Adelante Healthcare, Inc. Financial Statements, Supplementary Information and Single Audit Reports

Transcription

1 Financial Statements, Supplementary Information and Single Audit Reports Year Ended November 30, 2016 (With Comparative Totals for 2015)

2 Table of Contents November 30, 2016 (With Comparative Financial Information as of and for the Year Ended November 30, 2015) Independent Auditors' Report Financial Statements: Statement of Financial Position...3 Statement of Activities...4 Statement of Cash Flows...5 Notes to Financial Statements Supplementary Information: Schedule of Expenditures of Federal Awards...15 Notes to Schedule of Expenditures of Federal Awards...16 Single Audit Reports: 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 Independent Auditors' Report on Compliance for Each Major Program and on Internal Control Over Compliance Required by the Uniform Guidance Schedule of Findings and Questioned Costs Corrective Action Plan Summary Schedule of Prior Audit Findings

3 Independent Auditors' Report To the Board of Directors of Adelante Healthcare, Inc. Phoenix, Arizona Report on the Financial Statements We have audited the accompanying financial statements of Adelante Healthcare, Inc. (the Organization, a nonprofit corporation), which comprise the statement of financial position as of November 30, 2016, and the related statements of activities and cash flows for the year then ended, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America 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 financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Address 9019 East Bahia Drive Suite 100 Scottsdale, AZ Phone (602) Fax (602)

4 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Adelante Healthcare, Inc. as of November 30, 2016, and the changes in its net assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Report on Summarized Comparative Information We have previously audited the Organization's 2015 financial statements, and we expressed an unmodified audit opinion on those audited financial statements in our report dated July 1, In our opinion, the summarized comparative information presented herein as of and for the year ended November 30, 2015, is consistent, in all material respects, with the audited financial statements from which it has been derived. Other Matters Other Information Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying schedule of expenditures of federal awards, as required by Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, is presented for purposes of additional analysis and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the 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 July 11, 2017, on our consideration of the Organization'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 the internal control over financial reporting or compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Organization's internal control over financial reporting and compliance. July 11,

5 Statement of Financial Position November 30, 2016 (With Comparative Financial Information as of November 30, 2015) ASSETS Current assets: Cash and cash equivalents $ 846,909 $ 758,984 Investments 810, ,181 Accounts receivable, patient revenue, net 10,598,821 8,054,486 Grants receivable 554, ,925 Other receivables 465, ,825 Other current assets 715, ,572 Total current assets 13,992,259 11,241,973 Property and equipment: Land 185, ,601 Construction in progress 18, ,966 Building 1,434,226 1,434,226 Leasehold improvements 4,367,023 3,396,231 Furniture and equipment 6,137,580 5,402,928 Software 1,283, ,865 13,425,610 12,016,817 Less accumulated depreciation and amortization (7,887,398) (6,369,820) Total property and equipment 5,538,212 5,646,997 Total assets $ 19,530,471 $ 16,888,970 LIABILITIES AND NET ASSETS Current liabilities: Accounts payable $ 2,230,697 $ 1,970,749 Accrued payroll and related liabilities 3,088,407 1,815,729 Refundable advances 182,399 57,920 Deferred rent, current portion 57,880 50,857 Line-of-credit 2,835,000 1,735,000 Long-term debt, current portion 948, ,478 Total current liabilities 9,343,309 6,239,733 Deferred rent, less current portion 812, ,472 Long-term debt, less current portion 1,576,883 1,458,682 Total liabilities 11,732,508 8,535,887 Unrestricted net assets 7,797,963 8,353,083 Total liabilities and net assets $ 19,530,471 $ 16,888,970 The accompanying notes are an integral part of these statements. 3

6 Statement of Activities Year Ended November 30, 2016 (With Comparative Financial Information for the Year Ended November 30, 2015) Revenue and support: Patient revenue, net $ 34,301,970 $ 26,145,470 Direct federal grants 6,469,175 5,368,899 Federal support passed through 2,123,628 2,032,314 Other grants and contracts 763,312 1,140,610 Contributions 70,244 89,624 Investment (loss) income 23,781 (7,842) In-kind contributions 1,209,938 1,264,871 Incentives and other income 619, ,892 Total revenue and support 45,581,609 36,626,838 Expenses: Personnel services 25,108,121 19,571,001 Fringe benefits 4,791,656 3,464,146 Contractual services 3,243,016 2,126,387 Supplies 2,787,236 2,483,794 Administrative expenses 2,490,005 2,396,046 Occupancy 4,044,254 3,817,913 Depreciation and amortization 1,750,402 1,409,511 Travel and training 498, ,010 Interest 214, ,378 In-kind expenses 1,209,938 1,264,871 Total expenses 46,136,729 37,127,057 Change in net assets, before capital grants (555,120) (500,219) Capital grants 150,000 Change in net assets (555,120) (350,219) Net assets, beginning of year 8,353,083 8,703,302 Net assets, end of year $ 7,797,963 $ 8,353,083 The accompanying notes are an integral part of these statements. 4

7 Statement of Cash Flows Year Ended November 30, 2016 (With Comparative Financial Information for the Year Ended November 30, 2015) Cash flows from operating activities: Change in net assets $ (555,120) $ (350,219) Adjustments to reconcile changes in net assets to net cash provided by operating activities: Depreciation and amortization 1,750,402 1,409,511 Gain on disposal of property and equipment (52,178) (1,500) (Gain) loss on investments (23,781) 20,062 Capital grants (150,000) Changes in assets and liabilities: Accounts receivable, patient revenue, net (2,544,335) (845,261) Grants receivable 111, ,475 Other receivables (73,665) (372,157) Other current assets (135,679) (236,243) Accounts payable 259, ,685 Accrued payroll and related liabilities 1,272,678 (12,680) Refundable advances 124,479 (110,213) Deferred rent (18,133) 142,935 Net cash provided by operating activities 115, ,395 Cash flows from investing activities: Payments for purchases of investments 3,978 (11,819) Payments for purchases of property and equipment (532,142) (1,799,373) Net cash used for investing activities (528,164) (1,811,192) Cash flows from financing activities: Principal payments on notes payable (599,648) (723,523) Net proceeds from line-of-credit 1,100,000 1,735,000 Capital grants 150,000 Net cash provided by financing activities 500,352 1,161,477 Net increase (decrease) in cash and cash equivalents 87,925 (105,320) Cash and cash equivalents, beginning of year 758, ,304 Cash and cash equivalents, end of year $ 846,909 $ 758,984 Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 214,035 $ 178,378 Note proceeds paid directly to refinance debt $ 1,860,000 Noncash transaction: Equipment acquired under capital leases $ 1,197,178 The accompanying notes are an integral part of these statements. 5

8 Notes to Financial Statements November 30, 2016 (With Comparative Financial Information as of and for the Year Ended November 30, 2015) NOTE 1 - BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Adelante Healthcare, Inc. (the Organization) is an Arizona nonprofit corporation. The Organization operates two free-standing Community/Migrant Health Centers located in Surprise and Mesa, Arizona, seven satellite clinics in Maricopa County, and a WIC program. WIC is a health program which provides nutritious supplemental foods, nutrition education, and referrals to health and social services for pregnant, breast feeding, and postpartum women, and infants and children under five years of age. The Organization receives federal and non-federal funds in the form of grants from various agencies to support programs including immunization, dental and prenatal services, as well as the comprehensive medical care center and the seven satellites noted above. These financial statements include the results of operations under the U.S. Department of Health and Human Services (DHHS) grant award numbers 6H80CS and 5H80CS totaling $6,469,175 and $5,518,899, respectively, for the years ended November 30, 2016 and The DHHS grants comprised 15% of the Organization's total revenue in 2016 and The significant accounting policies of the Organization follow: Basis of Presentation: Financial statement presentation follows the recommendations of the Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) topic of Not-for-Profit Entities. The Organization 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. The Organization had no temporarily restricted or permanently restricted net assets at November 30, 2016 and Use of Estimates: In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents: For purposes of the statements of cash flows, the Organization considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Investments: Investments consist of mutual funds, and are recorded at fair value. Unrealized gains and losses are included in investment income. Grants Receivable: The Organization recognizes grants and contracts as support when eligible costs are incurred or services are provided. Grants receivable are recorded when grant and contract expenses are incurred or contracted services have been provided, but reimbursement has not been received by the Organization. The Organization considers the balances to be fully collectible, and accordingly no allowance for uncollectible amounts has been recorded in the financial statements. 6

9 Notes to Financial Statements November 30, 2016 (With Comparative Financial Information as of and for the Year Ended November 30, 2015) NOTE 1 - BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Property and Equipment: Property and equipment costing $1,000 or more are stated at cost, which is allocated to current and future periods through depreciation and amortization. Depreciation is computed using the straight-line method based on estimated economic lives of the assets as follows: Building Furniture and equipment Leasehold improvements Software years 3-10 years Lesser of the estimated useful life or remaining term of the applicable lease 3-7 years DHHS retains a reversionary interest in property and equipment purchased with its funds, as well as proceeds from the sale of such assets. Refundable Advances: The Organization records funds received from grant awards classified as exchange transactions as refundable advances until the related funds are expended and/or the services related to the awards are performed, at which time the funds are recognized as revenue. Deferred Rent: The Organization accounts for rent abatements contained in its leases on the straightline basis over the lease term for which rent is to be paid. Capitated Arrangements: The Organization received capitation payments under contracts with certain Arizona Health Care Cost Containment System (AHCCCS) funded health plans, based upon the number of persons covered by the contracts. The payments were recorded as net patient revenue when earned. Total capitation payments included in net patient revenue were $434,872 for the year ended November 30, No capitation payments were received during the year ended November 30, Expenses related to healthcare services provided under these contracts were recorded when incurred. The Organization may have been required to provide primary healthcare services which exceeded capitation premiums. However, the AHCCCS Prospective Payment System reimbursed the Organization for all unreimbursed costs of providing health care services to its members. Contributions: Contributions are reported in accordance with FASB ASC's topic of Not-for-Profit Entities. Contributions received are recorded as unrestricted, temporarily restricted, or permanently restricted support, depending on the existence and/or nature of any donor restrictions. All donorrestricted support is reported as an increase in temporarily or permanently restricted net assets depending on the nature of the restriction. When a restriction expires (that is, when the stipulated time restriction ends or purpose restriction is accomplished) temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. In-kind Contributions: In-kind contributions are also recognized in accordance with the provisions of FASB ASC's topic of Not-for-Profit Entities at their estimated fair value as of the date of the donation. The Organization recognized revenues and expenses totaling $1,209,938 and $1,264,871 for donated pharmaceuticals for the years ended November 30, 2016 and 2015, respectively. 7

10 Notes to Financial Statements November 30, 2016 (With Comparative Financial Information as of and for the Year Ended November 30, 2015) NOTE 1 - BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income Taxes: The Organization is exempt from federal and state income taxes as an organization other than a private foundation under Section 501(c)(3) of the Internal Revenue Code and similar state provisions. Expense Allocation: The costs of providing various programs and other activities have been summarized on a functional basis in Note 11. Accordingly, certain costs have been allocated to the programs and supporting services benefited. Reclassification: Certain amounts in the 2015 financial statements have been reclassified to conform to the 2016 presentation. Prior Year Summarized Information: The 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 only be read in conjunction with the Organization's financial statements for the year ended November 30, 2015, from which the summarized information was derived. NOTE 2 - CONCENTRATION OF CREDIT RISK The Organization's cash and cash equivalents on deposit at financial institutions are insured in limited amounts by the Federal Deposit Insurance Corporation (FDIC) and the Securities Investor Protection Corporation (SIPC). Balances may at times exceed insured amounts; however, the Organization manages the concentration of credit risk by maintaining deposits in multiple, high quality financial institutions. The Organization has not experienced any losses in such accounts and management believes it is not exposed to any significant credit risk. NOTE 3 - INVESTMENTS Details of the Organization's investments are presented in Note 14. Investment income for the years ended November 30 is as follows: Net gain (loss) $ 23,781 $ (20,062) Interest and dividends 12,220 Total investment income (loss) $ 23,781 $ (7,842) 8

11 Notes to Financial Statements November 30, 2016 (With Comparative Financial Information as of and for the Year Ended November 30, 2015) NOTE 4 - ACCOUNTS RECEIVABLE, PATIENT REVENUES, NET Accounts receivable consist of charges to patients for services provided to them. Settled charges have been adjusted by a sliding fee schedule based on each patient's ability to pay. Allowances for contractual adjustments and doubtful accounts have been recorded to cover receivable amounts management estimates will not be collected. The Prospective Payment System (PPS) receivable is included in accounts receivable, net, and it represents amounts due from the Arizona Health Care Cost Containment System (AHCCCS) for the unreimbursed cost of providing primary health care to AHCCCS members. The Organization completes annual reconciliations between actual costs of providing healthcare services to AHCCCS members and payments received for those encounters. The PPS receivable balance at November 30, 2016 and 2015 was comprised of the annual reconciliation amount due from AHCCCS. As of April 1, 2015, AHCCCS replaced the Prospective Payment System, and now the Organization receives its allinclusive per visit cost for each AHCCCS encounter by directly billing the contracted third party AHCCCS insurance plans. The following is a summary at November 30, Accounts receivable, patient revenues $ 7,083,133 $ 7,102,589 Allowances for contractual adjustments and doubtful accounts (2,252,348) (2,682,032) 4,830,785 4,420,557 PPS receivable, net 5,768,036 3,633,929 Accounts receivable, patient revenue, net $ 10,598,821 $ 8,054,486 NOTE 5 - LINE-OF-CREDIT The Organization has a line-of-credit with a maximum balance of $2.835 million. At November 30, 2016 and 2015, the Organization owed $2,835,000 and $1,735,000, respectively, and the interest rate was 4.5%. The line-of-credit matures in August

12 Notes to Financial Statements November 30, 2016 (With Comparative Financial Information as of and for the Year Ended November 30, 2015) NOTE 6 - LEASES Capital Leases The Organization entered into two capital lease agreements during the year ended November 30, 2016, for the purchase of equipment. The lease agreements expire at various dates through March The total cost of equipment acquired was approximately $1,241,000, with related accumulated amortization of $169,771 at November 30, Future minimum payments under the capital lease arrangements are as follows: Years ending November 30: 2017 $ 541, , , , ,237 1,228,680 Less amount representing interest from 4.5-6% 82,059 Total minimum lease payments $ 1,146,621 Operating Leases The Organization has several non-cancelable operating leases for certain facilities and equipment that expire on various dates through Rental expense for those leases was $3,301,434 and $3,096,228 for the years ended November 30, 2016 and 2015, respectively. Deferred rent on those leases was $870,196 and $888,329 at November 30, 2016 and 2015, respectively. Future minimum operating lease commitments are as follows: Years ending November 30: 2017 $ 2,978, ,565, ,247, ,912, ,819,285 Thereafter 10,300,672 Total minimum lease payments $ 21,824,011 10

13 Notes to Financial Statements November 30, 2016 (With Comparative Financial Information as of and for the Year Ended November 30, 2015) NOTE 7 - LONG-TERM DEBT Details of the Organization's long-term debt at November 30, 2016 and 2015, are as follows: Note payable to refinance various debts, secured by a deed of trust on real property. Interest at 3.95% and principal are payable in monthly installments of $34,352 beginning April The note matures in March $ 1,282,847 $ 1,636,079 Unsecured note payable in monthly installments of $3,787 including interest at 8%, maturing February , ,948 Capital lease obligations (Note 6) 1,146, ,133 2,525,809 2,068,160 Less current maturities: 948, ,478 $ 1,576,883 $ 1,458,682 Future maturities of the long-term debt are as follows: Years ending November 30: 2017 $ 948, , , , ,965 $ 2,525,809 NOTE 8 - OTHER GRANTS AND CONTRACTS The Organization receives grants and contract revenue from various sources. The following is a summary for the years ended November 30: A.T. Still University of Health Sciences $ 385,304 $ 385,704 Dignity Health 561,308 Meaningful Use 204,000 Virginia G. Piper Charitable Trust 77,035 Other 174, ,563 $ 763,312 $ 1,140,610 11

14 Notes to Financial Statements November 30, 2016 (With Comparative Financial Information as of and for the Year Ended November 30, 2015) NOTE 9 - PATIENT REVENUE, NET Patient revenue consists of gross charges to patients for services rendered. These charges are comparable to what other health service facilities would charge for the same services. Patient fees for qualifying patients are then decreased by a sliding fee scale (SFS) subsidy adjustment based on each patient's ability to pay. Patient revenues also include capitation revenues, for which amounts received are based on the number of patients assigned to the provider, with a set amount per patient received each month whether services are provided or not. Also, the Organization receives AHCCCS fees for services provided that are not included in the per patient set amount. These charges are adjusted based on a fee schedule from the provider. The following is a summary of patient and PPS revenues: Patient service charges $ 65,248,997 $ 41,251,588 Capitation receipts 434,872 PPS revenue 4,520,005 Adjustments including sliding fee scale subsidies, disallowed insurance, and uncollectible fees (30,947,027) (20,060,995) Net patient revenue $ 34,301,970 $ 26,145,470 NOTE 10 - RETIREMENT PLAN The Organization has a 403(b) defined contribution retirement plan, for which all employees are eligible to participate. Under the plan, employee contributions are immediately 100% vested and the Organization's contributions vest at a rate of 20% per year of service. The Organization may voluntarily contribute to eligible plan participant accounts after one year of service and working 1,000 hours. The Organization did not make contributions to the plan for the years ended November 30, 2016 and NOTE 11 - FUNCTIONAL EXPENSE CLASSIFICATION The following is a summary of the Organization's expenses by function for the years ended November 30, Primary care $ 30,598,836 $ 25,809,479 WIC program 2,006,429 1,956,105 General and administrative 13,529,598 9,332,501 Fundraising 1,866 28,972 Total $ 46,136,729 $ 37,127,057 NOTE 12 - SUBSEQUENT EVENTS The Organization has evaluated all events or transactions that occurred after November 30, 2016 through July 11, 2017, the date which the financial statements were available to be issued. 12

15 Notes to Financial Statements November 30, 2016 (With Comparative Financial Information as of and for the Year Ended November 30, 2015) NOTE 13 - CONTINGENT LIABILITIES Compliance: The Organization participates in federally-funded and state-funded programs administered by various government agencies. The programs included in these financial statements may be subject to program compliance and/or financial monitoring by the granting agencies or their representatives. The amount, if any, of expenses which may be disallowed by the granting agencies cannot be determined at this time. Healthcare Regulation: The healthcare industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not limited to, matters such as licensure, accreditation, program participation requirements, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. Violations of these laws and regulations could result in expulsion from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Management believes that the Organization is in compliance with all applicable laws and regulations. Compliance with such laws and regulations can be subject to future review and interpretation as well as regulatory actions unknown or unasserted at this time. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) broadened the scope of certain fraud and abuse laws by adding several criminal provisions for fraud offenses that apply to all health benefit programs. HIPAA also added a prohibition against incentives intended to influence decisions by Medicare beneficiaries as to the provider from which they receive services. HIPAA was followed by the Balanced Budget Act of 1997, which created additional fraud and abuse provisions, including civil penalties for contractors. HIPAA developed standards to protect the privacy and security of individually identifiable healthrelated information. The privacy standards regulate the use and disclosure of health-related information, whether communicated electronically, on paper or orally. Also, additional security regulations became mandatory on April 20, 2005, and require health care providers to implement administrative, physical and technical practices to protect the security of individually identifiable health-related information that is maintained or transmitted electronically. In February 2010, HIPAA requirements were updated by the Health Information Technology for Economic and Clinical Health Act (HITECH Act). Under the HITECH Act, violations of HIPAA requirements could now result in civil penalties of up to $50,000 per incident, and up to $1.5 million in total for each type of violation in a calendar year. Professional Liability Insurance: The Federally Supported Health Centers Assistance Act of 1992 authorizes the Public Health Service to assume responsibility for medical malpractice claims involving approved grantees and certain other health care providers under the Federal Tort Claims Act (FTCA). The Organization is currently covered under the FTCA. Litigation: Periodically, the Organization is involved in litigation and claims arising in the normal course of operations. In the opinion of management, based on consultation with legal counsel, losses, if any, from these matters are covered by insurance or are immaterial. 13

16 Notes to Financial Statements November 30, 2016 (With Comparative Financial Information as of and for the Year Ended November 30, 2015) NOTE 13 - CONTINGENT LIABILITIES (CONTINUED) Health Insurance: During the year ended November 30, 2012, the Organization became partially selfinsured for employee health plan benefits. The Organization's health insurance is provided under a partially self-funded employee welfare benefit plan managed by an independent third party. At November 30, 2016 and 2015, the Organization estimated amounts payable on self-insured claims to be approximately $570,000 and $110,000, respectively, which is included in accrued payroll and related liabilities in the accompanying statements of financial position. The Organization believes this amount is adequate to provide for the final disposition of such claims. NOTE 14 - FAIR VALUE MEASUREMENTS Accounting principles generally accepted in the United States of America (GAAP) establish a framework for measuring fair value and expanded disclosures about fair value measurements, which are determined based on assumptions that market participants would use in pricing assets and liabilities. GAAP establishes a fair value hierarchy that distinguishes between market participant assumptions and the Organization's own assumptions about market participant assumptions. Observable inputs are assumptions based on market data obtained from independent sources; while unobservable inputs are the Organization's own assumptions about what market participants would assume based on the best information available in the circumstance. Level 1: Unadjusted quoted market prices in active markets for identical assets or liabilities. Level 2: Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability. The Organization does not have any financial instruments it values based on Level 2 inputs. Level 3: Unobservable inputs for the asset or liability. The Organization does not have any financial instruments it values based on Level 3 inputs. The following table sets forth the level within the fair value hierarchy of the Organization's assets and liabilities subject to recurring fair value measurement as of November 30: Level 1 Level 1 Bonds $ 391,499 $ 344,359 Equity securities 278, ,642 Exchange traded funds (ETF) 43, ,217 Money market 13,323 12,883 Stocks 50,670 Other 33,078 31,080 Total $ 810,984 $ 791,181 14

17 SUPPLEMENTARY INFORMATION

18 Federal Grantor/Pass-Through Grantor/Program Title Adelante Healthcare, Inc. Schedule of Expenditures of Federal Awards Year Ended November 30, 2016 Federal CFDA Number Pass-Through Grantor's Number Expenditures Amount Provided to Subrecipient U.S. Department of Health and Human Services Direct programs: Health Center Program Cluster: Consolidated Health Centers N/A $ 6,469,175 Passed through the Arizona Alliance of Community Health Centers: PPHF Cooperative Agreement to Support Navigators in Federallyfacilitated and State Partnership Exchanges NAVCA ,300 Passed through the Arizona Department of Health Services: National Bioterrorism Hospital Preparedness Program HI ,961 - Total U.S. Department of Health and Human Services 6,535,436 - U.S. Department of Agriculture Passed through the Arizona Department of Health Services: Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) ADHS ,994,545 WIC Farmers' Market Nutrition Program HP ,313 Passed through the Arizona Community Action Association: State Administrative Matching Grants for the Supplemental Nutrition Program None 13,958 - Total U.S. Department of Agriculture 2,009,816 - Total Expenditures of Federal Awards $ 8,545,252 $ - The accompanying notes are an integral part of this schedule. 15

19 NOTE 1 - BASIS OF PRESENTATION Adelante Healthcare, Inc. Notes to Schedule of Expenditures of Federal Awards Year Ended November 30, 2016 The accompanying schedule of expenditures of federal awards includes the federal grant activity of Adelante Healthcare, Inc. and is presented on the accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of Title 2 U.S Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). NOTE 2 - CATALOG OF FEDERAL DOMESTIC ASSISTANCE (CFDA) NUMBERS The program titles and CFDA numbers were obtained from the federal or pass-through grantor or the 2016 Catalog of Federal Domestic Assistance. NOTE 3 - INDIRECT COST RATE The Organization has elected not to use the 10 percent de minimis indirect cost rate as allowed under the Uniform Guidance. NOTE 4 - SUBRECIPIENTS The Organization did not pass on any funds to subrecipients during the fiscal year ended November 30,

20 SINGLE AUDIT REPORTS

21 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 To the Board of Directors of Adelante Healthcare, Inc. Phoenix, Arizona We have audited, 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, the financial statements of Adelante Healthcare, Inc. (the Organization), which comprise the statement of financial position as of November 30, 2016, and the related statements of activities, and cash flows for the year then ended, and the related notes to the financial statements, and have issued our report thereon dated July 11, Internal Control Over Financial Reporting In planning and performing our audit of the 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 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. Our consideration of internal control was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. However, as described in the accompanying schedule of findings and questioned costs, we identified certain deficiencies in internal control that we consider to be material weaknesses and significant deficiencies. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. We consider the deficiency described in the accompanying schedule of findings and questioned costs as to be a material weakness. 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. We consider the deficiency described in the accompanying schedule of findings and questioned costs as to be a significant deficiency. 17 Address 9019 East Bahia Drive Suite 100 Scottsdale, AZ Phone (602) Fax (602)

22 Compliance and Other Matters As part of obtaining reasonable assurance about whether the Organization s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. The Organization's Response to Findings The Organization s response to the findings identified in our audit are presented in its corrective action plan at the end of this report. The Organization's response was not subjected to the auditing procedures applied in the audit of financial statements, and accordingly, we express no opinion on it. 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. July 11,

23 To the Board of Directors of Adelante Healthcare, Inc. Phoenix, Arizona Independent Auditors' Report on Compliance for Each Major Program and on Internal Control Over Compliance Required by the Uniform Guidance Report on Compliance for Each Major Federal Program We have audited Adelante Healthcare, Inc. (the Organization)'s compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on each of the Organization's major federal programs for the year ended November 30, The Organization's major federal programs are identified in the summary of auditors' results section of the accompanying schedule of findings and questioned costs. Management s Responsibility Management is responsible for compliance with federal statutes, regulations, and the terms and conditions of its federal awards applicable to its federal programs. Auditors' Responsibility Our responsibility is to express an opinion on compliance for each of the Organization's major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the Organization's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of the Organization's compliance. Opinion on Each Major Federal Program In our opinion, the Organization complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended November 30, Other Matters The results of our auditing procedures disclosed an instance of noncompliance, which is required to be reported in accordance with the Uniform Guidance and which is described in the accompanying schedule of findings and questioned costs as an item Our opinion on each major federal program is not modified with respect to this matter. 19 Address 9019 East Bahia Drive Suite 100 Scottsdale, AZ Phone (602) Fax (602)

24 The Organization s response to the noncompliance finding identified in our audit is presented in its corrective action plan at the end of this report. The Organization's response was not subjected to the auditing procedures applied in the audit of compliance, and accordingly, we express no opinion on it. Report on Internal Control over Compliance Management of the Organization is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the Organization's internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the Organization's internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. We identified a certain deficiency in internal control over compliance, as described in the accompanying schedule of findings and questioned costs as item , that we consider to be a material weakness. The Organization s response to the internal control over compliance findings identified in our audit is presented in its corrective action plan at the end of this report. The Organization's response was not subjected to the auditing procedures applied in the audit of compliance, and accordingly, we express no opinion on it. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose. July 11,

25 Schedule of Findings and Questioned Costs Year Ended November 30, 2016 SECTION I - SUMMARY OF AUDITORS' RESULTS Financial Statements: Type of auditors' report issued: Internal control over financial reporting: Unmodified Material weaknesses identified? X yes no Significant deficiencies identified? X yes none reported Noncompliance material to financial statements noted? yes X no Federal Awards: Internal control over major programs: Material weaknesses identified? X yes no Significant deficiencies identified? yes X none reported Type of auditors' report on compliance for major programs: Unmodified Any audit findings disclosed that are required to be reported in accordance with 2 CFR (a)? X yes no Identification of major programs: CFDA Number Name of Federal Programs or Cluster Health Centers Cluster: Consolidated Health Centers Dollar threshold used to distinguish between Type A and Type B programs: Auditee qualified as low-risk auditee? $750,000 yes X no Other Matters Auditee's Summary Schedule of Prior Audit Findings required to be reported in accordance with 2 CFR (b)? X yes no 21

26 Schedule of Findings and Questioned Costs Year Ended November 30, 2016 SECTION II - FINANCIAL STATEMENT FINDINGS Allowances for Contractual Adjustments and Doubtful Accounts (Repeating Finding: ) Criteria: Condition: Cause: Effect: Recommendation: Management response: Financial Reporting Process Criteria: Condition: Cause: Effect: Recommendation: The Organization should have adequate internal controls in place to help ensure that its accounts receivable, patient revenue, net are properly stated. Management's estimation of allowances for contractual adjustments and doubtful accounts should be based on the outstanding patient receivable balance, patient mix, and historical collections. Management's estimation of allowances for contractual adjustments and doubtful accounts were materially understated in relation to subsequent collections and; therefore, the net accounts receivable and patient revenue accounts were materially overstated. The Organization's analysis of the patient receivable balances did not adequately adjust for private insurance payor collection difficulties encountered. Prior to posting an audit adjustment, the Organization's net accounts receivable and patient revenue balances were overstated by approximately $350,000. The Organization should continue strengthening its internal control procedures to help ensure that the net accounts receivable and patient revenue balances are properly reported in the financial statements. In addition, the Organization should constantly monitor and investigate billing and collection activities to identify reasons for denials or delayed payments, and attempt to resolve these issues as quickly as possible in order to improve cash flows. Two commercial payors represent the majority of the encountered difficulties and have been historically challenging to work with. The Organization continues to engage these in problem resolution, including items affecting the 2016 audit period. The Organization should have adequate internal controls in place to help ensure that its financial statements and related note disclosures are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). During fieldwork, we noted discrepancies between the working trial balance and the Organization's supporting schedules. In response, management completed additional reconciliations and recorded post-closing entries to properly state those balances. The Organization did not have adequate procedures in place to help ensure that all of the Organization's year-end supporting schedules agreed to the working trial balance. Additional year-end reconciliations and adjustments were necessary to correct account balances in the Organization's financial statements. The Organization should evaluate its year-end financial closing process and develop comprehensive procedures to help ensure the working trial balance is accurate and financial reports are prepared in accordance with GAAP. 22

27 Schedule of Findings and Questioned Costs Year Ended November 30, 2016 SECTION III - FEDERAL AWARD FINDINGS AND QUESTIONED COSTS Federal Agency: Department of Health and Human Services Cluster Name: Health Centers Cluster CFDA No. and Name : Consolidated Health Centers Award number: 6H80CS : Program Income (Repeating Finding: , & ) Criteria: Patients applying for sliding fee scale (SFS) discounts should have their income levels adequately documented and accurately calculated, and patients should be given the proper discount based upon their income level in accordance with 42 CFR Section 51c.303(f). Condition: Cause: Effect: Recommendation: Out of forty-one sliding fee scale patient applications tested, three exceptions were noted: 1) Two instances were noted where no documentation was available to test the SFS discount provided. 2) One instance was noted where the income level calculated was not supported by the documentation provided. Unknown We could not verify whether proper discounts or adjusted fees were applied based on the patient's ability to pay. To help ensure the Organization is in compliance with the SFS, the Organization should continuously adhere to its formal written policies and procedures, and maintain supporting documentation in accordance with its documentation retention policy. In addition, the Organization should consider using the Health-e-Arizona Plus as the source of SFS applications and maintenance of the SFS documentation. 23

28 ADELANTE HEAlTHCARE Sustainable Health Core for All CORRECTIVE ACTION PLAN July 11,2017 We have prepared the following corrective action plan as required by the standards applicable to financial audits contained in Government Auditing Standards and by the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Specifically, for each finding we are providing you with the names of the contact people responsible for corrective action, the corrective action planned, and the anticipated completion date. FINANCIAL STATEMENT FINDING : Allowances for contractual adjustments and doubtful accounts Recommendation: Action Taken: The Organization should continue strengthening its internal control procedures to help ensure that the net accounts receivable and patient revenue balances are properly reported in the financial statements. In addition, the Organization should constantly monitor and investigate billing and collection activities to identify reasons for denials or delayed payments, and attempt to resolve these issues as quickly as possible in order to improve cash flows. During FY20 16, the organization experienced significant growth (31%) and demand for patient care. This increase in patient services affected all financial payer classes. This included commercial patients and new payers entering the Health Insurance Exchanges under the Affordable Care Act. Many payer shortcomings were encountered during the new plan implementation including credentialing, panel assignment, provider roster, payment processing and overall infrastructure development. These challenges, along with a small number of other commercial plans, created reimbursement challenges for the organization. Action items include - 1. Formal claim processing reviews with a small number of commercial payers (those representing the majority basis of the recommendation).

29 These fonnal reviews will continue until the organization is comfortable with the payer claims payment process. 2. Formal internal reporting of commercial claims has been initiated. This results in specific issue identification, action planning and resolution by the organization's billing and contracting teams. 3. Historical zero balance collection activity has been the basis for determining the estimated allowance doubtful accounts. This procedure has been modified to include the estimated effect of the above mentioned internal analysis. 4. Continued billing staff recruitment to keep up with the organization's growth. Completion date: June : Financial reporting process Recommendation: Action Taken: Completion date: The Organization should evaluate its year-end financial closing process and develop comprehensive procedures to help ensure the working trial balance is accurate and financial reports are prepared in accordance with GAAP. During FY20 16, new and additional staff were added to the finance department. As these resources become more familiar with the organization and the industry, it is anticipated this finding will not reoccur. June 2017 FEDERAL AWARD FINDINGS AND QUESTIONED COSTS : Program Income Recommendation: Action Taken: Completion date: To help ensure the Organization is in compliance with the SFS, the Organization should continuously adhere to its formal written policies and procedures, and maintain supporting documentation in accordance with its documentation retention policy. In addition, the Organization should consider using the Health-e-Arizona Plus as the source of the SFS application and maintenance of the SFS documentation. The SFS policy and procedure was modified to reflect this recommendation. June 2017 Signed: ----=--~- ~- Title: Chief Financial Officer

30 ADELANTE HEALTHCARE Sustainable Health Care for All SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS Year Ended November 30, 2016 Status of Financial Statement Findings Finding No: Status: Reason for recurrence and planned corrective action Allowance for contractual adjustments and doubtful accounts Not corrected. Similar condition and corrective action noted as an item During FY20 16, the organization experienced significant growth (31 %) and demand for patient care. This increase in patient services affected all financial payer classes. This included commercial patients and new payers entering the Health Insurance Exchanges under the Affordable Care Act. Many payer shortcomings were encountered during the new plan implementation including credentialing, panel assignment, provider roster, payment processing and overall infrastructure development. These challenges, along with a small number of other commercial plans, created reimbursement challenges for the organization. Action items include - 1. Formal claim processing reviews with a small number of commercial payers (those representing the majority basis of the recommendation). These formal reviews will continue until the organization is comfortable with the payer claims payment process. 2. Formal internal reporting of commercial claims has been initiated. This results in specific issue identification, action planning and resolution by the organizations billing and contracting teams. 3. Historical zero balance collection activity has been the basis for determining the estimated allowance doubtful accounts. This procedure has been modified to include the estimated effect of the above mentioned internal analysis. 4. Continued billing staff recruitment to keep up with the organization's growth.

31 Finding No: Status: PPS receivable Fully corrected. Status of Federal Award Findings and Questioned Costs CFDA No: Finding No: Status: Reason for recurrence and planned corrective action Health Centers Cluster: Consolidated Health Centers Affordable Care Act (ACA) Grants for New and Expanded Services under the Health Centers Program , and Program Income Not corrected. Similar condition and corrective action noted as an item The SFS policy and procedure was modified to reflect this recommendation. Signed: Title: Chief Financial Officer