||||
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Investing activities: |
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Advance payments | — | — | (56 | ) | (18 | ) | ||||||||||||||||
Purchase of securities | — | — | — | (192 | ) |
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| (7) |
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| — | |||||||||||
Proceeds from early termination of notes receivable | 91 | — | 221 | — |
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| — |
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| 326 | ||||||||||||
Proceeds from sales or dispositions of investment in securities | — | 356 | 1 | 356 | ||||||||||||||||||
Payments of note origination costs | (9 | ) | (2 | ) | (9 | ) | (5 | ) | ||||||||||||||
Note receivable and warrants advances | (60 | ) | (800 | ) | (60 | ) | (1,013 | ) | ||||||||||||||
Proceeds from sales or disposition of investment in securities |
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| — |
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| 161 | ||||||||||||||||
Notes receivable advances |
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| — |
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| (13) | ||||||||||||||||
Principal payments received on notes receivable | 443 | 823 | 1,777 | 2,527 |
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| 202 |
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| 363 | ||||||||||||
Net cash provided by investing activities | 465 | 377 | 1,874 | 1,655 |
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| 195 |
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| 837 | ||||||||||||
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Financing activities: |
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Distributions to Other Members | (445 | ) | (445 | ) | (1,333 | ) | (1,336 | ) |
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| (99) |
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| (444) | ||||||||
Distributions to Managing Member | (49 | ) | (50 | ) | (159 | ) | (149 | ) |
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| (11) |
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| (39) | ||||||||
Repurchase of Units | — | — | (18 | ) | — | |||||||||||||||||
Net cash used in financing activities | (494 | ) | (495 | ) | (1,510 | ) | (1,485 | ) |
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| (110) |
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| (483) | ||||||||
Net (decrease) increase in cash and cash equivalents | (85 | ) | (76 | ) | 169 | 193 | ||||||||||||||||
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Net increase in cash and cash equivalents |
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| 21 |
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| 298 | ||||||||||||||||
Cash and cash equivalents at beginning of period | 2,114 | 3,287 | 1,860 | 3,018 |
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| 70 |
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| 214 | ||||||||||||
Cash and cash equivalents at end of period | $ | 2,029 | $ | 3,211 | $ | 2,029 | $ | 3,211 |
| $ | 91 |
| $ | 512 | ||||||||
Supplemental disclosures of cash flow information: | ||||||||||||||||||||||
Cash paid during the period for taxes | $ | — | $ | — | $ | 3 | $ | 3 | ||||||||||||||
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Schedule of non-cash investing and financing transactions: |
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Distributions payable to Other Members at period-end | $ | 249 | $ | 251 | $ | 249 | $ | 251 |
| $ | 81 |
| $ | 249 | ||||||||
Distributions payable to Managing Member at period-end | $ | 28 | $ | 28 | $ | 28 | $ | 28 |
| $ | 7 |
| $ | 27 | ||||||||
Conversion of warrants to equity securities |
| $ | — |
| $ | 140 |
See accompanying notes.
6
ATEL GROWTH CAPITAL FUND 8, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Limited Liability Company matters:
ATEL Growth Capital Fund 8, LLC (the “Company” or the “Fund”) was formed under the laws of the state of California on December 8, 2011 for the purpose of providing financing for the acquisition of equipment and other goods and services used by emerging growth companies and established privately held companies without publicly traded securities, and for providing other forms of financing for, and to acquire equity interests and warrants and rights to purchase equity interests in such companies. The Fund may continue until it is terminated in accordance with the ATEL Growth Capital Fund 8, LLC limited liability company operating agreement dated December 13, 2011 (the “Operating Agreement”). The Managing Member of the Company is AGC Managing Member, LLC (the “Managing Member” or “Manager”), the renamed AGC 8 Managing Member, LLC which was formed in December 2011 as a Nevada limited liability company. Such name change is the result of an amendment to the articles of incorporation filed with the State of Nevada effective March 18, 2014. Contributions in the amount of $500 were received as of December 31, 2011, which represented the initial Member’s capital investment. As a limited liability company, the liability of any individual member for the obligations of the Fund is limited to the extent of capital contributions to the Fund by the individual member.
The offering of the Company was granted effectiveness by the Securities and Exchange Commission as of August 20, 2012. As of November 14, 2012, subscriptions for the minimum number of Units (120,000, representing $1.2 million), excluding subscriptions from Pennsylvania investors, had been received and the Fund requested subscription proceeds to be released from escrow. On that date, the Company commenced initial operations. Pennsylvania subscriptions were subject to a separate escrow and were released to the Fund only at such time as total subscription proceeds received by the Fund from all subscribers, including the escrowed Pennsylvania subscriptions, equal to not less than $3.75 million in gross proceeds. Total contributions to the Fund exceeded $3.75 million on March 13, 2013, at which time a request was processed to release the Pennsylvania escrowed amounts. The offering was terminated on August 20, 2014. Through September 30, 2017,
As of March 31, 2020, cumulative contributions, net of rescissions and related distributions paid, totaling $16.2 million (inclusive of the $500 initial Member’s capital investment) have been received. As of September 30, 2017,such date, a total of 1,615,0961,612,396 Units were issued and outstanding.
PriorThe 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 Unitholders, with any balance remaining after required minimum distributions to be used to purchase additional investments during the Reinvestment Period (ending six calendar years after the completion of the Company’s public offering of Units), (iii) provide additional distributions to Unitholders from any proceeds from sales of Equity interests and (iv) provide total cash distributions to Unitholders equal to a desirable rate of return on their investment capital. The Company is governed by the Operating agreement.
Pursuant to the terminationterms of its offering, the Fund, orOperating Agreement, the Managing Member and/or its affiliates receives compensation for services rendered and reimbursements for costs incurred on behalf of the Fund, incurred costs in connection withCompany (Note 5). The Company is required to maintain reasonable cash reserves for working capital, the organization, registrationrepurchase of Units and issuancecontingencies. The repurchase of Units is solely at the discretion of the Units. The amount of such costs borne by the Fund was limited by certain provisions of the Operating Agreement.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-K10K for the year ended December 31, 2016,2019, filed with the Securities and Exchange Commission.
7
2. Summary of Significant Accounting Policies:
Basis of presentation:
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”(‘‘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 and nine months ended September 30, 2017March 31, 2020 are not necessarily indicative of the results to be expected for the full year.
Certain prior period amounts may have been reclassified to conform to the current period presentation. These reclassifications had no significant effect on the reported financial position or results of operations.
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 September 30, 2017,March 31, 2020, up until the issuance of the financial statements. No events were noted which would require additional disclosure in the footnotes to the financial statements, 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 adjustments thereto.
7
Use of estimates: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 credit losses on notes receivable and the fair valuation of equity securities and warrants.
Accounts receivable:
Accounts receivable represent the amounts billed under notes receivable which are currently due to the Company. Allowances for credit losses are typically established based on historical charge off and collection experience and the collectability of specifically identified 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.
Credit risk:
Financial instruments that potentially subject the Company to concentrations of credit risk include cash and cash equivalents, 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 Funds’ cash is temporarily invested in U.S. Treasury 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 borrowers in various industries related to equipment financed through notes receivable.
8
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 the net investment in the notes on the balance sheet. Such net investment is comprised of the amount advanced on the loans, adjusting for net deferred loan fees or costs incurred at origination, amounts allocated to warrants received upon origination, and any payments received in advance. The unearned interest is recognized over the term of the notes and the income portion of each note payment is calculated so as to generate a constant rate of return on the net balance outstanding. Net deferred loan fees or costs, together with discounts recognized in connection with warrants acquired at origination, are accreted as an adjustment to yield 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.
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.
Note origination costs:
The Company capitalizes note origination costs and deferred loan fees associated with the origination and funding of investments in notes receivable. Costs incurred include both internal costs (e.g., the costs of employees’ activities in connection with successful loan originations) and any external broker fees incurred with such originations. These costs are amortized on a note by note basis over the actual contract term using the effective interest rate method. Upon termination of the underlying notes receivable, any of the remaining net note origination fees or costs are relieved. Likewise, the accumulated amortization related to the deferred costs is relieved. Costs related to notes receivable that are not consummated are not eligible for capitalization as note origination costs and are expensed as acquisition expense in the period of expenditure.
9
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 or financing of equipment and equity investment transactions which were not consummated. Such costs are reimbursable to the Managing Member under the terms of the Operating Agreement. As the costs are not eligible for capitalization as note origination costs, such amounts are expensed as incurred.
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.
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 financing business operates as one reportable segment because: a) the Company measures profit and loss at the portfolio assets level as a whole; b) the principal decision makers do not review information based on any operating segment other than the equipment financing 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 financing; and e) the Company has not chosen to organize its business around geographic areas.
The primary geographic region in which the Company seeks financing opportunities is North America. Currently, 100%All of the Company’s current operating revenues are fromfor the respective three months ended March 31, 2020 and 2019, and long-lived tangible assets as of March 31, 2020 and December 31, 2019 relate to customers domiciled in the United States.
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 registered for public sale with readily determinable fair values are measured at fair value with any changes in fair value recognized in the Company’s results of operations. The Company’s purchased securities not registered for public sale that do not have readily determinable fair values are measured at cost minus impairment, and adjusted for changes in observable prices. Factors considered by the Managing Member in determining fair value include, but are not limited to, available financial information, the issuer’s ability to meet its current obligations and indications of the issuer’s subsequent ability to raise capital. As of March 31, 2020 and December 31, 2019, investments in equity securities totaled $352 thousand and $314 thousand, respectively. For the respective three months ended March 31, 2020 and 2019, the Company recorded $5 thousand and $35 thousand of unrealized losses on investment securities with readily determinable fair values. In addition, during the same respective three-month periods ended March 31, 2020 and 2019, the Company recorded $37 thousand and $35 thousand of unrealized gains on investment securities that do not have readily determinable fair values based on changes in observable prices. Cumulatively, a total of $77 thousand was recorded to reduce the value of such investment securities based on changes in observable prices. Also, during the three months ended March 31, 2019, the Company recorded $161 thousand of realized gains on sales of investment securities. There were no sales or dispositions of investment securities during the three months ended March 31, 2020.
10
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. At March 31, 2020 and December 31, 2019, the Managing Member estimated the fair value of warrants to be $577 thousand and $588 thousand, respectively. During the three months ended March 31, 2020 and 2019, the Company recorded unrealized losses of $11 thousand and $102 thousand, respectively, on the fair valuation of its warrants. Additionally, there was a net exercise of warrants in exchange for equity securities of $140 thousand during the three months ended March 31, 2019. There were no such exercises of any kind during the three months ended March 31, 2020.
Per Unit data:
Net income (loss) per Unit is based upon the weighted average number of Other Members Units outstanding during the period.
Recent accounting pronouncements:
In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2020-03, Codification Improvements to Financial Instruments (“ASU 2020-03”). ASU 2020-03 improves and clarifies various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016. ASU 2020-03 includes seven different issues that describe the areas of improvement and the related amendments to GAAP that are intended to make the standards easier to understand and apply by eliminating inconsistencies and providing clarifications. The amendments have different effective dates. Management is currently evaluating the effect of adopting this new accounting guidance but does not expect adoption will have a material impact on the Fund’s financial statements and disclosures.
In June 2016, the FASB issued 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.
11
On August 15, 2019, the FASB issued a proposed ASU that would grant certain companies additional time to implement FASB standards on CECL and hedging. The proposed ASU defers the effective date for CECL to fiscal periods beginning after December 15, 2022, including interim periods within those fiscal years; and defers the effective dates for hedging to fiscal periods beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. The ASU was approved on October 16, 2019. In February 2020, the FASB issued ASU 2020-02 and delayed the effective date of Topic 326 until fiscal year beginning after December 15, 2022.
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.
3. Notes receivable, net:
The Company has various notes receivable from borrowers who have financed the purchase of equipment through the Company. The terms of the notes receivable are from 30 to 42 months and bear interest at implicit or stated rates ranging from 11.37% to 15.92% per annum. The notes are secured by the equipment financed and have maturity dates ranging from 2020 through 2022.
At March 31, 2020 and December 31, 2019, the Company had no notes receivable on non-accrual status.
As of March 31, 2020, the minimum future payments receivable were as follows (in thousands):
|
|
|
|
Nine months ending March 31, 2020 |
| $ | 219 |
Year ending December 31, 2021 |
|
| 155 |
|
|
| 374 |
Less: portion representing unearned interest income, net |
|
| (26) |
|
|
| 348 |
Unamortized discount on warrants received |
|
| (17) |
Notes receivable, net |
| $ | 331 |
12
4. Allowance for credit losses:
The Company had no allowance for credit losses at March 31, 2020.
The Company’s allowance for credit losses at March 31, 2019 were as follows (in thousands):
|
|
|
|
| Valuation Adjustments |
|
| Notes Receivable |
Balance December 31, 2018 | $ | 133 |
Provision for credit losses |
| 13 |
Balance March 31, 2019 | $ | 146 |
Allowance for Doubtful Accounts Receivable
Accounts receivable represent the amounts billed under notes receivable which are currently due to the Company.
Allowances for doubtful accounts are typically established based upon their aging and historical charge off and collection experience and the creditworthiness of specifically identified 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.
Accounts 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, such notes may be placed in 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. All payments received on amounts billed under notes receivable are applied only against outstanding principal balances.
Valuation Adjustments
In addition to the allowance established for delinquent accounts receivable, the total allowance also includes probableanticipated 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.
8
13
ATEL GROWTH CAPITAL FUND 8, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
The Company’s allowance for credit losses and its recorded investment in notes receivable as of Significant Accounting Policies: - (continued)
From time to time,
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|
|
| Notes Receivable | ||||
|
| March 31, 2020 |
| December 31, 2019 | ||
Allowance for credit losses: |
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|
|
|
|
|
Ending balance |
| $ | — |
| $ | — |
Ending balance: individually evaluated for impairment |
| $ | — |
| $ | — |
Ending balance: collectively evaluated for impairment |
| $ | — |
| $ | — |
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|
|
|
|
|
|
Notes receivable: |
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|
|
|
|
|
Ending balance |
| $ | 331 |
| $ | 514 |
Ending balance: individually evaluated for impairment |
| $ | 331 |
| $ | 514 |
Ending balance: collectively evaluated for impairment |
| $ | — |
| $ | — |
The Company evaluates the Company may purchase securitiescredit quality of its borrowersnotes receivable on a scale equivalent to the following quality indicators related to corporate risk profiles:
Pass – Any account whose debtor, co-debtor or receive warrants and rights to purchase securitiesany 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 connection with its lending arrangements.
Purchased securities (primarily preferred stocks) arethe tiers of ratings generally not registered for public sale and are carried at cost. Such securities are adjusted to fair value if the fair value is less than the carrying value and such impairment is deemedrecognized by the Managing Memberinvestment community as constituting an Investment Grade credit rating; or, has been determined by the Manager to be other than temporary. Factorsan 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 Managing MemberChief Credit Officer of the Manager to fall into one of the three risk profiles below.
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 determining fair value include, butdeterioration 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 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. As of September 30, 2017 and December 31, 2016, investments in equity securities totaled $521 thousand for both periods. There were no sales or dispositions of securities during the three and nine months ended September 30, 2017. In comparison, the realized gainscorrected. Such accounts are on the saleManager’s Credit Watch List.
Doubtful – Any account where the weaknesses make collection or disposition of investmentliquidation in securities totaled $218 thousand during both the three and nine months ended September 30, 2016.
Warrants owned by the Company are not registered for public sale, but are considered derivatives and are reflected at an estimated fair valuefull, on the balance sheet as determined by the Managing Member. At September 30, 2017basis of currently existing facts, conditions, and December 31, 2016, the Managing Member estimated the fair value of warrants to be $422 thousandvalues, highly questionable and $481 thousand, respectively. During the three months ended September 30, 2017 and 2016, the Company recordedimprobable. Accordingly, an unrealized loss of $86 thousand and an unrealized gain of $2 thousand,account that is so classified is on the fair valuation of its warrants, respectively. DuringManager’s Credit Watch List, and has been declared in default and the nine months ended September 30, 2017 and 2016,Manager has repossessed, or is attempting to repossess, the Company recorded unrealized losses of $59 thousand and $17 thousand, respectively, on fair valuation of its warrants. The Company also realized $98 thousand and $99 thousand related to the net exercise of certain warrants during the three and nine month periods ended September 30, 2017, respectively. There were no exercises of warrants during the three and nine months ended September 30, 2016. See Note 8 for further discussion.
Financial instruments that potentially subject the Company to concentrations of credit risk include cash and cash equivalents,equipment it financed. This category includes impaired notes receivable and accounts receivable. The Company places the majority of its cash deposits in non-interest bearing accounts with financial institutions that have no less than $10 billion in assets. Such deposits are insured up to $250,000. The remainder of the Funds’ cash is temporarily invested in U.S. Treasury denominated instruments. The concentration of such deposits and temporary cash investments is not deemed to create a significant risk to the Company. Accounts receivable represent amounts due from various industries.as applicable.
The Company issues only one class of Units, none of which are considered dilutive. Net income (loss) per Unit is based upon the weighted average number of Other Members Units outstanding during the period.
14
9
ATEL GROWTH CAPITAL FUND 8, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
At March 31, 2020 and December 31, 2019, the Company’s notes receivable by credit quality indicator and by class of Significant Accounting Policies: - (continued)
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| Notes Receivable | ||||
|
| March 31, 2020 |
| December 31, 2019 | ||
Pass |
| $ | 331 |
| $ | 514 |
Doubtful |
|
| — |
|
| — |
Total |
| $ | 331 |
| $ | 514 |
As of March 31, 2020 and December 31, 2019, there were no impaired investments in notes receivable.
At March 31, 2020 and December 31, 2019, investment in notes receivable is aged as follows (in thousands):
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| Recorded | |
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| Greater |
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| Total |
| Investment>90 | |||
|
| 31‑60 Days |
| 61‑90 Days |
| Than 90 |
| Total |
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|
|
| Notes |
| Days and | ||||||
March 31, 2020 |
| Past Due |
| Past Due |
| Days |
| Past Due |
| Current |
| Receivable |
| Accruing | |||||||
Notes receivable |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 331 |
| $ | 331 |
| $ | — |
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| Recorded | |
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| Greater |
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| Total |
| Investment>90 | |||
|
| 31‑60 Days |
| 61‑90 Days |
| Than 90 |
| Total |
|
|
|
| Notes |
| Days and | ||||||
December��31, 2019 |
| Past Due |
| Past Due |
| Days |
| Past Due |
| Current |
| Receivable |
| Accruing | |||||||
Notes receivable |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 514 |
| $ | 514 |
| $ | — |
5. Related party transactions:
The terms of the Operating Agreement provide that the Managing Member and/or affiliates are entitled to receive certain fees for gross financing revenues, and for management of the Company and its investment portfolio.
The Operating Agreement allows for the reimbursement of costs incurred by the Managing Member and/or affiliates for providing administrative services to the Company. Administrative services provided include Company accounting, investor relations, legal counsel and equipment financing documentation. The Managing Member is not reimbursed for services whereby it is entitled to receive a separate fee as compensation for such services, such as management of investments.
Cost reimbursements to the Managing Member or its affiliates are based on its costs incurred in performing administrative services for the Company. These costs are allocated to each managed entity based on certain criteria such as total assets, number of investors or contributed capital based upon the type of cost incurred. The Managing Member believes that the costs reimbursed are the lower of (i) actual costs incurred on behalf of the Company or (ii) the amount the Company would be required to pay independent parties for comparable administrative services in the same geographic location.
15
During the three months ended March 31, 2020 and 2019, the Managing Member and/or affiliates earned fees and billed for reimbursements pursuant to the Operating Agreement as follows (in thousands):
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|
|
|
|
|
| Three Months Ended | ||||
|
| March 31, | ||||
|
| 2020 |
| 2019 | ||
Administrative costs reimbursed to Managing Member and/or affiliates |
| $ | 23 |
| $ | 36 |
Asset management fees to Managing Member |
|
| 4 |
|
| 9 |
|
| $ | 27 |
| $ | 45 |
6. Commitments:
At March 31, 2020, there was no commitment to fund investments in notes receivable.
7. Members’ Capital:
A total of 1,612,396 Units were issued and outstanding at both March 31, 2020 and December 31, 2019. The Fund is authorized to issue up to 7,500,000 additional Units in addition to the Units issued to the initial Member (50 Units).
From the commencement of the Fund until the initial closing date, as defined in the Operating Agreement, the Company’s net income and net losses are allocated 100% to the Manager. Commencing with the initial closing date, net income and net losses are allocated 100% to the Members. An amount equal to 5% of all distributions of cash available for distribution and net disposition proceeds will be allocated to the Manager as the carried interest. An amount equal to (i) an additional 5% of all distributions from cash available for distribution and 1% of all distributions of net disposition proceeds will be paid to the Manager as a promotional interest until investors have received total distributions in amounts equal to their capital contributions plus an amount equal to a priority return of 8% per annum as defined in the Operating Agreement; and (ii) then 15% of all subsequent distributions will be allocated to the Manager as a promotional interest. Distributions not allocated to the Manager as carried or promotional interests will be allocated and paid to the Unitholders.
Distributions to the Other Members for March 31, 2020 and 2019 were as follows (in thousands, except as to Units and per Unit data):
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|
|
|
|
|
| Three Months Ended | ||||
|
| March 31, | ||||
|
| 2020 |
| 2019 | ||
Distributions declared |
| $ | 81 |
| $ | 444 |
Weighted average number of Units outstanding |
|
| 1,612,396 |
|
| 1,612,396 |
Weighted average distributions per Unit |
| $ | 0.05 |
| $ | 0.28 |
8. Fair value:value measurements:
Under applicable accounting standards, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
16
At March 31, 2020 and December 31, 2019, the Company’s warrants and investment securities were measured on a recurring basis. During the three months ended March 31, 2020 and 2019, the Company also recorded non-recurring adjustments to reflect the fair values of certain impaired notes receivable.
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.
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 and 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 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.
In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2016-15 — Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 addresses specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. Management is currently evaluating the standard and its impact on operations and financial reporting. The adoption of ASU 2016-15 by the Company is not expected to have a material effect on its financial statements.
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 net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in 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. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019,
10
including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018. Management is currently evaluating the standard and expects the Update may potentially result in an increase in the allowance for credit losses given the change to estimated losses over the contractual life adjusted for expected prepayments.
In January 2016, the FASB issued Accounting Standards Update 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). The new standard provides guidance related to accounting for equity investments and financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. ASU 2016-01, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, and (v) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Management is currently evaluating the standard and its operational and related disclosure requirements. The Company’s implementation efforts include the identification of equity securities within the scope of the guidance, the evaluation of the measurement alternative available for equity securities without a readily determinable fair value, and the related impact to accounting policies, presentation and disclosures.
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. On July 9, 2015, the FASB approved the deferral of the effective date of ASU 2014-09 by one year and in August 2015, issued Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”). ASU 2015-14 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 31, 2016, including interim reporting periods within that reporting period. 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 Company expects to adopt the Standards Update. A preliminary evaluation of the impact of such adoption on the financial statements of the Fund indicates that such impact is non-material as the new revenue guideline does not affect revenues from leases and loans, which comprise the majority of the Company’s revenues. Management expects that accounting policies will not materially change since the principles of revenue recognition from the standard are largely consistent with existing guidance and current practices applied by the Company.
11
The Company has various notes receivable from borrowers who have financed the purchase of equipment through the Company. As of September 30, 2017, the terms of the notes receivable are from 12 to 84 months and bear interest at implicit or stated rates ranging from 4.29% to 18.06% per annum. The notes are secured by the equipment financed and have maturity dates ranging from 2018 through 2020.
As of September 30, 2017 and December 31, 2016, four (Notes A and C) and seven (Notes A, B and C) of the Company’s notes receivable were on non-accrual status, respectively. Details are as follows, in thousands, except for the number of notes receivable and the annual interest rate:
Notes receivable A | ||||||||
Non-accrual | ||||||||
September 30, 2017 | December 31, 2016 | |||||||
Number of notes | 3 | 3 | ||||||
Net investment value | $ | 58 | $ | 133 | ||||
Annual interest rate | 18.00 | % | 18.00 | % | ||||
Fair value adjustments | $ | 58 | $ | 106 | ||||
Fair value amount | $ | — | $ | 27 | ||||
Interest income not recorded relative to original terms | $ | 16 | $ | 16 |
Notes receivable B | ||||||||
Non-accrual | ||||||||
December 31, 2016 | ||||||||
Number of notes | 3 | |||||||
Net investment value | $ | 668 | ||||||
Annual interest rate | 14.40 | % | ||||||
Fair value adjustments | $ | 611 | ||||||
Fair value amount | $ | 57 | ||||||
Interest income not recorded relative to original terms | $ | 96 |
12
Note receivable C | ||||||||
Non-accrual | Non-accrual | |||||||
September 30, 2017 | December 31, 2016 | |||||||
Number of notes | 1 | 1 | ||||||
Net investment value | $ | 28 | $ | 53 | ||||
Annual interest rate | 15.88 | % | 15.88 | % | ||||
Fair value adjustments | $ | — | $ | — | ||||
Fair value amount | $ | 28 | $ | 53 | ||||
Interest income not recorded relative to original terms | $ | 7 | $ | 2 |
As of September 30, 2017, the minimum future payments receivable are as follows (in thousands):
Three months ending December 31, 2017 | $ | 530 | ||
Year ending 2018 | 1,739 | |||
2019 | 1,025 | |||
2020 | 57 | |||
3,351 | ||||
Less: portion representing unearned interest income, net | (576 | ) | ||
Less: allowance for credit losses | (58 | ) | ||
Notes receivable, net | $ | 2,717 |
The Company’s allowance for credit losses are as follows (in thousands):
Valuation Adjustments – Notes Receivable | ||||
Balance December 31, 2015 | $ | 97 | ||
Provision for credit losses | 620 | |||
Balance December 31, 2016 | 717 | |||
Note receivable disposal | (611 | ) | ||
Reversal of provision for credit losses | (48 | ) | ||
Balance September 30, 2017 | $ | 58 |
13
The Company’s allowance for credit losses and its recorded investment in notes receivable as of September 30, 2017 and December 31, 2016 were as follows (in thousands):
September 30, 2017 | Notes Receivable | |||
Allowance for credit losses: | ||||
Ending balance | $ | 58 | ||
Ending balance: individually evaluated for impairment | $ | 58 | ||
Ending balance: collectively evaluated for impairment | $ | — | ||
Financing receivables: | ||||
Ending balance | $ | 2,775 | ||
Ending balance: individually evaluated for impairment | $ | 2,775 | ||
Ending balance: collectively evaluated for impairment | $ | — |
December 31, 2016 | Notes Receivable | |||
Allowance for credit losses: | ||||
Ending balance | $ | 717 | ||
Ending balance: individually evaluated for impairment | $ | 717 | ||
Ending balance: collectively evaluated for impairment | $ | — | ||
Financing receivables: | ||||
Ending balance | $ | 5,147 | ||
Ending balance: individually evaluated for impairment | $ | 5,147 | ||
Ending balance: collectively evaluated for impairment | $ | — |
The Company evaluates the credit quality of its notes receivables on a scale equivalent to the following quality indicators related to corporate risk profiles:
Pass — Any account whose debtor, co-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.
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.
14
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 September 30, 2017 and December 31, 2016, the Company’s notes receivables by credit quality indicator and by class of financing receivables are as follows (in thousands):
Notes Receivable | ||||||||
September 30, 2017 | December 31, 2016 | |||||||
Pass | $ | 2,691 | $ | 4,293 | ||||
Special mention | 84 | 53 | ||||||
Substandard | — | 133 | ||||||
Doubtful | — | 668 | ||||||
Total | $ | 2,775 | $ | 5,147 |
As of September 30, 2017 and December 31, 2016, the Company’s impaired loans were as follows (in thousands):
Impaired Loans | ||||||||||||||||||||
September 30, 2017 | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||
With no related allowance recorded | ||||||||||||||||||||
Notes receivable | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
With an allowance recorded | ||||||||||||||||||||
Notes receivable | 58 | 58 | 58 | 82 | — | |||||||||||||||
Total | $ | 58 | $ | 58 | $ | 58 | $ | 82 | $ | — |
Impaired Loans | ||||||||||||||||||||
December 31, 2016 | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||
With no related allowance recorded | ||||||||||||||||||||
Notes receivable | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
With an allowance recorded | ||||||||||||||||||||
Notes receivable | 801 | 809 | 717 | 833 | — | |||||||||||||||
Total | $ | 801 | $ | 809 | $ | 717 | $ | 833 | $ | — |
15
At September 30, 2017 and December 31, 2016, investment in financing receivables is aged as follows (in thousands):
September 30, 2017 | 31 – 60 Days Past Due | 61 – 90 Days Past Due | Greater Than 90 Days | Total Past Due | Current | Total Financing Receivables | Recorded Investment > 90 Days and Accruing | |||||||||||||||||||||
Notes receivable | $ | — | $ | — | $ | — | $ | — | $ | 2,775 | $ | 2,775 | $ | — | ||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | 2,775 | $ | 2,775 | $ | — |
December 31, 2016 | 31 – 60 Days Past Due | 61 – 90 Days Past Due | Greater Than 90 Days | Total Past Due | Current | Total Financing Receivables | Recorded Investment > 90 Days and Accruing | |||||||||||||||||||||
Notes receivable | $ | — | $ | — | $ | — | $ | — | $ | 5,147 | $ | 5,147 | $ | — | ||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | 5,147 | $ | 5,147 | $ | — |
As of September 30, 2017 and December 31, 2016, the Company had four and seven notes receivable, respectively, which were on non-accrual status (See Note 3 for details).
The terms of the Operating Agreement provide that the Managing Member and/or affiliates are entitled to receive certain fees for equipment management and resale and for management of the Company.
The Operating Agreement allows for the reimbursement of costs incurred by the Managing Member and/or affiliates for providing administrative services to the Company. Administrative services provided include Company accounting, investor relations, legal counsel and equipment financing documentation. The Managing Member is not reimbursed for services whereby it is entitled to receive a separate fee as compensation for such services, such as management of investments.
Cost reimbursements to the Managing Member or its affiliates are based on its costs incurred in performing administrative services for the Company. These costs are allocated to each managed entity based on certain criteria such as total assets, number of investors or contributed capital based upon the type of cost incurred. The Managing Member believes that the costs reimbursed are the lower of (i) actual costs incurred on behalf of the Company or (ii) the amount the Company would be required to pay independent parties for comparable administrative services in the same geographic location. During the three and nine months ended September 30, 2017 and 2016, the Managing Member and/or affiliates earned commissions and fees, and billed for reimbursements of costs and expenses pursuant to the Operating Agreement as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Administrative costs reimbursed to Managing Member and/or affiliates | $ | 60 | $ | 63 | $ | 195 | $ | 178 | ||||||||
Asset management fees to Managing Member | 11 | 19 | 43 | 59 | ||||||||||||
Acquisition costs and note origination fees paid to Managing Member | 56 | 165 | 161 | 206 | ||||||||||||
$ | 127 | $ | 247 | $ | 399 | $ | 443 |
16
At September 30, 2017, there were commitments to fund investments in notes receivable totaling $3.3 million. These amounts represent contract awards which may be canceled by the prospective borrower/investee or may not be accepted by the Company.
A total of 1,615,096 and 1,618,296 Units were issued and outstanding as of September 30, 2017 and December 31, 2016, respectively. The Fund is authorized to issue up to 7,500,000 Units in addition to the Units issued to the initial Member (50 Units).
Distributions to the Other Members for the three and nine months ended September 30, 2017 and 2016 are as follows (in thousands, except as to Units and per Unit data):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Distributions declared | $ | 444 | $ | 446 | $ | 1,332 | $ | 1,336 | ||||||||
Weighted average number of Units outstanding | 1,615,096 | 1,618,296 | 1,615,901 | 1,618,296 | ||||||||||||
Weighted average distributions per Unit | $ | 0.27 | $ | 0.28 | $ | 0.82 | $ | 0.83 |
At September 30, 2017 and December 31, 2016, only the Company’s warrants were measured on a recurring basis.
During the three and nine months ended September 30, 2017, no non-recurring adjustments were recorded to write down the fair values of certain notes receivable. During the year ended December 31, 2016, the Company recorded non-recurring fair value adjustments to reduce the cost basis of certain impaired notes receivable.
The measurement methodology is as follows:
Warrants (recurring)
Warrants owned by the Company are not registered for public sale, but are considered derivatives and are carried on the balance sheet at an estimated fair value at the end of the period. The valuation of the warrants was determined using a Black-Scholes formulation of value based upon the stock price(s), the exercise price(s), the volatility of comparable venturerespective similar publicly traded companies, time to maturity, and a risk free interest rate for the term(s) of the warrant exercise(s).
, and the respective exercise prices and number of warrants. As of September 30, 2017March 31, 2020 and December 31, 2016,2019, the calculated fair value of the Fund’s warrant portfolio totaled $422$577 thousand and $481$588 thousand, respectively. Such valuation is classified within Level 3 of the valuation hierarchy.
17
ATEL GROWTH CAPITAL FUND 8, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
The fair value of warrants that were accounted for on a recurring basis as ofduring the three and nine months ended September 30, 2017March 31, 2020 and 20162019, and classified as level 3, are as follows (in thousands):
|
|
|
|
|
|
|
|
| Three Months Ended | ||||
|
| March 31, | ||||
|
| 2020 |
| 2019 | ||
Fair value of warrants at beginning of period |
| $ | 588 |
| $ | 561 |
Warrants converted to securities |
|
| — |
|
| (140) |
Unrealized loss on fair value adjustment for warrants |
|
| (11) |
|
| (102) |
Fair value of warrants at end of period |
| $ | 577 |
| $ | 319 |
Investment securities (recurring)
The Company’s investment securities registered for public sale with readily determinable fair values are measured at fair value with any changes in fair value recognized in the Company’s results of operations.
The fair value of investment securities that were accounted for on a recurring basis during the three month periods ended March 31, 2020 and 2019, classified as Level 1 are as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Fair value of warrants at beginning of period | $ | 508 | $ | 703 | $ | 481 | $ | 722 | ||||||||
Fair value of new warrants, recorded during the year (included as a discount on notes receivable) | — | 31 | — | 31 | ||||||||||||
Unrealized (loss) gain on fair value adjustment for warrants | (86 | ) | 2 | (59 | ) | (17 | ) | |||||||||
Fair value of warrants at end of period | $ | 422 | $ | 736 | $ | 422 | $ | 736 |
|
|
|
|
|
|
|
|
|
| Three Months Ended | |||
|
|
| March 31, | |||
|
|
| 2020 |
| 2019 | |
Fair value of investment in securities at beginning of period |
| $ | 64 |
| $ | 117 |
Unrealized loss on fair market valuation of securities |
|
| (5) |
|
| (35) |
Fair value of investment in securities at end of period |
| $ | 59 |
| $ | 82 |
Impaired notes receivable (non-recurring)
The fair value of the Company’s notes receivable, when impairment adjustments are required, is estimated using either third party appraisals or estimations of the value of collateral (for collateral dependent loans).
or discounted cash flow analyses (by discounting estimated future cash flows) using the effective interest rate contained in the terms of the original loan. There was no fair value adjustment recorded for impaired notes receivable during the current quarter. During the three and nine months ended September 30, 2017March 31, 2019, the Company did not record any fair value adjustments. During the year ended December 31, 2016, the Company had recorded fair value adjustments totaling $620$13 thousand relative to sixfor impaired notes.
The fair value adjustments recorded in portfolio were non-recurring and were based upon an estimated valuation of underlying collateral. Under the Fair Value Measurements Topic of the FASB Accounting Standards Codification, the fair value of the impaired notes receivable is classified within Level 3 of the valuation hierarchy. The valuation utilizes a market approach technique and uses inputs from third party appraisers that utilize current market transactions as adjusted for certain factors specific to the underlying collateral.
The following table presents the fair value measurement
18
ATEL GROWTH CAPITAL FUND 8, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
December 31, 2016 | Level 1 Estimated Fair Value | Level 2 Estimated Fair Value | Level 3 Estimated Fair Value | |||||||||||||
Impaired notes receivable | $ | 84 | $ | — | $ | — | $ | 84 |
The following tables summarize the valuation techniques and significant unobservable inputs used for the Company’s recurring and non-recurring fair value calculation categorized as Level 3 in the fair value hierarchy at September 30, 2017March 31, 2020 and December 31, 2016:
2019:
March 31, 2020 | ||||||||||||||||
Valuation | Valuation | Unobservable | Range of | |||||||||||||
Name | Frequency | Technique | Inputs | (Weighted Average) | ||||||||||||
Warrants | Recurring | Black-Scholes formulation | Stock price | $ | 0.11 - $16.95 ($0.67) | |||||||||||
Exercise price | $0.02 - $25.76 ($0.34) | |||||||||||||||
Time to maturity (in years) | 0.74 - 11.70 (7.06) | |||||||||||||||
Risk-free interest rate | 0.16% - 1.58% (0.57%) | |||||||||||||||
Annualized volatility | 32.00% - 115.04% (48.13%) |
18
December 31, | ||||||||||||||||
Valuation | Valuation | Unobservable | Range of Input Values | |||||||||||||
Name | Frequency | Technique | Inputs | (Weighted Average) | ||||||||||||
Warrants | Recurring | Black-Scholes formulation | Stock price | $ | 0.10 - $16.07 (S0.66) | |||||||||||
Exercise price | $0.02 - $38.64 ($0.34) | |||||||||||||||
Time to maturity (in years) | 0.99 - 11.95 (7.31) | |||||||||||||||
Risk-free interest rate | 1.59% - 1.99% (1.82%) | |||||||||||||||
Annualized volatility | ||||||||||||||||
32.21% - 114.44% (47.97%) |
The following disclosure of the estimated fair value of financial instruments is made in accordance with the guidance provided by the Financial Instruments Topic of the FASB Accounting Standards Codification. Fair value estimates, methods and assumptions, set forth below for the Company’s financial instruments, are made solely to comply with the requirements of the Financial Instruments Topic and should be read in conjunction with the Company’s financial statements and related notes.
The Company has determined the estimated fair value amounts by using market information and valuation methodologies that it considers appropriate and consistent with the fair value accounting guidance. Considerable judgment is required to interpret market data to develop the estimates of fair value. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Cash and cash equivalents
The recorded amounts of the Company’s cash and cash equivalents approximate fair value because of the liquidity and short-term maturity of these instruments.
Notes receivable
The fair value of the Company’s notes receivable is generally estimated based upon various methodologies deployed by financial and credit management including, but not limited to, credit analysis, third party appraisal and/or discounted cash flow analysis based upon current market valuation techniques and market rates for similar types of lending arrangements, which may consider adjustments for impaired loans as deemed necessary.
Investment in securities
The Company’s investment securities are not registered for public sale andwith readily determinable fair values are carriedmeasured at cost which management believes approximates fair value as appropriately adjusted for impairment.with any changes in fair value recognized in the Company’s results of operations. These investment securities are valued based on their quoted market prices.
19
ATEL GROWTH CAPITAL FUND 8, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
The following tables present estimated fair values of the Company’s financial instruments in accordance with the guidance provided by the Financial Instruments Topic of the FASB Accounting Standards Codification at September 30, 2017March 31, 2020 and December 31, 20162019 (in thousands):
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|
|
|
|
| March 31, 2020 | |||||||||||||
|
| Carrying |
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Amount |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | |||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 91 |
| $ | 91 |
| $ | — |
| $ | — |
| $ | 91 |
Notes receivable, net |
|
| 331 |
|
| — |
|
| — |
|
| 336 |
|
| 336 |
Investment in securities |
|
| 59 |
|
| 59 |
|
| — |
|
| — |
|
| 59 |
Warrants |
|
| 577 |
|
| — |
|
| — |
|
| 577 |
|
| 577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
| ||||||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||||||||||||
September 30, 2017 |
| Carrying |
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|
|
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|
|
|
|
|
|
| |||||||||||||||||||||
Carrying Amount | Level 1 | Level 2 | Level 3 | Total |
| Amount |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | |||||||||||||||||||||
Financial assets: |
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|
|
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|
|
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|
|
|
|
|
|
|
| ||||||||||||||||||||
Cash and cash equivalents | $ | 2,029 | $ | 2,029 | $ | — | $ | — | $ | 2,029 |
| $ | 70 |
| $ | 70 |
| $ | — |
| $ | — |
| $ | 70 | ||||||||||
Notes receivable, net | 2,717 | — | — | 2,707 | 2,707 |
|
| 514 |
|
| — |
|
| — |
|
| 516 |
|
| 516 | |||||||||||||||
Investment in securities | 521 | — | — | 521 | 521 |
|
| 64 |
|
| 64 |
|
| — |
|
| — |
|
| 64 | |||||||||||||||
Warrants | 422 | — | — | 422 | 422 |
|
| 588 |
|
| — |
|
| — |
|
| 588 |
|
| 588 |
December 31, 2016 | ||||||||||||||||||||
Carrying Amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 1,860 | $ | 1,860 | $ | — | $ | — | $ | 1,860 | ||||||||||
Notes receivable, net | 4,430 | — | — | 4,416 | 4,416 | |||||||||||||||
Investment in securities | 521 | — | — | 521 | 521 | |||||||||||||||
Warrants | 481 | — | — | 481 | 481 |
Commitments and Contingencies
The fair value of contingent liabilities (or guarantees) is not considered material because management believes there has been no event that has occurred wherein a guarantee liability has been incurred or will likely be incurred.
On January 30, 2020, the World Health Organization declared the novel coronavirus outbreak a public health emergency. The Fund’s operations is located in California, which has restricted gatherings of people due to the coronavirus outbreak. At present, the Fund’s operations have not been adversely affected and continues to function effectively. Due to the dynamic nature of these unprecedented circumstances and possible business disruption, the Fund will continue to monitor the situation closely, but given the uncertainty about the situation, an estimate of the future impact, if any, cannot be made at this time.
20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Statements contained in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) and elsewhere in this Form 10-Q,10‑Q, which are not historical facts, may be forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. In particular, changes in general economic conditions, including significant rates of inflation and fluctuations in interest rates may result in reduced returns on invested capital. The Company’s performance is subject to risks relating to borrower defaults and the creditworthiness of its borrowers. Investors are cautioned not to attribute undue certainty to these forward-looking statements, which speak only as of the date of this Form 10-Q.10‑Q. We undertake no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Form 10-Q10‑Q or to reflect the occurrence of unanticipated events, other than as required by law.
Overview
ATEL Growth Capital Fund 8, LLC (the “Company” or the “Fund”) was formed under the laws of the state of California on December 8, 2011 for the purpose of providing financing for the acquisition of equipment and other goods and services used by emerging growth companies and established privately held companies without publicly traded securities, and for providing other forms of financing for, and to acquire equity interests and warrants and rights to purchase equity interests in such companies.
Through September 30, 2017,March 31, 2020, cumulative contributions, net of rescissions and related distributions paid, totaling $16.2 million (inclusive of the $500 initial Member’s capital investment) have been received. As of September 30, 2017,March 31, 2020, a total of 1,615,0961,612,396 Units were issued and outstanding.
Results of Operations
The three months ended September 30, 2017March 31, 2020 versus the three months ended September 30, 2016March 31, 2019
The Company had a net loss of $16$41 thousand and net income of $76$84 thousand for the respective three months ended September 30, 2017March 31, 2020 and 2016.2019, respectively. The results for the thirdfirst quarter of 2017 reflect2020 reflected decreases in both total revenues and total operating expenses when compared to the prior year period.
Total revenues were $40 thousand and $212 thousand for the third quarter of 2017 decreased by $226three months ended March 31, 2020 and 2019, respectively. The $172 thousand, or 64%81%, as compared to the prior year period. Such decreasedecline in revenues was largelyprimarily due to a $120 thousand, or 55%, decrease on thedecreases in gain on sales or dispositions of investment in securities; an $88 thousand unfavorable changesecurities and notes receivable interest income partially offset by a decline in unrealized losses on the fair value adjustment for warrants; and a $24 thousand, or 19%, decrease in interest income on notes receivables, including accretion of net note origination costs and discounts, due to the scheduled run-offvaluation of the portfolio.Fund’s warrants.
Total expenses for the third quarter ended September 30, 2017 decreased by $134 thousand, or 48%, as compared to the prior year period. The net decrease in total expenses was largely due to a $116 thousand, or 71%, decrease in acquisition expenses primarily attributable to the decrease in the period over period venture funding activity; and a $24 thousand reversal on the provision for credit losses, due to the cash received on notes receivable; offset in part, by a $13 thousand, or more than 6 times, increase in outside services, indicative of additional efforts required to comply with certain regulatory requirements.
The Company had net losses of $9 thousand and $539 thousand for the respective nine month periods ended September 30, 2017 and 2016. The results for the nine months ending September 30, 2017 reflect decreases in both total revenues and total operating expenses when compared to the prior year period.
Total revenues for the nine months of 2017 decreased by $151 thousand, or 23%, as compared to the prior year period. Such decrease was largely due to a $119 thousand, or 55% decrease on the gainGain on sales or dispositions of investment in securities; a $63securities declined by $161 thousand or 15%, decrease in interest income on notes
21
receivables, including accretionas the Fund realized such amount from the sale of net note origination costs and discounts, due to the scheduled run-off of the portfolio; and a $42 thousand unfavorable change on the fair value adjustment for warrants; offset, in part, by a $76 thousand increase on the gain on early termination of notes receivable.
Total expenses for the nine months ended September 30, 2017 decreased by $681 thousand, or 57%, as compared toinvestment securities during the prior year period. There were no sales or dispositions of investment securities during the current year period. Notes receivable interest income decreased by $85 thousand due to maturities of certain notes since March 31, 2019. The net decreaseFund is in totalits liquidating stage where notes receivable are increasingly nearing maturity and new loans are not placed to generate future income.
Such decreases in revenues were partially offset by a $91 thousand reduction in unrealized losses on the fair valuation of the Fund’s warrants.
Total expenses were $81 thousand and $128 thousand for the three months ended March 31, 2020 and 2019, respectively. The $47 thousand, or 37%, reduction in expenses was primarily due to decreases in outside services, cost reimbursements to affiliates, and the provision for credit losses.
21
Outside services declined by $15 thousand primarily as a $668result of lower consulting fees. Cost reimbursements to affiliates declined by $13 thousand or 108%, decreasedue to lower allocated costs. Such decline in allocated costs is reflective of a diminishing baseline allocation of common costs among the Fund and its affiliates. In addition, the provision for credit losses primarily due to management review and adjustmentdeclined by $13 thousand as the Fund realized a loss of three notes receivable insuch amount during the prior year period; and a $49 thousand, or 24%, decrease in acquisition expenses primarily attributableperiod relative to an impaired note. There were no impaired notes during the decrease in the period over period venture funding activity; offset, in part, by a $33 thousand, or 157%, increase in outside services, indicative of additional efforts required to comply with certain regulatory requirements.current year period.
Capital Resources and Liquidity
The
At March 31, 2020 and December 31, 2019, the Company’s cash and cash equivalents totaled $2.0 million$91 thousand and $1.9 million at September 30, 2017 and December 31, 2016,$70 thousand, respectively. The liquidity of the Company varies, increasing to the extent cash flows from its portfolio investments exceed expenses and decreasing as portfolio investments are acquired, as distributions are made to the Members and to the extent expenses exceed cash flows from its portfolio investments.
The Fund will acquireCompany currently believes it has adequate reserves available to meet its investments with cash. The Fund will not borrow to acquire its portfolio assetsimmediate cash requirements and does not intend or expect to incur any indebtedness. The Fund anticipates that it would incur indebtedness onlythose of the next twelve months, but in the event that it is requiredthose reserves were found to be inadequate, the Company would likely be in a position to borrow for temporary working capital purposes.against its current portfolio to meet such requirements.
Cash Flows
The following table sets forth summary cash flow data (in thousands):
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| Three Months Ended | ||||
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| March 31, | ||||
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| 2020 |
| 2019 | ||
Net cash (used in) provided by: |
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|
|
Operating activities |
| $ | (64) |
| $ | (56) |
Investing activities |
|
| 195 |
|
| 837 |
Financing activities |
|
| (110) |
|
| (483) |
Net increase in cash and cash equivalents |
| $ | 21 |
| $ | 298 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net cash (used in) provided by: | ||||||||||||||||
Operating activities | $ | (56 | ) | $ | 42 | $ | (195 | ) | $ | 23 | ||||||
Investing activities | 465 | 377 | 1,874 | 1,655 | ||||||||||||
Financing activities | (494 | ) | (495 | ) | (1,510 | ) | (1,485 | ) | ||||||||
Net (decrease) increase in cash and cash equivalents | $ | (85 | ) | $ | (76 | ) | $ | 169 | $ | 193 |
During the three months ended September 30, 2017March 31, 2020 and 2016,2019, the Company’s primary source of liquidity was cash flow from its investments inprincipal payments received on notes receivable totaling $443$202 thousand and $823$363 thousand, respectively. In addition, the Company realized $91$326 thousand and $356, of proceeds from the early termination of notes receivable and $161 thousand of proceeds from sales or dispositions of investment in securities during the respective three months ended September 30, 2017 and 2016.March 31, 2019. There were no such proceeds during the current year period.
During the same respective periods, cash was primarily used to pay distributions to both the Other Members and the Managing Member, totaling $494$110 thousand and $495$483 thousand for the respective three months ended September 30, 2017March 31, 2020 and 2016, respectively.2019. Cash was also used to fund new investments in notes receivable totaling $60 thousandpay invoices related to management fees and $800 thousandexpenses, and other payables during the three months ended September 30, 2017 and 2016, respectively.
22
During the nine months ended September 30, 2017 and 2016, the Company’s primary source of liquidity was cash flow from its investments in notes receivable of $1.8 million and $2.5 million, respectively. In addition, the Company realized $222 thousand and $356 thousand of proceeds from the early termination of notes receivable and sales or dispositions of investment securities during the respective nine months ended September 30, 2017 and 2016.both three-month periods.
During the same respective periods, cash was primarily used to pay distributions to both the Other Members and the Managing Member, totaling $1.5 million for both the nine months ended September 30, 2017 and 2016. Cash was also used to fund new investments in notes receivable and securities totaling $60 thousand and $1.2 million during the nine months ended September 30, 2017 and 2016, respectively.
Distributions
The Unitholders of record are entitled to certain distributions as provided under the Operating Agreement. The Company commenced periodic distributions beginning with the month of November 2012. Additional distributions have been made through September 30, 2017. March 31, 2020.
Cash distributions were paid by the Fund to Unitholders of record as of August 31, 2017, and paid through September 30, 2017. The distributions may be characterized for tax, accounting and economic purposes as a return of capital, a return on capital (including escrow interest) or a portion of each. Generally, the portion of each cash distribution by a company which exceeds its net income for the fiscal period would constitute a return of capital. The Fund is required by the terms of its Operating Agreement to distribute the net cash flow generated by its investments in certain minimum amounts during the Reinvestment Period before it can reinvest its operating cash flow in additional portfolio assets. See the discussion in the ATEL Growth Capital Fund 8, LLC Prospectus dated August 20, 2012 (“Prospectus”) under “Income, Losses and Distributions — Reinvestment.” Accordingly, the amount of cash flow from Fund investments distributed to Unitholders will not be available for reinvestment in additional portfolio assets.
The cash distributions were based on current and anticipated gross revenues from the loans funded and equity investments acquired. During the Fund’s acquisition and operating stages, the Fund may incur short term borrowing to fund regular distributions of such gross revenues to be generated by newly acquired transactions during their respective initial fixed terms. As such, all Fund periodic cash distributions made during these stages have been, and are expected in the future to be, based on the Fund’s actual and anticipated gross revenues to be generated from the binding initial terms of the loans and investments funded.
22
23
The following table summarizes distribution activity for the Fund from inception through September 30, 2017March 31, 2020 (in thousands)thousands, except as to Units and per Unit data):
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| Total |
| Weighted | |
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|
| Return of |
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| Distribution |
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|
| Total |
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|
| Distribution |
| Average Units | ||||
Distribution Period (1) |
| Paid | Capital |
|
|
| of Income |
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| Distribution |
|
|
| per Unit(2) |
| Outstanding(3) | ||||
Monthly and quarterly distributions |
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|
Oct 2012 - Mar 2013 (Distribution of all escrow interest) |
| July 2013 | $ | — |
|
|
| $ | — |
|
|
| $ | — |
|
|
|
| n/a |
| n/a |
Nov 14, 2012 - Nov 30, 2012 |
| Dec 2012 |
| 3 |
|
|
|
| — |
|
|
|
| 3 |
|
|
| $ | 0.43 |
| 6,306 |
Dec 2012 - Nov 2013 |
| Jan - Dec 2013 |
| 866 |
|
|
|
| — |
|
|
|
| 866 |
|
|
|
| 1.57 |
| 551,608 |
Dec 2013 - Nov 2014 |
| Jan - Dec 2014 |
| 1,452 |
|
|
|
| — |
|
|
|
| 1,452 |
|
|
|
| 1.08 |
| 1,349,575 |
Dec 2014 - Nov 2015 |
| Jan - Dec 2015 |
| 1,779 |
|
|
|
| — |
|
|
|
| 1,779 |
|
|
|
| 1.10 |
| 1,618,296 |
Dec 2015 - Nov 2016 |
| Jan - Dec 2016 |
| 1,780 |
|
|
|
| — |
|
|
|
| 1,780 |
|
|
|
| 1.10 |
| 1,618,296 |
Dec 2016 - Nov 2017 |
| Jan - Dec 2017 |
| 1,776 |
|
|
|
| — |
|
|
|
| 1,776 |
|
|
|
| 1.10 |
| 1,615,306 |
Dec 2017 - Nov 2018 |
| Jan - Dec 2018 |
| 1,772 |
|
|
|
| — |
|
|
|
| 1,772 |
|
|
|
| 1.10 |
| 1,612,396 |
Dec 2018 - Nov 2019 |
| Jan - Dec 2019 |
| 1,677 |
|
|
|
| — |
|
|
|
| 1,677 |
|
|
|
| 1.04 |
| 1,612,396 |
Dec 2019 - Feb 2020 |
| Jan - Feb 2020 |
| 99 |
|
|
|
| — |
|
|
|
| 99 |
|
|
|
| 0.06 |
| 1,612,396 |
|
|
| $ | 11,204 |
|
|
| $ | — |
|
|
| $ | 11,204 |
|
|
| $ | 8.58 |
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Source of distributions |
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Lease and loan payments/payoffs |
|
| $ | 11,204 |
| 100.00 | % | $ | — |
| 0.00 | % | $ | 11,204 |
| 100.00 | % |
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|
|
|
Interest income |
|
|
| — |
| 0.00 | % |
| — |
| 0.00 | % |
| — |
| 0.00 | % |
|
|
|
|
|
|
| $ | 11,204 |
| 100.00 | % | $ | — |
| 0.00 | % | $ | 11,204 |
| 100.00 | % |
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|
|
Distribution Period(1) | Paid | Return of Capital | Distribution of Income | Total Distribution | Total Distribution per Unit(2) | Weighted Average Units Outstanding(3) | ||||||||||||||||||||||||||||||
Monthly and quarterly distributions | ||||||||||||||||||||||||||||||||||||
Oct 2012 – Mar 2013 (Distribution of all escrow interest) | July 2013 | $ | — | $ | — | $ | — | n/a | n/a | |||||||||||||||||||||||||||
Nov 14, 2012 – Nov 30, 2012 | Dec 2012 | 3 | — | 3 | $ | 0.43 | 6,306 | |||||||||||||||||||||||||||||
Dec 2012 – Nov 2013 | Jan – Dec 2013 | 866 | — | 866 | 1.57 | 551,608 | ||||||||||||||||||||||||||||||
Dec 2013 – Nov 2014 | Jan – Dec 2014 | 1,452 | — | 1,452 | 1.08 | 1,349,575 | ||||||||||||||||||||||||||||||
Dec 2014 – Nov 2015 | Jan – Dec 2015 | 1,779 | — | 1,779 | 1.10 | 1,618,296 | ||||||||||||||||||||||||||||||
Dec 2015 – Nov 2016 | Jan – Dec 2016 | 1,780 | — | 1,780 | 1.10 | 1,618,296 | ||||||||||||||||||||||||||||||
Dec 2016 – Aug 2017 | Jan – Sep 2017 | 1,333 | — | 1,333 | 0.82 | 1,616,261 | ||||||||||||||||||||||||||||||
$ | 7,213 | $ | — | $ | 7,213 | $ | 6.10 | |||||||||||||||||||||||||||||
Source of distributions | ||||||||||||||||||||||||||||||||||||
Lease and loan payments/payoffs | $ | 7,213 | 100.00 | % | $ | — | 0.00 | % | $ | 7,213 | 100.00 | % | ||||||||||||||||||||||||
Interest income | — | 0.00 | % | — | 0.00 | % | — | 0.00 | % | |||||||||||||||||||||||||||
$ | 7,213 | 100.00 | % | $ | — | 0.00 | % | $ | 7,213 | 100.00 | % |
(1) | Investors may elect to receive their distributions either monthly or quarterly. See “Timing and Method of Distributions” on Page 46 of the Prospectus. |
(2) | Total distributions per Unit represents the per Unit distributions rate for those units which were outstanding for all of the applicable period. |
(3) | Balance shown represent weighted average units for the period from November 14 (date |
Commitments and Contingencies and Off-Balance Sheet Transactions
Commitments and Contingencies
At September 30, 2017,March 31, 2020, there were no commitments to fund investments in notes receivable totaling $3.3 million. These amounts represent contract awards which may be canceled by the prospective borrower/investee or may not be accepted by the Company..
Off-Balance Sheet Transactions
None.
Recent Accounting Pronouncements
For detailed information on recent accounting pronouncements, see Note 2, Summary of significant accounting policies.
Significant Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates, which are based upon historical experiences, market trends and financial forecasts, and upon various other assumptions that management believes to be reasonable under the circumstances and at that certain point in time. Actual results may differ, significantly at times, from these estimates under different assumptions or conditions.
24
The Company’s significant accounting policies are described in its Annual Report on Form 10-K for the year ended December 31, 2016.2019. There have been no material changes to the Company’s significant accounting policies since December 31, 2016.2019.
23
Item 4. Controls and Procedures.
Evaluation of disclosure controls and proceduresprocedures
The Company’s Managing Member’s Chairman of the Board, President and Chief Executive Officer, and Director, Executive Vice President and Chief Financial officer and Chief Operating Officer (“Management”), evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)13a‑15(e)) as of the end of the period covered by this report. Based on the evaluation of the Company’s disclosure controls and procedures, the Chief Executive Officer and Executive Vice President and Chief Financial and Operating OfficerManagement concluded that as of the end of the period covered by this report, the design and operation of these disclosure controls and procedures were effective.
The Company does not control the financial reporting process, and is solely dependent on the Management of the Managing Member, who is responsible for providing the Company with financial statements in accordance with generally accepted accounting principles in the United States. The Managing Member’s disclosure controls and procedures, as they are applicable to the Company, means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act (15 U.S.C. 78aet seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in internal control
There were no changes in the Managing Member’s internal control over financial reporting, as it is applicable to the Company, during the quarter ended September 30, 2017March 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Managing Member’s internal control over financial reporting, as it is applicable to the Company.
24
25
In the ordinary course of conducting business, there may be certain claims, suits, and complaints filed against the Managing Member. In the opinion of management, the outcome of such matters, if any, will not have a material impact on the Managing Member’s financial position or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
None.
(a) | Documents filed as a part of this report |
1. | Financial Statement Schedules |
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
2. | Other Exhibits | |||
Certification of Dean L. Cash pursuant to Rules 13a-14(a)/15d-14(a) | ||||
Certification of Paritosh K. Choksi pursuant to Rules 13a-14(a)/15d-14(a) | ||||
Certification | ||||
Certification | ||||
(101.INS) | XBRL Instance Document | |||
(101.SCH) | XBRL Taxonomy Extension Schema Document | |||
(101.CAL) | XBRL Taxonomy Extension Calculation Linkbase Document | |||
(101.DEF) | XBRL Taxonomy Extension Definition Linkbase Document | |||
(101.LAB) | XBRL Taxonomy Extension Label Linkbase Document | |||
(101.PRE) | XBRL Taxonomy Extension Presentation Linkbase Document | |||
25
26
TABLE OF CONTENTSSIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 9, 2017May 15, 2020
ATEL GROWTH CAPITAL FUND 8, LLC
(Registrant)
By: | AGC Managing Member, LLC | |||||||
Managing Member of Registrant |
By: | /s/ Dean L. Cash | ||||||
Dean L. Cash | |||||||
Chairman of the Board, President and |
By: | /s/ Paritosh K. Choksi | |||||
Paritosh K. Choksi | ||||||
Director, Executive Vice President and |
By: | /s/ Samuel Schussler | |||||
Samuel Schussler | ||||||
Senior Vice President and Chief Accounting Officer of |
27
26