The following is a discussion of our current financial position and results of operations. This discussion should be read together with our unaudited financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended
December 31, 2013. This discussion should also be read in conjunction with the disclosures below regarding "Forward-Looking Statements."
As used in this Quarterly Report on Form 10-Q, references to "we," "us," "our" or similar terms include ICON ECI Fund Sixteen.
Forward-Looking Statements Certain statements within this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"). These statements are being made pursuant to the PSLRA, with the intention of obtaining the benefits of the "safe harbor" provisions of the PSLRA, and, other than as required by law, we assume no obligation to update or supplement such statements. Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. You can identify these statements by the use of words such as "may," "would," "could," "anticipate," "believe," "estimate," "expect," "continue," "further," "plan," "seek," "intend," "predict" or "project" and variations of these words or comparable words or phrases of similar meaning. These forward-looking statements reflect our current beliefs and expectations with respect to future events. They are based on assumptions and are subject to risks and uncertainties and other factors outside of our control that may cause actual results to differ materially from those projected. We undertake no obligation to update publicly or review any forward-looking statement, whether as a result of new information, future developments or otherwise. Overview We are a direct financing fund that primarily makes investments in domestic and international businesses, which investments are primarily structured as debt and debt-like financings (such as loans, leases and other structured financing transactions) in, or that are collateralized by, Capital Assets utilized by such companies to operate their businesses, as well as other strategic investments in or collateralized by Capital Assets that our Managing Owner believes will provide us with a satisfactory, risk-adjusted rate of return. We were formed as a
Delawarestatutory trust and are treated as a partnership for federal income tax purposes. As of the Initial Closing Date, we raised a minimum of $1,200,000from the sale of our Shares, at which time shareholders were admitted and we commenced operations. As of June 13, 2014, we raised the $12,500,000minimum offering amount for the Commonwealth of Pennsylvania. Subsequent to the Initial Closing Date, we returned the initial capital contribution of $1,000to ICON Investment Group, LLC(the "Initial Shareholder"). From the commencement of our offering on July 1, 2013through June 30, 2014, we sold 13,479 Class A shares to 254 Class A shareholders and 223 Class I shares to three Class I shareholders, representing an aggregate of $13,608,485of capital contributions. From July 1, 2013through June 30, 2014, we incurred sales commissions to third parties of $941,806and dealer-manager and distribution fees to ICON Securitiesof $272,613. In addition, organization costs of $6,744and offering expenses of $124,854were incurred by us during such period and are included in due to Investment Manager and affiliates on our balance sheets. During the period from July 1, 2013through August 8, 2014, we raised $14,577,921in total equity and will continue to raise equity until no later than July 1, 2015. After the net offering proceeds have been invested, it is anticipated that additional investments will be made with the cash generated from our initial investments to the extent that cash is not used for our expenses, reserves and distributions to our shareholders. The investment in additional Capital Assets in this manner is called "reinvestment." We anticipate investing and reinvesting in Capital Assets from time to time for five years from the date we complete our offering. This time frame is called the "operating period" and may be extended, at our Managing Owner's discretion, for up to an additional three years. After the operating period, we will then sell our assets and/or let our investments mature in the ordinary course of business, during a time frame called the "wind down period."
We seek to generate returns in three ways. We seek to:
† generate current cash flow from payments of principal and/or interest (in the case of secured loans and other financing transactions) and rental payments (in the case of leases); 9
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† generate deferred cash flow by realizing the value of certain Capital Assets that we lease at the maturity of the investment; and
† generate a combination of both current and deferred cash flow from other structured investments.
In the case of secured loans and other financing transactions, the principal and interest payments due under the loan are expected to provide a return of and a return on the amount we lend. In the case of leases where there is significant current cash flow generated during the primary term of the lease and the value of the Capital Assets at the end of the term will be minimal or is not considered a primary reason for making the investment, the rental payments due under the lease are expected to be, in the aggregate, sufficient to provide a return of and a return on our investment. In the case of investments in leased Capital Assets that decline in value at a slow rate due to the long economic life of such Capital Assets, we expect that we will generate sufficient net proceeds at the end of the investment from the sale or re-lease of such Capital Assets. In the case of operating leases, we expect most, if not all, of the return of and the return on such investments to be realized upon the sale or re-lease of the Capital Assets. For leveraged leases, we expect the rental income we receive to be less than the purchase price of the Capital Assets because we will structure these transactions to utilize some or all of the lease rental payments to reduce the amount of non-recourse indebtedness used to acquire such assets.
In some cases with respect to the above investments, we may acquire equity interests, as well as warrants or other rights to acquire equity interests in the borrower or lessee that may increase the expected return on our investments.
In addition, we have established a cash reserve of approximately 0.5% of the gross offering proceeds. As of
Recent Significant Transactions
We engaged in the following significant transactions since
Mining Equipment On
September 12, 2013, a joint venture owned by us, Fund Eleven and Fund Twelve purchased mining equipment for approximately $15,107,000. The equipment is subject to a 24-month lease with Murray, which expires on September 30, 2015. On December 1, 2013and February 1, 2014, we contributed capital of approximately $934,000and $1,726,000, respectively, to the joint venture, inclusive of acquisition fees. Subsequent to our second capital contribution, the joint venture is owned 19.8% by us, 67.0% by Fund Eleven and 13.2% by Fund Twelve. On March 4, 2014, a joint venture owned 10% by us, 60% by Fund Twelve, 15% by Fund Fourteen and 15% by Fund Fifteen purchased mining equipment from an affiliate of Blackhawk. Simultaneously, the mining equipment was leased to Blackhawk and its affiliates for four years. The aggregate purchase price for the mining equipment of approximately $25,359,000was funded by approximately $17,859,000in cash and $7,500,000of non-recourse long-term debt. Our contribution to the joint venture was approximately $1,796,000. Trucks and Trailers On March 28, 2014, a joint venture owned 12.5% by us, 60% by Fund Twelve and 27.5% by Fund Fifteen purchased trucks, trailers and other equipment from subsidiaries of D&T for $12,200,000. Simultaneously, the trucks, trailers and other equipment were leased to D&T and its subsidiaries for 57 months. Our contribution to the joint venture was approximately $1,485,000.
The following table includes additional information on the significant transactions that we engaged in from the Initial Closing Date through
Table of Contents Net Credit Portfolio Equity Interest Expiration Collateral/ Carrying Loss Company Structure Invested Rate Date Priority Value (2) Reserve Current Status Murray Ownership Energy Lease
$2,659,195N/A 9/30/2015 of mining $2,058,841None Performing Corporation equipment (1) Blackhawk Ownership Mining, LLC Lease $1,795,597N/A 2/28/2018 of mining $1,764,578None Performing (1) equipment Ownership D&T of trucks, Holdings, Lease $1,484,705N/A 12/31/2018 trailers $1,402,329None Performing LLC (1) and equipment
(1) Our investment in this portfolio company is through a joint venture.
(2) Net carrying value of our investment in joint ventures is calculated as follows: investment at cost plus/less our share of
the cumulative net income/loss of the joint venture and less distributions received since the date of our initial investment.
Acquisition Fees We incurred acquisition fees to our Investment Manager of
$0and $101,524during the three and six months ended June 30, 2014, respectively. Acquisition fees of $101,524is included in due to our Investment Manager and affiliates on our balance sheet as of June 30, 2014.
Recent Accounting Pronouncements
May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers, which will become effective for us on January 1, 2017. We are currently in the process of evaluating the impact of the adoption of ASU 2014-09 on our financial statements. We do not believe any other recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on our financial statements.
Results of Operations for the Three Months Ended
Total revenue for the 2014 Quarter was
Total expenses for the 2014 Quarter were
$281,413, which were primarily comprised of administrative expense reimbursements due to our Investment Manager and other general and administrative expenses. Administrative expense reimbursements are costs incurred by our Investment Manager or its affiliates that are necessary for our operations.
Net Loss Attributable to Fund Sixteen
As a result of the foregoing factors, net loss attributable to us for the 2014 Quarter was
$147,639. Net loss attributable to us per weighted average additional Class A share and Class I share outstanding for the 2014 Quarter was $13.51and $13.32, respectively.
Results of Operations for the Six Months Ended
Total revenue for the 2014 Period was
$199,005, which was attributable to income generated from our investment in three joint ventures with Fund Eleven, Fund Twelve, Fund Fourteen and Fund Fifteen. Total expenses for the 2014 Period were $531,453, which were primarily comprised of administrative expense reimbursements due to our Investment Manager and other general and administrative expenses. Administrative expense reimbursements are costs incurred by our Investment Manager or its affiliates that are necessary for our operations.
Net Loss Attributable to Fund Sixteen
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As a result of the foregoing factors, net loss attributable to us for the 2014 Period was
$332,448. Net loss attributable to us per weighted average additional Class A share and Class I share outstanding for the 2014 Period was $41.26and $38.62, respectively. Financial Condition
This section discusses the major balance sheet variances at
Total assets increased
Total Liabilities Total liabilities increased
$947,701, from $198,077at December 31, 2013to $1,145,778at June 30, 2014. The increase was primarily due to administrative expense reimbursements, offering expenses and acquisition fees payable to our Investment Manager and its affiliates and the sales commission trail we accrued on the sale of our Class A shares during the 2014 Period.
Liquidity and Capital Resources
June 30, 2014and December 31, 2013, we had cash of $7,446,362and $1,027,327, respectively. Pursuant to the terms of our offering, we have established a cash reserve in the amount of 0.50% of the gross offering proceeds from the sale of our Shares. As of June 30, 2014, the cash reserve was $68,042. During our offering period, our main source of cash is from financing activities and our main use of cash is in investing activities.
We are offering our Shares on a "best efforts" basis with the current intention of raising up to
We will use the net proceeds of our offering to invest in Capital Assets located in
North America, Europeand other developed markets, including those in Asia, South Americaand elsewhere. We seek to acquire a portfolio of Capital Assets that is comprised of both transactions that generate (a) current cash flow from payments of principal and/or interest (in the case of secured loans and other financing transactions) and rental payments (in the case of leases), (b) deferred cash flow by realizing the value of certain Capital Assets that we lease at the maturity of the investment, or (c) a combination of both current and deferred cash flow from other structured investments. Unanticipated or greater than anticipated operating costs or losses (including a borrower's inability to make timely loan payments or a lessee's inability to make timely lease payments) would adversely affect our liquidity. To the extent that working capital may be insufficient to satisfy our cash requirements, we anticipate that we would fund our operations from cash flow generated by operating and financing activities. Our Managing Owner does not intend to fund any cash flow deficit of ours or provide other financial assistance to us. From the commencement of our offering on July 1, 2013through June 30, 2014, we sold 13,479 Class A shares to 254 Class A shareholders and 223 Class I shares to three Class I shareholders, representing an aggregate of $13,608,485of capital contributions. From July 1, 2013through June 30, 2014, we incurred sales commissions to third parties of $941,806and dealer-manager and distribution fees to ICON Securitiesof $272,613. In addition, organization costs of $6,744and offering expenses of $124,854were incurred by us during such period and are included in due to Investment Manager and affiliates on our balance sheets. Organization costs are expensed when incurred and offering expenses are recorded as a reduction of shareholders' equity. Cash Flows 12
Table of Contents Operating Activities
Cash provided by operating activities in the 2014 Period of
Investing Activities Cash used in investing activities in the 2014 Period of
$4,206,612was related to our investment in three joint ventures, partially offset by distributions received from our joint ventures in excess of profits. Financing Activities
Cash provided by financing activities in the 2014 Period of
Sources of Liquidity We believe that cash generated from the sale of our Shares pursuant to our offering and other financing activities, as well as our expected results of operations, will be sufficient to finance our liquidity requirements for the foreseeable future, including distributions to our shareholders, general and administrative expenses, new investment opportunities, management fees and administrative expense reimbursements.
Our ability to generate cash in the future is subject to general economic, financial, competitive, regulatory and other factors that affect us and our lessees' and borrowers' businesses that are beyond our control.
Financings and Borrowings
Revolving Line of Credit, Recourse
December 26, 2013, we entered into the Facility, which is secured by all of our assets not subject to a first priority lien. The interest rate for general advances under the Facility is CB&T's prime rate. We may elect to designate up to five advances on the outstanding principal balance of the Facility to bear interest at LIBOR plus 2.5% per year. In all instances, borrowings under the Facility are subject to an interest rate floor of 4.0% per year. In addition, we are obligated to pay an annualized 0.5% fee on unused commitments under the Facility. At June 30, 2014, there were no obligations outstanding under the Facility and we were in compliance with all covenants related to the Facility. Amounts available under the Facility are subject to a borrowing base that is determined, subject to certain limitations, by the present value of the future receivables under certain loans and lease agreements in which we have a beneficial interest. At June 30, 2014, we had $0available under the Facility pursuant to the borrowing base. Distributions We, at our Managing Owner's discretion, pay monthly distributions to our shareholders beginning with the first month after each such shareholder's admission and expect to continue to pay such distributions until the termination of our operating period. During the 2014 Period, we paid or accrued distributions to our Managing Owner, Class A additional shareholders and Class I shareholders of $2,459, $269,579and $4,676, respectively.
Commitments and Contingencies and Off-Balance Sheet Transactions
Commitments and Contingencies
At the time we acquire or divest of an interest in Capital Assets, we may, under very limited circumstances, agree to indemnify the seller or buyer for specific contingent liabilities. Our Managing Owner believes that any liability of ours that may arise as a result of any such indemnification obligations will not have a material adverse effect on our financial condition or results of operations taken as a whole. We are a party to the Facility, as discussed in "Financings and Borrowings - Revolving Line of Credit, Recourse" above. We had no borrowings under the Facility at
June 30, 2014.
Off-Balance Sheet Transactions
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June 30, 2014, our Investment Manager and its affiliates incurred organization and offering costs of $1,668,877on our behalf in accordance with the terms of our Trust Agreement. Of this amount, the Investment Manager has sought reimbursement of $187,615, which is included in due to Investment Manager and affiliates on our balance sheet as of June 30, 2014. The decision to pay organization and offering costs on our behalf and the decision to seek reimbursement for such costs is solely at the discretion of our Investment Manager and its affiliates. Accordingly, we may or may not be required to reimburse any remaining organization and offering expenses that have been or will be incurred by our Investment Manager and its affiliates. 14
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