Exhibit

EX-99.2 5 a2016riveroaksfinancials.htm EXHIBIT 99.2 Exhibit

Exhibit 99.1

ELITE SINUS SPINE AND ORTHO LLC

FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2016

Exhibit 99.1

ELITE SINUS SPINE AND ORTHO LLC

TABLE OF CONTENTS

INDEPENDENT AUDITOR’S REPORT 1

FINANCIAL STATEMENTS

Balance Sheet 2

Statement of Income 3

Statement of Changes in Members’ Equity 4

Statement of Cash Flows 5

Notes to the Financial Statements 6

INDEPENDENT AUDITOR’S REPORT

To the Board of Directors

Elite Sinus Spine and Ortho LLC

Houston, Texas

We have audited the accompanying financial statements of Elite Sinus Spine and Ortho LLC (the “Company”), a Texas limited liability company, which comprise the balance sheet as of December 31, 2016, and the related statements of income, changes in members’ equity, 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.

Auditor’s 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 auditor’s 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 auditor considers 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.

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 Elite Sinus Spine and Ortho LLC as of December 31, 2016, 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.

/s/ Desroches Partners, LLP

May 9, 2017

ELITE SINUS SPINE AND ORTHO LLC

BALANCE SHEET

DECEMBER 31, 2016

ASSETS

CURRENT ASSETS:

Cash and Cash Equivalents $ 188,625

Accounts Receivable 2,637,160

Prepaid Expenses 40,101

Total Current Assets 2,865,886

PROPERTY AND EQUIPMENT, NET 1,606,530

GOODWILL 1,773,808

TOTAL ASSETS $ 6,246,224

LIABILITIES AND MEMBERS’ EQUITY

CURRENT LIABILITIES:

Accounts Payable $ 122,918

Accrued Expenses 183,569

Due to Affiliates 140,494

Current Portion of Capital Lease Obligation 31,492

Current Portion of Notes Payable 774,656

Total Current Liabilities 1,253,129

LONG-TERM LIABILITIES:

Capital Lease Obligation, Net of Current Portion 47,707

Notes Payable, Net of Current Portion 896,491

Total Long-Term Liabilities 944,198

TOTAL LIABILITIES 2,197,327

COMMITMENTS AND CONTINGENCIES

MEMBERS’ EQUITY 4,048,897

TOTAL LIABILITIES AND MEMBERS’ EQUITY $ 6,246,224

The accompanying notes are an integral part of these financial statements

ELITE SINUS SPINE AND ORTHO LLC

STATEMENT OF INCOME

FOR THE YEAR ENDED DECEMBER 31, 2016

REVENUES, NET $ 6,944,874

OPERATING EXPENSES:

Insurance 26,249

Medical Supplies 95,443

Salaries and Wages 131,102

Professional Fees 141,798

Professional Services 168,028

Management Fees 360,524

Repairs and Maintenance 80,033

Leases and Rent 630,275

Equipment and Supplies 70,517

Property Taxes 28,092

Provision for Bad Debt 59,364

Office Expense 98,311

Depreciation 470,977

Total Operating Expenses 2,360,713

INCOME FROM OPERATIONS 4,584,161

OTHER INCOME (EXPENSE):

Sublease Rental Income 395,154

Equity in Earnings of Joint Venture 262,047

Interest Expense (108,241)

Other Income 18,316

Total Other Income 567,276

INCOME BEFORE PROVISION FOR STATE INCOME TAX 5,151,437

PROVISION FOR STATE INCOME TAX (21,261)

NET INCOME $ 5,130,176

The accompanying notes are an integral part of these financial statements

ELITE SINUS SPINE AND ORTHO LLC

STATEMENT OF CHANGES IN MEMBERS’ EQUITY

FOR THE YEAR ENDED DECEMBER 31, 2016

BALANCE, DECEMBER 31, 2015 $ 2,161,863

Net Income 5,130,176

Contributions 128,500

Distributions (3,371,642)

BALANCE, DECEMBER 31, 2016 $ 4,048,897

The accompanying notes are an integral part of these financial statements

ELITE SINUS SPINE AND ORTHO LLC

STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2016

CASH FLOW FROM OPERATING ACTIVITIES:

Net Income $ 5,130,176

Adjustments to Reconcile Net Income to Net Cash

Provided by Operating Activities:

Bad Debt Expense 59,364

Depreciation 470,977

Equity in Earnings of Joint Venture (262,047)

Change in Operating Assets and Liabilities:

Accounts Receivable (1,237,545)

Prepaid Expenses and Other Current Assets (18,715)

Accounts Payable 37,347

Accrued Expenses 42,227

Due to Affiliates (80,074)

Net Cash Provided by Operating Activities 4,141,710

CASH FLOW FROM INVESTING ACTIVITIES:

Purchases of Property and Equipment (312,818)

Initial Equity Investment in Joint Venture (51,463)

Distribution of Equity Investment in Joint Venture 313,510

Net Cash Used in Investing Activities (50,771)

CASH FLOW FROM FINANCING ACTIVITIES:

Principal Payments on Capital Lease Obligation (6,852)

Principal Payments on Notes Payable (810,094)

Contributions to Members 128,500

Distributions to Members (3,371,642)

Net Cash Used in Financing Activities (4,060,088)

NET CHANGE IN CASH AND CASH EQUIVALENTS 30,851

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 157,774

CASH AND CASH EQUIVALENTS, END OF YEAR $ 188,625

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash Paid for Interest $ 108,241

Cash Paid for State Income Tax $ 19,307

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

Purchase of Property and Equipment via Notes Payable $ 408,449

Purchase of Property and Equipment via Capital Lease Obligation $ 86,051

The accompanying notes are an integral part of these financial statements

ELITE SINUS SPINE AND ORTHO LLC

NOTES TO THE FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATION

Elite Sinus Spine and Ortho LLC (the “Company”) was formed on August 19, 2013 in the State of Texas as a limited liability company. Under the terms of the Hospital Department Management Agreement dated November 1, 2015 (the “Management Agreement”), the Company provides management services to a surgical facility in Houston, Texas.

The Company has an indefinite life unless terminated at an earlier date as provided for in the Company Agreement.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s financial statements. The financial statements and notes to the financial statements are the representation of the Company’s management, who is responsible for their integrity and objectivity.

Cash and Cash Equivalents

The Company defines cash and cash equivalents as cash on hand, cash in banks, and all highly liquid investments that are readily convertible to cash with original maturities of three months or less.

Accounts Receivable

Accounts receivable represents amounts owed to the Company that are expected to be collected within twelve months. Management evaluates receivables on an ongoing basis by analyzing current economic conditions, customer relationships, and previous payment histories. An allowance for doubtful accounts is established for specific accounts the Company considers uncollectible. At December 31, 2016, management determined no allowance was necessary as it considered all accounts receivable collectable.

Revenues

Revenues are based on the Management Agreement when they perform managerial services for the surgical facility. Revenues are reported at estimated net realizable value for services rendered. For the year ended December 31, 2016, the Company recorded a provision for bad debt expense totaling $59,364.

Property and Equipment

Property and equipment are stated at cost. Expenditures for additions, major renewals and betterments are capitalized, and expenditures for maintenance and repairs are charged against income as incurred. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed for the accounts, and any resulting gain or loss is reflected in income.

The Company provides for depreciation or property and equipment using the straight-line method over the lesser of the lease term of improved leasehold property, or the estimated useful lives of the respective assets.

ELITE SINUS SPINE AND ORTHO LLC

NOTES TO THE FINANCIAL STATEMENTS

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Goodwill and Other Intangible Assets

Goodwill of $1,773,808 was previously capitalized in connection with a purchase acquisition. Goodwill is not subject to amortization but is evaluated annually for any impairment in value. The Company has assessed various qualitative factors to determine whether it was necessary to perform a goodwill impairment test. If, from an evaluation of these qualitative factors, it was determined that it was more likely than not that the fair value of the reporting unit was less than the carrying value of goodwill, an impairment test would be performed. Based on the results of the assessment, the Company concluded that the more likely than not criteria was not met and no impairment testing was necessary in 2016.

Income Taxes

The Company is a limited liability company and, as such, is not subject to income tax. Taxable income or loss of the Company is included in the respective Members’ tax returns.

The Company is subject to Texas franchise tax, commonly referred to as the Texas margin tax, for the year ended December 31, 2016. Accordingly, a provision and liability for state income tax has been included on the accompanying financial statements.

The Company applies a more-likely-than-not recognition threshold for all tax uncertainties. Accordingly, only those tax benefits that have a greater than fifty percent likelihood of being sustained upon examination by the taxing authorities are recognized. As applied to the Company, any tax uncertainties would principally relate to state income taxes, or uncertainties in its U.S. Federal income tax return that is used to determine state income tax liability. The Company’s management has reviewed the Company’s tax positions and determined there were no significant outstanding or retroactive tax positions with less than a 50% likelihood of being sustained upon examination by the taxing authorities.

Based on its evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in its financial statements. The Company’s evaluation was performed for the tax years ended December 31, 2013 and December 31, 2016 for U.S. Federal and applicable states, the tax years that principally remain subject to examination by major tax jurisdictions as of December 31, 2016.

Fair Value Considerations

The Company uses fair value to measure financial and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The fair value hierarchy established and prioritized fair value measurements into three levels based on the nature of the inputs. The hierarchy gives the highest priority to inputs based on market data from independent sources (observable inputs- Level 1) and the lowest priority to a reporting entity's internal assumptions based upon the best information available when external market data is limited or unavailable (unobservable inputs- Level 3).

The Company's financial instruments (primarily cash and cash equivalents, receivables, payables, and debt) are carried in the accompanying balance sheets at amounts which reasonably approximate fair value.

ELITE SINUS SPINE AND ORTHO LLC

NOTES TO THE FINANCIAL STATEMENTS

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Estimates

The preparation of the 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 amount 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 those estimates. Estimates that have the most impact on the financial position and results of operations primarily relate to the collectability of and contractual adjustments to accounts receivable, the useful lives of property and equipment and certain accrued liabilities. Management believes these estimates and assumptions provide a reasonable basis for the fair presentation of the financial statements.

NOTE 3 – COMPANY AGREEMENT

The following are some of the significant terms of the Company Agreement:

Membership Interests

As specified in the Company Agreement, the Company has three classes of membership (Class A, Class B, and Class C) and there is no limit on the number of authorized shares to be issued for each class of membership. The Company was initially capitalized by contributions aggregating $558,981 for 58 Class A units, $500,000 for 20 Class B units, and $250,000 for 12 Class C units. Class B Members have special voting rights as specified in the Company Agreement.

Restrictions on Membership Interests

As defined in the agreement, no Class A Member, including spouse or ex-spouse, shall transfer any right, title or interest in their respective units without the approval of the Board of Directors.

As defined in the agreement, the Class B Member may transfer any or all interest in Class B units to any person subject to the right of first refusal granted to the Class A Members. Accordingly, the Class A Members shall have the right, but not the obligation, to purchase the Class B Member units for a period of 10 days for an agreed upon price as defined in the Company Agreement. Additionally, the Class A Members shall have the right and option, but not the obligation, to sell the Class A Members’ units in connection with the transfer of Class B Member units to said purchaser. The Class A Members must notify the Class B Member at least 30 days prior to said transfer.

If, at any time, the Class B Member desires to affect a Company sale to any person that is not an affiliate of the Class B Member, then the Class B Member shall have the option to require the Class A Members to transfer some or all of the units held by Class A Members to the respective purchaser at an agreed upon price as defined in the Company Agreement.

In the occurrence of a Terminating Event, as defined in the Company Agreement, the Company has a three-year period from the date of termination to purchase the Terminating Member’s units for an agreed upon price as defined in the Company Agreement.

ELITE SINUS SPINE AND ORTHO LLC

NOTES TO THE FINANCIAL STATEMENTS

NOTE 3 – COMPANY AGREEMENT – CONTINUED

Management and Liability of Members

The Operating Manager of the Company, except as otherwise expressly stated or provided in the Company Agreement, shall have full power and authority to take all action in connection with the Company’s affairs and to exercise exclusive management, supervision and control of the Company’s properties and business and shall have full power to do all things necessary or incident thereto, without the necessity of any further approval of a Member.

The Members of the Company shall not be personally liable for all or any part of the debts or other obligations of the Company, except for certain personal guaranties obtained in connection with said debts or other obligations.

Profits and Losses

The Company’s profits and losses shall be allocated to the Members in accordance with their outstanding units of membership interests (“sharing ratios”).

Distributions

The Operating Manager determines the cash available for distributions and distributions shall be issued at the Operating Manager’s discretion, but not less than once each year. Distributions made to the Members shall be allocated in accordance with their respective sharing ratios.

NOTE 4 – PROPERTY AND EQUIPMENT

Property and equipment consist of the following at December 31, 2016:

Life

(Years)

Computers and Software 3 to 5 $ 37,654

Furniture and Fixtures 7 68,526

Leasehold Improvements Up to 39 413,433

Medical Equipment 5 2,296,178

2,815,791

Less Accumulated Depreciation (1,209,261)

$ 1,606,530

For the year ended December 31, 2016, depreciation expense totaled $470,977.

ELITE SINUS SPINE AND ORTHO LLC

NOTES TO THE FINANCIAL STATEMENTS

NOTE 5 – NOTES PAYABLE

Notes Payable at December 31, 2016, consist of the following:

Note payable to a bank in monthly installments of approximately $42,000 including

interest at prime +0.5% with a floor of 4.25% (4.25% at December 31, 2016);

maturing March 2019 and secured by all business assets. $ 1,062,083

Note payable to a bank in monthly installments of approximately $14,000 including

interest at prime +0.25% with a floor of 4.25% (4.25% at December 31, 2016);

maturing March 2019 and secured by Property and Equipment. 247,837

Note payable to financing company in monthly installments of $1,369 including

interest at 5.84%; maturing February 2020 and secured by equipment. 47,381

Note payable to financing company in monthly installments of $4,439 including

interest at 7.03%; maturing December 2018 and secured by equipment. 102,943

Note payable to financing company in monthly installments of $4,375 including

interest at 8%; maturing December 2018 and secured by equipment. 100,443

Note payable to financing company in monthly installments of $3,845 including

interest at 8%; maturing July 2019 and secured by equipment. 110,460

1,671,147

Less: Current Portion (774,656)

Notes Payable, Net of Current Portion $ 896,491

The following is a summary of future minimum principal payments of notes payable:

Year Ending

December 31,

2017 $ 774,656

2018 731,995

2019 161,550

2020 2,946

$ 1,671,147

Certain note payable agreements are guaranteed by the Class B Member and its affiliates and contain certain financial and reporting covenants for which the Company was in compliance with at December 31, 2016.

ELITE SINUS SPINE AND ORTHO LLC

NOTES TO THE FINANCIAL STATEMENTS

NOTE 6 – CAPITAL AND OPERATING LEASES

As of December 31, 2016, the Company leases office space and office equipment under operating leases expiring in various years through 2022. The terms of the office lease require escalating annual rent payments with an annual adjustment, if necessary, to reflect increases in building operating expenses. According to the terms of the Management Agreement (see Note 1), the office space is sub-leased to its sole customer. All future lease commitments are reduced by future sub-rental revenues which approximate $470,000 per year through 2022. Future minimum lease payments under noncancellable office equipment leases are $68,332 for 2017 and $16,550 for 2018.

Rent expense, including month to month rentals, totaled $630,275 for the year ended December 31, 2016. Sublease rental income for the year ended December 31, 2016 totaled $395,154.

The Company leases equipment under a capital lease arrangement. The cost and related accumulated depreciation of the asset under capital lease as of December 31, 2016 totaled $86,051 and $5,737, respectively.

Future minimum rental payments under capital leases as of December 31, 2016 are as follows:

Year Ending Capital

December 31, Leases

2017 $ 37,542

2018 32,179

2019 18,772

Total Minimum Lease Payment 88,493

Less: Amount Representing Interest (9,294)

79,199

Less: Current Portion of Capital Lease Obligation (31,492)

Capital Lease Obligation, Net of Current Portion $ 47,707

NOTE 7 – EQUITY METHOD INVESTMENT

Effective October 2015, the Company entered into a joint venture agreement with other parties to jointly own and operate Dallas Metro Surgery Center LLC (“DMSC”). DMSC commenced operations in January 2016. The Company accounts for its investment in DMSC using the equity method of accounting whereby its investment account consists of its initial capital contribution plus its share of any profits and minus its share of any losses and preferred distributions. The Company initially contributed $51,463. In March 2016, the Company’s ownership interest in DMSC was redeemed. Consequently, the Company received a cash distribution of $313,510 which includes a return of initial capital and its proportional share of income of $262,047. The distributed income is reported as equity in earnings of joint venture on the accompanying statement of income.

ELITE SINUS SPINE AND ORTHO LLC

NOTES TO THE FINANCIAL STATEMENTS

NOTE 8 – RELATED PARTY TRANSACTIONS

As specified in the Company Agreement (see Note 3), the Class B and Class C Members provides certain administrative management services for the Company, the costs of which are determined by the Company Agreement. For the year ended December 31, 2016, the Company incurred expenses of $360,524.

At various times during the ordinary course of business, the Company and the Class B Member will pay expenses on behalf of one another. Additionally, the Class B Member may from time to time advance monies to fund operations. At December 31, 2016, the Company owed $140,494 to the Class B Member for such transactions which is included in due to affiliates on the accompanying balance sheet.

NOTE 9 – CONCENTRATION OF CREDIT RISK

Financial instruments which potentially subject the Company to concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. At various times during the year, the Company may have bank deposits in excess of Federal Deposit Insurance Corporation insurance limits. Management believes any credit risk is low due to the overall financial strength of the financial institution.

As of and for the year ended December 31, 2016, one customer accounted for 100% revenues and accounts receivable.

At December 31, 2016, three vendors accounted for 51% of accounts payable and one vendor accounted for 17% of purchases.

NOTE 10 – LITIGATION

At times, the Company is a defendant in various legal proceedings arising in the ordinary course of business. While, management believes the outcome of pending litigation and claims will not have a material adverse effect on the Company’s financial condition, operations, or cash flows, litigation is subject to inherent uncertainties.

NOTE 11 – SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the date the financial statements were available for issuance on May 9, 2017 and determined there were no matters materially affecting the Company’s financial statements or related notes to the financial statements