Financial Reports SINGLE AUDIT REPORTING PACKAGE YEAR ENDED JUNE 30, 2017
TABLE OF CONTENTS Independent Auditors' Report 1 FINANCIAL STATEMENTS Statements of Financial Position 4 Statements of Activities 5 Statements of Cash Flows 6 Notes to Financial Statements 7 REPORT ON INTERNAL CONTROL AND COMPLIANCE Independent Auditors Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 17 Independent Auditors Report on Compliance for Each Major Program and on Internal Control Over Compliance Required by the Uniform Guidance 19 Schedule of Expenditure of Federal Awards 21 Notes to the Schedule of Expenditure of Federal Awards 22 Schedule of findings and Questions Costs 23 Summary Schedule of Prior Audit Findings 25 Page
INDEPENDENT AUDITORS REPORT Board of Directors Southgate Academy, Inc. Tucson, Arizona Report on the Financial Statements We have audited the accompanying financial statements of Southgate Academy, Inc. (a nonprofit organization), which comprise the statement of financial position as of June 30, 2017, and the related statements of activities and cash flows for the year then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the 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. Tempe Scottsdale Casa Grande www.hhcpa.com
Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Southgate Academy, Inc. as of June 30, 2017, and the changes in its net assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Other Information Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying schedule of expenditures of federal awards, as required by Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, is presented for purposes of additional analysis and is not a required part of the 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 financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to 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 financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated March 28, 2018, on our consideration of Southgate Academy, Inc. s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Southgate Academy, Inc. s internal control over financial reporting and compliance. Tempe, Arizona March 28, 2018
FINANCIAL STATEMENTS
STATEMENT OF FINANCIAL POSITION June 30, 2017 ASSETS CURRENT ASSETS Cash and cash equivalents $ 191,054 Cash and cash equivalents, restricted 1,705,387 Due from other governments 15,705 TOTAL CURRENT ASSETS 1,912,146 PROPERTY AND EQUIPMENT, NET 15,268,264 BOND RESERVES 1,188,461 LIABILITIES AND NET ASSETS TOTAL ASSETS $ 18,368,871 CURRENT LIABILITIES Accounts payable $ 123,642 Accrued payroll and other expenses 123,736 Accrued interest 51,910 Current portion of bonds and leases payable 651,792 TOTAL CURRENT LIABILITIES 951,080 LONG-TERM DEBT, net of current portion and debt issuance costs 12,601,995 TOTAL LIABILITIES 13,553,075 NET ASSETS Unrestricted 4,815,796 TOTAL LIABILITIES AND NET ASSETS $ 18,368,871 See accompanying notes. 4
STATEMENT OF ACTIVITIES Year Ended June 30, 2017 Unrestricted SUPPORT AND REVENUE State Equalization $ 4,559,309 Classroom Site Fund 308,746 Instructional Improvement Fund 32,944 Government grants and assistance 993,089 Miscellaneous 59,825 TOTAL SUPPORT AND REVENUE 5,953,913 OPERATING EXPENSES Payroll 2,802,125 Payroll related taxes and benefits 561,020 Purchased services 821,121 Supplies 249,715 Interest 1,041,539 Depreciation and amortization 689,654 Miscellaneous 14,689 TOTAL OPERATING EXPENSES 6,179,863 LOSS ON DISPOSAL 1,829,823 CHANGE IN NET ASSETS (2,055,773) NET ASSETS, BEGINNING OF YEAR 6,871,569 NET ASSETS, END OF YEAR $ 4,815,796 See accompanying notes. 5
STATEMENT OF CASH FLOWS Year Ended June 30, 2017 CASH FLOWS FROM OPERATING ACTIVITIES Change in net assets $ (2,055,773) Adjustments to reconcile change in net assets to net cash provided by operating activities: Amortization of debt issuance costs included in interest expense 19,685 Depreciation 689,654 Loss on sale of property 1,829,823 Decrease (increase) in: Due from other governments 170,927 Increase (decrease) in: Accounts payable 19,085 Accrued payroll and other expenses 90,261 NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 763,662 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (1,738,057) Proceeds from sale of property and equipment 2,520,177 NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 782,120 CASH FLOWS FROM FINANCING ACTIVITIES Payments for loan acquisition fees (321,629) Payments on bonds and notes payable (13,268,575) Proceeds from note payable 13,394,994 NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (195,210) NET INCREASE IN CASH AND CASH EQUIVALENTS 1,350,572 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,734,330 CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,084,902 Supplemental information: Cash paid for interest $ 1,041,539 RECONCILIATION OF CASH AND CASH EQUIVALENTS Cash and cash equivalents $ 191,054 Cash and cash equivalents - restricted 2,893,848 Total cash and cash equivalents $ 3,084,902 See accompanying notes. 6
NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Southgate Academy, Inc. (Southgate) is an Arizona nonprofit corporation, incorporated on November 21, 2002, that provides educational services to students in kindergarten through twelfth grade. Southgate operates in Tucson, Arizona, under a charter contract with the Arizona State Board for Charter Schools (expiring June 30, 2033), which mandates policy and operational guidelines. Southgate's mission is to successfully promote a higher standard of education and establish a safe environment for learning and social development, thereby enabling students to become life-long responsible citizens. The significant accounting policies of Southgate are as follows: Basis of Presentation The accompanying financial statements have been prepared on the accrual basis of accounting. Southgate is required to report information regarding its financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. Southgate had no temporarily restricted or permanently restricted net assets at June 30, 2017. Cash and Cash Equivalents Southgate considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents. Due from Governments Due from governments consists mainly of state approved payments to Southgate to operate the charter school. Arizona Revised Statutes 15-185(B) and 15-973(B) requires 12 payments of State Equalization assistance to be paid to Arizona charter schools, therefore, Southgate has never experienced any losses due to non-payment and has not established an allowance. Property and Equipment Land, buildings and related improvements with a cost of $3,000 or more and vehicles, furniture and equipment of $300 or more and an estimated useful life of one year or more are recorded and stated at cost, if purchased, or at their estimated fair value, if donated. Donations of property and equipment are recorded at fair value as of the date of donation. Such donations are reported as unrestricted support unless the donor has restricted the donated asset to a specific purpose. Assets donated with explicit restrictions regarding their use and contributions of cash that must be used to acquire property and equipment are reported as restricted support. Absent donor stipulations regarding how long those donated assets must be maintained, Southgate reports expirations of donor restrictions when the donated or acquired assets are placed in service as instructed by the donor. Southgate reclassifies temporarily restricted net assets to unrestricted net assets at that time. 7
NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Property and Equipment (continued) Depreciation and amortization is provided on the straight-line basis over the estimated useful lives of the respective assets. Land improvements Buildings and improvements Vehicles, furniture and equipment 5-30 years 5-30 years 3-10 years Maintenance and repairs are charged to expense as incurred. The costs and accumulated depreciation of assets sold or retired are removed from the accounts and any gain or loss is recognized in the year of disposal. Loan Issuance Costs Loan issuance costs and origination fees are deferred and amortized over the term of the loan on a straight-line basis and are reported on the statement of financial position as a direct deduction from the face amount of long-term debt. Amortized costs are included in interest expense. Revenue Recognition Southgate recognizes revenue from contracts, primarily with federal and state agencies, when services are rendered. A receivable is recorded to the extent the revenue earned exceeds payments received. Contributions Contributions received are recorded as unrestricted, temporarily restricted or permanently restricted support based on the existence and/or nature of any donor restrictions. All donor restricted support is reported as an increase in temporarily restricted or permanently restricted net assets depending on the nature of the restriction. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. Donor-restricted contributions whose restrictions are met in the same reporting period are reported as unrestricted support. 8
NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Use of Estimates In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of any contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Advertising Advertising costs are expensed as incurred. Income Taxes Southgate qualifies as a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code (IRC), qualifies for the charitable contribution deduction and has been classified as an organization that is not a private foundation. Income determined to be unrelated business taxable income (UBTI) would be subject to income tax. Southgate follows accounting standards for uncertainty in income taxes, which require that tax positions initially need to be recognized in the financial statements when it is more likely-thannot that the positions will not be sustained upon examination by the tax authorities. As of June 30, 2017, Southgate had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements. Southgate recognizes interest and penalties associated with income tax in operating expenses. During the years ended June 30, 2017, Southgate did not have any income tax related interest and penalty expense. Functional Expense Allocation The costs of providing various programs and other activities have been summarized on a functional basis in note 7. Accordingly, certain costs have been allocated among the programs and supporting services benefited. Date of Management s Review In preparing these financial statements, Southgate has evaluated events and transactions for potential recognition or disclosure through March 28, 2018, the date the financial statements were available to be issued. 9
NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Change in Accounting Policy In fiscal year 2017, the Southgate retrospectively adopted the requirements of ASU 2015-03, Interest - Imputation of Interest, Simplifying the Presentation of Debt Issuance Costs, to present debt issuance costs as a reduction of the carrying amount of the debt rather than as an asset. In prior years these debt issuance costs were included in Loan Issuance Costs. Current and long-term debt as of June 30, 2017 is reported on the statement of net position as $651,792 and $12,601,995, respectively, with the associated $364,705 of unamortized debt issuance costs included in long-term debt. Amortization of the debt issuance costs of $19,685 is reported as interest expense in the statement of activities and was previously presented as amortization expense. NOTE 2 RESTRICTED CASH AND BOND RESERVES Classroom Site Funds: Restricted cash consists of carryforward balances of Classroom Site Funds. Monies received from the Classroom Site Funds are restricted by Arizona Revised Statutes for teacher compensation increases, performance based bonuses and other employment related costs. Industrial Development Authority (IDA) loan: Based on the terms of an indenture of trust agreement associated with the Industrial Development Authority (IDA) loan (see note 5), Southgate is required to keep a specified amount within a Debt Service Reserve Fund, which can only be used to satisfy principal and interest requirements in the event of default by Southgate. The Repair and Replacement Fund can only be used by the trustee for major repairs to the school campus in the event of default by Southgate. During fiscal year ending June 30, 2012, a microburst destroyed a section of the school, as a result The Casualty Account Fund, a trust account, was created for the proceeds from the insurance company and payments for the repair and reconstruction of Southgate. The trust accounts that comprise the current portion of restricted cash can only be used for the purposes described in the trust agreement. 10
NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE 2 RESTRICTED CASH AND BOND RESERVES (Continued) Restricted cash and bond reserves at June 30, 2017, is as follows: Current portion Classroom Site Funds $ 8,572 Principal and Interest Fund 92,643 Revenue Fund 453,783 Project Fund 1,150,389 Total current portion 1,705,387 Non-current portion Debt Service Reserve Fund 633,776 Repair and Replacement Fund 446,190 Working Capital Reserve Fund 108,495 Total non-current portion 1,188,461 Total $2,893,848 NOTE 3 CONCENTRATION OF CREDIT RISK Financial instruments that subject Southgate to potential concentrations of credit risk consist principally of cash and cash equivalents, accounts receivable, and grants receivable. Southgate maintains its cash in bank accounts with financial institutions, which at times may exceed federally insured limits. Southgate has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash balances. Of Southgate s revenue for the year ended June 30, 2017, approximately 99% was derived from funds passed through or provided by the Arizona Department of Education. Collection from the state is reasonably assured, provided that the School complies with contract terms stipulated in its contract with the Arizona State Board for Charter Schools. Changes in state funding levels for charter schools could have a significant impact on the School s ability to operate. NOTE 4 PROPERTY AND EQUIPMENT Property and equipment at June 30, 2017 consist of: Land $ 3,139,445 Land improvements 296,684 Buildings and impovements 15,224,001 Office furniture and equipment 1,235,960 19,896,090 Accumulated depreciation (4,627,826) Property and equipment, net $ 15,268,264 Depreciation expense was $689,654 for the year ended June 30, 2017. 11
NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE 5 LONG-TERM DEBT Long-term debt consisted of the following at June 30, 2017: On September 10, 2015, $29,754 was financed to purchase a pickup truck. The loan matures over a 60 month period, with a stated interest rate of 5.50%. Monthly principal and interest payments are $570. The loan is secured by the truck purchased. $ 20,301 On August 25, 2015, $457,213 was financed to purchase four school busses. The loan matures over a 60 month period, with a stated interest rate of 5.16%. An initial payment of $210,000 was due immediately followed by five annual principal and interest payments of $57,353 due each September 15th. The loan is secured by the busses purchased. 203,197 On July 18, 2016, $68,584 was financed to purchase two vans. The loan matures over a 60 month period, with a stated interest rate of 3.90%. Payments are due monthly in the amount of $1,262. The loan is secured by the vans purchased. 57,074 On November 1, 2016, the School finalized a loan agreemnt with the Industrial Development Authority of Pima County ("Pima IDA"). The loan was issued for refinancing previous debt, financing the construction of improvements, funding certain reserves pursuant to the loan agreement, and paying certain issuance costs. The loan has an original principal balance of $13,621,343 and a stated interest rate of 3.95%. The loan matures on December 1, 2032. 13,337,920 13,618,492 Current portion (651,792) Less debt issuance costs, net of accumulated amortization of $26,141 (364,705) Long-term debt, net of current portion and debt issuance costs $ 12,601,995 12
NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE 5 LONG-TERM DEBT (Continued) Future maturities of long-term debt are as follows: Years Ending June 30, 2018 $ 651,792 2019 679,495 2020 707,218 2021 730,852 2022 688,652 Thereafter 10,160,483 $ 13,618,492 NOTE 6 OPERATING LEASE The Organization conducts its administrative activities from facilities that are leased under a five-year noncancelable operating lease expiring in 2022. The lease contains a renewal option for an additional five-year period. Future minimum rental payments due under the lease are as follows: Years Ending June 30, 2018 $ 32,400 2019 32,800 2020 33,400 2021 33,600 2022 11,200 $ 143,400 For the year ended June 30, 2017 rental expense amounted to $55,200. NOTE 7 FUNCTIONAL EXPENSE CLASSIFICATION The following is a summary of Southgate' expenses by function for the year ended June 30, 2017. Kindergarten through twelfth grade education $ 4,498,284 General and administrative 1,681,579 $ 6,179,863 13
NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE 8 COMMITMENTS AND CONTINGENT LIABILITIES Compliance: Southgate's compliance with certain laws and regulations is subject to review by the State of Arizona, Office of the Auditor General and Department of Education. Such reviews could result in adjustments or withholding of Southgate's State Equalization. Litigation: Southgate is subject to various claims, legal proceedings, and investigations covering a wide range of matters that arise in the ordinary course of business. In the opinion of management all such matters are adequately covered by insurance or by accruals, and if not so covered, are without merit or are of such kind, or involve such amounts, as would not have a significant effect on the financial position or results of operations of Southgate if disposed of unfavorably. NOTE 9 ECONOMIC DEPENDENCY Approximately 82% of Southgate's revenue for the year ended June 30, 2017, was derived from the State of Arizona through payments of State Equalization, Classroom Site Funds (Proposition 301) and the Instructional Improvement Fund. Funds that are paid from the State of Arizona are subject to funding approval from the state legislature. Changes in state funding levels for charter schools could have a significant impact on Southgate's future revenues. NOTE 10 RELATED PARTY TRANSACTIONS A Southgate board member, who is also a member of management, has an ownership interest in Millennium Community Ventures, LLC (MCV). MCV is also a member of Pyramid Ventures, LLC (Pyramid). Southgate made interest payments of $48,000 to Pyramid via a member during the fiscal year ending June 30, 2017. Southgate had an amount outstanding $2,481,706 to Pyramid for principal payments on a note for land purchased and originally valued at $4,000,000 and with the intention to expand the school facilities. During the year ended June 30, 2017, it was determined that Southgate would not be able to use the land to expand and they were unable to sell the land. As a result, the land was turned over to Pyramid and the remaining debt was forgiven. One of the members of Pyramid Ventures is as a member of 4 Diamond Builders, LLC. Southgate paid $1,442,626 to 4 Diamond Builders for construction services. 14
NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE 11 NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board has issued Accounting Standards Update ( ASU ) No. 2016-14, Not-For-Profit Entities: Presentation of Financial Statements of Not-For-Profit Entities. This Standard is effective for years beginning after December 15, 2017. The Standard requires several changes to how not-for-profit entities report certain financial statement information including net asset classification, cash flows, underwater endowment funds, investment expenses, and other areas. In addition, the new guidance requires disclosures on the entity s liquidity policy and quantitative disclosures that communicate the availability of financial assets to meet cash needs for general expenditures within one year of the Statement of Financial Position date. Management is currently in the process of evaluating the impact of adoption of this ASU on the financial statements. The Financial Accounting Standards Board has issued Accounting Standards Update ( ASU ) No. 2014-09, Revenue from Contracts with Customers. For nonpublic companies, this standard must be adopted for annual reporting periods beginning after December 15, 2018. The standard s core principle is that an organization will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the organization expects to be entitled in exchange for those goods or services. This standard also includes expanded disclosure requirements that result in an entity providing users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the entity s contracts with customers. Management is currently in the process of evaluating the impact of adoption of this ASU on the financial statements. The Financial Accounting Standards Board has issued Accounting Standards Update ( ASU ) No. 2016-02, Leases. For nonpublic companies, the standard must be adopted for annual reporting periods beginning after December 15, 2019. The standard s core principle is the recognition of lease assets and lease liabilities by lessees for substantially all leases, including those currently classified as operating leases. Under the ASU, a lessee will be required to recognize assets and liabilities for operating and finance leases with terms of more than 12 months. Management is currently in the process of evaluating the impact of adoption of this ASU on the financial statements. 15
REPORT ON INTERNAL CONTROL AND COMPLIANCE
INDEPENDENT AUDITORS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS Board of Directors Southgate Academy, Inc. Tucson, Arizona We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of Southgate Academy, Inc. (a nonprofit corporation)(the School), which comprise the statement of financial position as of June 30, 2017, and the related statements of activities, and cash flows for the year then ended, and the related notes to the financial statements, and have issued our report thereon dated March 28, 2018. Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered Southgate Academy, Inc. s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of Southgate Academy, Inc. s internal control. Accordingly, we do not express an opinion on the effectiveness of Southgate Academy, Inc. s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Tempe Scottsdale Casa Grande www.hhcpa.com
Compliance and Other Matters As part of obtaining reasonable assurance about whether Southgate Academy, Inc. s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Tempe, Arizona March 28, 2018
INDEPENDENT AUDITORS REPORT ON COMPLIANCE FOR EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE Board of Directors Southgate Academy, Inc. Tucson, Arizona Report on Compliance for Each Major Federal Program We have audited Southgate Academy, Inc. s (the School) compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on each of Southgate Academy s major federal programs for the year ended June 30, 2017. Southgate Academy, Inc. s major federal programs are identified in the summary of auditors results section of the accompanying schedule of findings and questioned costs. Management s Responsibility Management is responsible for compliance with the requirements of federal statutes, regulations, and the terms and conditions of its federal awards applicable to its federal programs. Auditors Responsibility Our responsibility is to express an opinion on compliance for each of Southgate Academy, Inc. s major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about Southgate Academy, Inc. s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of Southgate Academy, Inc. s compliance. Tempe Scottsdale Casa Grande www.hhcpa.com
Opinion on Each Major Federal Program In our opinion, the School complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended June 30, 2017. Report on Internal Control Over Compliance Management of the Southgate Academy, Inc. is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered Southgate Academy, Inc. s internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of Southgate Academy, Inc. s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that have not been identified. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose. Tempe, Arizona March 28, 2018
SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS Year Ended June 30, 2017 Federal Grantor / Pass-Through Grantor / Program Federal CFDA Number Grantor's Number Federal Expenditures U.S. DEPARTMENT OF AGRICULTURE Passed through Arizona Department of Education: Nutrition Cluster: National School Lunch Program - Reimbursement 10.555 17FT1TTI-610362-01A 529,127 * Total U.S. Department of Agriculture 529,127 U.S. DEPARTMENT OF EDUCATION Passed through Arizona Department of Education: Title I, Part A - Grants to Local Education Agencies 84.010 17FT1TTI-610362-01A 380,101 IDEA - Part B, Basic Entitlements 84.027 17FESCBG-610362-09A 88,946 Supporting Effective Instruction State Grants 84.367 17FT1TII-610362-03A 22,022 Total U.S. Department of Education 491,069 TOTAL EXPENDITURES OF FEDERAL AWARDS $ 1,020,196 * Denotes major program See accompanying notes to schedule of expenditures of federal awards. 21
NOTES TO THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS Year Ended June 30, 2017 NOTE 1 BASIS OF PRESENTATION The accompanying Schedule of Expenditures of Federal Awards includes the federal grant activity of the Southgate Academy, Inc. under programs of the federal government for the year ended June 30, 2017. The information in this schedule is presented in accordance with requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Because the Schedule presents only a selected portion of the operations of Southgate Academy, Inc., it is not intended to and does not present the financial position, changes in net position, or cash flows of the Southgate Academy, Inc. NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A) Expenditures reported on the Schedule are reported on the accrual basis of accounting. Such expenditures are recognized following the cost principles contained in the Uniform Guidance and/or Circular A-122, Cost Principles for Non-Profit Organizations, wherein certain types of expenditures are not allowable or are limited as to reimbursement. B) The Southgate Academy, Inc. has elected to use the 10 percent de minimis indirect cost rate as allowed under the Uniform Guidance. 22
SCHEDULE OF FINDINGS AND QUESTIONED COSTS Year Ended June 30, 2017 SECTION I SUMMARY OF AUDITORS RESULTS Financial Statements Type of auditors report issued: Unmodified Internal control over financial reporting: Material weakness(es) identified? yes _X_ no Significant deficiency(ies) identified that are not considered to be a material weakness(es)? yes X none reported Noncompliance material to financial statements noted? yes X_ no Federal Awards Internal control over major programs: Material weakness(es) identified? yes X_ no Significant deficiency(ies) identified that are not considered to be a material weakness(es)? yes X none reported Type of auditors report issued on compliance for each major program listed below Any audit findings disclosed that are required to be reported in accordance with 2 CFR section 200.516(a)? Unmodified yes X_ no Identification of major programs: CFDA Numbers Name of Federal Program or Cluster 10.555 National School Lunch Program - Reimbursement Dollar threshold used to distinguish between Type A and Type B programs: $750,000 Auditee qualified as low-risk auditee? yes _ X no 23
SCHEDULE OF FINDINGS AND QUESTIONED COSTS Year Ended June 30, 2017 SECTION II FINDINGS RELATED TO FINANCIAL STATEMENTS REPORTED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS None noted. SECTION III FINDINGS AND QUESTIONED COSTS RELATED TO FEDERAL AWARDS None noted. 24
80UTn<iATr ACADf~Y 7842 East Wrightstown Road * Tucson, AZ 85715 T (520) 741-7900 * F (520) 741-7901 * www.southgateaz.org March 23, 2018 Southgate Academy, Inc. Summary Schedule of Prior Audit Findings Year Ended June 30, 2017 The findings from the year ended June 30, 2016 schedule of findings and questioned costs are discussed below. The findings are numbered consistently with the numbers assigned in the schedule. DEPARTMENT OF EDUCATION 2016-001 Procurement of capital acquisitions Condition: Southgate did not follow competitive sealed bid procurement requirements for a total of $152,927 reported for a construction build-out of Southgate's cafeteria, $146,847 of which was charged to the Child Nutrition Cluster. Recommendation: The auditor recommended Southgate review procurement requirements at 2 CFR 200.320, and ensure that requ ired steps are followed based on anticipated aggregate expenditures. Action Taken: The recommendation was adopted during fiscal year 2017 and as a result procurement was based on anticipated aggregate expenditures. Sincerely yours, 3f'M.~ Sylvia M. Calmelat