SER Jobs for Progress of. and Subsidiaries

Transcription

1 SER Jobs for Progress of the Texas Gulf Coast, Inc. and Subsidiaries CONSOLIDATED FINANCIAL STATEMENTS AND SINGLE AUDIT REPORTS August 31, 2017 AND 2016

2 SER-Jobs for Progress of the Texas Gulf Coast, Inc. and Subsidiaries Table of Contents August 31, 2017 and 2016 REPORT Independent Auditors Report 1 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Financial Position as of August 31, 2017 and Consolidated Statements of Activities for the years ended August 31, 2017 and Consolidated Statements of Functional Expenses for the years ended August 31, 2017 and Consolidated Statements of Cash Flows for the years ended August 31, 2017 and Notes to Consolidated Financial Statements 8 SINGLE AUDIT REPORTS Schedule of Expenditures of Federal Awards for the year ended August 31, Notes to Schedule of Expenditures of Federal Awards 19 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 21 Independent Auditors Report on Compliance for Each Major Federal Program and on Internal Controls over Compliance Required by the Uniform Guidance 23 Schedule of Findings and Questioned Costs 25

3 INDEPENDENT AUDITORS REPORT To the Board of Directors SER-Jobs for Progress of the Texas Gulf Coast, Inc. Houston, Texas Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of SER-Jobs for Progress of the Texas Gulf Coast, Inc. and Subsidiaries (collectively SER ), which comprise the consolidated statements of financial position as of August 31, 2017 and 2016, and the related consolidated statements of activities, functional expenses, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated 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 consolidated 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 consolidated financial statements based on our audits. We conducted our audits in accordance with 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. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to SER's preparation and fair presentation of the consolidated 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 SER'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 consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of SER-Jobs for Progress of the Texas Gulf Coast, Inc. and Subsidiaries, as of August 31, 2017 and 2016, and the changes in their net assets and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

4 Other Matters Our audit was conducted for the purpose of forming an opinion on the consolidated 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 consolidated 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 consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated 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 consolidated 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 January 25, 2018, on our consideration of SER 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 SER s internal control over financial reporting and compliance. Houston, Texas January 25,

5 Consolidated Statements of Financial Position August 31, 2017 and 2016 ASSETS Current Assets Cash and cash equivalents $ 569,100 $ 420,165 Restricted cash 7,409,075 - Grants receivable 1,280, ,246 Contributions receivable 540, ,000 Capital campaign receivable 139,200 18,700 Unbilled grant revenue - 365,752 Other receivable - 35,776 Prepaid expenses and deposits 146,572 80,774 Total Current Assets 10,084,626 2,002,413 Property and Equipment, Net 4,590,611 3,095,330 Other Assets Unamortized closing costs Note receivable Long-term portion of capital campaign receivable 304,888 6,587,500 47, ,720 Certificate of deposit 102, ,838 Total Other Assets 7,041, ,558 Total Assets $ 21,716,921 $ 5,226,301 LIABILITIES AND NET ASSETS Current Liabilities Accounts payable and accrued liabilities $ 821,497 $ 214,003 Line of credit - 185,749 Accrued salaries and personnel costs 182, ,712 Deferred revenues 42,275 - Current portion of notes payable 4,986,104 20,305 Total Current Liabilities 6,032, ,769 Long-term Liabilities Line of credit 325,174 - Long term notes payable, excluding current portion 10,024, ,676 Total Long-term Liabilities 10,349, ,676 Total Liabilities 16,382, ,445 Commitments and Contingencies Net Assets Unrestricted Land, building and improvements 3,328,801 2,166,837 Undesignated 1,284,976 1,421,101 4,613,777 3,587,938 Temporarily restricted 721, ,918 Total Net Assets 5,334,789 4,403,856 Total Liabilities and Net Assets $ 21,716,921 $ 5,226,301 The accompanying notes are an integral part of these consolidated financial statements. -3-

6 Consolidated Statements of Activities For the Years Ended August 31, 2017 and Temporarily Restricted Total Unrestricted Temporarily Restricted Unrestricted Total Revenues Federal grant revenue $ 3,025,002 $ - $ 3,025,002 $ 3,600,703 $ - $ 3,600,703 State grant revenue 95,016-95, , ,180 Other grant revenue 1,674, ,668 2,394,855 1,424, ,574 2,283,277 United Way revenue - 515, , , ,000 Fundraising , ,967 Contributions and donations 207, , , , , ,970 Rental income 198, , , ,561 Investment income 1,249-1, Other income 24,180-24,180 28,719-28,719 Net assets released from restrictions 1,874,740 (1,874,740) - 1,504,377 (1,504,377) - Total Revenues 7,100,739 (94,906) 7,005,833 7,493,697 65,617 7,559,314 Expenses Program Expenses Employer, Education and Training: Adult programs 1,612,120-1,612,120 1,154,002-1,154,002 Senior programs 69,045-69, , ,850 Youth programs 3,060,875-3,060,875 2,704,327-2,704,327 Veteran programs ,545-99,545 Other programs 222, , , ,509 Total Program Expenses 4,964,073-4,964,073 4,409,233-4,409,233 Community Reinvestment 355, , Management and General 130, , , ,241 Fundraising 333, , , ,136 SERCORP / SERCDC 291, , , ,733 Total Expenses 6,074,900-6,074,900 5,505,343-5,505,343 Change in net assets 1,025,839 (94,906) 930,933 1,988,354 65,617 2,053,971 Net assets, beginning of year 3,587, ,918 4,403,856 1,599, ,301 2,349,885 Net assets, end of year $ 4,613,777 $ 721,012 $ 5,334,789 $ 3,587,938 $ 815,918 $ 4,403,856 The accompanying notes are an integral part of these consolidated financial statements. -4-

7 Consolidated Statement of Functional Expenses For the Year Ended August 31, 2017 Employer, Education and Training Services Adult Senior Youth Other Programs Total Program Expenses Community Reinvestment Management and General Fundraising SERCDC Total Expenses Salaries and benefits $ 1,258,409 $ 59,837 $ 1,121,086 $ 95,568 $ 2,534,900 $ 20,818 $ 70,196 $ 208,540 $ 90,699 $ 2,925,153 Communications 25,237 1,824 27,095 2,299 56, ,773 3, ,546 Equipment 38,605 1,011 26,875 2,578 69, ,557 2,088 1,294 81,915 Facilities 21, ,473 22,993 71,473 25,056 3,635 2,009 56, ,254 Insurance 12, , ,538 85,247 1,198 1,215 17, ,313 Interest expense , ,794 83,320 Outreach 7, ,307 5,808 25, ,331 2,022 1,220 36,648 Office expense 15,125 1,006 18,114 2,934 37,179 1,848 4,862 3, ,481 Professional expenses 7, ,366 1,110 22, ,029 11, ,329 25, ,058 Participant training 177, ,733,373 82,548 1,993,831 33,577 3, ,030,885 Taxes ,047 47,047 Travel 26,397 2,177 35,455 2,717 66, ,286 3, ,993 Fundraising ,984-2,177 Depreciation 12, ,027 1,801 30,752 1, ,576 31,395 67,136 Miscellaneous 9, , , ,307 1, ,974 Total Expenses $ 1,612,120 $ 69,045 $ 3,060,875 $ 222,033 $ 4,964,073 $ 355,901 $ 130,052 $ 333,095 $ 291,779 $ 6,074,900 The accompanying notes are an integral part of these consolidated financial statements. -5-

8 Consolidated Statement of Functional Expenses For the Year Ended August 31, 2016 Employer, Education and Training Services Other Adult Senior Youth Veterans Programs Total Program Expenses Management and General Fundraising SERCORP/ SERCDC Total Expenses Salaries and benefits $ 928,224 $ 130,893 $ 956,274 $ 88,823 $ 107,357 $ 2,211,571 $ 26,248 $ 263,176 $ 98,400 $ 2,599,395 Communications 17,601 3,396 23,590 2,116 2,860 49,563 1,713 3,082 1,386 55,744 Equipment 18,319 1,486 24,610 1,717 3,364 49,496 3,509 2, ,785 Facilities 8,997 1,209 19,861 1,181 29,795 61,043 2,612 1,440 74, ,359 Insurance 11,058 1,512 11,042 1,477 32,547 57, ,814 42, ,105 Interest expense ,804 9, ,982 68,786 Outreach 13,216 1,143 19, ,668 12,905 1,081 3,340 51,994 Office expense 16,531 3,543 16, ,228 39,708 6,870 8, ,683 Professional expenses 4, , ,694 58,243 33, ,299 35, ,044 Participant training 103, ,572, ,352 1,739,318 3, ,743,682 Taxes ,104 66,104 Travel 23,955 6,066 37,313 2, ,505 5,812 5,223 3,092 84,632 Fundraising , ,081 Depreciation 1, , , ,339 63,460 Contributions ,750 7,750 Miscellaneous 5, , ,426 21,583 22,276 5,649 9,231 58,739 Total Expenses $ 1,154,002 $ 150,850 $ 2,704,327 $ 99,545 $ 300,509 $ 4,409,233 $ 120,241 $ 518,136 $ 457,733 $ 5,505,343 The accompanying notes are an integral part of these consolidated financial statements. -6-

9 Consolidated Statements of Cash Flows For the Years Ended August 31, 2017 and Cash flows from operating activities Change in net assets $ 930,933 $ 2,053,971 Adjustments to reconcile change in net assets to net cash provided by operating activities Repayment of note payable from grant revenue - (1,488,000) Contributions restricted to capital projects (544,166) (146,420) Depreciation and amortization 67,136 63,460 Changes in operating assets and liabilities Grants receivable Contributions receivable (694,433) (45,000) 489,210 76,500 Unbilled grant revenue 365,752 (365,752) Other receivable 35,776 (35,776) Prepaid expenses and deposits (65,798) 27,099 Accounts payable and accrued liabilities 607,494 (97,536) Accrued salaries and personnel costs 58,279 (30,568) Deferred revenue 42,275 (145,025) Net cash provided by operating activities 758, ,163 Cash flows from investing activities Reinvestment of interest income (1,239) (838) Purchase of land (394,207) - Renovations to building (821,210) - Payment of closing costs (304,888) (485,919) Net cash used in investing activities (1,521,544) (486,757) Cash flows from financing activities Proceeds from contributions restricted to capital projects 404, ,000 Repayments on notes payable (793,163) (19,469) Borrowings on notes payable 15,158,377 19,996 Net borrowings (repayments) on line of credit 139,425 (79,456) Advances on note receivable (6,587,500) - Net cash provided by financing activities 8,321,306 21,071 Net increase (decrease) in cash and cash equivalents 7,558,010 (64,523) Cash and cash equivalents, beginning of year 420, ,688 Cash and cash equivalents, end of year $ 7,978,175 $ 420,165 Supplemental noncash investing and financing activities Property and equipment acquired under notes payable $ 347,000 $ - Repayment of note payable from grant revenue $ - $ 1,488,000 Supplemental disclosures of cash flow information Cash paid during the year for interest $ 83,315 $ 68,786 The accompanying notes are an integral part of these consolidated financial statements. -7-

10 Notes to Consolidated Financial Statements Note 1 - Organization SER-Jobs for Progress of the Texas Gulf Coast, Inc. (SER-Jobs) is a Texas nonprofit corporation. SER-Jobs provides career counseling and job placement services for economically disadvantaged residents of Harris and surrounding counties. Primary funding is received from participation in Federal grant programs, a City of Houston grant and United Way grants. Federal grants, a City of Houston grant and United Way funds amounted to approximately 85% and 74%, respectively of SER-Jobs revenues for the year ended August 31, 2017 and Additionally, these sources represented 82% and 90% of the total receivable balance, including unbilled revenue and retainage receivable, at August 31, 2017 and 2016, respectively. Additional funding is received from contributions and State of Texas funding sources. SERCORP of Houston, Inc. (SERCORP) was organized in February 1992 as a for-profit Texas corporation and was a 100% owned subsidiary of SER-Jobs. SERCORP owned land and several buildings and leased office space to SER-Jobs and one other unrelated entity. SERCORP did not receive Federal grant revenues. On July 25, 2016, SERCORP was converted into a not-for-profit entity, SER Community Development Corporation (SERCDC). SER- Jobs is the sole member of (SERCDC). All of the assets and liabilities of SERCORP were transferred to the new corporation at carrying amounts on the date of conversion. SERCORP s management believes the transfer did not result in the recognition of gain or loss under the Internal Revenue Code. SER QALICB is a Texas nonprofit corporation and is a 100% owned subsidiary of SER-Jobs. SER QALICB was formed on April 19, 2017 and qualifies as an active low-income community business for the purposes of generating certain tax credits called New Markets Tax Credits (NMTCs) under section 45D of the Internal Revenue Code of 1986, as amended. See Note 3 for more details about the NMTCs arrangement. Note 2 - Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of SER-Jobs and its wholly-owned subsidiaries, SERCORP, SERCDC and SER QALICB (collectively, SER). All significant intercompany accounts and transactions have been eliminated. Basis of Presentation The consolidated financial statements of SER have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. Under accounting principles generally accepted in the United States of America, SER 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. Accordingly, net assets of SER and changes therein are classified and reported as follows: o o o Unrestricted net assets - Net assets that are not subject to donor-imposed stipulations and that may be designated for a specific purpose by action of the Board of Directors. Temporarily restricted net assets - Net assets subject to donor-imposed stipulations that may or will be met either by actions of SER and/or passage of time. This classification includes contributions and unconditional promises to give for which the ultimate purpose of the proceeds is not permanently restricted. Permanently restricted net assets - Net assets subject to donor-imposed stipulations that they be maintained in perpetuity by SER. SER has no permanently restricted net assets. -8-

11 Notes to Consolidated Financial Statements Note 2 - Summary of Significant Accounting Policies (Continued) Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, SER considers all highly liquid investments with maturity at date of purchase of three months or less to be cash equivalents. SER held no cash equivalents at August 31, 2017 and SER maintains cash accounts at various banks, which at times, may exceed the Federal Deposit Insurance Corporation s limit. SER has not experienced any losses from maintaining cash accounts in excess of the federally insured limit. Management reviews the credit ratings of the financial institutions with which it conducts business on an annual basis and believes any credit risk is low due to the overall financial strength of the financial institutions. Restricted cash is segregated under the NMTCs agreement to pay costs for construction in progress on the Telephone Road facility (Note 3). Grants Receivable Grants receivable consist of private and government grants and are considered to be fully collectible; accordingly, no allowance for doubtful accounts has been established. If amounts become uncollectible, they will be charged to operations when the determination is made. Unbilled grant revenue represents recorded revenue that has not yet been billed on the grant. Note Receivable SER has a financing receivable related to NMTCs (Note 3) included in the accompanying consolidated statements of financial position. SER evaluates the credit quality of its financing receivables based on a combination of factors, including, but not limited to the quality of the pledge collateral. SER considers the credit quality of such arrangements to be good, therefore no allowance for credit losses has been recognized. Principal repayments on the note receivable are not due until December SER recognizes interest income as earned and does not record interest income for impaired financing receivables. Financing receivables are placed on nonaccrual status, with interest no longer accruing, generally as a result of delinquent payments. A financing receivable is considered to be impaired when SER determines that it is probable that it will not be able to collect amounts due under the contractual terms. If cash is received, the financing receivable balance is reduced and related credit allowance adjusted accordingly. Fair value approximates the carrying amount of financing receivables because such financing receivables are discounted at a rate comparable to market. The financing receivable was not in a nonaccrual status at August 31, Certificate of Deposit SER has one certificate of deposit totaling $102,077 and $100,838 as of August 31, 2017 and 2016, respectively, maturing March 8, Accordingly it has been classified as noncurrent in these consolidated financial statements. -9-

12 Notes to Consolidated Financial Statements Note 2 - Summary of Significant Accounting Policies (Continued) Property and Equipment Property and equipment are recorded at cost if purchased or at fair market value at the time of donation. Depreciation is calculated on a tax basis of depreciation over the estimated useful life of the respective asset. Management has determined that the impact of using tax basis over the straight-line basis of depreciation is not material. The estimated useful lives of the assets are 39 years for the buildings, building improvements range from 5 to 39 years, and 5 years for furniture, fixtures and equipment. Property and equipment expenditures greater than $5,000 are capitalized. Maintenance and repairs are charged to expense when incurred. Equipment purchases made from Federal grant funds, where SER does not have title to the equipment and is legally obligated to return it to the funding source at the end of the grant period, are accounted for as expenses at the time of acquisition. SER evaluates the recoverability of the carrying value of long-lived assets whenever events or circumstances indicate the carrying amount may not be recoverable. If a long-lived asset is tested for recoverability and the undiscounted estimated future cash flows expected to result from the use of the asset is less than the carrying amount of the asset, the asset cost is adjusted to fair value and an impairment loss is recognized. No asset impairment was recognized during the years ended August 31, 2017 and 2016, respectively. Unamortized Closing Costs SER has unamortized closing costs related to costs incurred to complete the NMTCs arrangement and pay for closing costs (Note 3) which are to be amortized over 39 years of the life of the building once construction is complete. Deferred Revenues Deferred revenues represent prepaid government grants that were not earned by fiscal year-end and paid contributions for fundraising events. Fundraising income is recognized in the period the event occurs. Vacation and Sick Leave Benefits SER-Jobs provides vacation and sick leave benefits to its employees. The cost of vacation benefits is recorded when such benefits are earned and are payable upon employee termination. The cost of sick leave benefits, which are not payable upon employee termination, is recorded when such benefits are taken. Accrued vacation benefits approximated $90,000 and $64,000 as of August 31, 2017 and 2016, respectively, and are included in accrued salaries and personnel costs in the consolidated statements of financial position. Revenue and Contributions Receivable SER accounts for contributions in accordance with accounting principles generally accepted in the United States of America. Contributions are recorded as unrestricted, temporarily restricted, or permanently restricted support, depending on the existence and/or nature of any donor restrictions. Contributions receivable that are expected to be collected within one year are recorded at net realizable value. Amounts that are expected to be collected in future years are discounted to estimate the present value of future cash flows, if material. As of September 30, 2017, unamortized discount totaled $3,580. Management of SER considers the contributions and accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts has been recorded. If amounts become uncollectible, they will be charged to operations when that determination is made. The long-term portion of the capital campaign pledges of $47,219 and $27,720 at August 31, 2017 and 2016 respectively, will be collected between one year and five years. Support that is restricted by the donor is reported as an increase in temporarily restricted or permanently restricted net assets in the reporting period in which the support is recognized. When a restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statements of activities as net assets released from restrictions. -10-

13 Notes to Consolidated Financial Statements Note 2 - Summary of Significant Accounting Policies (Continued) SER reports gifts of property and equipment as unrestricted support unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as temporarily restricted support. Absent explicit donor stipulations about how long those assets must be maintained, SER reports expirations of donor restrictions when the donated or acquired long-lived assets are placed in service. Rental income from operating leases is recorded on a straight-line basis over the term of the lease. Government Grants Support funded by grants is recognized as SER-Jobs performs the contracted services or incurs outlays eligible for reimbursement under the grant agreements. Grant activities and outlays are subject to audit and acceptance by the granting agency and, as a result of such audit, adjustments could be required. Functional Expenses The costs of providing the various programs and other activities have been summarized on a functional basis in the consolidated statements of activities. Expenses that cannot be directly identified with a specific program are charged to the various programs based upon salaries, square footage, or other reasonable methods for allocating multiple program expenditures. The lease of office space by SER-Jobs from SERCORP and SERCDC has been allocated to the applicable programs with the intercompany elimination being reflected in SERCORP s and SERCDC s allocated expenses. Income Taxes SER-Jobs, SER QALICB and SERCDC are exempt from federal income tax under Section 501(a) of the Internal Revenue Code (the Code) as an organization described in Section 501(c)(3) and comparable state law. Contributions to all three entities are tax deductible within the limitations prescribed by the Code. SERCORP is not tax exempt and is subject to federal income tax based on its net income. However no income tax was due on SERCORP prior to its conversion to SERCDC on July 25, The accounting standard on accounting for uncertainty in income taxes addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under that guidance, SER may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. SER accounts for uncertain tax positions, when it is more likely than not, that such an asset or a liability will be realized. As of August 31, 2017 and 2016, management of SER believes there were no uncertain tax positions to be recognized or recorded. Use of Estimates The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities, the amounts of reported revenues and expenses, and the allocation of expenses among various functions. Actual results could vary from the estimates that were used. -11-

14 Notes to Consolidated Financial Statements Note 2 - Summary of Significant Accounting Policies (Continued) Fair Value Considerations SER uses fair value to measure financial and certain nonmonetary financial assets and liabilities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability. SER s financial instruments (primarily cash and cash equivalents, certificate of deposit, receivables, payables, and debt) are carried in the accompanying consolidated financial statements at amounts, which reasonably approximate fair value. Recent Financial Accounting Pronouncement In August 2016, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) , Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. Under this ASU, net assets will be presented in two classes: net assets with donor restrictions and net assets without donor restrictions. Underwater endowments will be included in net assets with donor restrictions and new or enhanced disclosures regarding the composition of net assets will be required. Disclosures regarding liquidity and availability of resources for general operating expenditures within one year of the date of the statement of financial position must also be presented. The ASU requires expenses to be presented by both nature and function, and investment return will be presented net of investment expenses. Absent specific donor stipulations, SER will use the placed-inservice approach for reporting expirations of restrictions on long-lived assets. The ASU is effective for fiscal periods beginning after December 15, 2017, but early adoption is permitted. Adoption of this ASU will impact the presentation and disclosures of SER s financial statements. As of August 31, 2017, SER did not early adopt this standard. Note 3 New Markets Tax Credits In January 2017, Local Initiatives Support Corporation (LISC) approved an allocation of $2 million and Capital One New Market Investments allocated $8 million in New Market Tax Credits (NMTCs) for SER s Workforce Opportunity Center. SER closed on the NMTCs funding on July 13, The purpose of NMTCs transactions is to provide funds to SER to finance the acquisition, development and construction of the Telephone Road facility that will be used as a Workforce Opportunity Center benefitting persons at least 51% of whom must be members of lowincome families. Prior to entering the NMTCs transactions, SER-Jobs transferred the Telephone Road building and all related improvements to SER QALICB. These transfers were recorded at carrying amounts on the date of transfer. Concurrently, SER-Jobs entered into a 75 year lease arrangement with SER QALICB for the use of Telephone Road facility. Under the NMTCs arrangement, SER-Jobs received a $4,840,242 loan from LISC (Note 7). Of these funds, $4,767,638 along with $1,819,862 of reimbursement from SER QALICB was used to make a loan of $6,587,500 to COCRF Investor 86, LLC (Investment Fund) (Note 6). Using these proceeds, in addition to $3,412,500 of contributions from Capital One, National Association (Investor member), the Investment Fund made an equity investment of $8 million and $2 million, respectively, in New Markets Investment 107, LLC, and COCRF SubCDE 56, LLC. (collectively SubCDE s ). New Markets Investment 107, LLC, and COCRF SubCDE 56, LLC, used these funds to make a loan of $7,720,000 and $2,000,000, respectively (collectively QLICI loans ) to SER QALICB (Note 7). SER QALICB utilized these funds to reimburse $1,998,636 to SER-Jobs and pay NMTCs and closing costs of $304,888 (Note 2 Unamortized Closing Costs). Additionally, the loan proceeds of $7,409,075 is restricted to pay for construction of the Telephone Road building (Note 2 Cash and Cash Equivalents). -12-

15 Note 3 New Markets Tax Credit (Continued) SER-JOBS FOR PROGRESS OF THE Notes to Consolidated Financial Statements The QLICI loans are intended to qualify as a qualified low-income community investment under the NMTCs arrangement. To qualify, SER must comply with certain representations, warranties, and covenants. These include, but are not limited to, a covenant that at least 51% of the benefitting persons from the Workforce Opportunity Center must be members of low-income families for 7 years after the Telephone Road building is placed in service. If, as a result of the breach of the agreement or loan documents by SER, the lender is required to recapture all or any part of the NTMCs previously claimed by the Lender, SER agrees to pay to the Lender an amount equal to the sum of the credits recaptured. Additionally, the QLICI lenders have a security interest in the assets of SER QALICB as noted in Note 7 below. Lastly, with regards to the NMTCs, SER has agreed to grant to the Investor Member an option (put option) to sell its investor interest in the Investment Fund to SER for a price of $1,000, plus other costs as stated in the agreement. Following 180 days of the expiration of the put option period or the rejection of put notice by the Investor Member, whichever is earlier, SER has the right to purchase the Investor Interest in the Investment Fund, subject to certain conditions as defined in the agreement, for an amount equal to the fair market value of the Investor Interest, as determined by an independent appraiser. Note 4 - Related Party Transactions A SER-Jobs Board of Director is a Regional President of a bank with whom SER-Jobs and SERCDC has financed term notes (Note 7) and SER-Jobs has obtained the line of credit facility (Note 8). Contributions from board members and their families was $128,000 and $45,000 for the years ended August 31, 2017 and 2016, respectively. Receivables outstanding related to these contributions were $37,000 and $45,000 for the years ended August 31, 2017 and 2016, respectively. Note 5 - Property and Equipment Property and equipment are comprised as follows at August 31: Building and building improvements $ 4,200,965 $ 3,032,758 Land 869, ,562 Furniture, fixtures and equipment 167, ,917 Total property and equipment 5,238,654 3,676,237 Less accumulated depreciation and amortization (648,043) (580,907) Property and equipment, net $ 4,590,611 $ 3,095,330 Included in building and building improvements is Telephone Road facility which has not been placed in service. Cost of this facility at August 31, 2017 and 2016 was $2,992,425 and $1,846,532. The depreciation and amortization expense was $67,136 and $63,460 for the years ended August 31, 2017 and 2016, respectively. -13-

16 Note 6 - Notes Receivable Notes receivable consisted of the following at August 31: SER-JOBS FOR PROGRESS OF THE Notes to Consolidated Financial Statements Note receivable dated July 13, 2017 from the Investment Fund in relation to the NMTCs Program (Note 3). Interest is % per annum and is due quarterly. Quarterly debt service payments including interest range from $21,238 to $83,142. Principal payments begin December 2024, with final payment due June 15, Prepayments on the note are allowed. The note is secured by Investment Fund s entire interest in SubCDE s (Note 3). $ 6,587,500 $ - Note 7 - Notes Payable Notes payable consisted of the following at August 31: Note payable by SER Jobs: Bridge Loan dated July 12, 2017 in the form of a term note due to LISC with the principal amount of $4,480,242, (Note 3) bearing interest at the fixed rate of 6.00%. Interest is due on a monthly basis and principal is due within 5 days after each receipt of a payment under the City CBDG Grant or the County CDBG Grant. This note is secured by the future right, title and interest in the City CBDG Grant and the County CDBG. The final balance on the note is due on August 1, $ 4,699,562 $ - Note payable by SERCDC : Term note due to a bank with the principal amount of $350,000, bearing interest at the fixed rate of 4.25%. The principal and interest of the note shall be due and payable in monthly installments of $2,644. This note is secured by a building and guaranteed by SER-Jobs and is scheduled to mature in August The note contains reporting covenants, and a financial covenant to maintain debt service coverage ratio. SERCDC is in compliance with these requirements at August 31, 2017 and , ,985 Note payable by SER Jobs: Term note due to a bank allowing SER-Jobs option to request periodic advancements in various increments, subject to a maximum of $1,488,000, bearing interest at the fixed rate of 4.5%. Interest on the note shall be due and payable monthly as it accrues until June 7, 2017, then the note shall be due and payable in monthly installments of $9,467, including interest, until maturity on June 7, This note is secured by a building and guaranteed by SERCDC. The note contains reporting covenants, and a financial covenant to maintain debt service coverage ratio. The loan was paid off during ,996 Note payable by SERCDC : Term note due to a bank with the principal amount of $347,000, bearing interest at the fixed rate of 5.25%. The principal and interest of the note shall be due and payable in monthly installments of $3,737. This note is secured by land and guaranteed by SER-Jobs and is scheduled to mature in March The note contains reporting covenants, and a financial covenant to maintain debt service coverage ratio. SERCDC is in compliance with these requirements at August 31, ,160 -

17 Note 7 - Notes Payable (Continued) SER-JOBS FOR PROGRESS OF THE Notes to Consolidated Financial Statements Note payable by SER QALICB : Note payable dated July 13, 2017 to New Market Investment 107 LLC, in relation to the NMTCs Program (Note 3). Interest is 1.0% per annum and is due quarterly. Quarterly debt service payments including interest range from $16,941 to $118,999. Principal payments begin July 2024 with final payment due July 12, Prepayments on the loan are not allowed. The note is secured by all assets of SER QALICB. 7,720,000 - Note payable by SER QALICB : Note payable dated July 13, 2017 to COCRF SubCDE 56, LLC, in relation to the NMTCs Program (Note 3). Interest is 1.0% per annum and is due quarterly. Quarterly debt service payments including interest range from $2,891 to $20,361. Principal payments begin December 2024 with final payment due July 12, Prepayments on the loan are not allowed. The note is secured by all assets of SER QALICB. 1,317,500 - Note payable by SER QALICB : Note payable dated July 13, 2017 to COCRF SubCDE 56, LLC, in relation to the NMTCs Program (Note 3). Interest is 1.0% per annum and is due quarterly. Quarterly debt service payments including interest range from $1,498 to $10,547. Principal payments begin December 2024 with final payment due July 12, Prepayments on the loan are not allowed. The note is secured by all assets of SER QALICB. $ 682,500 $ - Total notes payable 15,010, ,981 Less current portion (4,986,104) (20,305) Long-term notes payable $ 10,024,091 $ 277,676 Future principal payments under these notes are summarized below: Years Ending August 31, 2018 $ 4,986, , , , ,497 Thereafter 9,720,000 Total $ 15,010,195 Note 8 - Line of Credit At August 31, 2016, SER-Jobs had a $600,000 bank line of credit which matured on August 5, Amounts borrowed under this agreement bore interest at prime 4.25% per annum. At August 31, 2016, SER-Jobs had borrowings on this line of credit of $185,749. During 2017, this line was renewed until August 5, 2019 at an interest rate of 5.25% per annum. At August 31, 2017, SER-Jobs had borrowings on this line of credit of $325,174. The line is secured by a building and guaranteed by SERCDC. The line of credit facility agreement contains reporting covenants, and a financial covenant to maintain debt service coverage ratio. SER-Jobs is in compliance with these requirements at August 31, 2017 and

18 Notes to Consolidated Financial Statements Note 9 - Retirement Plan SER-Jobs has a voluntary, defined contribution plan which provides retirement benefits to participating employees. Originally, employees were eligible to participate upon completion of one year of continuous service. Effective January 1, 2015, a Safe Harbor election was made that allowed participants to begin contributing immediately. Participants may make salary deferral contributions subject to Internal Revenue Service limitations. SER-Jobs contributes up to 5% of the participant s salary. SER-Jobs contributions to the defined contribution plan approximated $53,000 and $61,000 for the years ended August 31, 2017 and 2016, respectively. Note 10 - Temporarily Restricted Net Assets As of August 31, 2017 and 2016, $264,391 and $306,618, respectively, in net assets are temporarily restricted for capital campaign or for a specific purpose. Restricted contributions are primarily for programs that provide training to those individuals that live or work in the Greater East End Management District (the District) or for job training programs with businesses within the District, as well as programs that subsidize job coaching and training for adults. As of August 31, 2017 and 2016, $456,621 and $509,300, respectively, in net assets are temporarily restricted United Way funds or other programs due to timing for the completion of programs within a certain time frame. Note 11 - Net Assets Released From Restrictions Net assets of $1,874,740 and $1,504,377 were released from donor restrictions during the years ended August 31, 2017 and 2016, respectively, by incurring expenses related to capital campaign or by satisfying grant or time restrictions specified by donors. Note 12 - Commitments and Contingencies Amounts received from the government and other grant agencies require fulfillment of certain conditions as set forth in the grant contracts. SER-Jobs intends to fulfill the conditions of all grants, recognizing that failure to fulfill the conditions could result in the return of funds to grantors. SER is also a co-signer on a performance bond totaling $70,199 related to one of the contracts. Amounts received or receivable from grantor agencies are subject to audit and adjustment by the grantor agencies. Any disallowed claims, including amounts already collected, could become a liability of SER-Jobs. In management s opinion, disallowed claims, if any, would not have a material adverse effect on SER-Jobs financial position or results of operations. On April 14, 2017, SER entered into a contractual agreement with a contractor for the renovation and construction of Telephone Road building. For the year ended August 31, 2017, amounts expended on construction totaled $201,571, with an additional $553,835 accrued and an additional $83,934 recorded in retainage payable, which are included under accounts payable and accrued liabilities in the accompanying statements of financial position. Commitments of SER under the remaining contract at August 31, 2017 totaled $5,264,378 which will be paid with funds from CDBG grants and NMTCs proceeds. In October 2017, SER received a change order for construction for $250,121 to repair the Telephone Road building slab as a result of damages resulting from Hurricane Harvey. -16-

19 Notes to Consolidated Financial Statements Note 13 - Leased Facilities During fiscal years 2017 and 2016, SERCORP/SERCDC leased building space to SER-Jobs and one other unrelated entity under operating lease agreements, expiring through June Cost of land and buildings under the operating lease to the unrelated entity was $66,440 and $468,031, respectively, for both years. Accumulated depreciation on buildings under operating lease was $368,464 and $357,188 at August 31, 2017 and 2016, respectively. Minimum lease payments due to SERCDC under this operating lease from the unrelated entity are as follows as of August 31, 2017: Note 14 - Leases Years Ending August 31, 2018 $ 197, , ,832 $ 567,971 SER-Jobs presently leases equipment and office space under various operating lease agreements, expiring through February Rental expense under these agreements approximated $27,000 and $21,000 for the years ended August 31, 2017 and 2016, respectively. The future obligations under SER-Jobs operating leases as of August 31, 2017 are as follows: Years Ending August 31, 2018 $ 22, , , ,482 $ 78,203 Note 15 - Community Development Block Grants and other funding In 2016, SER-Jobs was awarded a Community Development Block Grant for the workforce training site renovation project in the unserved area of the east end of Houston, pass through from Harris County, in the amount of $2 million and from the City of Houston, in the amount of $5.3 million to cover the cost of acquisition and renovation of the Telephone Road building. The grant is structured as a performance-based loan requiring that the Telephone Road building be used as a Workforce Opportunity Center benefitting persons at least 51% of whom must be members of low-income families. No interest or principal is repayable under the grant provided that SER-Jobs uses the facility for the assigned purpose for at least 5 years after the facility is put into service. SER-Jobs intends to meet the requirements as listed in the grant agreement. During 2017 and 2016, $1,161,964 and $2,166,837, respectively, of the grant was utilized by SER-Jobs. As of August 31, 2017, $3,971,199 of the grant remains to be used for renovations. Note 16 - Subsequent Events Management has evaluated subsequent events through the date the consolidated financial statements were available for issuance on January 25, Other than as mentioned in Note 12, no other matters were identified affecting the accompanying consolidated financial statements or related disclosures except those elsewhere. -17-

20 SINGLE AUDIT REPORTS

21 Schedule of Expenditures of Federal Awards For the year ended August 31, 2017 FEDERAL GRANTOR/ PASS-THROUGH GRANTOR/ PROGRAM TITLE CATALOG OF FEDERAL DOMESTIC ASSISTANCE NUMBER PASS-THORUGH GRANTOR S/ CONTRACT NUMBER EXPENDITURES U S. Department of Labor Direct programs - Reintegration of Ex-Offenders-Training to Work PE A-48 $ 343,421 Youth Build YB A-48 17,453 Youth Build YB A ,543 Total YouthBuild 493,996 Pass Through from National Agencies - SER-Jobs for Progress National, Inc. - Senior Community Service Employment Program ,687 Pass Through from State Agencies - Texas Workforce Commission - Pass Through from Local Agencies Workforce Innovation and Opportunity Act Cluster Houston Galveston Area Council - WIA Youth Activities / ,164 Total Workforce Innovation and Opportunity Act Cluster 529,164 Total U.S. Department of Labor 1,434,268 U S. Department of Education Pass Through from National Agencies - Houston Galveston Area Council. - Summer Earn & Learn / ,254 Harris County Juvenile Probation Board Charter School Vocational Education Program A 16/ ,221 Total U.S. Department of Education 184,475 U S. Department of Housing and Urban Development CDBG Entitlement Grants Cluster Pass Through from National Agencies - Local Initiatives Support Corporation - Community Development Block Grant ,649 Pass Through from the City of Houston Community Development Block Grant ,938 Pass Through from Harris County Community Development Block Grant C ,026 Total CDBG Entitlement Grants Cluster Total U.S. Department of Housing and Urban Development See Independent Auditors Report and accompanying notes to Schedule of Expenditures of Federal Awards ,185,613 1,185,613 U S. Department of Health and Human Services Pass Through from Local Agencies - AVANCE - Healthy Marriages FM ,000 Corporation for National and Community Service Pass Through from National Agencies - Local Initiatives Support Corporation - Social Innovation Fund ,199 Bridges to Career Opportunities ,447 Total Corporation for National and Community Service 197,646 Total Expenditures of Federal Awards $ 3,025,002

22 Notes to Schedule of Expenditures of Federal Awards Note 1 - General The accompanying schedule of expenditures of federal awards presents the activity of all federal award programs of SER-Jobs for Progress of the Texas Gulf Coast, Inc. (SER-Jobs) during the year ended August 31, SER-Jobs accounting policies and procedures are defined in note 2 to the consolidated financial statements. All awards received directly from federal agencies, as well as federal awards passed through other government or local agencies have been included in the schedule. Note 2 - Basis of Accounting The schedule is presented using the accrual basis of accounting whereby grant revenues are recognized as expenditures are incurred. Separate accounts are maintained for the different awards to aid in the observance of limitations and restrictions imposed by the funding agencies. The information in this schedule is presented in accordance with the 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). Note 3 - Relationship to Federal Financial Reports Amounts reported in the schedule may not agree with the amounts reported in the related federal financial reports filed with grantor agencies because of different program year-ends and accruals that will be reflected in the next report filed with the agencies. Note 4 - Insurance Coverage During the year ended August 31, 2017, SER-Jobs maintained the following types of insurance: Commercial general liability including professional liability, errors and omission, and property coverage - $1,000,000 each occurrence, $2,000,000 general aggregate, plus umbrella liability of $1,000,000 each occurrence and aggregate. Automobile liability - $1,000,000 per accident Directors and officer liability (including employment practices) - $2,000,000 aggregate Fiduciary liability and crime policy - $550,000 each loss Cyber Security liability - $1,000,000 general aggregate Workers compensation- $1,000,000 each accident Electronic Data Processing - $392,000 general aggregate Accident Policy - $25,000 general aggregate Note 5 - Noncash Assistance SER-Jobs did not receive any federal noncash assistance for the fiscal year ended August 31,