Exhibit 99.1
THE JOINT SAN GABRIEL VALLEY GROUP, INC.
Financial Statements
and
Independent Auditors' Report
December 31, 2014
THE JOINT SAN GABRIEL VALLEY GROUP, INC.
Table of Contents
Page
| Independent Auditors' Report | 1 |
| Financial Statements | |
| Balance Sheet | 3 |
| Statement of Operations | 4 |
| Statement of Changes in Stockholder's Equity (Deficit) | 5 |
| Statement of Cash Flows | 6 |
| Notes to Financial Statements | 7 |
INDEPENDENT AUDITORS' REPORT
To the Stockholder
The Joint San Gabriel Valley Group, Inc.
Whittier, California
We have audited the accompanying financial statements of The Joint San Gabriel Valley Group, Inc., which are comprised of the balance sheet as of December 31, 2014, and the related statements of operations, changes in stockholder's equity (deficit), and cash flows for the year then ended, and the related notes to the financial statements.
MANAGEMENT'S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
AUDITORS' RESPONSIBILITY
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
To the Stockholder
The Joint San Gabriel Valley Group, Inc.
Page Two
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
OPINION
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Joint San Gabriel Valley Group, Inc. as of December 31, 2014, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
EMPHASIS OF OTHER MATTERS
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Notes 1 and 2 to the financial statements, the Company sold substantially all of its assets subsequent to year end, has suffered recurring losses from operations, and has a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
EKS&H LLLP
May 15, 2015
Denver, Colorado
THE JOINT SAN GABRIEL VALLEY GROUP, INC.
Balance Sheet
December 31, 2014
Assets
| Current assets | ||||
| Cash | $ | 40,586 | ||
| Accounts receivable | 1,035 | |||
| Prepaid expenses | 12,625 | |||
| Total current assets | 54,246 | |||
| Non-current assets | ||||
| Property and equipment, net | 260,094 | |||
| Franchise fees, net | 200,583 | |||
| Deposits | 8,688 | |||
| Total non-current assets | 469,365 | |||
| Total assets | $ | 523,611 | ||
Liabilities and Stockholder's Equity (Deficit) | ||||
| Current liabilities | ||||
| Accounts payable and accrued expenses | $ | 89,754 | ||
| Advances from stockholder | 650,000 | |||
| Deferred rent, current portion | 10,403 | |||
| Total current liabilities | 750,157 | |||
| Non-current liabilities | ||||
| Deferred rent, less current portion | 39,564 | |||
| Total liabilities | 789,721 | |||
| Commitments and contingencies | ||||
| Stockholder's equity (deficit) | ||||
| Common stock, no par value, 1,000,000 shares authorized, 460,000 shares issued and outstanding | 460,000 | |||
| Accumulated deficit | (726,110 | ) | ||
| Total stockholder's equity (deficit) | (266,110 | ) | ||
| Total liabilities and stockholder's equity (deficit) | $ | 523,611 | ||
See notes to financial statements.
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THE JOINT SAN GABRIEL VALLEY GROUP, INC.
Statement of Operations
For the Year Ended December 31, 2014
| Revenues | ||||
| Management fees | $ | 55,030 | ||
| Expenses | ||||
| General and administrative | 445,643 | |||
| Selling and marketing | 25,305 | |||
| Depreciation and amortization | 83,799 | |||
| Total expenses | 554,747 | |||
| Net loss | $ | (499,717 | ) |
See notes to financial statements.
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THE JOINT SAN GABRIEL VALLEY GROUP, INC.
Statement of Changes in Stockholder's Equity (Deficit)
For the Year Ended December 31, 2014
| Total | ||||||||||||||||
| Common Stock | Accumulated | Stockholder's | ||||||||||||||
| Shares | Amount | Deficit | Equity (Deficit) | |||||||||||||
| Balance - December 31, 2013 | 460,000 | $ | 460,000 | $ | (226,393 | ) | $ | 233,607 | ||||||||
| Net loss | - | - | (499,717 | ) | (499,717 | ) | ||||||||||
| Balance - December 31, 2014 | 460,000 | $ | 460,000 | $ | (726,110 | ) | $ | (266,110 | ) | |||||||
See notes to financial statements.
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THE JOINT SAN GABRIEL VALLEY GROUP, INC.
Statement of Cash Flows
For the Year Ended December 31, 2014
| Cash flows from operating activities | ||||
| Net loss | $ | (499,717 | ) | |
| Adjustments to reconcile net loss to net cash used in operating activities | ||||
| Depreciation and amortization | 83,799 | |||
| Changes in operating assets and liabilities | ||||
| Accounts receivable | (493 | ) | ||
| Prepaid expenses | (11,706 | ) | ||
| Accounts payable and accrued expenses | 92,701 | |||
| Deferred rent | 36,816 | |||
| Deposits | (2,607 | ) | ||
| 198,510 | ||||
| Net cash used in operating activities | (301,207 | ) | ||
| Cash flows from investing activities | ||||
| Purchase of property and equipment | (221,466 | ) | ||
| Net cash used in investing activities | (221,466 | ) | ||
| Cash flows from financing activities | ||||
| Advances from stockholder | 500,000 | |||
| Net cash provided by financing activities | 500,000 | |||
| Net decrease in cash | (22,673 | ) | ||
| Cash - beginning of year | 63,259 | |||
| Cash - end of year | $ | 40,586 |
See notes to financial statements.
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THE JOINT SAN GABRIEL VALLEY GROUP, INC.
Notes to Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies
The Joint San Gabriel Valley Group, Inc. (the "Company") was formed in February 2012 for the purpose of owning and operating franchises for The Joint Corp. ("The Joint"), a franchisor that specializes in providing affordable, convenient, and accessible chiropractic care through licensed chiropractic professionals.
In 2012, the Company purchased the franchise rights to own and operate ten franchises in California. In the state of California, a chiropractor must be part of a professional services corporation ("PC") in order to provide chiropractic services. The Company has entered into three management agreements with PCs to manage the respective PCs. The remaining seven units are not developed or in operation.
On March 6, 2015, the Company entered into an agreement with The Joint in which it sold substantially all of the assets of two developed franchises and terminated its franchise rights under nine of the Company's ten franchise agreements for $300,000. The Company retained its right to own and operate one operating franchise.
Cash
The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests. The Company had no cash equivalents as of December 31, 2014.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided utilizing the straight-line method over the estimated useful lives for owned assets, ranging from three to seven years, and the shorter of the estimated useful life or related lease terms for leasehold improvements.
Franchise Fees
For each franchise purchased by the Company, a fee of $29,000 is paid to The Joint. The fees are amortized over a period of 10 years, which is the term of the franchise agreement.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recovered. The Company looks primarily to the estimated undiscounted future cash flows in its assessment of whether or not long-lived assets have been impaired. No impairments of long-lived assets were recorded for the year ended December 31, 2014.
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THE JOINT SAN GABRIEL VALLEY GROUP, INC.
Notes to Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)
Revenue Recognition
The Company derives its revenue in the form of fees from the performance of management, organizational, and administrative services. Based on agreements with the PCs, the Company earns a monthly fee from each PC. Each of the PCs are in the initial stage of business development and have not generated enough revenue to cover the monthly fees outlined in the agreement. Since the collectibility of the full management fee is uncertain, revenue has only been recognized to the extent of fees expected to be collected from the PC.
Royalties and Advertising Fees
Pursuant to the franchise agreements, the Company is required to pay royalties and advertising fees based on a percentage of sales, including 6% for royalties and 1% for advertising fees.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense for the year ended December 31, 2014 was $24,768.
Income Taxes
The Company has elected to be treated as an S corporation for income tax purposes. Accordingly, taxable income and losses of the Company are reported on the income tax returns of the stockholder, and no provision for federal income taxes has been recorded on the accompanying financial statements.
The Company applies a more-likely-than-not measurement methodology to reflect the financial statement impact of uncertain tax positions taken or expected to be taken in a tax return. If taxing authorities were to disallow any tax positions taken by the Company, the additional income taxes, if any, would be imposed on the Company's stockholder rather than on the Company. Accordingly, there would be no effect on the Company's financial statements.
Use of Estimates
The preparation of financial statements in conformity 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 disclosures 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 those estimates.
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THE JOINT SAN GABRIEL VALLEY GROUP, INC.
Notes to Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)
Subsequent Events
The Company has evaluated all subsequent events through the auditors' report date, which is the date the financial statements were available for issuance. Except as disclosed in Note 1, there were no material subsequent events that required recognition or additional disclosure in these financial statements.
Deferred Rent Obligation
The Company has entered into operating lease agreements for its corporate office and warehouses, some of which contain provisions for future rent increases or periods in which rent payments are reduced. The Company records monthly rent expense equal to the total of the payments due over the lease term, divided by the number of months of the lease term. The difference between rent expense recorded and the amount paid is credited or charged to deferred rent obligation, which is reflected as a separate line item in the accompanying balance sheet.
Note 2 - Going Concern
The accompanying financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and liquidation of liabilities in the ordinary course of business.
As shown in the accompanying financial statements, the Company has incurred recurring losses from operations, and as of December 31, 2014, the Company's total liabilities exceeded its total assets by approximately $260,000. These factors raise substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Note 3 - Balance Sheet Disclosures
Property and equipment are summarized as follows at December 31, 2014:
| Leasehold improvements | $ | 254,104 | ||
| Furniture and fixtures | 59,536 | |||
| Office equipment | 25,580 | |||
| 339,220 | ||||
| Less accumulated depreciation and amortization | (79,126 | ) | ||
| $ | 260,094 |
Depreciation expense for the year ended December 31, 2014 was $54,799.
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THE JOINT SAN GABRIEL VALLEY GROUP, INC.
Notes to Financial Statements
Note 3 - Balance Sheet Disclosures (continued)
Franchise fees consist of the following at December 31, 2014:
| Franchisee | $ | 290,000 | ||
| Less accumulated amortization | (89,417 | ) | ||
| $ | 200,583 |
Amortization expense for the year ended December 31, 2014 was $29,000. Future amortization expense is as follows:
| Year Ending December 31, | ||||
| 2015 | $ | 29,000 | ||
| 2016 | 29,000 | |||
| 2017 | 29,000 | |||
| 2018 | 29,000 | |||
| 2019 | 29,000 | |||
| Thereafter | 55,583 | |||
| $ | 200,583 | |||
Note 4 - Advances from Stockholder
The Company has outstanding amounts due to its stockholder. The advances are non-interest bearing and are due on demand.
Note 5 - Commitments and Contingencies
Operating Leases
The Company leases facilities under non-cancelable operating leases. Rent expense for the year ended December 31, 2014 was $108,912.
Future minimum lease payments under these leases are approximately as follows:
| Year Ending December 31, | ||||
| 2015 | $ | 101,000 | ||
| 2016 | 103,000 | |||
| 2017 | 105,000 | |||
| 2018 | 75,000 | |||
| 2019 | 28,000 | |||
| $ | 412,000 | |||
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THE JOINT SAN GABRIEL VALLEY GROUP, INC.
Notes to Financial Statements
Note 5 - Commitments and Contingencies (continued)
Litigation
In the normal course of business, the Company is party to litigation from time to time. The Company maintains insurance to cover certain actions and believes that resolution of such litigation will not have a material adverse effect on the Company.
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