TRIANGLE RESIDENTIAL OPTIONS FOR SUBSTANCE ABUSERS, INC. AND AFFILIATES CONSOLIDATED FINANCIAL STATEMENTS. for the year ended June 30, 2016

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1 CONSOLIDATED FINANCIAL STATEMENTS for the year ended June 30, 2016

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 Acrnunrants 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, 2016, 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, 2016, 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 Information We have previously audited Triangle Residential Options for Substance Abusers, Inc. and Affiliates' 2015 consolidated financial statements and we expressed an unmodified opinion on those audited consolidated financial statements in our report dated October 13, In our opinion, the summarized comparative information presented herein as of and for the year ended June 30, 2015 is consistent, in all material respects, with the audited consolidated financial statements from which it has been derived. Other Reporting Required by Government Auditi11g Standards In accordance with Government Auditing Standards, we have also issued our report dated October 11, 2016, 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. ~o...~\,~~~l.,..~i;> Gamer, North Carolina October 11,

5 CONSOLIDATED STATEMENT OF FINANCIAL POSITION June 30, 2016 with comparative totals as of June 30, 2015 ASSETS LIABILITIES AND NET ASSETS Current assets: Current liabilities: Cash and cash equivalents $ 2,729,619 $ 1,649,398 Accounts payable $ 301,396 $ 368,627 Replacement reserves 97,079 87,335 Accrued expenses 195, ,862 Accounts receivable (less allowances for doubtful accounts of $7,842 and Current portion of long-term debt 391, ,066 $41,102 at June 30, 2016 and 2015, respectively) 306, ,310 Current maturities of obligations under capital leases 49,209 12,858 Grants receivable 51,960 53,050 Refundable advances - grant 1,071,030 - Current portion of long-term note receivable 25,000 25,000 Total current liabilities 2,008, ,413 Other receivables 69,566 63,903 Promises to give 100, ,000 Long-term liabilities: Due from residents (less allowances for doubtful accounts of $8,442 and Refundable advances 490, ,450 $23,339 at June 30, 2016 and 2015, respectively) 11,248 11,536 Long-term debt, less current portion 1,914,870 2,297,332 Prepaid expenses 202, ,285 Obligations under capital leases, less current maturities 69,806 42,594 Inventory 2,163,286 1,943,316 Total long-term liabilities 2,475,126 2,830,376 Total current assets 5,755,833 4,431,133 Total liabilities 4,483,192 3,770,789 Property and equipment, net 12,793,694 12,481,633 Net assets: Other assets: Unrestricted 13,372,684 12,451,209 Promises to give in one to five years 185,106 - Temporarily restricted 801, ,145 Long-term note receivable, less current portion 22,664 45,377 Permanently restricted 100, ,000 Total other assets 207,770 45,377 Total net assets 14,274,105 13,187,354 Total assets $ 18,757,297 $ 16,958,143 Total liabilities and net assets $ 18,757,297 $ 16,958,143 The accompanying notes are an integral part of the consolidated financial statements. 3

6 CONSOLIDATED STATEMENT OF ACTIVITIES for the year ended June 30, 2016 with comparative totals for Temporarily Permanently Unrestricted Restricted Restricted Totals Totals Public support and revenue: Public support: Contributions $ 681,810 $ 240,527 $ - $ 922,337 $ 974,045 Grants 1,832,658 55,764-1,888, ,496 Donated materials, services and property 4,412, ,412,786 4,258,438 Total public support 6,927, ,291-7,223,545 6,143,979 Revenue: Net vocational programs revenue 9,643, ,643,173 8,975,283 Graduate program revenue 158, , ,725 Transitional care revenue 439, , ,174 Other income 13, ,922 - Interest income 3, ,662 6,849 Total revenue 10,258, ,258,267 9,664,031 Net assets released from restrictions 131,015 (131,015) Total public support and revenue 17,316, ,276-17,481,812 15,808,010 Expenses: Program services 15,098, ,098,293 14,191,750 Supporting services: Management and general 820, , ,709 Fundraising 476, , ,603 Total supporting services 1,296, ,296,768 1,156,312 Total expenses 16,395, ,395,061 15,348,062 Changes in net assets 921, ,276-1,086, ,948 Net assets at beginning of year 12,451, , ,000 13,187,354 12,727,406 Net assets at end of year $ 13,372,684 $ 801,421 $ 100,000 $ 14,274,105 $ 13,187,354 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, 2016 with comparative totals for 2015 Program Services 2016 Supporting Services 2015 Management Fund- Grand and General Raising Totals Totals Salaries, tax and benefits $ 2,970,342 $ 623,551 $ 287,920 $ 3,881,813 $ 3,526,218 Resident expenses 5,311, ,311,077 5,131,454 Supplies 509,156 4,858 14, , ,318 Insurance 351,437 26,201 19, , ,448 Auto expenses 295, , ,033 Utilities and security 959,690 34,658 12,786 1,007,134 1,029,201 Vocational programs expense 1,123, ,123,728 1,244,139 Maintenance and repairs 1,094,989 3,214 1,907 1,100, ,100 Equipment rent 113,196 2,581 2, , ,930 Telephone 150,819 4,974 4, , ,019 Professional Fees 655,143 59,734 71, , ,546 Interest expense 102, , ,987 Small equipment 106,145 1,269 3, , ,943 Taxes and licenses 133,699 13,012 6, , ,964 Bad debt (recovery) expense (19,183) - - (19,183) 40,956 Meals and travel 54,425 6,717 11,710 72,852 40,094 Dues and subscriptions 3,708 6,050 1,256 11,014 9,904 Training expense 13,714 3,885 2,903 20,502 18,293 Office expense 57,076 13,907 16,716 87,699 87,964 Advertising 29, ,504 24,717 Depreciation and amortization 1,078,842 14,689 18,872 1,112, ,840 Loss on disposal of property and equipment ,538 Miscellaneous 2, , Total expenses $ 15,098,293 $ 820,376 $ 476,392 $ 16,395,061 $ 15,348,062 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, 2016 with comparative totals for 2015 Cash flows from operating activities: Cash received from grantors and contributors $ 3,619,030 $ 1,961,727 Cash received from clients and third-party payers 10,364,276 9,616,104 Cash paid to suppliers and employees (11,513,968) (10,748,684) Interest received 3,662 6,849 Interest paid (79,553) (76,036) Net cash provided by operating activities 2,393, ,960 Cash flows from investing activities: Purchases of property and equipment (1,065,586) (1,318,545) Proceeds from sales of property and equipment 125,350 21,200 Replacement reserve deposits (9,744) (17,892) Net cash used in investing activities (949,980) (1,315,237) Cash flows from financing activities: Proceeds from issuance of debt - 321,015 Repayment of debt (529,632) (410,061) Repayment of obligations under capital leases (24,642) (12,449) Contributions restricted for clinical building 191, ,660 Net cash provided by (used in) financing activities (363,246) 21,165 Net (decrease) increase in cash 1,080,221 (534,112) Cash at beginning of year 1,649,398 2,183,510 Cash at end of year $ 2,729,619 $ 1,649,398 (Continued) 6

9 CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) for the year ended June 30, 2016 with comparative totals for 2015 Reconciliation of changes in net assets to net cash provided by operating activities: Changes in net assets $ 1,086,751 $ 459,948 Adjustments to reconcile changes in net assets to net cash cash provided by operating activities: Depreciation and amortization 1,112, ,840 Contributions restricted for clinical building (191,028) (122,660) Bad debt (recovery) expense (19,183) 40,956 Accretion of imputed interest discount 23,271 41,951 In-kind property and equipment donations (217,746) (447,474) (Gain)/Loss on disposal of property and equipment (13,922) 5,538 Changes in assets and liabilities: Note receivable 22,713 21,998 Accounts receivable 77,436 (55,128) Grants receivable 1,090 (5,028) Promises to give (185,106) 96,807 Other receivables (5,663) (9,193) Due from residents 288 5,252 Prepaid expenses (68,733) 2,883 Inventory (219,970) (197,905) Accounts payable (95,587) (50,374) Accrued expenses 15,403 13,549 Refundable advance - grant 1,071,030 - Net cash provided by operating activities $ 2,393,447 $ 759,960 Supplemental schedule of noncash investing and financing activities: Purchase of building and land with debt proceeds $ 136,000 $ - Acquisition of equipment under capital leases 88,205 67,901 In-kind property and equipment donations 217, ,474 $ 441,951 $ 515,375 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. 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 measureable 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 5-40 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. 9

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 $196,601 and $305,795 for the years ended June 30, 2016 and 2015, 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, 2016 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, 2016 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 $30,504 and $24,717 for the years ended June 30, 2016 and 2015, 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, 2015, 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, 2016 and 2015: Note Receivable - current portion $ 25,000 $ 25,000 Note receivable - non current portion 25,000 50,000 Less unamortized discount based on imputed interest rate of 3.25% (2,336) (4,623) 22,664 45,377 Note receivable less unamortized discount $ 47,664 $ 70,377 11

14 3. PROMISES TO GIVE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Promises to give are summarized as follows at June 30, 2016 and 2015: Promises to give - current portion $ 100,000 $ 100,000 Promises to give - one to five years 200,000 - Less unamortized discount based on imputed interest rate of 3.25% (14,894) - 185,106 - Promises to give less unamortized discount $ 285,106 $ 100, PROPERTY AND EQUIPMENT Net property and equipment is summarized as follows at June 30, 2016 and 2015: Land $ 2,197,816 $ 2,197,746 Buildings and improvements 15,081,479 14,416,325 Furniture and equipment 1,074, ,480 Vehicles 2,552,285 2,200,188 Construction in progress 210,591 42,301 21,116,577 19,812,040 Less accumulated depreciation and amortization (8,322,883) (7,330,407) Net property and equipment $ 12,793,694 $ 12,481,633 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, 2016, $1,625,000 had been received 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 $28,494 and $55,445 for the years ended June 30, 2016 and 2015, 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 $19,562 and $11,183 for the years ended June 30, 2016 and 2015, respectively. 12

15 6. LEASES (Continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The equipment and related accumulated amortization as of June 30, 2016 are as follows: Equipment $ 156,106 Less accumulated amortization (30,745) $ 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: Year ending June 30, Operating Leases Capital Leases 2017 $ 33,583 $ 53, ,846 45, ,391 19, ,414 6,864 Thereafter Total minimum lease payments $ 77,234 $ 125,569 Less amount representing interest (6,554) Present value of net minimum capital lease payments $ 119,015 Less current maturities (49,209) Obligations under capital leases, less current maturities $ 69, REFUNDABLE ADVANCES Refundable advances are summarized as follows as of June 30, 2016 and 2015: 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, 2016 and 2015: North Carolina Housing Finance Agency Non-interest bearing note payable, due December 2037 in monthly installments of $794, with a face amount of $204,210 net of unaccreted discount of $97,943 (effective interest rate, 6.9%) as of June 30, 2016, secured by a deed of trust on property and assignment of rents and leases. $ 106,267 $ 108,383 City of Durham Non-interest bearing note payable, due April 2035 in monthly installments of $769, with a face amount of $173,673 net of unaccreted discount of $66,248 as of June 30, 2016 (effective interest rate, 5.6%) secured by real property and assignment of rents and leases. 107, ,564 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. 559, ,180 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. 1,319,998 1,452,016 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 $286,941 as of June 30, 2016 (effective interest rate, 3.25%), secured by real property and assignment of rents. 213, ,255 $ 2,306,036 $ 2,676,398 Less current portion (391,166) (379,066) Long-term portion $ 1,914,870 $ 2,297,332 Future maturities of long-term debt at June 30, 2016 are summarized as follows: Year ending June 30, 2017 $ 391, , , , ,421 Thereafter 964,577 $ 2,306,036 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, 2016 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, 2016 and 2015 was $451,132 and $472,846, respectively. Imputed interest expense of $23,271 and $35,364 is reported in the accompanying consolidated statement of functional expenses for the years ended June 30, 2016 and 2015, 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, 2016 and Interest accrues at 2.25% above the 30-day LIBOR (0.47% and 0.18% at June 30, 2016 and 2015, 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, 2016 or 2015, and the line expires on March 10,

18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. RESTRICTIONS ON ASSETS Temporarily restricted net assets at June 30, 2016 and 2015 respectively, are summarized as follows: Donated building (net book value) $ - $ 20,833 Food commodities 30, Education 21,616 37,627 Clinical Building 292, ,588 Automotive 4,850 - NCHFA Housing Program 97, ,349 City of Durham Housing Program 67,663 73,752 NCHFA Housing Program - Dormitories 286, ,745 $ 801,421 $ 636,145 Permanently restricted net assets at June 30, 2016 and 2015 respectively, are summarized as follows: 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 $131,015 and $133,643 for the years ended June 30, 2016 and 2015, 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, 2016 and 2015 were $88,265 and $53,951, respectively 12. SUBSEQUENT EVENTS Effective July 1, 2016, the Organization established a 457(b) plan for eligible employees. Management has evaluated subsequent events through October 11, 2016, the date which the consolidated financial statements are available for issue. 16

19 SCHEDULE OF EXPENDITURES OF FEDERAL AND STATE AWARDS for the year ended June 30, 2016 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 $ 55,764 $ 25,797 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 255, ,368 TOTAL FEDERAL AWARDS 311, ,165 State Awards: NC Department of Health and Human Services N/A ,625, ,055 * Alliance Behavioral Healthcare N/A N/A 350, ,000 TOTAL STATE AWARDS 1,975, ,055 TOTAL AWARDS $ 2,286,132 $ 1,155,220 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 II Langdon & Company up 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, 2016, 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 11, 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, Gamer, 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. ct~.4~~... ~ October 11,