TRIANGLE RESIDENTIAL OPTIONS FOR SUBSTANCE ABUSERS, INC. AND AFFILIATES CONSOLIDATED FINANCIAL STATEMENTS. for the year ended June 30, 2017

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1 CONSOLIDATED FINANCIAL STATEMENTS for the year ended June 30, 2017

2 TRIANGLE RESIDENTIAL OPTIONS FOR SUBSTANCE ABUSERS INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page(s) Independent Auditor s Report 1-2 Consolidated Financial Statements: Consolidated Statement of Financial Position 3 Consolidated Statement of Activities 4 Consolidated Statement of Functional Expenses 5 Consolidated Statement of Cash Flows 6-7 Notes to Consolidated Financial Statements 8-16 Supplementary Information: Schedule of Federal and State Awards 17 Independent Auditor s 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 18-19

3 Langdon & Company llp Certified Public Accountants INDEPENDENT AUDITOR'S REPORT To the Board of Directors of Triangle Residential Options for Substance Abusers, Inc. and Affiliates Report on the consolidated financial statements We have audited the accompanying consolidated financial statements of Triangle Residential Options for Substance Abusers, Inc. and Affiliates (the "Organization"), which comprise of the statement of financial position as of June 30, 2017, and the related statements of activities, functional expenses, and cash flows for the year 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. Auditor's Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit 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 audit 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 auditor's 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 the entity'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 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 consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 223 Highway 70, East Pointe, Suite 100, Garner, NC P I F: I

4 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Triangle Residential Options for Substance Abusers, Inc. and Affiliates as of June 30, 2017, and the changes in its net assets and its cash flows for the year then ended in conformity 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 consolidated financial statements as a whole. The accompanying Schedule of Federal and State awards, as required by North Carolina G.S. 143C-6-23 Non-State Entities Receiving State Funds 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. Report on Summarized Comparative /reformation We have previously audited Triangle Residential Options for Substance Abusers, Inc. and Affiliates' 2016 consolidated financial statements and we expressed an unmodified opinion on those audited consolidated financial statements in our report dated October 11, In our opinion, the summarized comparative information presented herein as of and for the year ended June 30, 2016 is consistent, in all material respects, with the audited consolidated financial statements from which it has been derived. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated October 10, 2017, on our consideration of Triangle Residential Options for Substance Abusers, Inc. and Affiliates' internal control over financial reporting and on our tests of their 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 the 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 Triangle Residential Options for Substance Abusers, Inc. and Affiliates' internal control over financial reporting and compliance. ~er,'::~ ~ Co""f>~ L. l. ~ October I 0,

5 CONSOLIDATED STATEMENT OF FINANCIAL POSITION June 30, 2017 with comparative totals as of June 30, 2016 ASSETS LIABILITIES AND NET ASSETS Current assets: Current liabilities: Cash and cash equivalents $ 2,968,572 $ 2,729,619 Accounts payable $ 674,262 $ 301,396 Replacement reserves 106,733 97,079 Accrued expenses 206, ,265 Accounts receivable (less allowances for doubtful accounts of $7,572 and Current portion of long-term debt 404, ,166 $7,842 at June 30, 2017 and 2016, respectively) 488, ,057 Current maturities of obligations under capital leases 63,682 49,209 Grants receivable 14,497 51,960 Refundable advances - grant 16,320 1,071,030 Current portion of long-term note receivable 24,213 25,000 Total current liabilities 1,364,794 2,008,066 Other receivables 75,865 69,566 Promises to give 105, ,000 Long-term liabilities: Due from residents (less allowances for doubtful accounts of $2,233 and Refundable advances 490, ,450 $8,442 at June 30, 2017 and 2016, respectively) 20,107 11,248 Long-term debt, less current portion 1,518,621 1,914,870 Prepaid expenses 175, ,018 Obligations under capital leases, less current maturities 70,111 69,806 Inventory 2,218,567 2,163,286 Total long-term liabilities 2,079,182 2,475,126 Total current assets 6,198,588 5,755,833 Total liabilities 3,443,976 4,483,192 Property and equipment, net 15,666,764 12,793,694 Net assets: Other assets: Unrestricted 17,197,367 13,372,684 Promises to give in one to five years 110, ,106 Temporarily restricted 1,242, ,421 Long-term note receivable, less current portion - 22,664 Permanently restricted 100, ,000 Other assets 7,624 - Total net assets 18,539,397 14,274,105 Total other assets 118, ,770 Total assets $ 21,983,373 $ 18,757,297 Total liabilities and net assets $ 21,983,373 $ 18,757,297 The accompanying notes are an integral part of the consolidated financial statements. 3

6 CONSOLIDATED STATEMENT OF ACTIVITIES for the year ended June 30, 2017 with comparative totals for Temporarily Permanently Unrestricted Restricted Restricted Totals Totals Public support and revenue: Public support: Contributions $ 705,019 $ 1,305,979 $ - $ 2,010,998 $ 922,337 Grants 3,778,820 55,188-3,834,008 1,888,422 Donated materials, services and property 4,787, ,787,695 4,412,786 Total public support 9,271,534 1,361,167-10,632,701 7,223,545 Revenue: Net vocational programs revenue 10,302, ,302,262 9,643,173 Graduate program revenue 130, , ,076 Transitional care revenue 336, , ,434 Other income ,922 Interest income 14, ,567 3,662 Total revenue 10,784, ,784,001 10,258,267 Net assets released from restrictions 920,558 (920,558) Total public support and revenue 20,976, ,609-21,416,702 17,481,812 Expenses: Program services 15,859, ,859,818 15,098,293 Supporting services: Management and general 839, , ,376 Fundraising 452, , ,392 Total supporting services 1,291, ,291,592 1,296,768 Total expenses 17,151, ,151,410 16,395,061 Changes in net assets 3,824, ,609-4,265,292 1,086,751 Net assets at beginning of year 13,372, , ,000 14,274,105 13,187,354 Net assets at end of year $ 17,197,367 $ 1,242,030 $ 100,000 $ 18,539,397 $ 14,274,105 The accompanying notes are an integral part of the consolidated financial statements. 4

7 CONSOLIDATED STATEMENT OF FUNCTIONAL EXPENSES for the year ended June 30, 2017 with comparative totals for 2016 Program Services 2017 Supporting Services 2016 Management Fund- Grand and General Raising Totals Totals Salaries, tax and benefits $ 3,214,307 $ 623,280 $ 306,183 $ 4,143,770 $ 3,881,813 Resident expenses 5,824, ,824,033 5,311,077 Supplies 517,385 6,569 7, , ,972 Insurance 364,023 28,629 7, , ,997 Auto expenses 278, , ,015 Utilities and security 983,069 31,976 4,499 1,019,544 1,007,134 Vocational programs expense 1,091, ,091,402 1,123,728 Maintenance and repairs 997,149 2, ,000,475 1,100,110 Equipment rent 110,044 1,874 1, , ,221 Telephone 148,825 8,993 5, , ,250 Professional Fees 706,890 59,399 57, , ,996 Interest expense 82, , ,824 Small equipment 94,011 3,819 1,535 99, ,778 Taxes and licenses 137,978 16,567 6, , ,761 Bad debt expense (recovery) 10, ,791 (19,183) Meals and travel 55,131 6,472 12,215 73,818 72,852 Dues and subscriptions 4,921 6,356 2,028 13,305 11,014 Training expense 24,475 5,109 5,083 34,667 20,502 Office expense 45,512 16,213 19,147 80,872 87,699 Advertising 17, ,478 30,504 Depreciation and amortization 1,148,070 20,925 15,821 1,184,816 1,112,403 Loss on disposal of property and equipment 2, ,242 - Miscellaneous ,594 Total expenses $ 15,859,818 $ 839,009 $ 452,583 $ 17,151,410 $ 16,395,061 The accompanying notes are an integral part of the consolidated financial statements. 5

8 CONSOLIDATED STATEMENT OF CASH FLOWS for the year ended June 30, 2017 with comparative totals for 2016 Cash flows from operating activities: Cash received from grantors and contributors $ 3,586,182 $ 3,619,030 Cash received from clients and third-party payers 10,590,380 10,364,276 Cash paid to suppliers and employees (11,273,000) (11,513,968) Interest received 14,567 3,662 Interest paid (59,603) (79,553) Net cash provided by operating activities 2,858,526 2,393,447 Cash flows from investing activities: Purchases of property and equipment (3,400,781) (1,065,586) Proceeds from sales of property and equipment ,350 Replacement reserve deposits (9,654) (9,744) Net cash used in investing activities (3,410,285) (949,980) Cash flows from financing activities: Repayment of debt (406,706) (529,632) Repayment of obligations under capital leases (60,561) (24,642) Contributions restricted for clinical building 1,257, ,028 Net cash provided by (used in) financing activities 790,712 (363,246) Net increase in cash 238,953 1,080,221 Cash at beginning of year 2,729,619 1,649,398 Cash at end of year $ 2,968,572 $ 2,729,619 (Continued) 6

9 CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) for the year ended June 30, 2017 with comparative totals for 2016 Reconciliation of changes in net assets to net cash provided by operating activities: Changes in net assets $ 4,265,292 $ 1,086,751 Adjustments to reconcile changes in net assets to net cash cash provided by operating activities: Depreciation and amortization 1,184,816 1,112,403 Contributions restricted for clinical building (1,257,979) (191,028) Bad debt expense (recovery) 10,791 (19,183) Accretion of imputed interest discount 23,570 23,271 In-kind property and equipment donations (239,557) (217,746) Loss/(Gain) on disposal of property and equipment 2,242 (13,922) Changes in assets and liabilities: Note receivable 23,451 22,713 Accounts receivable (193,556) 77,436 Grants receivable 37,463 1,090 Promises to give 69,041 (185,106) Other receivables (6,299) (5,663) Due from residents (8,859) 288 Prepaid expenses 26,474 (68,733) Inventory (55,281) (219,970) Accounts payable 20,641 (95,587) Accrued expenses 10,986 15,403 Refundable advance - grant (1,054,710) 1,071,030 Net cash provided by operating activities $ 2,858,526 $ 2,393,447 Supplemental schedule of noncash investing and financing activities: Purchase of building and land with debt proceeds $ - $ 136,000 Acquisition of equipment under capital leases 75,339 88,205 In-kind property and equipment donations 239, ,746 $ 314,896 $ 441,951 The accompanying notes are an integral part of the consolidated financial statements. 7

10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization Triangle Residential Options for Substance Abusers, Inc. and affiliates (the "Organization") was incorporated on October 8, It is a multi-year residential self-help program for substance abusers located in North Carolina. The Organization serves men and women, age 18 and older, at no cost to the individual. For some, it serves as an alternative to incarceration. The Organization's program emphasizes education, vocational training and communication skills. In order to provide residents with job skills, the Organization operates a number of income-generating vocational training programs. These vocational training programs include moving and storage services, lawn care, commercial cleaning, Christmas tree lots and a thrift store. The Organization is also supported with significant amounts of contributions, government grants and donated materials, services and property. Principles of Consolidation The consolidated financial statements include the accounts of Triangle Residential Options for Substance Abusers, Inc., ("TROSA, Inc.") TROSA Commercial, Inc., and TROSA Residential, Inc., both of which TROSA, Inc. is the sole member. Cash and Cash Equivalents For the purpose of the consolidated statement of cash flows, the Organization considers cash on hand and deposits in bank and all highly liquid investments with an original maturity of three months or less, excluding cash whose use is restricted by debt covenants, to be cash and cash equivalents. The Organization maintains its cash accounts with financial institutions, which at times, exceed federally insured limits. The Organization has not experienced any losses in such accounts. Accounts Receivable Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a method that approximates a provision for bad debt expense and an adjustment to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written-off through a charge to the valuation allowance and a reduction of accounts receivable. Contributions, Grants and Federal and State Awards Contributions, grants, and Federal and State awards received by the Organization are recorded as unrestricted, temporarily restricted, or permanently restricted support depending on the existence and/or nature of any donor/grantor restrictions. Contributions that are restricted by the donor are reported as increases in unrestricted net assets if the restrictions expire, that is, the stipulated time restrictions end or a purpose restriction is accomplished, in the reporting period in which the revenue is recognized. All other donor-restricted contributions are reported as increases in temporarily or permanently restricted net assets, depending on the nature of the restrictions. When a restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. 8

11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Contributions, Grants and Federal and State Awards (Continued) Conditional promises to give are recognized when the conditions on which they depend are substantially met. Unconditional promises to give, due in subsequent years, are reported at the present value of their net realizable value using a risk adjusted discount rate. Seventy percent of grant revenue reflected in the statement of activities for the year ended June 30, 2017 was from one grantor. In addition, approximately 71% of contributions and grants received and recorded during the year ended June 30, 2017 were restricted or used for capital improvements. Inventory Inventory primarily consists of donated and purchased food and beverages, supplies and items sold in the course of the Organization's vocational training programs. Inventory is valued at the lower of cost or market and cost is determined on the first-in, first-out method. Donated items are recorded at estimated fair value at the date of donation. The Organization receives a significant amount of contributed goods and materials that it processes as merchandise available for sale in its thrift store. The Organization believes that the inventory of these donated items does not possess an attribute that is easily measurable or verifiable with sufficient reliability to determine inventory value at the time of the donation. Instead, the value of inventory at the end of the year is estimated using historical sales of similar inventory. Property and Equipment The Organization capitalizes property and equipment over $2,000. Lesser amounts are expensed. Purchased property and equipment are recorded at cost. Donated property and equipment is recorded as revenue at its estimated fair value as of the date of the donation. Such donations are reported as unrestricted revenue 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 either temporarily or permanently restricted support. The Organization reclassifies temporarily restricted net assets to unrestricted net assets in conjunction with the recognition of depreciation expense over the useful life of the donated asset. Absent donor stipulations regarding how long those donor assets must be maintained, the Organization reports expirations of donor restrictions when the donated or acquired assets are placed into service as instructed by the donor. The Organization reclassifies temporarily restricted net assets to unrestricted net assets at that time. Depreciation is computed using the straight-line method over the following useful lives: Buildings and improvements Furniture and equipment Vehicles years 5-10 years 5-7 years Expenditures for repairs and maintenance are charged to expense as incurred. The cost of major renewals and betterments is capitalized and depreciated over their useful lives. Upon disposition of property and equipment, the related asset and accumulated depreciation amounts are removed and any gain or loss is reflected within the statement of activities for the period.

12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Donated Assets and Services Donated materials, property and equipment and services are recorded at their estimated fair market values at date of receipt and are reflected as contributions in the accompanying consolidated financial statements. The Organization benefited from donated labor valued at $227,331 and $196,601 for the years ended June 30, 2017 and 2016, respectively. The Organization recognizes the fair value of contributed services received if such services a) create or enhance a nonfinancial asset or b) require specialized skills that are provided by individuals possessing those skills and would typically need to be purchased if not contributed. The Organization receives services from a large number of volunteers who give significant amounts of their time to the Organization s programs but which do not meet the criteria for financial statement recognition. Functional Classification of Expenses Operating expenses not directly attributable to a specific function are allocated to specific functions by the Organization's management based on what it considers to be the best available objective criteria, such as hours worked or relative benefit. Income Taxes TROSA, Inc. is exempt from income tax under the Internal Revenue Code Section 501(c)(3). TROSA Residential, Inc. and TROSA Commercial, Inc. are exempt from income tax under the Internal Revenue Code Section 501(c)(2). There is no unrelated business income tax for the years ended June 30, 2017 and The Organization evaluates its uncertain tax positions using provisions of Financial Accounting Standards Board Accounting Standards Codification (ASC) , Recognition of a Tax Position. Accordingly, it is the Organization's policy to record a liability for any tax position taken that is beneficial to the Organization, including any related interest and penalties, when it is more likely than not the position of management with respect to a transaction or class of transactions will be overturned by a taxing authority upon examination. Management believes there are no such positions as of June 30, 2017 or Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Accordingly, actual results could differ from those estimates. Management considers the estimates of the valuation of donated inventory, including food, beverages, and supplies, as well as donated services and property to be critical accounting policies requiring extensive subjective judgments. The valuation of donated food, beverages, supplies and services is based on quoted valuations, historical experience and price comparisons for similar products and services. Actual results could differ from these estimates under different assumptions or conditions. 10

13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Schedule of Expenditures of Federal and State Awards The accompanying Schedule of Federal and State Awards includes the federal and State grant activity of the Organization and is presented on the cash basis of accounting. Some amounts presented in this schedule may differ from amounts presented in, or used in the preparation of, the basic consolidated financial statements. Advertising Expenses The cost of advertising is charged to expense as incurred. Advertising expense amounted to $18,478 and $30,504 for the years ended June 30, 2017 and 2016, respectively. Comparative Totals The consolidated financial statements include certain prior year summarized comparative information in total but not by net asset class. Such information does not include sufficient detail to constitute a presentation in conformity with accounting principles generally accepted in the United States of America. Accordingly, such information should be read in conjunction with the Organization's consolidated financial statements for the year ended June 30, 2016, from which the summarized information was derived. 2. NOTE RECEIVABLE Note receivable consists of a non-interest bearing note due in six annual payments of $25,000, beginning April 27, 2013 and relates to the sale of certain real property. Management considers this note to be fully collectible and, accordingly, no allowance for doubtful accounts is considered necessary. Note receivable is summarized as follows at June 30, 2017 and 2016: Note Receivable - current portion $ 24,213 $ 25,000 Note receivable - non current portion - 25,000 Less unamortized discount based on imputed interest rate of 3.25% - (2,336) - 22,664 Note receivable less unamortized discount $ 24,213 $ 47,664 11

14 3. PROMISES TO GIVE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Promises to give are summarized as follows at June 30, 2017 and 2016: Promises to give - current portion $ 105,668 $ 100,000 Promises to give - one to five years 113, ,000 Less unamortized discount based on imputed interest rate of 3.25% (3,435) (14,894) 110, ,106 Promises to give less unamortized discount $ 216,065 $ 285, PROPERTY AND EQUIPMENT Net property and equipment is summarized as follows at June 30, 2017 and 2016: Land $ 2,249,223 $ 2,197,816 Buildings and improvements 16,981,136 15,081,479 Furniture and equipment 1,294,223 1,074,406 Vehicles 2,826,613 2,552,285 Construction in progress 1,793, ,591 25,145,010 21,116,577 Less accumulated depreciation and amortization (9,478,246) (8,322,883) Net property and equipment $ 15,666,764 $ 12,793,694 Included in furniture and equipment is the net book value of equipment under capital leases, as referenced in Note REFUNDABLE ADVANCE - GRANT During 2016, the Organization received a two-year restricted grant totaling $3,250,000, which ends on June 30, At June 30, 2017 and 2016, $16,320 and $1,071,030 remains unexpended and is classified as a current liability in the accompanying consolidated statement of financial position. 6. LEASES The Organization leases equipment, buildings, dumpsters, and warehouse space under non-cancelable operating lease agreements expiring in Lease expense relating to these leases was $53,154 and $28,494 for the years ended June 30, 2017 and 2016, respectively. The Organization also leases equipment under capital lease agreements expiring in The assets and liabilities under the capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the assets. The assets are amortized over the related lease term or the estimated productive life. Amortization of the equipment under the capital leases was $30,393 and $19,562 for the years ended June 30, 2017 and 2016, respectively. 12

15 6. LEASES (Continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The equipment and related accumulated amortization as of June 30 are as follows: Equipment $ 231,445 $ 156,106 Less accumulated amortization (61,138) (30,745) $ 170,307 $ 125,361 Future minimum lease payments under the non-cancelable operating leases, including the financial impact of escalation clauses, and the present value of future minimum lease payments under capital leases are as follows: Operating Leases Capital Leases Year ending June 30, ,556 66, ,919 41, ,866 28, , ,330 Total minimum lease payments $ 98,341 $ 140,935 Less amount representing interest (7,142) Present value of net minimum capital lease payments $ 133,793 Less current maturities (63,682) Obligations under capital leases, less current maturities $ 70, REFUNDABLE ADVANCES Refundable advances are summarized as follows as of June 30, 2017 and 2016: North Carolina Housing Finance Agency Refundable advance, secured by a deed of trust on the property and assignment of rents and leases. Assuming the Organization complies with applicable restrictions and covenants, the advance will be forgiven in 10% increments beginning in 2024 and will be entirely forgiven by November $ 120,000 $ 120,000 North Carolina Housing Finance Agency Refundable advance, secured by a deed of trust on the property and assignment of rents and leases. Assuming the Organization complies with applicable restrictions and covenants, the advance will be forgiven in 10% increments beginning in 2028 and will be entirely forgiven by November ,450 70,450 13

16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. REFUNDABLE ADVANCES (Continued) PNC Bank, National Association Refundable advance, secured by a deed of trust on the property and assignment of rents and leases pursuant to the Federal Home Loan Bank Act. Assuming the Organization complies with applicable restrictions and covenants, the advance will be forgiven in full in October , ,000 Total refundable advances $ 490,450 $ 490, LONG-TERM DEBT Long term debt is summarized as follows at June 30, 2017 and 2016: North Carolina Housing Finance Agency Non-interest bearing note payable, due December 2037 in monthly installments of $794, with a face amount of $194,675 net of unaccreted discount of $90,675 (effective interest rate, 6.9%) as of June 30, 2017, secured by a deed of trust on property and assignment of rents and leases. $ 104,000 $ 106,267 City of Durham Non-interest bearing note payable, due April 2035 in monthly installments of $769, with a face amount of $165,860 net of unaccreted discount of $61,754 as of June 30, 2017 (effective interest rate, 5.6%) secured by real property and assignment of rents and leases. 104, ,425 Branch Banking and Trust Note payable with a fixed interest rate of 2.85%, due in monthly installments of $21,657, maturing December 2018, secured by real property. 312, ,287 Branch Banking and Trust Acquisition and construction loan in the name of TROSA Commercial, Inc. with a fixed interest rate of 3.99% due in monthly installments of $15,707, maturing September 2024, secured by real property. Guaranteed by TROSA, Inc. 1,182,387 1,319,998 14

17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. LONG-TERM DEBT (Continued) North Carolina Housing Finance Agency Non-interest bearing note payable, due in full at maturity (October 2042), with a face amount of $500,000 net of unaccreted discount of $279,913 as of June 30, 2017 (effective interest rate, 3.25%), secured by real property and assignment of rents. 220, ,059 $ 1,922,900 $ 2,306,036 Less current portion (404,279) (391,166) Long-term portion $ 1,518,621 $ 1,914,870 Future maturities of long-term debt at June 30, 2017 are summarized as follows: Year ending June 30, , , , , ,466 Thereafter 1,286,364 $ 2,413,350 Certain agreements contain various restrictive covenants, including requirements regarding minimum cash to debt ratio, filing of annual compliance certificates, maintaining documentation related to lowcome housing calculations and maintaining replacement reserve deposits. The Organization was in compliance with restrictive covenants contained in the debt agreements at June 30, 2017 and The discount on the applicable loans is accreted to interest expense over the lives of the loans. The aggregate remaining unaccreted discount as of June 30, 2017 and 2016 was $432,342 and $452,541, respectively. Imputed interest expense of $23,570 and $23,271 is reported in the accompanying consolidated statement of functional expenses for the years ended June 30, 2017 and 2016, respectively. 9. LINE OF CREDIT The Organization has available a revolving line of credit in the amount of $750,000 for the years ended June 30, 2017 and Interest accrues at 2.25% above the 30-day LIBOR (1.06% and 0.47% at June 30, 2017 and 2016, respectively). The line is collateralized by a first deed of trust on certain real property, accounts receivable, and inventory. There was no outstanding balance at June 30, 2017 or 2016, and the line expires on March 10,

18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. RESTRICTIONS ON ASSETS Temporarily restricted net assets at June 30, 2017 and 2016 respectively, are summarized as follows: Food commodities $ 8,318 $ 30,218 Education - 21,616 Clinical Building 782, ,196 Automotive - 4,850 Resident Life 19,232 - NCHFA Housing Program 90,675 97,937 City of Durham Housing Program 61,754 67,663 NCHFA Housing Program - Dormitories 279, ,941 $ 1,242,030 $ 801,421 Permanently restricted net assets at June 30, 2017 and 2016 respectively, are summarized as follows: 16 Donated land $ 100,000 $ 100,000 Title of certain land and building, with a carrying value of $100,000, was transferred from Durham County (the County) in Under the terms of this agreement, title will revert back to the County if it ceases to be used for the purpose of conducting community education, development, revitalization, drug treatment, and recreational activities or for any other purpose for which the County could use the property as a governmental entity. Net assets released from donor restrictions by accomplishing purpose or time restrictions were $920,558 and $131,015 for the years ended June 30, 2017 and 2016, respectively. 11. RETIREMENT PLAN Employees of the Organization may participate in an Internal Revenue Code section 403(b) retirement savings plan. The plan was funded solely by employee contributions to the plan, pursuant to a salary reduction agreement, until October 1, 2014 when the Organization began providing an employer match. The match is dollar for dollar for the first 3% and fifty cents on the dollar for the next 2% with a maximum match of 4%. An employee must contribute to receive the match. Contributions to the plan during the year ended June 30, 2017 and 2016 were $96,913 and $88,265, respectively. Effective July 1, 2016, the Organization also sponsors an Internal Revenue Code Section 457(b) defined contribution retirement plan covering key managerial employees who meet eligibility requirements regarding service and age. The fair value of contributions to the plan for the year ended June 30, 2017 was $7, SUBSEQUENT EVENTS Management has evaluated subsequent events through October 10, 2017, the date which the consolidated financial statements are available for issue.

19 SCHEDULE OF EXPENDITURES OF FEDERAL AND STATE AWARDS for the year ended June 30, 2017 Federal/State Grantor/Pass Through Grantor/Program Federal CFDA Number Project/ Contract # Receipts Expenditures Federal Awards: U.S. Department of Agriculture Passed through N.C. Department of Agriculture Emergency Food Assistance Program (Food Commodities) G DFC $ 55,188 $ 77,089 Department of Veterans Affairs - VA Health Passed through the Durham VA Medical Center VA Homeless Providers Grant and Per Diem Program NC VA Homeless Providers Grant and Per Diem Program NC 248, ,341 TOTAL FEDERAL AWARDS 303, ,430 State Awards: NC Department of Health and Human Services N/A ,625,000 2,705,455 * Alliance Behavioral Healthcare N/A N/A 350, ,000 TOTAL STATE AWARDS 1,975,000 3,055,455 TOTAL AWARDS $ 2,278,529 $ 3,380,885 Note: The information on this schedule has been prepared on the cash basis of accounting. Therefore, receipts are recognized when received rather than when earned, and expenditures are recognized when paid rather than when obligations are incurred. * Programs that have a direct and material effect on the Organization s financial statements. 17

20 Langdon & Company llp Certified Public Accountants INDEPENDENT AUDITOR'S 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 To the Board of Directors of Triangle Residential Options for Substance Abusers, Inc. and Affiliates 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 consolidated financial statements of Triangle Residential Options for Substance Abusers, Inc. and Affiliates (the "Organization"), which comprise the statement of financial position as of June 30, 2017, and the related consolidated statements of activities, functional expenses and cash flows for the year then ended, and the related notes to the financial statements, and have issued our report thereon dated October l 0, Internal Control over Financial Reporting In planning and performing our audit of the consolidated financial statements, we considered the Organization'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 consolidated financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Organization's internal control. Accordingly, we do not express an opinion on the effectiveness of the Organization'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 consolidated 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. Compliance and Other Matters As part of obtaining reasonable assurance about whether the Organization's consolidated 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 consolidated 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. 223 Highway 70, East Pointe, Suite 100, Garner, NC P I F: I 18

21 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 organization'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 organization's internal control and compliance. Accordingly, this communication is not suitable for any other purpose. ~~o:t.::" ~ta~~l~~ October I 0,