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Home My WebLink About14 - Annual Review of Visit Newport Beach Audited Financial Statements and Expenditure ReportQ SEW Pp�T CITY OF O � z NEWPORT BEACH <,FORN'P City Council Staff Report October 12, 2021 Agenda Item No. 14 TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL FROM: Scott Catlett, Finance Director — 949-644-3123, scatlett@newportbeachca.gov PREPARED BY: Steve Montano, Deputy Finance Director, smontano@newportbeachca.gov PHONE: 949-644-3240 TITLE: Annual Review of Visit Newport Beach Audited Financial Statements and Expenditure Report ABSTRACT: In accordance with Sections 6(d) and 6(e) of the City of Newport Beach's agreement with Visit Newport Beach (VNB), originally entered into on September 27, 2011, and amended on August 5, 2015, VNB's audited financial statements, management letters, and compliance expenditure report are attached for the City Council's review. RECOMMENDATION: a) Determine this action is exempt from the California Environmental Quality Act (CEQA) pursuant to Sections 15060(c)(2) and 15060(c)(3) of the CEQA Guidelines because this action will not result in a physical change to the environment, directly or indirectly; and b) Receive and file. DISCUSSION: The following reports are subject to review by the City Council: Audited Financial Statements and Management Letters VNB shall submit to the City of Newport Beach audited financial statements for its most recently ended year, including any management letter associated with the audited financial statements. The City Council shall review the audited financial statements and management letters. Expenditure Report VNB shall submit an expenditure report, which shall be certified by VNB and a Certified Public Accountant to the effect that the funds received pursuant to the Agreement were expended in accordance with the Agreement in the previous fiscal year for purposes authorized by the Agreement. This report shall include reasonable detail in support of the certification, including expenditures for or contributions to special events and not-for-profit organizations in Newport Beach. 14-1 Annual Review of Visit Newport Beach Audited Financial Statements and Expenditure Report October 12, 2021 Page 2 The audited financial statements and expenditure report were reviewed by the audit firm of KMJ Corbin & Company. Their review indicated that the financial statements of both Newport Beach & Company and Visit Newport Beach presented fairly, in all material respects, the financial position of each entity. In other words, the audit of both entities was clean with no audit findings. The firm's review of the required expenditure report indicated that they concurred with the assertion by VNB's management that they complied with the applicable provisions of the Agreement with the City relative to expenditures. FISCAL IMPACT: Under its agreement with the City, VNB receives 18% of all Transient Occupancy Tax revenue collected by the City to fund destination marketing services and activities. Additionally, VNB receives revenue from the Newport Beach Tourism Business Improvement District (TBID), which is funded by a levy of 3% of most revenues from short-term stays at participating lodging businesses within the City. The TBID funds are dedicated to meeting and event sales promotion and marketing programs. Total revenues from these sources, as outlined in the attached financial statements, amounted to approximately $4.8 million in 2021, down from $9.4 million in 2020 due to the impacts of the COVID-19 pandemic. ENVIRONMENTAL REVIEW: Staff recommends the City Council find this action is not subject to the California Environmental Quality Act (CEQA) pursuant to Sections 15060(c)(2) (the activity will not result in a direct or reasonably foreseeable indirect physical change in the environment) and 15060(c)(3) (the activity is not a project as defined in Section 15378) of the CEQA Guidelines, California Code of Regulations, Title 14, Chapter 3, because it has no potential for resulting in physical change to the environment, directly or indirectly. NOTICING: The agenda item has been noticed according to the Brown Act (72 hours in advance of the meeting at which the City Council considers the item). ATTACHMENTS: Attachment A —Visit Newport Beach Audited Financial Statements for the Year Ended June 30, 2021, and Accompanying Management Letter Dated September 30, 2021 (Exhibit 1) Attachment B — Newport Beach and Company Audited Financial Statements for the Year Ended June 30, 2021, and Accompanying Management Letter Dated September 30, 2021 (Exhibit 2) Attachment C — Visit Newport Beach Expenditure Compliance Report for the Year Ended June 30, 2021 14-2 Attachment A Visit Newport Beach Audited Financial Statements for the Year Ended June 30, 2021, and Accompanying Management Letter dated September 30, 2021 (Exhibit 1) 14-3 VISIT NEWPORT BEACH INC. (A Non -Profit Organization) FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION For The Years Ended June 30, 2021 and 2020 with INDEPENDENT AUDITORS' REPORT THEREON p 949 431 0997 f 714 544 1034 2855 Michelle Dr Suite 350 Irvine CA 92606 kmjpartnerscpaxom p 818 999 5885 f 818 704 4668 20720 Ventura Blvd Suite 160 Woodland Hills CA 91364 14-4 VISIT NEWPORT BEACH INC. (A Non -Profit Organization) TABLE OF CONTENTS Independent Auditors' Report................................................................................................. 1-2 Financial Statements: Statements of Financial Position........................................................................................ 3 Statements of Activities..................................................................................................... 4 Statementsof Cash Flows.................................................................................................. 5 Notes to Financial Statements.......................................................................................6-19 Supplemental Information: Schedule I — Statement of Financial Position by Funding Source ................................... 20 Schedule Il — Statement of Activities by Funding Source ............................................... 21 p 949 431 0997 f 714 544 1034 2855 Michelle Dr Suite 350 Irvine CA 92606 kmlpartnerscpa.com p 818 999 5885 f 818 704 4668 20720 Ventura Blvd Suite 160 Woodland Hills CA 91364 14-5 i KJ� �j J Corbin & lvl Company Business Advisors Tax and Audit Independent Auditors' Report Board of Directors Visit Newport Beach Inc. We have audited the accompanying financial statements of Visit Newport Beach Inc. (a non-profit organization) (the "Organization"), which comprise the statements of financial position as of June 30, 2021 and 2020, and the related statements of activities and cash flows for the years 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 audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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 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. p 949 431 0997 f 714 544 1034 2855 Michelle Dr Suite 350 Irvine CA 92606 kmlpartnerscpa.conn p 818 999 5885 f 818 704 4668 20720 Ventura Blvd Suite 160 Woodland Hills CA 91364 14-6 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Visit Newport Beach Inc. as of June 30, 2021 and 2020, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter - Related Party Transactions As discussed in Note 9 to the financial statements, Visit Newport Beach Inc. has significant transactions with a related non-profit organization. Our opinion is not modified with respect to this matter. Other Matter As discussed in Note 2 to the financial statements, the Organization changed its method for revenue recognition in 2021 as a result of the adoption of the amendments to the Financial Accounting Standards Board Accounting Standards Codification resulting from Accounting Standards Update 2014-09, Revenue from Contracts with Customers, effective July 1, 2020. Our opinion is not modified with respect to this matter. Other Matter - Supplemental Information Our audit was conducted for the purpose of forming an opinion on the financial statements taken as a whole. The supplemental information contained in Schedules I and II on pages 20-21 is presented for purposes of additional analysis and is not a required part of the 2021 financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the 2021 financial statements. The information has been subjected to the auditing procedures applied in the audit of the 2021 financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the 2021 financial statements or the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the 2021 financial statements as a whole. kM-T Ckk4." � 15Y�Lnl LLP KMJ Corbin & Company LLP Irvine, California September 30, 2021 14-7 VISIT NEWPORT BEACH INC. (A Non -Profit Organization) STATEMENTS OF FINANCIAL POSITION June 30, 2021 2020 ASSETS Current assets: Cash and cash equivalents $ 5,918,574 $ 1,698,312 Short-term investments - 2,606,273 Accounts receivable - 145,623 Related -party receivables, net - 32,739 Prepaid expenses and other current assets 182,475 197,685 Total current assets 6,101,049 4,680,632 Property and equipment, net 19,541 31,767 Website development costs, net - 96,628 Deposits and other assets 9,619 9,619 $ 6.130.209 $ 4.818.646 LIABILITIES AND NET ASSETS Current liabilities: Accounts payable $ 100,796 $ 91,351 Related party payables, net 17,611 - Accrued expenses 41,041 33,340 Accrued payroll and related expenses 74,727 27,510 Group booking incentive reserve 6,500 31,300 Loan payable, current portion 3,256 - Total current liabilities 243,931 183,501 Deferred rent, net of current portion 3,071 22,123 Loan payable, net of current portion 146,024 150,000 Total liabilities 393,026 355,624 Commitments and contingencies Net assets without donor restrictions 5,737,183 4,463,022 $ 6.130.209 $ 4.818.646 See accompanying notes to financial statements 3 14-8 VISIT NEWPORT BEACH INC. (A Non -Profit Organization) STATEMENTS OF ACTIVITIES For The Years Ended June 30, 2021 2020 Support and revenues: Service fee revenues $ 4,757,188 $ 9,412,997 Interest income 3,677 25,118 Other income 22,800 10,000 Total support and revenues 4,783,665 9,448,115 Expenses: Marketing (including $1,248,512 and $2,129,382 to Newport Beach & Company during 2021 and 2020, respectively — see Note 9) 2,310,049 5,836,561 Salaries and benefits 799,805 1,392,718 Other 290,796 470,634 Depreciation and amortization 108,854 107,788 Total expenses 3,509,504 7,807,701 Change in net assets without donor restrictions 1,274,161 1,640,414 Net assets without donor restrictions, beginning of year 4,463,022 2,822,608 Net assets without donor restrictions, end of year $ 5,737,183 $ 4.463.022 See accompanying notes to financial statements 4 14-9 VISIT NEWPORT BEACH INC. (A Non -Profit Organization) STATEMENTS OF CASH FLOWS Cash flows from investing activities: Purchases of investments (6,466,614) (4,756,191) Proceeds from sales/maturities of investments 9,072,000 3,423,000 Website development costs - (39,735) Purchases of property and equipment - (11,805) Net cash provided by (used in) investing activities 2,605,386 (1,384,731) Cash flows from financing activities: Proceeds from loan - 150,000 Payments on loan payable (720) - Net cash (used in) provided by financing activities (720) 150,000 Net increase in cash and cash equivalents 4,220,262 110,278 Cash and cash equivalents at beginning of year 1,698,312 1,588,034 Cash and cash equivalents at end of year $ 5.918.574 $ 1.698.312 Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 4,046 $ - See accompanying notes to financial statements 5 14-10 For The Years Ended June 30, 2021 2020 Cash flows from operating activities: Change in net assets without donor restrictions $ 1,274,161 $ 1,640,414 Adjustments to reconcile change in net assets without donor restrictions to net cash provided by operating activities: Depreciation and amortization 108,854 107,788 Accrued interest income 887 22,639 Changes in operating assets and liabilities: Accounts receivable 145,623 (145,623) Related -party receivables/payables, net 50,350 (140,085) Prepaid expenses and other current assets 15,210 119,811 Accounts payable 9,445 (10,723) Accrued expenses 7,701 11,380 Accrued payroll and related expenses 47,217 (197,459) Group booking incentive reserve (24,800) (66,906) Deferred rent (19,052) 3,773 Net cash provided by operating activities 1,615,596 1,345,009 Cash flows from investing activities: Purchases of investments (6,466,614) (4,756,191) Proceeds from sales/maturities of investments 9,072,000 3,423,000 Website development costs - (39,735) Purchases of property and equipment - (11,805) Net cash provided by (used in) investing activities 2,605,386 (1,384,731) Cash flows from financing activities: Proceeds from loan - 150,000 Payments on loan payable (720) - Net cash (used in) provided by financing activities (720) 150,000 Net increase in cash and cash equivalents 4,220,262 110,278 Cash and cash equivalents at beginning of year 1,698,312 1,588,034 Cash and cash equivalents at end of year $ 5.918.574 $ 1.698.312 Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 4,046 $ - See accompanying notes to financial statements 5 14-10 VISIT NEWPORT BEACH INC. (A Non -Profit Organization) NOTES TO FINANCIAL STATEMENTS For The Years Ended June 30, 2021 and 2020 NOTE 1— ORGANIZATION Nature of Operations Visit Newport Beach Inc. (the "Organization") is a non-profit organization formed under the laws of the State of California. Transient Occupancy Tax("TOT") The Organization currently has an agreement ("TOT Agreement") with the City of Newport Beach (the "City") through December 31, 2024 to promote tourism and serve the needs of visitors to the City. Under the terms of the TOT Agreement, the Organization is responsible to develop, plan, carry out and supervise a program to market and promote the Newport Beach brand and to promote tourism in, and serve the needs of, visitors to the City as well as increase the amount of Transient Occupancy Tax collected through its promotional activities. The City collects a Transient Occupancy Tax as well as a Visitor's Service Fee applied to the transient rental of lodging rooms (collectively, the "TOT"). The City pays the Organization 18% of the annual TOT in monthly installments. As the Organization is not entitled to its share of the TOT until paid by the City, amounts are recognized as revenue when received. Adjustments to monthly revenues paid during the year ended June 30, 2020 have been recorded as accounts receivable as of June 30, 2020, comprising 38% of the accounts receivable. There were no adjustments noted as of June 30, 2021. The City shall have the right, in its sole discretion, to adjust the payment (increase or decrease the percentage of TOT paid to the Organization) as part of its once -annual budget adoption process for any reason after notice to the Organization and an opportunity for the Organization to formally comment on the adjustment. For the years ended June 30, 2021 and 2020, the Organization received approximately 65% and 55%, respectively, of its service fee revenues from the City through the TOT. The City has the right to terminate the TOT Agreement, without cause, by giving the Organization 365 days' written notice of its intention to terminate. Should the City reduce or stop its funding to the Organization due to the Organization's default or termination of the TOT Agreement, the Organization's operations will be impacted. Tourism Business Improvement District ("TBID") The Newport Beach Tourism Business Improvement District ("NBTBID") was established April 28, 2009, and expires on January 31, 2024, pursuant to the Management District Plan, as amended (the "Plan"). The NBTBID is funded by assessments levied on participating lodging businesses within a specified district. The assessments are restricted for use for sales promotion and marketing programs to market the City as a tourist, meeting and event destination as outlined in 6 14-11 VISIT NEWPORT BEACH INC. (A Non -Profit Organization) NOTES TO FINANCIAL STATEMENTS For The Years Ended June 30, 2021 and 2020 NOTE 1— ORGANIZATION, continued the Plan. Either party may terminate this agreement by providing the other party ninety calendar days' written notice prior to the effective date of termination. As the Organization is not entitled to its share of the assessments collected until paid by the City, amounts are recognized as revenue when received. For the years ended June 30, 2021 and 2020, the Organization received approximately 35% and 45%, respectively, of its service fee revenues from the City through TBID assessments. Adjustments to monthly revenues paid during the year ended June 30, 2020 have been recorded as accounts receivable as of June 30, 2020, comprising 62% of the accounts receivable. There were no adjustments noted as of June 30, 2021. As of June 30, 2021 and 2020, the NBTBID is represented by nine (9) hotels within the City of Newport Beach which collect a 3.0% tax on short-term stays. The City is entitled to 0.25% of the receipts annually for the collection of the assessments and disbursements of the NBTBID. NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. Net assets and revenues, expenses, gains, and losses are classified based on the existence or absence of donor -imposed restrictions. Accordingly, net assets and changes therein are classified and reported as follows: Without donor restrictions — Net assets that are not subject to donor -imposed stipulations. These assets are available to support the Organization's general activities and operations at the discretion of the Board of Directors. With donor restrictions — Net assets that are subject to donor -imposed restrictions. Some donor - imposed restrictions are temporary in nature, such as those that will be met by the passage of time or other events specified by the donor. Other donor -imposed restrictions are perpetual in nature, where the donor stipulates that such resources be maintained in perpetuity. Generally, the donors of these assets permit the Organization to use all or part of the income earned on related investments for general or specific purposes. As of and for the years ended June 30, 2021 and 2020, the Organization had no net assets with donor restrictions. 7 14-12 VISIT NEWPORT BEACH INC. (A Non -Profit Organization) NOTES TO FINANCIAL STATEMENTS For The Years Ended June 30, 2021 and 2020 NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Revenues are reported as increases in net assets without donor restrictions unless use of the related assets is limited by donor -imposed restrictions. Expenses are reported as decreases in net assets without donor restrictions. Gains and losses on investments and other assets are reported as increases or decreases in net assets without donor restrictions unless their use is restricted by explicit donor stipulations or by law. Li uidi In December 2019, a novel strain of coronavirus disease ("COVID-19") was first reported in Wuhan, China. Less than four months later, on March 11, 2020, the World Health Organization declared COVID-19 a global pandemic. The extent of COVID-19's effect on the Organization's operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, all of which are uncertain and difficult to predict considered the rapidly evolving landscape. The Organization is currently analyzing the potential impacts to all of its business segments. At this time, it is not possible to determine the magnitude of the overall impact of COVID-19 on the Organization. However, it could have a material adverse effect on the Organization's financial condition, liquidity, results of operations, and cash flows. In the short term, one of the impacts of the pandemic is that the Organization's revenues have declined, but the Organization cannot predict whether this decline is temporary or not. During the year ended June 30, 2021, the Organization took certain cost cutting measures including reducing discretionary marketing and other expenses, and reducing payroll through pay cuts, furloughs, and reduction in its workforce. The Organization believes these measures, along with its existing cash and cash equivalents, will be sufficient to cover its cash flow requirements for at least the next twelve months from the date of issuance of these financial statements (see Note 3). However, there can be no assurance that the Organization will not use its existing capital resources sooner than currently expected. Use of Estimates The preparation of financial statements requires the Organization 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. Significant estimates made by the Organization's management include, but are not limited to, the sufficiency of its cash and investment resources to fund operations for the next twelve months, the collectability of receivables, the recoverability of long-lived assets, fair value of investments and the allocation of expenses to program activities and general and administrative. Actual results may differ from those estimates. 8 14-13 VISIT NEWPORT BEACH INC. (A Non -Profit Organization) NOTES TO FINANCIAL STATEMENTS For The Years Ended June 30, 2021 and 2020 NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Cash and Cash Equivalents The Organization considers all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents. The Organization maintains its cash and cash equivalent balances at various financial institutions. The total cash balances are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $250,000 per institution. At June 30, 2021, the Organization had approximately $5,258,000 of uninsured cash and cash equivalent balances. The Organization periodically reviews the quality of the financial institutions it has deposits with to minimize risk of loss. To date, no losses have been incurred. Accounts Receivable Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts at year end. Management determines the allowance for doubtful accounts by identifying troubled accounts based on current and historical experience. There were no accounts receivable as of the year ended June 30, 2021. At June 30, 2020, the Organization considered its accounts receivable to be fully collectible and accordingly did not record an allowance for doubtful accounts. As of June 30, 2020, one customer accounted for 100% of the Organization's total accounts receivable balance. Investments and Fair Value Measurements Investments and cash equivalents consist of U.S. Treasury Bills which are carried at amortized cost, which approximates fair value. Accounting guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal, or in the absence of a principal market, the most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date. Accounting guidance establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs in priority that may be used to measure fair value: Level 1Quoted prices in active markets for identical assets or liabilities; 9 14-14 VISIT NEWPORT BEACH INC. (A Non -Profit Organization) NOTES TO FINANCIAL STATEMENTS For The Years Ended June 30, 2021 and 2020 NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Level 2—Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (such as interest rates and yield curves, credit risks, and default rates) or other inputs that are principally derived from or corroborated by observable market data by correlation or by other means; and Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The fair value of the Organization's U.S. Treasury Bills are based partially upon quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the assets. These instruments have been classified within Level 2 of the valuation hierarchy. As of June 30, 2020, the Organization's investments measured at fair value on a recurring basis were as follows: June 30. 2020 Quoted Prices in Significant Active Markets Significant Other Unobservable for Identical Observable Inputs Assets (Level 1) Inputs (Level 2) (Level 3) Short-term investments: U.S. Treasury Bills $ - $ 2.606.273 $ - Property and Equipment Property and equipment are stated at cost. Donated assets are recorded at their fair market value when received. The cost of purchased assets or fair market value of donated assets is depreciated using the straight-line method over the estimated useful lives of the related assets which range from three to seven years. Leasehold improvements are amortized over the lesser of their estimated useful lives or the related lease term. Maintenance and repairs are charged to expense as incurred. Significant renewals and betterments are capitalized. 10 14-15 VISIT NEWPORT BEACH INC. (A Non -Profit Organization) NOTES TO FINANCIAL STATEMENTS For The Years Ended June 30, 2021 and 2020 NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued It is the Organization's policy to capitalize property and equipment over $1,500. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is reflected in the statements of activities. Website Development Costs The Organization accounts for the costs of developing its mobile apps and websites by capitalizing the costs during the application development stage when it is probable that the project will be completed and the property will be used to perform the function intended. Website development costs are amortized on a straight-line basis over their estimated useful lives when completed, which are typically the earlier of approximately three years or term based on estimated disposal date. The recoverability of intangible assets is evaluated periodically, taking into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. For the years ended June 30, 2021 and 2020, the Organization capitalized website development costs of $0 and $39,735, respectively. For the years ended June 30, 2021 and 2020, the Organization recorded amortization expense on website development costs totaling $96,628 and $90,046, respectively. Impairment of Long -Lived Assets The Organization evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset are less than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value. At June 30, 2021 and 2020, the Organization's management believes there is no impairment of its long-lived assets. There can be no assurance, however, that market conditions will not change or demand for the Organization's services will continue, which could result in impairment of long-lived assets in the future. Group Booking Incentive The Organization has established an incentive program for businesses by paying for certain costs of conferences and group meetings held in Newport Beach hotels in order to attract businesses and groups to the City. Costs are considered incurred upon the reservation of the hotel for future meetings. As of June 30, 2021 and 2020, group booking accruals were $6,500 and $31,300, respectively. VISIT NEWPORT BEACH INC. (A Non -Profit Organization) NOTES TO FINANCIAL STATEMENTS For The Years Ended June 30, 2021 and 2020 NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Contributed Materials and Services Donated materials and other noncash contributions (if any) are reflected in the accompanying financial statements at their estimated fair market values at date of receipt. Contributions of services are recognized if the services received create or enhance nonfinancial assets or require specialized skills, are provided by individuals possessing those skills and would typically need to be purchased if not provided by donation. Other volunteer services that do not meet these criteria are not recognized in the financial statements as there is no objective basis of deriving their value. One of the services provided by the Organization in its efforts to promote the City is to organize site inspections and other promotional events with a variety of potential visiting groups. These groups are introduced by the Organization's staff to the various hotels, restaurants, and other local businesses involved in the tourism industry in Newport Beach. All businesses visited are also sponsors of the Organization. Many of the Organization's sponsors contribute materials, such as meals and rooms, in connection with this program. During the years ended June 30, 2021 and 2020, the Organization determined there were no significant contributed materials and services. Additionally, a substantial number of unpaid volunteers have made significant contributions of time to the Organization. No amounts have been reflected in the financial statements for these contributions as they do not meet the required criteria. Income Tax Status The Organization qualifies as a tax-exempt organization for Federal income taxes under Section 501(c)(6) of the United States Internal Revenue Code and for California state income taxes under Section 23701(d) of the California Revenue and Taxation Code; therefore, the Organization has no provision for federal or state income taxes. During the years ended June 30, 2021 and 2020, the Organization had no unrelated business income. The Organization annually evaluates tax positions as part of the preparation of its exempt tax return. This process includes an analysis of whether tax positions the Organization takes with regard to a particular item of income or deduction would meet the definition of an uncertain tax position under current accounting guidance. The Organization believes its tax positions are appropriate based on current facts and circumstances. The Organization's policy is to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. At June 30, 2021 and 2020, the Organization did not have any unrecognized tax benefits. The Organization is no longer subject to U.S. federal, state or local income tax examinations by tax authorities for years before 2017. 12 14-17 VISIT NEWPORT BEACH INC. (A Non -Profit Organization) NOTES TO FINANCIAL STATEMENTS For The Years Ended June 30, 2021 and 2020 NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Allocated Expenses The costs of providing program activities and supporting services have been summarized on a functional basis in Note 5. The Organization incurs expenses that directly relate to, and can be assigned to, a specific program or supporting activity. The Organization also conducts a number of activities which benefit both its program objectives as well as supporting services. These costs, which are not specifically attributable to a specific program or supporting activity, are allocated by management on a consistent basis among program and supporting services benefited, based on either financial or nonfinancial data, such as headcount, occupancy or estimates of time and effort incurred by personnel. Recent Accounting Pronouncements On July 1, 2020, the Organization adopted Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, as codified in Accounting Standards Codification ("ASC") 606, by applying the modified retrospective method for all contracts. The Organization evaluated its revenue streams to identify whether each stream would be subject to the provisions of ASC 606 and any differences in the timing, measurement, or presentation of revenue recognition compared to ASC 605, Revenue Recognition ("ASC 605"). Based on the assessment of the Organization's revenue streams, the pattern and timing of recognition of the Company's revenues under ASC 606 are similar to the manner in which the Company previously recognized revenue under ASC 605, so there was no effect of the Organization's adoption of ASC 606. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires the lease rights and obligations arising from lease contracts, including existing and new arrangements, to be recognized as assets and liabilities on the statement of financial position. ASU 2016-02, as amended, is effective for reporting periods beginning after December 15, 2021, with early adoption permitted. While still evaluating this update, the Organization expects the adoption of this update to have a material effect on its financial condition due to the recognition of the lease rights and obligations as assets and liabilities. The Organization does not expect this update to have a material effect on its results of operations and cash flows. 13 14-18 VISIT NEWPORT BEACH INC. (A Non -Profit Organization) NOTES TO FINANCIAL STATEMENTS For The Years Ended June 30, 2021 and 2020 NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued In September 2020, the Financial Accounting Standards Board ("FASB") issued ASU No. 2020- 07, Presentation and Disclosures by Not -for -Profit Entities for Contributed Nonfinancial Assets (Topic 958), which requires the Organization to change its financial statement presentation and disclosure of contributed nonfinancial assets, or gifts -in-kind. ASU No. 2020-07 defines gifts -in- kind as contributed nonfinancial assets donations made for goods or services the Organization would purchase in the normal course of business. Gifts -in-kind of tangible property include items like operating facilities, utilities, office furniture, and supplies provided to the Organization; items donated to the Organization to be auctioned through charitable events; and items used in program activities, such as medical supplies, building supplies, appliances, and fixtures. Intangible gifts -in- kind include items like copyrights, patents, and royalties; specialized volunteer services, such as those from nurses for medical organizations or project managers and builders for construction projects; and expertise, such as accounting, legal, and consulting services. ASU No. 2020-07 is effective for the Organization for fiscal year 2022. Early adoption is permitted. The Organization is currently evaluating the impact that the adoption of ASU No. 2020-07 will have on its financial statements. Subsequent Events The Organization has evaluated subsequent events through September 30, 2021, the date which the financial statements were available to be issued. Based upon its evaluation, management has determined that no subsequent events have occurred that would require recognition in the accompanying financial statements or disclosure in the notes thereto except as disclosed herein. NOTE 3 — LIQUIDITY AND AVAILABILITY At June 30, 2021, the Organization has $5,918,574 of financial assets available within one year of the statement of financial position date to meet cash needs for general expenditures consisting of cash and cash equivalents of $5,918,574. None of the financial assets are subject to donor or other contractual restrictions that make them unavailable for general expenditures within one year of the statement of financial position. Prior to COVID-19, the Organization had a goal to maintain financial assets, which consist of cash, cash equivalents and short-term investments, on hand to meet 90 days of normal operating expenses, which are, on average, approximately $395,000 per month. The Organization has a policy to structure its financial assets to be available as its general expenditures, liabilities, and other obligations come due. The Organization invests cash in excess of daily requirements in various short-term treasury instruments. 14 14-19 VISIT NEWPORT BEACH INC. (A Non -Profit Organization) NOTES TO FINANCIAL STATEMENTS For The Years Ended June 30, 2021 and 2020 NOTE 3 — LIQUIDITY AND AVAILABILITY, continued Funding for the Organization is dependent on the hotel room nights booked in certain Newport Beach hotels each year and the subsequent portion of the TOT that is allocated through the City to the Organization and the portion of the TBID assessments that are sent to the Organization from the TBID participants. Annual revenue fluctuates depending on annual visitors to Newport Beach. As a result, the Organization closely monitors the monthly projected and received revenue to determine if any change needs to be made to budgeted annual expenditures. As discussed in Note 2, in response to COVID-19, the Organization has performed an analysis to determine whether it will have sufficient cash to fund operations for the next 12 months. Based on budgeting for necessary expenses and obligations due along with minimal service fee revenues as a result of the impact of COVID-19 on hotel stays, the Organization has concluded that it will have sufficient cash to fund operations for at least 12 months from the date of issuance of these financial statements. NOTE 4 — PROPERTY AND EQUIPMENT Property and equipment consists of the following at June 30: 2021 2020 Leasehold improvements $ 38,468 $ 38,468 Computer equipment 40,516 40,516 Office furniture and fixtures 136,812 136,812 215,796 215,796 Less accumulated depreciation and amortization (196,255) (184,029) $ 19.541 $ 31.767 For the years ended June 30, 2021 and 2020, the Organization recorded depreciation expense on property and equipment totaling $12,226 and $17,742, respectively. 15 14-20 VISIT NEWPORT BEACH INC. (A Non -Profit Organization) NOTES TO FINANCIAL STATEMENTS For The Years Ended June 30, 2021 and 2020 NOTE 5 - STATEMENT OF FUNCTIONAL EXPENSES The statements of functional expenses for the years ended June 30, 2021 and 2020 are as follows: 2021 Program General and 2020 Activities Administrative Total Total (Summarized) Salaries and benefits: Salaries $ 453,995 $ 131,603 $ 585,598 $ 1,074,593 Payroll taxes and employee benefits 165,486 48,721 214,207 318,125 Total salaries and benefits 619,481 180,324 799,805 1,392,718 Other expense: Marketing 1,974,684 335,365 2,310,049 5,836,561 Office lease 88,607 29,536 118,143 116,808 Repairs and maintenance - 18,683 18,683 24,614 Insurance - 7,651 7,651 9,426 Office supplies - 3,518 3,518 10,869 Equipment and equipment rental 9,699 21,130 30,829 34,518 Postage and other dues and fees 58,367 4,876 63,243 115,853 Meeting and education 5,181 11,166 16,347 46,321 Professional fees and services - 26,304 26,304 59,460 Bad debt - 557 557 31,500 Interest - 4,046 4,046 - Depreciation and amortization 96,628 12,226 108,854 107,788 Travel and related 1,475 1,475 21,265 Total functional expenses $ 2.854.122 $ 655.382 $ 3.509.504 $ 7.807.701 The Organization incurred expenses related to program activities totaling approximately $6,554,000 for the year ended June 30, 2020. NOTE 6 - LOAN AGREEMENT On June 3, 2020, the Company entered into an Economic Injury Disaster Loan (the "Loan") administered by the U.S. Small Business Administration. The loan has an original principal balance of $150,000, bears interest at 2.75% per annum and matures on June 3, 2050. The loan requires monthly payments beginning in June 2021. Payments are first applied to interest accrued and then principal. The amount borrowed under the Loan is guaranteed by substantially all of the Organization's assets. The Organization will use all the proceeds of this Loan solely as working capital to alleviate economic injury caused by COVID-19. The Loan contains customary events of default, and the occurrence of an event of default may result in a claim for the immediate repayment of all amounts outstanding under the Loan. 16 14-21 VISIT NEWPORT BEACH INC. (A Non -Profit Organization) NOTES TO FINANCIAL STATEMENTS For The Years Ended June 30, 2021 and 2020 NOTE 6 — LOAN AGREEMENT, continued Future minimum payments under the Organization's loan agreement are as follows: Years Ending June 30, 2022 $ 3,256 2023 3,731 2024 3,835 2025 3,942 2026 4,052 Thereafter 130.464 $ 149.280 NOTE 7 — COMMITMENTS AND CONTINGENCIES Lease Agreements The Organization is obligated under a lease for its facility, which is accounted for as an operating lease. The lease expires in September 2022, and rent, as amended, is payable between $8,359 and $12,016 per month. As a result of the fourth amendment to this lease, the Organization assigned its rights to Newport Beach & Company ("NB & Co."), a related party. Under the terms of this lease, this assignment does not relieve the Organization of its lease obligations. As a result, the Organization continues to be liable for future rent payments. The facility lease contains a five-year extension option at the end of the lease term. Total rent expense incurred by the Organization under operating leases was approximately $118,000 and $117,000 for the years ended June 30, 2021 and 2020, respectively, and is included in other expenses. Such amounts are net of the amounts paid by the related party pursuant to the Agreement disclosed in Note 9. Future minimum payments due on the Organization's allocated portion of the non -cancelable facility lease commitment in excess of one year are as follows: Years Ending June 30, 2022 2023 133,000 31,000 $ 164,000 17 14-22 VISIT NEWPORT BEACH INC. (A Non -Profit Organization) NOTES TO FINANCIAL STATEMENTS For The Years Ended June 30, 2021 and 2020 NOTE 7 — COMMITMENTS AND CONTINGENCIES, continued Commitments The Organization also has several commitments for databases and services regarding marketing, promotion and other contracts ranging from approximately $287 to $5,000 per month over various terms with 20 months or less remaining at June 30, 2021 and 24 months or less remaining at June 30, 2020. From these commitments, the Organization incurred approximately $253,000 and $504,000 of expenses for the years ended June 30, 2021 and 2020, respectively, which are recorded in marketing expenses in the accompanying statements of activities. The Organization has a commitment to contribute $150,000 annually, commencing on June 1, 2014 through December 31, 2024, to the City to be spent on programs or activities that benefit the public, which is recorded in marketing expenses for the years ended June 30, 2021 and 2020. Due to the rights of termination per the agreement, these commitments are considered due each June and December. Guarantees and Indemnities The Organization has made certain indemnities and guarantees, under which it may be required to make payments to a guaranteed or indemnified parry, in relation to certain actions or transactions. The Organization indemnifies its directors, officers, employees and agents, as permitted under the laws of the State of California. Pursuant to the TOT Agreement, the Organization also indemnifies the City and all of its related boards, councils, officers, employees, and volunteers from claims related to the conduct of the Organization or any of its officers, employees, or associated individuals. In connection with its facility lease, the Organization has indemnified its lessor for certain claims arising from the use of the facilities. The duration of the guarantees and indemnities varies, and is generally tied to the life of the agreement. These guarantees and indemnities do not provide for any limitation of the maximum potential future payments the Organization could be obligated to make. Historically, the Organization has not been obligated nor incurred any payments for these obligations and, therefore, no liabilities have been recorded for these indemnities and guarantees in the accompanying statements of financial position. NOTE 8 — RETIREMENT PLAN The Organization has a 401(k) retirement plan covering all eligible employees. The plan provided matching contributions based upon employees' voluntary contributions and the Organization's contributions. Effective March 31, 2020, the Organization amended the 401(k) retirement plan to exclude employer matching contributions. Effective December 13, 2020, the Organization amended the 401(k) retirement plan to reinstate employer matching contributions. The total expense recorded by the Organization during the years ended June 30, 2021 and 2020 was approximately $28,000 and $73,000, respectively, and is included in salaries and benefit expenses in the accompanying statements of activities. 18 14-23 VISIT NEWPORT BEACH INC. (A Non -Profit Organization) NOTES TO FINANCIAL STATEMENTS For The Years Ended June 30, 2021 and 2020 NOTE 9 — RELATED -PARTY TRANSACTIONS During the years ended June 30, 2021 and 2020, the Organization had transactions with a related party that is also a non-profit organization. The related entity, NB & Co., specializes in marketing and promotion services that promote economic development with the City. Pursuant to an Agreement for Services ("Agreement") dated April 1, 2013, the Organization appointed NB & Co. as an exclusive provider of services that the Organization shall need to carry out its mission and obligations to the City. In consideration for these services, the Organization agreed to pay NB & Co. annual fees totaling $108,000 for the years ended June 30, 2021 and 2020. The Organization has also agreed to reimburse NB & Co. for all reasonable expenses incurred by it in carrying out its duties to the Organization, including rent and related facility costs, payroll and related benefits, and other direct marketing costs. For the years ended June 30, 2021 and 2020, the Organization incurred $1,140,512 and $2,021,382, respectively, from NB & Co. for these costs, which are recorded in marketing expenses in the accompanying statements of activities. NB & Co.'s costs for the years ended June 30, 2021 and 2020 were broken out as follows: $33,305 and $140,093, respectively, of direct marketing, $770,095 and $1,556,505, respectively, of salaries and benefits, and $337,112 and $324,784, respectively, of other (including rent and related facility costs). The Agreement, as amended, expires on June 30, 2024. As of June 30, 2021 and 2020, the Organization has net related -party (payables) receivables of $(17,611) and $32,739, respectively, in the accompanying statements of financial position. These amounts do not bear interest, are not collateralized, and have no stated repayment terms. 19 14-24 VISIT NEWPORT BEACH INC. (A Non -Profit Organization) SCHEDULE I - STATEMENT OF FINANCIAL POSITION BY FUNDING SOURCE June 30, 2021 Current assets: Cash and cash equivalents Prepaid expenses and other current assets Total current assets Property and equipment, net Deposits and other assets Current liabilities: TOT* TBID $ 3,723,457 $ 2,195,117 44,663 137,812 3,768,120 2,332,929 11,038 8,503 9,619 - $ 3.788.777 $ 2.341.432 Accounts payable $ 79,271 $ 21,525 Related -party payables, net 17,461 150 Accrued expenses 5,000 36,041 Accrued payroll and related expenses - 74,727 Group booking incentive reserve - 6,500 Loan payable, current portion 3,256 - Total current liabilities 104,988 138,943 Deferred rent, net of current portion - 3,071 Loan payable 146,024 - Total liabilities 251,012 142,014 Net assets without donor restrictions 3.537.765 2.199.418 $ 3.788.777 $ 2.341.432 * Includes balances for other marketing and administrative costs. Eliminations Total $ - $ 5,918,574 - 182,475 - 6,101,049 - 19,541 9,619 $ $ 6.130.209 $ - $ 100,796 - 17,611 - 41,041 - 74,727 - 6,500 - 3,256 - 243,931 - 3,071 - 146,024 - 393,026 5,737,183 20 14-25 VISIT NEWPORT BEACH INC. (A Non -Profit Organization) SCHEDULE II - STATEMENT OF ACTIVITIES BY FUNDING SOURCE For The Year Ended June 30, 2021 Support and revenues: Service fee revenues Interest income Other income Total support and revenues Expenses: Marketing Salaries and benefits Other Depreciation and amortization Total expenses Change in net assets without donor restrictions Net assets, beginning of year Net assets, end of year TOT* TBID $ 3,075,276 $ 1,681,912 2,183 1,494 - 22,800 3,077,459 1,706,206 1,936,510 373,539 - 799,805 53,886 236,910 77.120 31.734 2,067,516 1,441,988 1,009,943 264,218 2,527,822 1,935,200 $ 3.537.765 $ 2.199.418 * Includes balances for other marketing and administrative costs. Eliminations Total $ - $ 4,757,188 - 3,677 - 22,800 4,783,665 2,310,049 799,805 290,796 108.854 3,509,504 1,274,161 4,463,022 21 14-26 Exhibit 1 Visit Newport Beach Audited Financial Statements for the Year Ended June 30, 2021, Accompanying Management Letter dated September 30, 2021 14-27 in J' KMCompare Y Business Advisors Tax and Audit September 30, 2021 To the Board of Directors of Visit Newport Beach Inc. 1600 Newport Center Drive Newport Beach, California 92660 We have audited the financial statements of Visit Newport Beach Inc. (the "Organization") as of and for the year ended June 30, 2021, and have issued our report thereon dated September 30, 2021. Professional standards require that we advise you of the following matters relating to our audit. Our Responsibility in Relation to the Financial Statement Audit As communicated in our engagement letter dated May 20, 2021, our responsibility, as described by professional standards, is to form and express an opinion about whether the financial statements that have been prepared by management with your oversight are presented fairly, in all material respects, in accordance with accounting principles generally accepted in the United States of America. Our audit of the financial statements does not relieve you or management of its respective responsibilities. Our responsibility, as prescribed by professional standards, is to plan and perform our audit to obtain reasonable, rather than absolute, assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Organization's internal control over financial reporting. Accordingly, as part of our audits, we considered the internal control of the Organization solely for the purpose of determining our audit procedures and not to provide any assurance concerning such internal control. In conjunction with the annual audit, we also performed an examination of management's assertion included in the Management Statement Regarding Compliance with Certain Provisions of the Agreement Between the City of Newport Beach and the Organization for Tourism Promotion, Branding, and Marketing Services (the "Agreement"), that the Organization complied with the provisions in Section 4 of the Agreement regarding the 2021 Expenditures Report, summarizing the expenditures of funds received pursuant to the Agreement during the year ended June 30, 2021. We are also responsible for communicating significant matters related to the audit that are, in our professional judgment, relevant to your responsibilities in overseeing the financial reporting process. However, we are not required to design procedures for the purpose of identifying other matters to communicate to you. p 949 431 0997 f 714 544 1034 2855 Michelle Dr Suite 350 Irvine CA 92606 kmlpartnerscpa.com p 818 999 5885 f 818 704 4668 20720 Ventura Blvd Suite 160 Woodland Hills CA 91364 14-28 September 30, 2021 Page 2 Planned Scope and Timing of the Audit We conducted our audit consistent with the planned scope and timing we previously communicated to you in a letter dated September 7, 2021. Compliance with All Ethics Requirements Regarding Independence The engagement team, others in our firm, as appropriate, and our firm have complied with all relevant ethical requirements regarding independence. As part of the audit, we assisted you in preparing a draft of your financial statements and related notes, a nonattest service. With respect to any nonattest service we performed, the Organization's management has been responsible for (a) making all management decisions and performing all management functions; (b) assigning a competent individual to oversee the services; (c) evaluating the adequacy of the services performed; (d) evaluating and accepting responsibility for the results of the services performed; and (e) establishing and maintaining internal controls, including monitoring ongoing activities. Qualitative Aspects of the Entity's Significant Accounting Practices Significant Accounting Policies Management has the responsibility to select and use appropriate accounting policies. A summary of the significant accounting policies adopted by the Organization is included in Note 2 to the financial statements. Other than the adoption of ASU 2014-09 — Revenue from Contracts with Customers, there have been no initial selection of accounting policies and no changes in significant accounting policies or their application during the year ended June 30, 2021. No matters have come to our attention that would require us, under professional standards, to inform you about (1) the methods used to account for significant unusual transactions and (2) the effect of significant accounting policies in controversial or emerging areas for which there is a lack of authoritative guidance or consensus. Significant Accounting Estimates Accounting estimates are an integral part of the financial statements prepared by management and are based on management's current judgments. Those judgments are normally based on knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ markedly from management's current judgments. Significant estimates made by the Organization's management include, but are not limited to, the sufficiency of its cash and investment resources to fund operations for the next twelve months, the collectability of accounts receivable, the recoverability of long-lived assets, fair value of investments and the allocation of expenses to program activities and general and administrative. 14-29 September 30, 2021 Page 3 • Management's estimate of the sufficiency of its cash and investment resources to fund operations for the next twelve months is based on the Organization's forecast of future income and obligations. • Management's estimate of the collectability of accounts receivables is based on assessing the potential uncollectible receivables outstanding using the specific identification method. • Management's estimate of the recoverability of long-lived assets is based on comparing forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value. • Management's estimate of the fair value of investments is based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal, or in the absence of a principal market, the most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date. • Management's estimate of allocation of expenses to program activities and general and administrative is based on assessing the purpose and nature of the expenditures incurred during the year. We evaluated the key factors and assumptions used to develop the estimates and determined that they are reasonable in relation to the financial statements taken as a whole. Financial Statement Disclosures Certain financial statement disclosures involve significant judgment and are particularly sensitive because of their significance to financial statement users. The most sensitive disclosures affecting the Organization's financial statements relate to disclosure of COVID-19 impacts including liquidity and related -party transactions. Identified or Suspected Fraud We have not identified or obtained information that indicates that fraud may have occurred. Significant Difficulties Encountered during the Audit We encountered no significant difficulties in dealing with management relating to the performance of the audit. 14-30 September 30, 2021 Page 4 Uncorrected and Corrected Misstatements For purposes of this communication, professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that we believe are trivial, and communicate them to the appropriate level of management. Further, professional standards require us to also communicate the effect of uncorrected misstatements related to prior periods on the relevant classes of transactions, account balances or disclosures, and the financial statements as a whole. There were no uncorrected misstatements during the year ended June 30, 2021. In addition, professional standards require us to communicate to you all material, corrected misstatements that were brought to the attention of management as a result of our audit procedures. There were no material corrected misstatements that we identified as a result of our audit procedures that were brought to the attention of, and corrected by, management. Disagreements with Management For purposes of this letter, professional standards define a disagreement with management as a matter, whether or not resolved to our satisfaction, concerning a financial accounting, reporting, or auditing matter, which could be significant to the Organization's financial statements or the auditors' report. No such disagreements arose during the course of the audit. Representations Requested from Management We have requested certain written representations from management, which are included in a separate letter dated September 30, 2021. Management's Consultations with Other Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters. Management informed us that, and to our knowledge, there were no consultations with other accountants regarding auditing and accounting matters. Other Significant Findings or Issues In the normal course of our professional association with the Organization, we generally discuss a variety of matters, including the application of accounting principles and auditing standards, operating and regulatory conditions affecting the Organization, and operational plans and strategies that may affect the risks of material misstatement. None of the matters discussed resulted in a condition to our retention as the Organization's auditors. 14-31 September 30, 2021 Page 5 Supplemental Information The supplementary information contained in Schedules I and II of the financial statements is presented for purposes of additional analysis and is not a required part of the 2021 financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the 2021 financial statements. The information has been subjected to the auditing procedures applied in the audit of the 2021 financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the 2021 financial statements or the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. This report is intended solely for the information and use of the Board of Directors and management of the Organization, and is not intended to be and should not be used by anyone other than these specified parties. Very truly yours, kMJ- CAvw t 10*n- LLP KMJ Corbin & Company LLP 14-32 Attachment B Newport Beach and Company Audited Financial Statements for the Year Ended June 30, 2021, and Accompanying Management Letter dated September 30, 2021 (Exhibit 2) 14-33 NEWPORT BEACH & COMPANY (A Non -Profit Organization) FINANCIAL STATEMENTS For The Years Ended June 30, 2021 and 2020 with INDEPENDENT AUDITORS' REPORT THEREON 14-34 NEWPORT BEACH & COMPANY (A Non -Profit Organization) TABLE OF CONTENTS Independent Auditors' Report.................................................................................................1-2 Financial Statements: Statements of Financial Position........................................................................................ 3 Statementsof Activities..................................................................................................... 4 Statementsof Cash Flows.................................................................................................. 5 Notes to Financial Statements.......................................................................................6-16 14-35 i KJ� �j J Corbin & lvl Company Business Advisors Tax and Audit Independent Auditors' Report Board of Directors Newport Beach & Company We have audited the accompanying financial statements of Newport Beach & Company (a non- profit organization) (the "Organization"), which comprise the statements of financial position as of June 30, 2021 and 2020, and the related statements of activities and cash flows for the years 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 audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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 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. p 949 431 0997 f 714 544 1034 2855 Michelle Dr Suite 350 Irvine CA 92606 kmlpartnerscpa.conn p 818 999 5885 f 818 704 4668 20720 Ventura Blvd Suite 160 Woodland Hills CA 91364 14-36 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Newport Beach & Company as of June 30, 2021 and 2020, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter - Related Party Transactions As discussed in Note 9 to the financial statements, Newport Beach & Company has significant transactions with a related non-profit organization and the Organization derives substantial support and revenue from that related non-profit organization. Our opinion is not modified with respect to this matter. Other Matter As discussed in Note 2 to the financial statements, the Organization changed its method for revenue recognition in 2021 as a result of the adoption of the amendments to the Financial Accounting Standards Board Accounting Standards Codification resulting from Accounting Standards Update 2014-09, Revenue from Contracts with Customers, effective July 1, 2020. Our opinion is not modified with respect to this matter. kMT ckk"'t C"fol LLP KMJ Corbin & Company LLP Irvine, California September 30, 2021 14-37 NEWPORT BEACH & COMPANY (A Non -Profit Organization) STATEMENTS OF FINANCIAL POSITION June 30, 2021 2020 ASSETS Current assets: Cash $ 219,454 $ 72,690 Accounts receivable 12,891 43,753 Related -party receivables, net 17,611 - Prepaid expenses and other current assets 76,649 32,672 Total current assets 326,605 149,115 Property and equipment, net 38,142 64,843 $ 364,747 $ 213.958 LIABILITIES AND NET ASSETS Current liabilities: Accounts payable $ 6,049 $ 6,171 Related -party payables, net - 32,739 Accrued expenses 131,671 72,522 Accrued payroll and related expenses 123,767 51,661 Current portion of deferred compensation - 20,000 Loan payable, current portion 1,009 - Total current liabilities 262,496 183,093 Deferred rent, net of current portion 14,229 100,891 Loan payable, net of current portion 108,441 - Total liabilities 385,166 283,984 Commitments and contingencies Net assets without donor restrictions (20,419) (70,026) $ 364,747 $ 213,958 See accompanying notes to financial statements 3 14-38 NEWPORT BEACH & COMPANY (A Non -Profit Organization) STATEMENTS OF ACTIVITIES For The Years Ended June 30, 2021 2020 Support and revenues: Service fees from related parry $ 1,248,512 $ 2,129,382 Community marketing income 227,621 309,391 Paycheck protection program grant 227,527 - Total support and revenues 1,703,660 2,438,773 Expenses: Marketing 111,740 169,364 Salaries and benefits 982,803 1,588,115 Other 532,809 615,560 Depreciation 26,701 35,059 Total expenses 1,654,053 2,408,098 Increase in net assets without donor restrictions 4907 30,675 Net assets without donor restrictions, beginning of year (70,026) (100,701) Net assets without donor restrictions, end of year $ (20,419) $ (70.026) See accompanying notes to financial statements 4 14-39 Cash flows from operating activities: Change in net assets without donor restrictions Adjustments to reconcile change in net assets without without donor restrictions to net cash provided by operating activities: Depreciation Loss on disposal of equipment Changes in operating assets and liabilities: Accounts receivable Related -party receivables/payables, net Prepaid expenses and other current assets Accounts payable Accrued expenses Accrued payroll and related expenses Deferred compensation Deferred rent Net cash provided by operating activities Cash flows used in investing activities: Purchases of property and equipment Cash flows provided by financing activities: Proceeds from loan Net increase in cash Cash at beginning of year Cash at end of year NEWPORT BEACH & COMPANY (A Non -Profit Organization) STATEMENTS OF CASH FLOWS For The Years Ended June 30, 2021 2020 $ 49,607 $ 30,675 26,701 35,059 - 1,675 30,862 6,392 (50,350) 140,085 (43,977) 7,173 (122) (80,354) 59,149 50,746 72,106 (146,785) (20,000) (20,000) (86,662) 3,301 37,314 27,967 - (9,821) 109,450 146,764 18,146 72,690 54,544 $ 219,454 $ 72.690 See accompanying notes to financial statements S 14-40 NEWPORT BEACH & COMPANY (A Non -Profit Organization) NOTES TO FINANCIAL STATEMENTS For The Years Ended June 30, 2021 and 2020 NOTE 1— ORGANIZATION Nature of Operations Newport Beach & Company (the "Organization") is a non-profit organization formed under the laws of the State of California in 2013. The Organization specializes in marketing and promotion services related to enhancing the economic development for the City of Newport Beach (the "City"). The Organization currently has agreements with the City to manage its public access television channel and to provide services to the Balboa Village Merchants Association. Through June 30, 2021, the Organization also had an agreement with the City to provide services to the Newport Beach Restaurant Association Business Improvement District. By embracing a variety of neighborhoods, businesses and individual unique voices into a complementary story, the Organization seeks to strengthen all of its partners, drive new revenue to the City and enhance the City's overall economic vibrancy. Newport Beach TV ("NBTV") The agreement between the Organization and the City provides management and consulting services in support of NBTV. Such services include production, administrative, and sponsorship services. This agreement expires on April 30, 2023. Newport Beach Restaurant Association Business Improvement District ("NBRA BID") The agreement between the Organization and the City, which expired on June 30, 2021, provided marketing planning and programming, public and media relations, research and measurement, membership and community events services to the City related to the NBRA BID. NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. Net assets and revenues, expenses, gains, and losses are classified based on the existence or absence of donor -imposed restrictions. Accordingly, net assets and changes therein are classified and reported as follows: Without donor restrictions —Net assets that are not subject to donor -imposed stipulations. These assets are available to support the Organization's general activities and operations at the discretion of the Board of Directors. 6 14-41 NEWPORT BEACH & COMPANY (A Non -Profit Organization) NOTES TO FINANCIAL STATEMENTS For The Years Ended June 30, 2021 and 2020 NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued With donor restrictions - Net assets that are subject to donor -imposed restrictions. Some donor - imposed restrictions are temporary in nature, such as those that will be met by the passage of time or other events specified by the donor. Other donor -imposed restrictions are perpetual in nature, where the donor stipulates that such resources be maintained in perpetuity. Generally, the donors of these assets permit the Organization to use all or part of the income earned on related investments for general or specific purposes. Revenues are reported as increases in net assets without donor restrictions unless use of the related assets is limited by donor -imposed restrictions. Expenses are reported as decreases in net assets without donor restrictions. Gains and losses on investments and other assets are reported as increases or decreases in net assets without donor restrictions unless their use is restricted by explicit donor stipulations or by law. As of and for the years ended June 30, 2021 and 2020, the Organization had no net assets with donor restrictions. Li uidi In December 2019, a novel strain of coronavirus disease ("COVID-19") was first reported in Wuhan, China. Less than four months later, on March 11, 2020, the World Health Organization declared COVID-19 a global pandemic. The extent of COVID-19's effect on the Organization's operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, all of which are uncertain and difficult to predict considered the rapidly evolving landscape. The Organization is currently analyzing the potential impacts to all of its business segments. At this time, it is not possible to determine the magnitude of the overall impact of COVID-19 on the Organization. However, it could have a material adverse effect on the Organization's financial condition, liquidity, results of operations, and cash flows. In the short term, one of the impacts of the pandemic is that the Organization's revenues have declined, but the Organization cannot predict whether this decline is temporary or not. During the year ended June 30, 2021, the Organization took certain cost cutting measures including reducing discretionary marketing and other expenses, and reducing payroll through pay cuts, furloughs, and reduction in its workforce. The Organization believes these measures, along with its existing cash, will be sufficient to cover its cash flow requirements for at least the next twelve months from the date of issuance of these financial statements (see Note 3). However, there can be no assurance that the Organization will not use its existing capital resources sooner than currently expected. 7 14-42 NEWPORT BEACH & COMPANY (A Non -Profit Organization) NOTES TO FINANCIAL STATEMENTS For The Years Ended June 30, 2021 and 2020 NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Use of Estimates The preparation of financial statements requires the Organization 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. Significant estimates made by the Organization's management include, but are not limited to, the sufficiency of its cash resources to fund operations for the next twelve months, the collectability of receivables, the recoverability of long-lived assets and the allocation of expenses to program activities and general and administrative. Actual results may differ from those estimates. Cash and Cash Equivalents The Organization considers all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents. The Organization maintains its cash balances at various financial institutions. The total cash balances are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $250,000 per institution. At June 30, 2021, the Organization had no uninsured balances. The Organization periodically reviews the quality of the financial institutions it has deposits with to minimize risk of loss. To date, no losses have been incurred. Accounts Receivable Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts at year end. Management determines the allowance for doubtful accounts by identifying troubled accounts based on current and historical experience. At June 30, 2021 and 2020, the Organization considers its accounts receivable to be fully collectible and accordingly did not record an allowance for doubtful accounts. As of June 30, 2021 and 2020, one and two customers, respectively, accounted for approximately 99% and 95% respectively, of the Organization's total accounts receivable balance. Property and Equipment Property and equipment are stated at cost. Donated assets are recorded at their fair market value when received. The cost of purchased assets or fair market value of donated assets is depreciated using the straight-line method over the estimated useful lives of the related assets which range from three to seven years. Leasehold improvements are amortized over the lesser of their estimated useful lives or the related lease term. Maintenance and repairs are charged to expense as incurred. Significant renewals and betterments are capitalized. 8 14-43 NEWPORT BEACH & COMPANY (A Non -Profit Organization) NOTES TO FINANCIAL STATEMENTS For The Years Ended June 30, 2021 and 2020 NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued It is the Organization's policy to capitalize property and equipment over $1,500. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is reflected in the statements of activities. Deferred Compensation Deferred compensation represents a commitment to make annual $20,000 annuity payments through 2021 to a member of the Organization's management. There were no amounts due as of June 30, 2021. Impairment of Long -Lived Assets The Organization evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset are less than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value. At June 30, 2021 and 2020, the Organization's management believes there is no impairment of its long-lived assets. There can be no assurance, however, that market conditions will not change or demand for the Organization's services will continue, which could result in impairment of long-lived assets in the future. Contributed Materials and Services Donated materials and other noncash contributions (if any) are reflected in the accompanying financial statements at their estimated fair market values at date of receipt. Contributions of services are recognized if the services received create or enhance nonfinancial assets or require specialized skills, are provided by individuals possessing those skills and would typically need to be purchased if not provided by donation. Other volunteer services that do not meet these criteria are not recognized in the financial statements as there is no objective basis of deriving their value. During the years ended June 30, 2021 and 2020, the Organization did not have significant contributed materials and services. 9 14-44 NEWPORT BEACH & COMPANY (A Non -Profit Organization) NOTES TO FINANCIAL STATEMENTS For The Years Ended June 30, 2021 and 2020 NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Income Tax Status The Organization qualifies as a tax-exempt organization for Federal income taxes under Section 501(c)(6) of the United States Internal Revenue Code and for California state income taxes under Section 23701(d) of the California Revenue and Taxation Code; therefore, the Organization has no provision for federal or state income taxes. During the years ended June 30, 2021 and 2020, the Organization had no unrelated business income. The Organization annually evaluates tax positions as part of the preparation of its exempt tax return. This process includes an analysis of whether tax positions the Organization takes with regard to a particular item of income or deduction would meet the definition of an uncertain tax position under current accounting guidance. The Organization believes its tax positions are appropriate based on current facts and circumstances. The Organization's policy is to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. At June 30, 2021 and 2020, the Organization did not have any unrecognized tax benefits. The Organization is no longer subject to income tax examinations by tax authorities for years before 2017. Allocated Expenses The costs of providing program activities and supporting services have been summarized on a functional basis in Note 5. The Organization incurs expenses that directly relate to, and can be assigned to, a specific program or supporting activity. The Organization also conducts a number of activities which benefit both its program objectives as well as supporting services. These costs, which are not specifically attributable to a specific program or supporting activity, are allocated by management on a consistent basis among program and supporting services benefited, based on either financial or nonfinancial data, such as headcount, occupancy or estimates of time and effort incurred by personnel. Recent Accounting Pronouncements On July 1, 2020, the Organization adopted Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, as codified in Accounting Standards Codification ("ASC") 606, by applying the modified retrospective method for all contracts. The Organization evaluated its revenue streams to identify whether each stream would be subject to the provisions of ASC 606 and any differences in the timing, measurement, or presentation of revenue recognition compared to ASC 605, Revenue Recognition ("ASC 605"). Based on the assessment of the Organization's revenue streams, the pattern and timing of recognition of the Company's revenues under ASC 606 are similar to the manner in which the Company previously recognized revenue under ASC 605, so there was no effect as a result of the Organization's adoption of ASC 606. 10 14-45 NEWPORT BEACH & COMPANY (A Non -Profit Organization) NOTES TO FINANCIAL STATEMENTS For The Years Ended June 30, 2021 and 2020 NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, Leases (Topic 842), which requires the lease rights and obligations arising from lease contracts, including existing and new arrangements, to be recognized as assets and liabilities on the statement of financial position. ASU 2016-02, as amended, is effective for reporting periods beginning after December 15, 2021, with early adoption permitted. While still evaluating this update, the Organization expects the adoption of this update to have a material effect on its financial condition due to the recognition of the lease rights and obligations as assets and liabilities. The Organization does not expect this update to have a material effect on its results of operations and cash flows. In September 2020, the FASB issued ASU No. 2020-07, Presentation and Disclosures by Not -for - Profit Entities for Contributed Nonfinancial Assets (Topic 958), which requires the Organization to change its financial statement presentation and disclosure of contributed nonfinancial assets, or gifts -in-kind. ASU No. 2020-07 defines gifts -in-kind as contributed nonfinancial assets donations made for goods or services the Organization would purchase in the normal course of business. Gifts -in-kind of tangible property include items like operating facilities, utilities, office furniture, and supplies provided to the Organization; items donated to the Organization to be auctioned through charitable events; and items used in program activities, such as medical supplies, building supplies, appliances, and fixtures. Intangible gifts -in-kind include items like copyrights, patents, and royalties; specialized volunteer services, such as those from nurses for medical organizations or project managers and builders for construction projects; and expertise, such as accounting, legal, and consulting services. ASU No. 2020-07 is effective for the Organization for fiscal year 2022. Early adoption is permitted. The Organization is currently evaluating the impact that the adoption of ASU No. 2020-07 will have on its financial statements. Subsequent Events The Organization has evaluated subsequent events through September 30, 2021, the date which the financial statements were available to be issued. Based upon its evaluation, management has determined that no subsequent events have occurred that would require recognition in the accompanying financial statements or disclosure in the notes thereto except as disclosed herein. NOTE 3 — LIQUIDITY AND AVAILABILITY The Organization has $232,345 of financial assets available within one year of the statement of financial position date to meet cash needs for general expenditures consisting of cash of $219,454 and accounts receivable of $12,891. None of the financial assets are subject to donor or other contractual restrictions that make them unavailable for general expenditures within one year of the statement of financial position. The Organization has a policy to structure its financial assets to be available as its general expenditures, liabilities, and other obligations come due. 11 14-46 NEWPORT BEACH & COMPANY (A Non -Profit Organization) NOTES TO FINANCIAL STATEMENTS For The Years Ended June 30, 2021 and 2020 NOTE 3 — LIQUIDITY AND AVAILABILITY, continued Funding for the Organization is dependent on funding received from a related parry (see Note 9) and revenue generated through marketing efforts. As a result, the Organization closely monitors the monthly projected and received revenue to determine if any changes need to be made to budgeted annual expenditures. As discussed in Note 2, in response to COVID-19, the Organization has performed an analysis to determine whether it will have sufficient cash to fund operations for the next twelve months. Based on budgeting for necessary expenses and obligations due along with minimal service fee revenues as a result of the impact of COVID-19 on hotel stays, the Organization has concluded that it will have sufficient cash to fund operations for at least twelve months from the date of issuance of these financial statements. NOTE 4 — PROPERTY AND EQUIPMENT Property and equipment consists of the following at June 30: 2021 Leasehold improvements $ 79,990 Computer equipment 126,456 Office furniture and fixtures 81,409 287,855 Less accumulated depreciation and amortization (249,713) $ 38,142 2020 $ 79,990 126,456 81,409 287,855 (223,012) $ 64.843 12 14-47 NEWPORT BEACH & COMPANY (A Non -Profit Organization) NOTES TO FINANCIAL STATEMENTS For The Years Ended June 30, 2021 and 2020 NOTE 5 - STATEMENT OF FUNCTIONAL EXPENSES The statements of functional expenses for the years ended June 30, 2021 and 2020 are as follows: Salaries and benefits: Salaries Payroll taxes and employee benefits Total salaries and benefits Other expense: Marketing Office lease Repairs and maintenance Insurance Office supplies Equipment and equipment rental Postage and fees Meeting and education Professional fees and services Depreciation Bad debt Travel and related Total functional expenses 2021 Program General and 2020 Activities Administrative Total Total (Summarized) $ 611,597 $ 169,780 $ 781,377 $ 1,210,112 147,842 53,584 201,426 378,003 759,439 223,364 982,803 1,588,115 111,478 262 111,740 169,364 305,478 101,826 407,304 409,271 - 21,083 21,083 30,322 - 6,086 6,086 6,944 - 3,580 3,580 16,628 15,269 28,049 43,318 49,525 1,859 16,455 18,314 5,319 1,093 4,451 5,544 44,133 - 23,117 23,117 22,639 - 26,701 26,701 35,059 - - - 4,888 2,641 1,822 4,463 25,891 $ 1.197.257 $ 456.796 $ 1.654.053 $ 2.408.098 The Organization incurred expenses related to program activities totaling approximately $1,733,000 for the year ended June 30, 2020. NOTE 6 - PAYCHECK PROTECTION PROGRAM GRANT/LOAN In January 2021, the Organization entered into an unsecured promissory note for a loan (the "Loan") in the principal amount of $336,997 and received cash proceeds of the same amount, pursuant to the Paycheck Protection Program (the "PPP"), which is administered by the U.S. Small Business Administration (the "SBA"). Under the terms of the Loan, interest accrues on the outstanding principal at the rate of 1.0% per annum. The term of the Loan is five years, unless sooner required in connection with an event of default under the Loan. To the extent the Loan amount is not fully forgiven by the SBA, the Organization is obligated to make equal monthly payments of principal and interest beginning on the earlier of. (1) the date the SBA sends the loan forgiveness amount to the lender or (2) ten months after the covered 24 -week period, until the maturity date. 13 14-48 NEWPORT BEACH & COMPANY (A Non -Profit Organization) NOTES TO FINANCIAL STATEMENTS For The Years Ended June 30, 2021 and 2020 NOTE 6 — PAYCHECK PROTECTION PROGRAM GRANT/LOAN, continued The PPP provides a mechanism for forgiveness of up to the full amount borrowed. Under the PPP, the Organization may apply for and be granted forgiveness for all or part of the PPP Loan. The amount of loan proceeds eligible for forgiveness is based on a formula that takes into account a number of factors, including the amount of loan proceeds used by the Organization during the 24 - week period after the loan origination for certain purposes including payroll costs, interest on certain mortgage obligations, rent payments on certain leases, and certain qualified utility payments (it being anticipated that at least 60% of the loan amount will be required to be used for eligible payroll costs); the employer maintaining or rehiring employees and maintaining salaries at certain levels; and other factors. Subject to the other requirements and limitations on loan forgiveness, only loan proceeds spent on payroll and other eligible expenses during the covered 24 -week period will qualify for forgiveness. The Organization has used $227,527 of the proceeds for purposes consistent with the PPP and believes that its use of this portion of the loan proceeds will meet the conditions for forgiveness. While management believes that it is probable that $227,527 will be forgiven, no definite assurance can be provided that forgiveness for any portion of the PPP Loan will be obtained. Since the Company used $227,527 of the proceeds from the PPP Loan for such qualifying expenses before June 30, 2021, the Company recorded this amount of the PPP Loan proceeds as a conditional cost -reimbursed government grant in the accompanying consolidated statements of activities for the year ended June 30, 2021 pursuant to relevant technical accounting guidance. Future minimum payments under the Organization's loan agreement (net of estimated forgiveness) are as follows: Years Ending June 30, 2022 $ 1,009 2023 29,873 2024 30,173 2025 30,476 2026 17,919 $ 109,450 14 14-49 NEWPORT BEACH & COMPANY (A Non -Profit Organization) NOTES TO FINANCIAL STATEMENTS For The Years Ended June 30, 2021 and 2020 NOTE 7 — COMMITMENTS AND CONTINGENCIES Lease Agreements The Organization is obligated under a lease for its facility, which is accounted for as an operating lease. The lease expires in September 2022 and rent, as amended, is payable between $6,922 and $32,905 per month. As a result of the fourth amendment to this lease, the Organization is a party to the lease originally entered into by Visit Newport Beach Inc. ("VNB"), a related party. Under the terms of this lease, each assignee shall be deemed to assume all lease obligations, and as a result, the Organization may be liable for future rent payments. The facility lease contains a five- year extension option at the end of the lease term. Total rent expense incurred by the Organization under its operating lease was approximately $407,000 and $409,000 for the years ended June 30, 2021 and 2020, respectively, and is included in other expenses. Such amounts are net of the amounts paid by VNB pursuant to the Agreement discussed in Note 9. Future minimum payments due on its allocated portion of the non -cancelable facility lease commitment in excess of one year are as follows: Years Ending June 30, 2022 2023 Guarantees and Indemnities 480,000 113,000 $ 593,000 The Organization has made certain indemnities and guarantees (including under its PPP Loan), under which it may be required to make payments to a guaranteed or indemnified party, in relation to certain actions or transactions. The Organization indemnifies its directors, officers, employees and agents, as permitted under the laws of the State of California. In connection with its facility lease, the Organization has indemnified its lessor for certain claims arising from the use of the facilities. The duration of the guarantees and indemnities varies, and is generally tied to the life of the agreement. These guarantees and indemnities do not provide for any limitation of the maximum potential future payments the Organization could be obligated to make. Historically, the Organization has not been obligated nor incurred any payments for these obligations and, therefore, no liabilities have been recorded for these indemnities and guarantees in the accompanying statements of financial position. IS 14-50 NEWPORT BEACH & COMPANY (A Non -Profit Organization) NOTES TO FINANCIAL STATEMENTS For The Years Ended June 30, 2021 and 2020 NOTE 8 — RETIREMENT PLAN The Organization has a 401(k) retirement plan covering all eligible employees. The plan provided matching contributions based upon employees' voluntary contributions and the Organization's contributions. Effective March 31, 2020, the Organization amended the 401(k) retirement plan to exclude employer matching contributions. Effective December 13, 2020, the 401(k) retirement plan was further amended to reinstate the employer matching contributions. The total expense recorded by the Organization during the years ended June 30, 2021 and 2020 was approximately $27,000 and $70,000, respectively, which is recorded in salaries and benefits expenses in the accompanying statements of activities. NOTE 9 — RELATED -PARTY TRANSACTIONS During the years ended June 30, 2021 and 2020, the Organization had transactions with a related party that is also a non-profit organization. The related entity, VNB, initiates, sponsors, promotes and carries out plans, policies and activities to attract conferences and visitors to the City. VNB was the driving force behind the formation of the Organization. Pursuant to an Agreement for Services ("Agreement") dated April 1, 2013, the Organization was appointed by VNB as an exclusive provider of services that VNB shall need to carry out its mission and obligations to the City. In consideration for these services, VNB agreed to pay monthly fees totaling $108,000 for the years ended June 30, 2021 and 2020. VNB has also agreed to reimburse the Organization for all reasonable expenses incurred by it in carrying out its duties to VNB, including rent and related facility costs, payroll and related benefits, and other direct marketing costs. For the years ended June 30, 2021 and 2020, the Organization billed $1,140,512 and $2,021,382, respectively, to VNB for these fees and costs, which are recorded as service fees from related party in the accompanying statements of activities. The Agreement, as amended, expires on June 30, 2024. As of June 30, 2021 and 2020, the Organization has net related -party receivables (payables) of $17,611 and ($32,739), respectively, in the accompanying statements of financial position. These amounts do not bear interest, are not collateralized and have no stated repayment terms. 16 14-51 Exhibit 2 Newport Beach and Company Audited Financial Statements for the Year Ended June 30, 2021, Accompanying Management Letter dated September 30, 2021 14-52 KMJ1Corbin & Company Business Advisors Tax and Audit September 30, 2021 To the Board of Directors of Newport Beach & Company 1600 Newport Center Drive Newport Beach, California 92660 We have audited the financial statements of Newport Beach & Company (the "Organization") as of and for the year ended June 30, 2021, and have issued our report thereon dated September 30, 2021. Professional standards require that we advise you of the following matters relating to our audit. Our Responsibility in Relation to the Financial Statement Audit As communicated in our engagement letter dated May 20, 2021 our responsibility, as described by professional standards, is to form and express an opinion about whether the financial statements that have been prepared by management with your oversight are presented fairly, in all material respects, in conformity with accounting principles generally accepted in the United States of America. Our audit of the financial statements does not relieve you or management of its respective responsibilities. Our responsibility, as prescribed by professional standards, is to plan and perform our audit to obtain reasonable, rather than absolute, assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Organization's internal control over financial reporting. Accordingly, as part of our audit, we considered the internal control of the Organization solely for the purpose of determining our audit procedures and not to provide any assurance concerning such internal control. We are also responsible for communicating significant matters related to the audit that are, in our professional judgment, relevant to your responsibilities in overseeing the financial reporting process. However, we are not required to design procedures for the purpose of identifying other matters to communicate to you. Planned Scope and Timing of the Audit We conducted our audit consistent with the planned scope and timing we previously communicated to you in a letter dated September 7, 2021. p 949 431 0997 f 714 544 1034 2855 Michelle Dr Suite 350 Irvine CA 92606 kmlpartnerscpa.com p 818 999 5885 f 818 704 4668 20720 Ventura Blvd Suite 160 Woodland Hills CA 91364 14-53 Newport Beach & Company September 30, 2021 Page 2 Compliance with All Ethics Requirements Regarding Independence The engagement team, others in our firm, as appropriate, and our firm have complied with all relevant ethical requirements regarding independence. As part of the audit, we assisted you in preparing a draft of your financial statements and related notes, a nonattest service. With respect to any nonattest service we performed, the Organization's management has been responsible for (a) making all management decisions and performing all management functions; (b) assigning a competent individual to oversee the services; (c) evaluating the adequacy of the services performed; (d) evaluating and accepting responsibility for the results of the services performed; and (e) establishing and maintaining internal controls, including monitoring ongoing activities. Qualitative Aspects of the Entity's Significant Accounting Practices Significant Accounting Policies Management has the responsibility to select and use appropriate accounting policies. A summary of the significant accounting policies adopted by the Organization is included in Note 2 to the financial statements. Other than the adoption of ASU 2014-09 — Revenue from Contracts with Customers, there have been no initial selection of accounting policies and no changes in significant accounting policies or their application during the year ended June 30, 2021. No matters have come to our attention that would require us, under professional standards, to inform you about (1) the methods used to account for significant unusual transactions and (2) the effect of significant accounting policies in controversial or emerging areas for which there is a lack of authoritative guidance or consensus. Significant Accounting Estimates Accounting estimates are an integral part of the financial statements prepared by management and are based on management's current judgments. Those judgments are normally based on knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ markedly from management's current judgments. Significant estimates made by the Organization's management include, but are not limited to, the sufficiency of its cash to fund operations for the next twelve months, the collectability of accounts receivable, the recoverability of long-lived assets, and the allocation of expenses to program activities and general and administrative. • Management's estimate of the sufficiency of its cash and investment resources to fund operations for the next twelve months is based on the Organization's forecast of future income and obligations. 14-54 Newport Beach & Company September 30, 2021 Page 3 • Management's estimate of the collectability of accounts receivables is based on assessing the potential uncollectible receivables outstanding using the specific identification method. • Management's estimate of the recoverability of long-lived assets is based on comparing forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value. • Management's estimate of allocation of expenses to program activities and general and administrative is based on assessing the purpose of the expenditures incurred during the year. We evaluated the key factors and assumptions used to develop the estimates and determined that they are reasonable in relation to the financial statements taken as a whole. Financial Statement Disclosures Certain financial statement disclosures involve significant judgment and are particularly sensitive because of their significance to financial statement users. The most sensitive disclosures affecting the Organization's financial statements relate to related -party transactions. Identified or Suspected Fraud We have not identified or obtained information that indicates that fraud may have occurred. Significant Difficulties Encountered during the Audit We encountered no significant difficulties in dealing with management relating to the performance of the audit. Uncorrected and Corrected Misstatements For purposes of this communication, professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that we believe are trivial, and communicate them to the appropriate level of management. Further, professional standards require us to also communicate the effect of uncorrected misstatements related to prior periods on the relevant classes of transactions, account balances or disclosures, and the financial statements as a whole. There were no uncorrected misstatements during the year ended June 30, 2021. In addition, professional standards require us to communicate to you all material, corrected misstatements that were brought to the attention of management as a result of our audit procedures. There were no material corrected misstatements that we identified as a result of our audit procedures that were brought to the attention of, and corrected by, management. 14-55 Newport Beach & Company September 30, 2021 Page 4 Disagreements with Management For purposes of this letter, professional standards define a disagreement with management as a matter, whether or not resolved to our satisfaction, concerning a financial accounting, reporting, or auditing matter, which could be significant to the Organization's financial statements or the auditors' report. No such disagreements arose during the course of the audit. Representations Requested from Management We have requested certain written representations from management, which are included in the attached letter dated September 30, 2021. Management's Consultations with Other Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters. Management informed us that, and to our knowledge, there were no consultations with other accountants regarding auditing and accounting matters. Other Significant Findings or Issues In the normal course of our professional association with the Organization, we generally discuss a variety of matters, including the application of accounting principles and auditing standards, operating and regulatory conditions affecting the Organization, and operational plans and strategies that may affect the risks of material misstatement. None of the matters discussed resulted in a condition to our retention as the Organization's auditors. This report is intended solely for the information and use of the Board of Directors and management of the Organization, and is not intended to be and should not be used by anyone other than these specified parties. Very truly yours, kMT ckk-,V,j Ca"n L -P KMJ Corbin & Company LLP 14-56 Attachment C Visit Newport Beach Expenditure Compliance Report for the Year Ended June 30, 2021 14-57 VISIT NEWPORT BEACH INC. (a Non -Profit Organization) EXPENDITURES REPORT For The Year Ended June 30, 2021 with INDEPENDENT AUDITORS' REPORT THEREON 14-58 K j� ^ T I Corbin & 1v1J Company Business Advisors Tax and Audit Independent Auditors' Report Board of Directors of Visit Newport Beach Inc. We have examined management's assertion, included in the accompanying Management Statement Regarding Compliance With Certain Provisions of the Agreement Between the City of Newport Beach and Visit Newport Beach Inc. for Tourism Promotion, Branding, and Marketing Services, that Visit Newport Beach Inc. (the "Organization") complied with the provisions in Section 4 of the Agreement Between the City of Newport Beach and Visit Newport Beach Inc. for Tourism Promotion, Branding, and Marketing Services (the "Agreement") regarding the attached 2021 Expenditures Report, summarizing the expenditures of funds received pursuant to the Agreement during the period July 1, 2020 to June 30, 2021. The Organization's management is responsible for its assertion. Our responsibility is to express an opinion on management's assertion about the Organization's compliance with the specified requirements based on our examination. Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants. Those standards require that we plan and perform the examination to obtain reasonable assurance about whether management's assertion about compliance with the specified requirements is fairly stated, in all material respects. The nature, timing, and extent of the procedures selected depend on our judgment, including an assessment of the risks of material misstatement of management's assertion, whether due to fraud or error. We believe that the evidence we obtained is sufficient and appropriate to provide a reasonable basis for our opinion. Our examination does not provide a legal determination on the Organization's compliance with the specified requirements. In our opinion, management's assertion that Visit Newport Beach Inc. complied with the provisions of Section 4 of the Agreement regarding the attached 2021 Expenditures Report for the year ended June 30, 2021 is fairly stated, in all material respects. This report is intended solely for the information and use of Visit Newport Beach, Inc. and the City of Newport Beach and is not intended to be and should not be used by anyone other than these specified parties. IST t 10hn La KMJ Corbin & Company LLP Irvine, California September 30, 2021 p 949 431 0997 f 714 544 1034 2855 Michelle Dr Suite 350 Irvine CA 92606 kmlpartnerscpa.com p 818 999 5885 f 818 704 4668 20720 Ventura Blvd Suite 160 Woodland Hills CA 91364 14-59 DI VISIT NEWPORT BEACH CALIFORNIA Management Statement Regarding Compliance With Certain Provisions of the Agreement Between the City of Newport Beach and Visit Newport Beach Inc. for Tourism Promotion, Branding, and Marketing Services We, as members of management of Visit Newport Beach Inc. (the "Organization"), are responsible for complying with the provisions of Section 4 of the Agreement Between the City of Newport Beach and Visit Newport Beach Inc. (collectively, the "Parties") for Tourism Promotion, Branding, and Marketing Services (the "Agreement") in that funds received by the Organization pursuant to this Agreement were expended in accordance with this Agreement. We are responsible for establishing and maintaining effective internal controls over compliance with the provisions of Section 4 of the Agreement_ We have performed an evaluation of the Organization's compliance with the provisions of Section 4 of the Agreement regarding funds expended during the year ended June 30, 2021, as summarized in the attached 2021 Expenditures Report. Based on this evaluation, we assert that the Organization was in compliance with the provisions of Section 4 of the Agreement as described below: Section 4 of the Agreement requires the Organization to "develop, plan, carry out, and supervise a program to market and promote the Newport Beach brand and to promote tourism in, and serve the needs of, visitors to Newport Beach as well as increase the amount of TOT collected through their promotional activities (`Services'). Subject to the foregoing sentence, the Services shall, at a minimum, include the following: (a) the maintenance of suitable office space and the employment of competent personnel to carry out the promotional, branding and marketing duties; (b) the preparation of brochures, publications, guides, on-line promotions, social network efforts, and other marketing materials and information that inform prospective tourists and visitors of the recreational activities, cultural assets, shopping and dining opportunities, night- time stay opportunities, and natural beauty of Newport Beach; (c) the dissemination of information described in this section by way of the media, direct mail, handouts, social networking, websites, smart phone applications, or other means of distribution; and (d) the development and implementation of specific marketing programs designed to increase awareness of the Newport Beach brand and to increase business and visitor trade in Newport Beach; and (e) any additional Services when proposed by the City which are consistent with the promotion of tourism and the Newport Beach brand which are mutually agreeable and acceptable to the Parties." Vi !: a 14-60 A VISIT NEWPORT BEACH, INC. 2021 Expenditures Report Total Expenses 1,990,393 14-61 July 1, 2020 - June 30, 2021 2021 Expenses General and Administrative Expenses Operating Expenses 64100 - Office Supplies 173 64125 - Computer Software (non-deprec) 5,844 64130 - Voice and Data - Office 79 64145 - Shipping Charges 238 64150 - Bank Fees 290 64160 - Membership Dues 29,888 64170 - Team Meetings 3,750 64175 - Governance Meeting Expenses 750 Total Operating Expenses 41,012 Insurance 63100 - General Liability Insurance 1,337 63300 - Board of Directors Insurance 2,488 Total Insurance 3,825 Professional Fees 64207 - Bloggers 5,121 64201 - Audit Fees 4,000 64202 - Tax Preparation Fees 1,000 Total Professional Fees 10,121 Miscellaneous Expense 64350 -Interest Expense 4,046 Total Miscellaneous Expense 4,046 Total General and Administrative 59,004 Advertising Expenses 66101 - Advertising - Purchased 252,081 66102 - Advertising - Local Events 480 66121 - Promotional Gift Cards 1,250 66202 - Ad Production 19,436 66203 - Creative Design/Development 61,010 66205 - Photography/Video Production 63,618 66212 - Community Sponsorships 150,000 Total Advertising Expenses 547,875 Marketing Expenses Community Relations 67101 - Research 29,540 67102 - Christmas Boat Parade 19,936 67105 - Awards 450 67107 - Promotional Items 236 Total Community Relations 50,162 Marketing Collateral 67312 - Collateral Distribution 7,650 Total Marketing Collateral 7,650 Digital Marketing 67501 - Social Media 38,633 67502 - Website Maintenance 45,956 67503 - Online Search Advertising 46,273 67504 - Digital Advertising 11,212 67511 - Digital Lifestyle Channel Production 250 66211 - CRM Maintenance 19,204 Total Digital Marketing 161,528 Communications/Public Relations 67601 - Media Services 12,816 67602 - Media FAM Tours 1,234 67607 - Media Relations 4,518 67608 - Digital Assets/Media Library 4,794 Total Communications/Public Relations 23,362 Total Marketing Expenses 242,702 International Marketing Initiatives 67401 - International Brand Awareness Fees - 67412 - International Brand Events 300 Total International Marketing Initiatives 300 NB&Company Fees 68001 - NB&Co Fees 1,140,512 Total NB&Company Fees 1,140,512 Total Expenses 1,990,393 14-61 Other Expenditures: Fixed asset additions capitalized Website development costs capitalized Change in other prepaid expenses and current liabilities, net (58,086) (58,086) $ 1,932,307 NOTES: A Included in this account are expenditures for or contributions to special events and not-for-profit organizations in Newport Beach as follows: Vendor Event Amount City of Newport Beach Arts Sponsorship 150,000 $ 150,000 B Consist of reimbursements for costs incurred by Newport Beach & Company as follows: Class of Expense Amount Salaries/Benefits $ 690,712 Marketing Expenses $ 345,677 G&A Overhead $ 104,123 $ 1,140,512 14-62