LOHMAN COMPANY, PLLC

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1 SUNLAND SPRINGS VILLAGE GOLF CLUB, INC. FINANCIAL STATEMENTS (Compiled) YEAR ENDED SEPTEMBER 30, 2016 LOHMAN COMPANY, PLLC Certified Public Accountants & Business Consultants

2 CONTENTS INDEPENDENT ACCOUNTANT S COMPILATION REPORT FINANCIAL STATEMENTS Statement of financial position 1 Statement of activities 3 Statement of cash flows 5 Notes to financial statements 7

3 LOHMAN COMPANY, PLLC Certified Public Accountants & Business Consultants INDEPENDENT ACCOUNTANT'S COMPILATION REPORT To the Board of Directors Sunland Springs Village Golf Club, Inc. Mesa, Arizona Management is responsible for the accompanying financial statements of Sunland Springs Village Golf Club, Inc. ( Club ), which comprise the statement of financial position as of September 30, 2016, and the related statements of activities and cash flows for the year then ended and notes to the financial statements in accordance with accounting principles generally accepted in the United States of America. We have performed a compilation engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. We did not audit or review the financial statements nor were we required to perform any procedures to verify the accuracy or completeness of the information provided by management. Accordingly, we do not express an opinion, a conclusion, nor provide any form of assurance on these financial statements. This report is intended solely for the information and use of the board of directors and members of the Club and is not intended to be, and should not be, used by anyone other than these specified parties. Mesa, Arizona December 8, South Stapley Drive, Suite 108, Mesa, Arizona Phone: Fax: Toll-Free:

4 STATEMENT OF FINANCIAL POSITION September 30, 2016 ASSETS Current assets Cash Cash $ 236,943 Cash- operating and payroll 31,972 Cash- board designated funds 400, ,915 Inventories 31,687 Prepaid expenses and other current assets 132,088 Total current assets 832,690 Property and equipment Land 562,599 Land improvements 240,608 Buildings 429,937 Equipment and fixtures 326,826 1,559,970 Less accumulated depreciation (41,272) Total property and equipment 1,518,698 License, net of accumulated amortization of $1,500 18,500 Total assets $ 2,369,888 See accompanying notes and independent accountant's compilation report 1

5 STATEMENT OF FINANCIAL POSITION (Continued) September 30, 2016 LIABILITIES AND NET ASSETS Current liabilities Accounts payable $ 93,712 Accrued expenses 144,039 Income tax payable 2,368 Deferred revenue 94,371 Total current liabilities 334,490 Due to Farnsworth - memberships 95,000 Deferred tax liability 4,000 Total liabilities 433,490 Net assets Unrestricted 1,536,398 Board designated 400,000 Total net assets 1,936,398 Total liabilities and net assets $ 2,369,888 See accompanying notes and independent accountant's compilation report 2

6 STATEMENT OF ACTIVITIES Year Ended September 30, 2016 Revenues and income Patio fund donations $ 204,163 Course services 315,739 Greens fees 553,137 Other 9,812 Total member dues, fees and other 1,082,851 Golf shop 61,928 Food and beverage 28,944 Less cost of sales (56,303) Total net revenue 34,569 Total revenues and income 1,117,420 Operating expenses Golf course maintenance 631,967 Golf shop 5,078 General and administrative 284,410 Food and beverage 27,467 Course services 56,613 Other operating expenses 55,941 Total operating expenses 1,061,476 See accompanying notes and independent accountant's compilation report 3

7 STATEMENT OF ACTIVITIES (Continued) Year Ended September 30, 2016 Excess of revenues and income over operating expenses before other revenues (expenses), income tax expense and other changes in net assets 55,944 Other revenues (expenses) Gain on sale of equipment 28,301 Depreciation and amortization expense (48,903) Total other revenues (expenses) (20,602) Excess of revenues and income over expenses before income tax expense and other changes in net assets 35,342 Income tax expense 6,368 Excess of revenues and income over expenses before other changes in net assets 28,974 Other changes in net assets Proceeds from issuance of memberships 1,140,637 Total other changes in net assets 1,140,637 Change in net assets 1,169,611 Net assets, beginning balance 766,787 Net assets, ending balance $ 1,936,398 See accompanying notes and independent accountant's compilation report 4

8 STATEMENT OF CASH FLOWS Year Ended September 30, 2016 Cash flows from operating activities Change in net assets $ 28,974 Adjustments to reconcile change in net assets to net cash provided by operating activities Depreciation and amortization expense 48,903 Deferred tax 4,000 Gain on sale of equipment (28,301) (Increase) decrease in: Inventories (31,687) Prepaid expenses and other current assets (49,988) Increase (decrease) in: Accounts payable 74,698 Accrued expenses 144,039 Income tax payable 2,368 Deferred revenue 94,371 Due to Farnsworth - memberships 95,000 Net cash provided by operating activities 382,377 Cash flows from investing activities Acquisition of golf course and equipment (1,276,273) Purchases of equipment (363,627) Net cash used by investing activities (1,639,900) See accompanying notes and independent accountant's compilation report 5

9 STATEMENT OF CASH FLOWS (Continued) Year Ended September 30, 2016 Cash flows from financing activities Proceeds from issuance of equity memberships 1,140,637 Net cash provided by financing activities 1,140,637 Net decrease in cash (116,886) Cash, beginning balance 785,801 Cash, ending balance $ 668,915 Supplemental disclosures of cash flow information Noncash investing activities: Equipment traded in for leased equipment $ 82,100 See accompanying notes and independent accountant's compilation report 6

10 NOTES TO FINANCIAL STATEMENTS Note 1. Nature of Club and Summary of Significant Accounting Policies Nature of club: Sunland Springs Village Golf Club, Inc. ( Club ) was incorporated on May 18, 2015 as a not-for-profit corporation under the laws of the State of Arizona. The purpose of the Club is to assure the continued existence and maintenance of the golf course by acquiring, maintaining and operating the course for the use of the Club s members, their guests and the public at large. The Club is located in the 55+ master planned active adult community in Arizona s Valley of the Sun, known as Sunland Springs Village in Mesa, Arizona. It is overseen by a five-member Board of Directors with retiring or replacement members elected by the voting membership certificate holders. The Club consists of Charter memberships offered to owners of residences within Sunland Springs Village for a membership fee of $5,000, until November 15, Non-charter memberships were sold after November 15, 2015 for $5,000. Each membership certificate holder shall have one vote at annual or special meetings of the membership and members can have the Club sell memberships for $5,000, which is set by the Board. Members are given preferences for season pass program pricing, green fees, early tee time bookings, reduced rates on range balls discounted pro shop and snack shop prices, all such terms and prices are set by the Board. There were 381 members at September 30, Included in operating expenses in the accompanying statement of activities for the year ended September 30, 2016 were one-time start-up and promotion expenses not associated with normal operating expenses. These one-time expenses totaled approximately $37,800 which included legal expenses, membership (shirt and hat) promotion expenses, appraisal and other expenses associated with the golf course acquisition. See accompanying independent accountant s compilation report 7

11 NOTES TO FINANCIAL STATEMENTS Note 1. Nature of Club and Summary of Significant Accounting Policies (Continued) Basis of presentation: The Club s financial statement presentation is governed by Accounting Standards Codification ( ASC ) Subtopic 205, Presentation of Financial Statements ( ASC 205 ). ASC 205 establishes a specific financial statement reporting format for not-for-profit organizations and requires the statement of activities to reflect all changes in net assets. Under ASC 205, a not-for-profit organization is required to report information regarding its financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets and permanently restricted net assets based upon the existence or absence of donor-imposed restrictions as follows: Unrestricted Net assets that are not subject to donor-imposed restrictions. Certain unrestricted net assets may be designated for specific purposes by action of the Board of Directors. See Note 1 for Board designated unrestricted net assets. Temporarily restricted Permanently restricted Net assets subject to donor-imposed restrictions that were not met as of the year end of the current reporting period and can be fulfilled by action of the Club pursuant to those restrictions or that expire by the passage of time. The Club currently does not have any donor-imposed temporarily restricted net assets. Net assets subject to donor-imposed restrictions that they be maintained permanently by the Club. The Club currently does not have any donorimposed permanently restricted net assets. Concentration of cash: The Club maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. Inventories: Inventories (consisting of golf merchandise and food and liquor) are valued at the lower of cost or market value. Cost is determined using the first-in, first out ( FIFO ) assumption. Market is based on the lower of replacement cost or estimated realizable value. The valuation of inventories requires management to estimate obsolete or excess inventories as well as inventories that are not of saleable quality. The determination of obsolete or excess inventories requires management to estimate the future demand for the Club s inventories. Management determined that no allowance for inventories obsolescence was necessary as of September 30, See accompanying independent accountant s compilation report 8

12 NOTES TO FINANCIAL STATEMENTS Note 1. Nature of Club and Summary of Significant Accounting Policies (Continued) Property and equipment: The Club capitalizes all property and equipment with a cost or estimated fair value greater than $2,500 and estimated useful life of greater than one year. The Club also capitalizes property, to which it has title or other evidence of ownership, purchased from the developer. That property is recorded at fair value, which approximated the purchase price and consists of land, land improvements, buildings and equipment and fixtures. Depreciation has been provided utilizing the straight-line method over the estimated useful lives of the respective assets as follows: Land improvements Buildings Equipment and fixtures 15 years 39 years 5 to 39 years Repairs that significantly extend the lives of equipment and fixtures are capitalized, while routine repairs and maintenance are expensed when incurred. When items of property and equipment are sold or retired, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is included in unrestricted net assets. The cost of the patio addition during 2016 was approximately $200,000, which was included in buildings and equipment and fixtures in the accompanying statement of financial position. Included in accrued expenses on the accompanying statement of financial position as of September 30, 2016 was approximately $80,000 of patio costs that will be paid during fiscal year The patio addition was completed and placed in service by the year ended September 30, Long-lived assets: Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. Impairment is measured by a comparison of the carrying amount of an asset to the future net undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. There were no such impairment losses during the year ended September 30, Deferred revenue: Deferred revenue consists of seasonal/annual passes, which have been paid in advance, but not yet earned. See accompanying independent accountant s compilation report 9

13 NOTES TO FINANCIAL STATEMENTS Note 1. Nature of Club and Summary of Significant Accounting Policies (Continued) Revenue recognition: The Club follows ASC Topic 958, Not-for-profit Entities ( ASC 958 ). In accordance with ASC 958, contributions received are recorded as unrestricted, temporarily restricted or permanently restricted support, depending on the existence and/or nature of any donor restriction. All donations are considered to be available for unrestricted use unless specifically restricted by the donor. Amounts received that are designated for future periods or restricted by the donor for specific purposes are reported as temporarily restricted or permanently restricted support that increases those net asset classes. When a temporary restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. However, if a restriction is fulfilled in the same time period in which the contribution is received, the Club reports the support as unrestricted The Club recognizes revenue for seasonal/annual passes ratably over the period covered by the pass. The Club recognizes revenue for green fees, driving range, golf cart rental, golf merchandise and food and beverage charges when incurred. Gift card revenues are recognized at the time of use. Board designated funds: Board designated fund consists of cash held in a financial institution of $400,000 as of September 30, The board designated fund is designated for Club emergencies; therefore, the funds are considered cash for purposes of the statement of cash flows. Advertising costs: The Club expenses the cost of advertising as incurred. Advertising expense were $13,988, which excludes membership promotional expenses, for the year ended September 30, 2016 and is included in operating expenses on the accompanying statement of activities. Sales taxes: The Club records taxes assessed by a governmental authority including sales, use, value added and excise taxes on a net basis, therefore amounts are excluded from total revenues and income and operating expenses. Any taxes not yet remitted to applicable taxing authorities are included in accrued expenses on the accompanying statement of financial position. See accompanying independent accountant s compilation report 10

14 NOTES TO FINANCIAL STATEMENTS Note 1. Nature of Club and Summary of Significant Accounting Policies (Continued) Income taxes: The Club was incorporated as a not-for-profit corporation. However, the Club has not filed for an exemption from federal income taxes under Section 501(c)(7) of the Internal Revenue Code and as a result is a for-profit corporation for income tax reporting purposes. Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Club adopted the accounting standard on accounting for uncertainty in income taxes, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under this guidance, the Club may recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The guidance on accounting for uncertainty in income taxes also addresses de-recognition, classification, interest and penalties on income taxes, and accounting in interim periods. As a result of implementation of this guidance, management determined the Club had taken no uncertain tax positions. The Club files income tax returns in the U.S. federal jurisdiction and Arizona. With few exceptions, the Club is no longer subject to U.S. federal, or state and local income tax examinations by tax authorities for years before 2015 as 2015 was the initial filing year for the Club. If applicable, the Club recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Subsequent events: The Club has evaluated subsequent events through December 5, 2016, the date on which the financial statements were available to be issued. See Note 8 for a discussion of subsequent events noted. See accompanying independent accountant s compilation report 11

15 NOTES TO FINANCIAL STATEMENTS Note 2. Recent Accounting Guidance In May 2014, the Financial Accounting Standards Board ( FASB ) issued Accounting Standard Update ( ASU ) , Revenue from Contracts with Customers (Topic 606), requiring an organization to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. The updated standard will be effective for annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, The Club has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on the financial statements. In February 2016, the FASB issued ASU , Leases (Topic 842), requiring an organization that leases assets or lessees to recognize assets and liabilities on their statement of financial position for leases with lease terms of more than 12 months. The updated standard will replace most existing lease recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. The updated standard will be effective for annual reporting periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, Early adoption is permitted for all clubs. The Club has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on the financial statements. In August 2016, the FASB issued ASU , Presentation of Financial Statements of Not-for-Profit ( NFP ) Entities (Topic 958) will change the way all NFPs classify net assets and prepare financial statements. The updated standard will be effective for annual financial statements issued for fiscal years beginning after December 15, 2017 and for interim periods within fiscal years beginning after December 15, Early adoption is permitted for all clubs The Club has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on the financial statements. See accompanying independent accountant s compilation report 12

16 NOTES TO FINANCIAL STATEMENTS Note 3. Acquisition of Club Facilities and Golf Course During September 2015, the Club entered into an agreement with Farnsworth Development Company ( Developer ) to acquire land, water rights, land improvements, buildings, and equipment and fixtures of Sunland Springs Village Course for $1,190,000. The Club raised funds for the purchase by offering memberships for $5,000. On December 31, 2015, the Club acquired all of the assets of Sunland Springs Village Course from the Developer. The total acquisition price was $1,276,273, which also included survey fees and legal expenses. In addition, during the acquisition, the Developer purchased 21 memberships for $105,000, for the Developer to sell memberships as they continue to sell homes at Sunland Springs Village community. The Developer may sell the memberships until there are no more than 20 lots or condominium units remaining unsold by the Developer. Once the Developer reaches this level, the Club is required to buy back remaining unsold memberships at $5,000 per membership. During the year ended September 30, 2016, two memberships were sold by the Developer. As of September 30, 2016, due to developer for memberships was $95,000. The Club accounted for the acquisition using the acquisition method of accounting, which is in accordance with applicable GAAP whereby the total acquisition price allocates to tangible and intangible assets acquired and liabilities assumed based on respective fair values. The following table summarizes the values of assets acquired as of December 31, 2015, the date of acquisition: Assets: Land, land improvements and buildings $ 1,048,213 Equipment and fixtures 208,060 License 20,000 $ 1,276,273 Subsequent to the acquisition of the Club, inventory was valued at approximately $60,000 and was purchased from the Developer. Note 4. Inventories Inventories consist of the following as of September 30, 2016: Golf merchandise $ 28,048 Food and liquor 3,639 $ 31,687 See accompanying independent accountant s compilation report 13

17 NOTES TO FINANCIAL STATEMENTS Note 5. Commitments and Contingencies Operating leases: The Club leases golf carts and golf course equipment under non-cancelable operating leases, requiring monthly aggregate payments of $2,903, expiring through September The future minimum rental payments required under these operating leases are as follows as of September 30, 2016: Years Ending September 30: 2017 $ 34, , , ,838 $ 139,352 Services agreement: During the year ended September 30, 2016, the Club entered into a three-year agreement with a company to provide operational, management and financial services to the Club. The agreement renews annually automatically after the three-year period, unless six months written notice is provided prior to renewal. The agreement calls for a monthly management fee of $5,000, plus an annual maximum bonus of $25,000 based on performance on a calendar year basis and can be reduced if the company does not meet certain performance criteria. Management fee incurred, including a $10,000 bonus approved by the Board was $55,000 during the year ended September 30, 2016 and is included in the other operating expenses on the statement of activities. See accompanying independent accountant s compilation report 14

18 NOTES TO FINANCIAL STATEMENTS Note 6. Income Tax Matters Net deferred tax liabilities consist of the following components as of September 30, 2016: Deferred tax assets: Accrued vacation $ 5,000 Depreciation - state 4,000 Member excess expenses over revenues and income 3,000 carryforwards Federal net operating loss benefit 9,000 Total deferred tax assets 21,000 Deferred tax liabilities: Depreciation - federal (25,000) Total net deferred tax liabilities $ (4,000) The income taxes expense charged to income consists of the following for the year ended September 30, 2016: Current tax expense $ 2,368 Deferred tax expense 4,000 $ 6,368 The income tax provision differs from the amount of income tax determined by applying the U.S. federal and state income tax rates to pretax income for the year ended September 30, 2016, due to applying tax rates at lower brackets due to the amount of taxable income. As of September 30, 2016, the Club has federal operating loss carryforwards of approximately $26,000 expiring The member excess expenses over revenues and income for both federal and state carry forward until utilized with no expiration. Note 7. Related Party Transactions The Club receives reimbursement for utilities from the Homeowners Association. Total reimbursement was $8,000 for the year ended September 30, 2016 and is included in other income on the accompanying statement of activities. Note 8. Subsequent Events Subsequent to the year ended September 30, 2016, the Club purchased a green mower and a fairway mower totaling approximately $35,000. See accompanying independent accountant s compilation report 15