Financial Statements September 30, 2016 Touchstone Behavioral Health dba Touchstone Health Services

Transcription

1 Financial Statements Touchstone Behavioral Health dba Touchstone Health Services

2 Table of Contents Independent Auditor s Report... 1 Statement of Financial Position... 3 Statement of Activities and Change in Net Assets... 4 Statement of Functional Expenses... 5 Statement of Cash Flows... 6 Notes to Financial Statements... 7

3 Independent Auditor s Report To the Board of Directors Touchstone Behavioral Health dba Touchstone Health Services Phoenix, Arizona Report on the Financial Statements We have audited the accompanying financial statements of Touchstone Behavioral Health dba Touchstone Health Services (the Organization), which comprise the statement of financial position as of, and the related statements of activities and change in net assets, functional expenses, 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. Auditor s 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 consolidated financial statements. The procedures selected depend on the auditor s 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 Organization 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 Organization 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. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects the financial position of the Organization as of, and the changes in its nets assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America N. Central Ave., Ste. 400 Phoenix, AZ T F EOE 1

4 Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued a report dated April 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, 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 the Organization s internal control over financial reporting and compliance. Phoenix, Arizona April 11,

5 Statement of Financial Position Assets Current Assets Cash and cash equivalents $ 3,907,062 Grants and contracts receivable 187,257 Clients and insurance receivable, net 96,368 Prepaid expenses and other assets 253,277 Total current assets 4,443,964 Property and Equipment, Net 1,567,533 Investments 2,960,729 Deposits 36,926 Total assets $ 9,009,152 Liabilities and Net Assets Current Liabilities Accounts payable $ 27,265 Accrued expenses 900,463 Deferred revenue 2,660,656 Current portion of deferred rent 17,066 Current portion of capital lease obligations 41,755 Current portion of long-term debt 41,931 Total current liabilities 3,689,136 Deferred Rent, Net of Current Portion 205,240 Capital Lease Obligations, Net of Current Portion 56,889 Long-Term Debt, Net of Current Portion 777,516 Total liabilities 4,728,781 Net Assets Unrestricted 4,278,819 Temporarily restricted 1,552 Total net assets 4,280,371 Total liabilities and net assets $ 9,009,152 See Notes to Financial Statements 3

6 Statement of Activities and Change in Net Assets Year Ended Temporarily Unrestricted Restricted Total Revenue, Gains and Other Support Grants and contracts $ 16,451,190 $ - $ 16,451,190 Client fees and insurance (net of contractual allowances and discounts) 26,311-26,311 Contributions 13,796 1,552 15,348 Other 14,047-14,047 Total operating revenue, gains and other support 16,505,344 1,552 16,506,896 Operating Expenses Personnel services 11,668,492-11,668,492 Professional services 1,868,218-1,868,218 Property services 891, ,846 Other purchased services 491, ,688 Supplies 127, ,012 Technology expense 501, ,184 Miscellaneous expense 296, ,792 Depreciation and amortization 267, ,311 Total operating expenses 16,112,543-16,112,543 Other Income (Expense) Investment income, net 163, ,654 Loss on disposal of property and equipment (31,937) - (31,937) Total other income (expense) 131, ,717 Change in Net Assets 524,518 1, ,070 Net Assets, Beginning of Year 3,754,301-3,754,301 Net Assets, End of Year $ 4,278,819 $ 1,552 $ 4,280,371 See Notes to Financial Statements 4

7 Statement of Functional Expenses Year Ended Supporting Program Services Services Total Management Outpatient WIT FCAP EBP Prevention Prevention Program and Services Program Program Programs SABG Grants Services General Total Personnel Services $ 6,320,430 $ 1,080,274 $ 715,394 $ 1,437,426 $ 52,336 $ 632,463 $ 10,238,323 $ 1,430,169 $ 11,668,492 Professional Services 1,178,835 15,753 14, ,496 2, ,823 1,638, ,809 1,868,218 Property Services 486,238 98,080 57, ,919 3,725 64, ,756 59, ,846 Other Purchased Services 200,828 54,498 26,480 80,570 18,445 29, ,111 81, ,688 Supplies 39,422 29,478 3,703 1,579 4,031 45, ,230 3, ,012 Technology Expense 265,684 48,868 28,735 58,925 2,146 31, ,725 65, ,184 Miscellaneous Expense 104,506 17,458 12,435 52, , ,314 91, ,792 Total expenses before depreciation and amortization 8,595,943 1,344, ,689 1,941,230 83,289 1,060,308 13,883,868 1,961,364 15,845,232 Depreciation and Amortization 106,324 19,674 15,887 22, , ,836 79, ,311 Total expenses $ 8,702,267 $ 1,364,084 $ 874,576 $ 1,963,724 $ 84,285 $ 1,082,768 $ 14,071,704 $ 2,040,839 $ 16,112,543 See Notes to Financial Statements 5

8 Statement of Cash Flows Year Ended Cash Flows from Operating Activities Change in net assets $ 526,070 Adjustments to reconcile change in net assets to net cash from operating activities Depreciation and amortization 267,311 Provision for bad debts 17,887 Net realized and unrealized gain on investments (81,433) Loss on disposal of property and equipment 31,937 Changes in operating assets and liabilities Grants and contracts receivable 127,945 Clients and insurance receivable, net 60,019 Prepaid expenses and other assets (36,356) Accounts payable (107,143) Accrued expenses 221,120 Deferred revenue 434,502 Deferred rent 11,980 Net Cash Provided by Operating Activities 1,473,839 Cash Flows from Investing Activities Purchases of property and equipment (548,969) Proceeds from sale of equipment 15,719 Purchases of investments (82,220) Net Cash Used in Investing Activities (615,470) Cash Flows from Financing Activities Principal payments on long-term debt (20,553) Principal payments on capital lease obligations (107,878) Net Cash Used in Financing Activities (128,431) Net Change in Cash and Cash Equivalents 729,938 Cash and Cash Equivalents, Beginning of Year 3,177,124 Cash and Cash Equivalents, End of Year $ 3,907,062 Supplemental Disclosure of Cash Flow Information Cash paid for interest $ 23,950 Supplemental Disclosure of Non-Cash Investing and Financing Activities Purchase of building through issuance of long-term debt $ 840,000 See Notes to Financial Statements 6

9 Notes to Financial Statements Note 1 - Nature of Operations and Significant Accounting Policies Nature of Operations Touchstone Behavioral Health dba Touchstone Health Services ( Touchstone ) was incorporated in 1968 in the state of Arizona as a not-for-profit corporation. Touchstone partners with individuals, families, schools and other service providers to deliver the optimal continuum of health, education and social services, with an emphasis on services that support individuals and families to acquire the skills to live productive and responsible lives. Program Services Outpatient Services includes outpatient therapy, psychiatric services, infant and early childhood program (comprehensive array of services to youth aged birth to 6 years including developmental and child parent psychotherapy and interaction to improve the quality of parent child relationship), respite (temporary needed weekend break for parents or guardians) and high needs case management. The Whatever It Takes (WIT) program is one of the Meet Me Where I Am programs that provides intensive inhome support to children who are at risk of out of home placement by working with families in their homes, schools and other community environments to help build skills necessary to improve functioning. Family Centered Autism Program (FCAP) provides evidenced-based services to youth who are on the autism spectrum and to their family members utilizing interventions to improve behavior and family functioning. Evidenced-Based Programs (EPB) includes Functional Family Therapy and Multisystemic Therapy which is designed for youth ages for the youth and family where there is behavioral, conduct, serious acting out or problematic sexual issues. Therapy services are provided in the home or community. Prevention SABG (Substance Abuse Block Grant) is a Substance Abuse and Mental Health Services Administration (SAMHSA) grant which is designed to educate those who interact with youth on signs and symptoms of mental health problems. Prevention Grants include: a Teen Pregnancy Prevention Program funded by the Federal Department of Health and Human Services centered on community awareness and a parenting program; and, a Teen Pregnancy Prevention Program funded by Maricopa County which builds on the capacity of community organizations of pregnancy prevention. The significant accounting policies followed by Touchstone are as follows: Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires Touchstone to make estimates and assumptions that affect the reported amounts of 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 and those differences could be material. 7

10 Notes to Consolidated Financial Statements Cash and Cash Equivalents Touchstone considers all cash and highly liquid financial instruments with original maturities of three months or less, and which are neither held for nor restricted by donors for long-term purposes, to be cash and cash equivalents. Cash and highly liquid financial instruments restricted to building project, permanent endowment, or other long-term purposes are excluded from this definition. Clients and Insurance Receivable Clients and insurance receivable primarily represents amounts due from the provision of behavioral health services. Clients and insurance receivable are stated at the amount management expects to collect. Touchstone grants credit without collateral to its clients and patients, most of whom are local residents and are insured under payment arrangements with payors which include (1) third party payors including commercial carriers, health maintenance organizations, and (2) private individuals. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual balances. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to client and insurance receivable. At, the valuation allowance totaled $22,978. Grants and Contracts Receivable Grants and contracts receivable primarily represent amounts due under government contracts and grants. Grants and contracts receivable are stated at the amount management expects to collect. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based upon its assessment of the current status of individual balances. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to grants and contracts receivable. Although Touchstone does not require collateral on its grants and contracts receivable, credit risk with respect to grants and contracts receivable is limited due to the nature of the funding sources comprising Touchstone s customer base. At, management considers grants and contracts receivable to be collectible in full. Accordingly, an allowance is not considered necessary. Investments Touchstone records investment purchases at cost, or if donated, at fair value on the date of donation. Thereafter, investments are reported at their fair values in the statement of financial position. Net investment return/(loss) is reported in the statement of activities and consists of interest and dividend income, realized and unrealized capital gains and losses, less investment management and custodial fees. Property and Equipment Touchstone records property and equipment additions over $1,000 at cost, or if donated, at fair value on the date of donation. All computer equipment is capitalized. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets ranging from three to thirty years, or in the case of capitalized leased assets or leasehold improvements, the lesser of the useful life of the asset or the lease term. When assets are sold or otherwise disposed of, the cost and related depreciation or amortization are removed from the accounts, and any resulting gain or loss is included in the statement of activities. Costs of maintenance and repairs that do not improve or extend the useful lives of the respective assets are expensed currently. 8

11 Notes to Financial Statements Touchstone reviews the carrying values of property and equipment for impairment whenever events or circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. When considered impaired, an impairment loss is recognized to the extent carrying value exceeds the fair value of the asset. There were no indicators of asset impairment during the year ended. Deferred Rent Touchstone leases the majority of its clinics and other premises. A number of the leases include scheduled base rent increases over their term. The total amount of base rent payments, including scheduled increases, is expensed on the straight-line method over the term of the leases. The deferred lease liability represents the excess of such amounts over actual cash payments. Net Assets Net assets, revenues, gains and losses are classified based on the existence or absence of donor-imposed restrictions. Accordingly, net assets and changes therein are classified and reported as follows: Unrestricted Net Assets Net assets available for use in general operations. Unrestricted board-designated net assets consist of net assets designated by the Board of Directors for operating reserve and board-designated endowment. Temporarily Restricted Net Assets Net assets subject to donor restrictions that may or will be met by expenditures or our actions and/or the passage of time, and certain income earned on permanently restricted net assets that has not yet been appropriated for expenditure by our Board of Directors. Touchstone reports contributions restricted by donors as increases in unrestricted net assets if the restrictions expire (that is, when a stipulated time restriction ends or 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. Permanently Restricted Net Assets Net assets whose use is limited by donor-imposed restrictions that neither expire by the passage of time nor can be fulfilled or otherwise removed by our actions. The restrictions stipulate that resources be maintained permanently but permit Touchstone to expend the income generated in accordance with the provisions of the agreements. Touchstone has no permanently restricted net assets at. Revenue and Revenue Recognition Revenue is recognized when earned. Program service fees and payments under cost-reimbursable contracts received in advance are deferred to the applicable period in which the related services are performed or expenditures are incurred, respectively. Contributions are recognized when cash, securities or other assets, an unconditional promise to give, or notification of a beneficial interest is received. Conditional promises to give are not recognized until the conditions on which they depend have been substantially met. 9

12 Notes to Financial Statements Functional Allocation of Expenses The costs of program and supporting services activities have been summarized on a functional basis in the statement of activities. The statement of functional expenses present the natural classification detail of expenses by function. Accordingly, certain costs have been allocated among the programs and supporting services benefited. Healthcare Service Cost Recognition The costs of providing behavioral healthcare services are accrued in the period in which the services are provided to eligible recipients. Advertising Advertising costs are charged to operations when incurred. Advertising expense charged to operations was approximately $1,600 for the year ended. Income Tax Status Touchstone is organized as an Arizona nonprofit corporation and has been recognized by the Internal Revenue Service (IRS) as exempt from federal income taxes under Section 501(a) of the Internal Revenue Code as an organization described in Section 501(c)(3) and has been determined not to be a private foundation under section 509(a)(2). Accordingly, contributions to it qualify for the charitable contribution deduction under Sections 170(b)(1)(A). Touchstone is annually required to file a Return of Organization Exempt from Income Tax (Form 990) with the IRS. In addition, the entity is subject to income tax on net income that is derived from business activities that is unrelated to their exempt purpose. Touchstone has determined that the entity is not subject to unrelated business income tax and have not filed an Exempt Organization Business Income Tax Return (Form 990-T) with the IRS, or its Arizona equivalent, Form 99-T. Touchstone believes that the entity has appropriate support for any tax positions taken affecting its annual filing requirements, and as such, does not have any uncertain tax positions that are material to the financial statements. Touchstone would recognize future accrued interest and penalties related to unrecognized tax benefits and liabilities in income tax expense if such interest and penalties are incurred. Subsequent Events Touchstone has evaluated subsequent events through April 11, 2017, the date which the financial statements were available to be issued. 10

13 Notes to Financial Statements Note 2 - Grants and Contracts Receivable Grants and contracts receivable consist of the following at : Department of Health and Human Services $ 100,082 Maricopa County Department of Public Health 63,391 Other 23,784 Total grants and contracts receivable $ 187,257 Note 3 - Property and Equipment Property and equipment consist of the following at : Furniture, fixtures and equipment $ 1,356,394 Leasehold improvements 299,298 Vehicles 83,534 Projects in progress 48,680 Buildings 1,052,516 Total cost and donated value 2,840,422 Less accumulated depreciation and amortization (1,272,889) Net property and equipment $ 1,567,533 Depreciation expense charged to operations was $267,311 for the year ended. Touchstone leases under various capital lease agreements for equipment and vehicles with a total value of $189,000. The leases expire through The assets and liabilities under the capital leases are recorded at the estimated fair value of the leased equipment and vehicles. The assets are amortized over their estimated productive lives. Note 4 - Investment Income Investment income for the year ended is as follows: Interest and dividends $ 101,868 Net unrealized gains on investments 81,433 Investment expense (19,647) Total investment gain $ 163,654 11

14 Notes to Financial Statements Note 5 - Fair Value Measurements Touchstone reports certain assets at fair value in the financial statements. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal, or most advantageous, market at the measurement date under current market conditions regardless of whether that price is directly observable or estimated using another valuation technique. Inputs used to determine fair value refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity s own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available. A three-tier hierarchy categorizes the inputs as follows: Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities that Touchstone can access at the measurement date. Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, and market-corroborated inputs. Level 3 Unobservable inputs for the asset or liability. In these situations, Touchstone develops inputs using the best information available in the circumstances. In some cases, the inputs used to measure the fair value of an asset or a liability might be categorized within different levels of the fair value hierarchy. In those cases, the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. Assessing the significance of a particular input to entire measurement requires judgment, taking into account factors specific to the asset or liability. The categorization of an asset within the hierarchy is based upon the pricing transparency of the asset and does not necessarily correspond to our assessment of the quality, risk or liquidity profile of the asset or liability. 12

15 Notes to Financial Statements The following table presents investments measured at fair value on a recurring basis at : Fair Value Measurements at Report Date Using Quoted Prices in Significant Active Markets Other Significant for Identical Observable Unobservable Assets Inputs Inputs (Level 1) (Level 2) (Level 3) Total Mutual Funds: Mid-cap blend $ 118,189 $ - $ - $ 118,189 Consumer defensive 71, ,514 Small blend 60, ,366 Health 71, ,317 Large growth 444, ,128 Large blend 470, ,035 Total mutual funds 1,235, ,235,549 Other: Short-term bond 887, ,601 Commodities broad basket 60, ,946 Bank loan 238, ,865 High yield bond 60, ,071 Real estate 56, ,988 Ultrashort bond 355, ,194 Total other funds 1,659, ,659,665 Money Market Fund 65, ,515 $ 2,960,729 $ - $ - $ 2,960,729 Note 6 - Note Payable Touchstone has a $200,000 revolving line of credit with a bank which has an unspecified maturity date. The line calls for monthly interest payments at the bank prime rate plus 1.50% (5.00% at ). The line is collateralized by substantially all the assets of Touchstone. No amounts were outstanding under the line of credit at. Note 7 - Long-Term Debt In January 2016, Touchstone entered into a loan agreement for $840,000 with a bank and together with $210,000 cash from operations Touchstone purchased a building to be used to provide behavioral health and other healthcare services. The loan agreement is due in monthly installments of $6,358 including principal and interest at the rate of 4.25% per annum commencing March 1, 2016 through February 1, The loan is collateralized by a deed of trust. 13

16 Notes to Financial Statements Annual principal payments on the note payable are scheduled as follows: Years Ending September 30, 2017 $ 41, , , , ,275 Thereafter 588,602 Total principal payments $ 819,447 Note 8 - Capital Lease Obligations At, capital lease obligations consist of the following: Equipment lease due in monthly installments of principal and interest of $3,501 including interest at 11.17% through November 2018; secured by the equipment. $ 80,517 Vehicle leases due in monthly installments of principal and interest ranging from $322 to $642 including interest at 4.75% through April 2019; secured by vehicles. 18,127 Total capital lease obligations 98,644 Less current portion (41,755) Capital lease obligations, net of current portion $ 56,889 Annual payments on capital lease obligations are scheduled as follows at : Years Ending September 30, 2017 $ 49, , ,855 Total annual payments 110,291 Less portion representing interest (11,647) Total principal 98,644 Less current portion (41,755) Non-current portion $ 56,889 14

17 Notes to Financial Statements Note 9 - Retirement Plan Touchstone maintains a defined contribution profit sharing plan that incorporates 401(k) provisions for eligible employees. Eligible employees may make contributions to the plan not to exceed specified annual ceiling amounts. Touchstone may make contributions to the plan at the discretion of management and the Board of Directors. Touchstone s contributions under the plan totaled $131,929 for the year ended. Note 10 - Leases Touchstone leases office space under operating leases that expire at various dates through March Future minimum lease payments under operating leases are as follows: Years Ending September 30, 2017 $ 560, , , , ,080 Thereafter 165,503 Total minimum lease payments $ 2,793,375 Lease expense for facilities for the year ended was $608,799. No renewal options are provided for in the leases; however, in the normal course of business, operating leases are generally renewed or replaced by other leases. Note 11 - Commitments and Contingencies Litigation From time to time, Touchstone is involved in various legal actions occurring in the normal course of business. In the opinion of management, based on consultation with legal counsel, there will be no adverse effect on its financial position or results of operations as a result of these matters. Compliance The contracted services revenue received by Touchstone is subject to compliance audits by the funding agencies or their representatives. Funding agencies may, at their discretion, request reimbursement for expenses or return of funds, or both, as a result of noncompliance by Touchstone with the terms of the contracts. Management believes that Touchstone is in compliance with the term of its contracts. 15

18 Notes to Financial Statements 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 necessarily limited to, matters such as licensure, accreditation, government healthcare 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 Touchstone is in compliance with fraud and abuse laws and regulations, as well as other applicable government 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. Health reform legislation at both the federal and state levels continues to evolve. Changes continue to impact existing and future laws and rules. Such changes may impact the way Touchstone does business, restrict revenue and growth in certain eligibility categories, increase medical, administrative and capital costs, and expose Touchstone to increased risk of loss or further liabilities. Touchstone s operating results, financial position and cash flows could be adversely impacted by such changes. Liability Insurance Touchstone maintains professional and general liability coverage on an occurrence basis through commercial insurance carriers. Touchstone s general liability per location claim coverage is $1,000,000 with an aggregate maximum annual of $3,000,000 with no per claim deductible. Touchstone s professional liability per claim coverage is $1,000,000 with an aggregate maximum annual of $3,000,000 with no per claim deductible. Contract Compliance For the years ending and 2015, Touchstone reported less than the minimum value of encounters as required per Touchstone s contracts. As a result, Touchstone was subject to a potential encounter recoupment by one funding agency of approximately $276,000 related to the year ending and $2,215,000 related to the year ending September 30, 2015; and a potential encounter recoupment of approximately $170,000 related to the year ending September 30, 2015 by another funding agency. Accordingly, Touchstone has recorded a payable to the funding sources related to the encounter recoupments. In addition, Touchstone is subject to a profit risk corridor calculation that calculates a return of premium for any profit amount, for certain contracts, in excess of 4.00%. Touchstone did not record a return of premiums as a result of the profit risk corridor calculation for the year ended. Note 12 - Economic Dependency and Concentration of Credit Risk Touchstone received approximately 85% of its revenue for the year ended directly from Mercy Maricopa Integrated Care. Management believes any loss due to these concentrations of credit risk would be significant. 16

19 Schedule of Expenditures of Federal Awards, and Reports Required by Government Auditing Standards and Uniform Guidance Touchstone Behavioral Health dba Touchstone Health Services

20 Table of Contents 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... 1 Independent Auditor s Report on Compliance for the Major Federal Program; Report on Internal Control Over Compliance; and Report on the Schedule of Expenditures of Federal Awards Required by Uniform Guidance... 3 Schedule of Expenditures of Federal Awards... 5 Notes to Schedule of Expenditures of Federal Awards... 6 Schedule of Findings and Questioned Costs... 7

21 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 The Board of Directors Touchstone Behavioral Health dba Touchstone Health Services 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 Touchstone Behavioral Health dba Touchstone Health Services (Organization), which comprise the statement of financial position as of, and the related 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 April 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 opinions 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 over financial reporting was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control over financial reporting 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 a certain deficiency in internal control that we consider to be a material weakness. 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 identified as 2016-A described in the accompanying schedule of findings and questioned costs 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 N. Central Ave., Ste. 400 Phoenix, AZ T F EOE 1

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 finding identified in our audit is described in the accompanying schedule of findings and questioned costs. The Organization s response was not subjected to the auditing procedures applied in the audit of the 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. Phoenix, Arizona April 11,

23 Independent Auditor s Report on Compliance for the Major Federal Program; Report on Internal Control Over Compliance; and Report on the Schedule of Expenditures of Federal Awards Required by Uniform Guidance The Board of Directors Touchstone Behavioral Health dba Touchstone Health Services Phoenix, Arizona Report on Compliance for the Major Federal Program We have audited Touchstone Behavioral Health dba Touchstone Health Services (Organization) compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on the Organization s major federal program for the year ended. The Organization s major federal program is identified in the summary of auditor s 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. Auditor s Responsibility Our responsibility is to express an opinion on the compliance for the Organization s major federal program 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 requirement 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 Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the 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 the major federal program. However, our audit does not provide a legal determination of the Organization s compliance. Opinion on Major Federal Program In our opinion, the Organization complied, in all material respects, with the compliance requirements referred to above that could have a direct and material effect on its major federal program identified in the summary of auditor s results section of the accompanying schedule of findings and questioned costs for the year ended N. Central Ave., Ste. 400 Phoenix, AZ T F EOE 3

24 Report on Internal Control over Compliance Management of the Organization is responsible for establishing and maintaining effective internal control over compliance with the 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 the major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for the 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 compliance requirement 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 that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Report on Schedule of Expenditures of Federal Awards Required by Uniform Guidance We have audited the financial statements of the Organization as of and for the year ended September 30, 2016, and have issued our report thereon dated April 11, 2017, which contained an unmodified opinion on those financial statements. 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 is presented for purposes of additional analysis as required by Uniform Guidance and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the schedule of expenditures of federal awards is fairly stated in all material respects in relation to the financial statements as a whole. 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 Uniform Guidance. Accordingly, this report is not suitable for any other purpose. Phoenix, Arizona April 11,

25 Schedule of Expenditures of Federal Awards Year Ended Federal Grantor/Pass-Through Grantor/Program Title Federal CFDA Pass-Through Entity Federal Number Identifying Number Expenditures Department of Health and Human Services Substance Abuse and Mental Health Services Passed-through Arizona Children's Association SM62802A $ 125,000 Block Grants for Community Health Services Passed-through Mercy Maricopa Integrated Care ADHS ,980 Block Grants for Prevention and Treatment of Substance Abuse Passed-through Mercy Maricopa Integrated Care ADHS ,822 Direct Drug free communities support program N/A 34,710 Teenage pregnancy prevention program N/A 842,115 Subtotal Department of Health and Human Services 1,267,627 Total Expenditures of Federal Awards $ 1,267,627 5

26 Notes to Schedule of Expenditures of Federal Awards Year Ended Note 1 - Basis of Presentation The accompanying Schedule of Expenditures of Federal Awards includes the federal grant activity of Touchstone Behavioral Health dba Touchstone Health Services (the Organization), and is presented on the accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of Uniform Guidance. The Organization received federal awards both directly from federal agencies and indirectly through pass-through entities. Note 2 - Significant Accounting Policies Expenditures reported on the Schedule of Expenditures of Federal Awards are reported on the accrual basis of accounting. Such expenditures are recognized following the cost principles contained in Subpart E Cost Principles of Uniform Guidance, wherein certain types of expenditures are not allowable or are limited as to reimbursement. The Organization s summary of significant accounting policies is presented in Note 1 in the basic financial statements. The Organization has elected to use the 10% de minimis cost rate. Note 3 - 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. 6

27 Schedule of Findings and Questioned Costs Year Ended Section I Summary of Auditor's Results Financial Statements Type of auditor's report issued Internal control over financial reporting: Material weaknesses identified Significant deficiencies identified not considered to be material weaknesses Noncompliance material to financial statements noted? Unmodified Yes None reported No Federal Awards Internal control over major programs: Material weaknesses identified Significant deficiencies identified not considered to be material weaknesses Type of auditor's report issued on compliance for major programs Any audit findings disclosed that are required to be reported in accordance with section Uniform Guidance 2 CFR : No None reported Unmodified No Identification of major programs: Name of Federal Program or Cluster CFDA Number Department of Health and Human Services Teenage Pregnancy Prevention Program Dollar threshold used to distinguish between type A and type B programs $ 750,000 Auditee qualified as low-risk auditee? No 7

28 Schedule of Findings and Questioned Costs Year Ended Section II Financial Statement Findings Material Weakness 2016-A Preparation of the Financial Statements and Audit Adjustments Criteria: As auditors, we were requested to prepare the financial statements from data provided by the Organization. This data included material misstatements related to the current period that improperly stated current assets, short-term and long-term liabilities, and expenses. Condition: During the course of our audit procedures, we identified some adjustments to be made to the financial statements in order for them to fully represent generally accepted accounting principles (GAAP) basis financial statements which were not identified by the Organization s internal control system. The audit adjustments resulted in the financial information provided for the preparation of the financial statement to not be free from material misstatement. Cause: Per discussion with management, there has been turnover in the last couple of years in management and accounting. Effect: The financial statements and disclosures in the financial statements could be incomplete or incorrect with respect to GAAP. Recommendation: Internal control procedures and accounting and reporting procedures should be routinely reviewed and modified to ensure that all general ledger balances are reconciled on a regular basis and reviewed by management prior to the audit for compliance with GAAP. Views of Responsible Officials: Management agrees with the finding. Section III Federal Award Findings and Questioned Costs None Reported 8

29 Summary Schedule of Prior Year Findings Year Ended Section IV Summary of Prior Year Findings 2015-A Preparation of the Financial Statements and Audit Adjustments Condition: During the course of audit procedures, we identified some adjustments to be made to the financial statements in order for them to fully represent GAAP basis financial statements which were not identified by the Organization s internal control system. The audit adjustments resulted in the financial information provided for the preparation of the financial statement to not be free from material misstatement. Status: See current status of finding 2016-A. ADDRESS N. 35 TH AVE PHOENIX, AZ WEBSITE TOUCHSTONEHS.ORG