FIT KIDS, INC. dba Champion Schools AUDITED FINANCIAL STATEMENTS AND SINGLE AUDIT REPORTS. For the Year Ended. June 30, 2016

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1 FIT KIDS, INC. AUDITED FINANCIAL STATEMENTS AND SINGLE AUDIT REPORTS For the Year Ended June 30, 2016

2 TABLE OF CONTENTS June 30, 2016 Independent Auditor s Report.. 1 Financial Statements: Statement of Financial Position Statement of Activities Statement of Functional Expenses Statement of Cash Flows Notes to Financial Statements Schedule of Expenditures of Federal Awards Notes to Schedule of Expenditures of Federal Awards 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 Independent Auditor s Report on Compliance for Each Major Program and on Internal Control over Compliance Required by Uniform Guidance Schedule of Findings and Questioned Costs Page

3 INDEPENDENT AUDITOR S REPORT Board of Directors Scottsdale, Arizona Report on the Financial Statements We have audited the accompanying financial statements of, (a nonprofit organization), which are comprised of the statement of financial position as of June 30, 2016 and the related statements of activities, functional expenses and cash flows for the year then ended and the related notes to the 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 the 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 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 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. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of, as of June 30, 2016 and the changes in its net assets and its cash flows for the year then ended, in accordance with auditing principles generally accepted in the United States of America

4 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 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 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 March 27, 2017 on our consideration of Fit Kids Inc., internal control over financial reporting and compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering s internal controls over financial reporting and compliance. Mara G. Mann, CPA Phoenix, AZ March 27, 2017

5 FIT KIDS, INC. STATEMENT OF FINANCIAL POSITION As of June 30, 2016 ASSETS Current Assets: Cash $ 830,087 Prepaid expenses 12,468 Accounts receivable 271,632 Total Current Assets 1,114,187 Property and Equipment, net -- Note 4 398,166 Deposits 35,411 Total Assets $ 1,547,764 LIABILITIES AND NET DEFICIT Current Liabilities: Accounts payable $ 95,427 Wages payable 97,468 Line of credit -- Note 5 17,403 Capital lease payable, current portion -- Note 6 64,873 Note payable, current portion -- Note 7 66,558 Total Current Liabilities 341,729 Capital leases payable, net of current portion -- Note 6 176,075 Note payable, net of current portion -- Note 7 82,410 Deferred rent -- Note 8 876,853 Deferred lease incentive -- Note 9 236,668 Total Liabilities 1,713,735 NET DEFICIT Unrestricted Net Deficit (343,761) Temporarily Restricted Net Assets -- Note ,790 Total Net Deficit (165,971) Total Liabilities and Net Deficit $ 1,547,764 The accompanying notes are an integral part of these financial statements. 3

6 FIT KIDS, INC. STATEMENT OF ACTIVITIES For the Year Ending June 30, 2016 Unrestricted Temporarily Restricted Total Support and Revenue: State equalization program $ 6,309,942 $ 6,309,942 Federal grants $ 1,705,162 1,705,162 State grants 417, ,650 Local grants 4,000 4,000 Contributions 9,570 9,570 Fundraising and other income 130, ,883 Restrictions satisfied by payments 1,958,592 (1,958,592) Total Support and Revenue 8,399, ,790 8,577,207 Expenses: Program Services Academic programs 8,130,723 8,130,723 Supporting Services Fundraising 19,530 19,530 Administration 261, ,096 Total Expenses 8,411,349 8,411,349 (Decrease) Increase in Net Assets (11,932) 177, ,858 NET (DEFICIT) ASSETS BEGINNING OF YEAR (331,829) (331,829) NET (DEFICIT) ASSETS AT END OF YEAR $ (343,761) $ 177,790 $ (165,971) The accompanying notes are an integral part of these financial statements. 4

7 FIT KIDS, INC. STATEMENT OF FUNCTIONAL EXPENSES For the Year Ending June 30, 2016 Supporting Services - Program Admin- Total Services Fundraising istration Expenses Salaries and wages $ 3,167,174 $ 2,475 $ 107,929 $ 3,277,578 Payroll taxes 242, , ,735 Employee benefits 44, ,333 55,920 Advertising 228, ,754 Communications 258, ,067 Depreciation 115, ,074 Food 20,296 20,296 Dues and fees 40,412 16,219 56,631 Insurance 206, ,667 Interest 6,281 6,281 Other 37,035 37,035 Professional development 21,525 21,525 Professional services 8,501 85,600 94,101 Purchased services 1,012,632 3,032 1,015,664 Rent of buildings 1,755,357 28,726 1,784,083 Rent of equipemnt 88,358 88,358 Repair and maintenance 188, ,890 Supplies 411,614 8, ,722 Textbooks and instructional aids 83,939 83,939 Travel and transportation 64,756 64,756 Utilities 137, ,273 $ 8,130,723 $ 19,530 $ 261,096 $ 8,411,349 The accompanying notes are an integral part of these financial statements. 5

8 FIT KIDS, INC. STATEMENT OF CASH FLOWS For the Year Ending June 30, 2016 CASH FLOWS FROM OPERATING ACTIVITIES: Increase in Net Deficit $ 165,858 Adjustments to reconcile the increase in net deficit to net cash used by operating activities: Depreciation 115,074 Changes in operating assets and liabilities: Accounts receivable (211,060) Prepaid expenses 97,547 Accounts payable (48,180) Wages payable 30,866 Deferred rent 308,176 Deferred lease incentive (284,764) Net Cash Used By Operating Activities 173,517 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (54,273) Net Cash Used By Investing Activities (54,273) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from lease incentives and reimbursements 340,097 Proceeds from loan payable 40,000 Principal payments on notes payable and capital leases (48,786) Principal payments on credit line (9,516) Net Cash Provided By Financing Activities 321,795 NET DECREASE IN CASH 441,039 CASH AT BEGINNING OF YEAR 389,048 CASH AT END OF YEAR $ 830,087 Supplemental Disclosures Of Cash Flow Information Is As Follows: Cash paid for interest $ 6,281 The accompanying notes are an integral part of these financial statements. 6

9 NOTES TO FINANCIAL STATEMENTS June 30, 2016 NOTE 1 -- PURPOSE AND ORGANIZATION, (the School ) was organized as a not-for-profit charter school in 2007 to provide education services to students in kindergarten through eighth grade, in Phoenix, Arizona. The School operates under a charter contact with the Arizona State Board for Charter Schools (expiring June 30, 2033), which mandates policy and operational guidelines. The School s mission states: We are poised to expand on our success and develop a nationwide system of unique, high standards schools, providing the highest level of professional athletic training combined with rigorous academic program. The accompanying financial statements are summaries of the financial position, results of operations, net asset classifications and sources and applications of cash of NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting - The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles. Basis of Presentation - The School 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. These net assets classifications are described as follows: Unrestricted Net Assets - not subject to donor-imposed restrictions. Unrestricted net assets may be designated for specific purposes or locations by action of the Board of Directors. Temporarily Restricted Net Assets - subject to donor-imposed stipulations that may be fulfilled by actions of the School to meet the stipulations or become unrestricted at the date specified by the donor. Permanently Restricted Net Assets - subject to donor-imposed stipulations that they be retained and invested permanently by the School. The School has no permanently restricted net assets. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. Cash - For purposes of these statements, cash consists of checking and savings accounts. 7

10 NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2016 NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES (Continued) Property and Equipment - It is the School s current policy to capitalize land, buildings and related improvements and leasehold improvements with a cost of $5,000 or more, and vehicles, furniture and equipment with a cost of $1,000 or more. Purchased property and equipment is capitalized at cost. It is the policy of the School to record donations of property and equipment at their estimated fair value. Such donations are reported as unrestricted contributions unless the donor has restricted the donated asset to a specific purpose. Property and equipment is depreciated using the straight-line method. Support and Revenue - Support and revenue consists mainly of equalization payments from the State of Arizona and Federal grants. These amounts are recorded as increases in unrestricted net assets when promised to the School. The School uses volunteers in all of its varieties of programs. Contributed services are reported as contributions at their fair value if such services create or enhance non-financial assets, or would have been purchased if not provided by contribution, and which require specialized skills provided by individuals possessing such skills. There were no material contributed services meeting these criteria for Donations-In-Kind - Material donations of in-kind items received by the School are recorded as income along with a corresponding charge to expense or capitalized cost. There were no donations-in-kind for Advertising - Advertising costs are expensed as incurred. Income Taxes - The School is an organization exempt from income taxation under Section 501 (a) as an entity described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended. It is not classified as a private foundation. Functional Allocation of Expenses - The costs of providing the various programs and other activities have been summarized on a functional basis. Accordingly, certain costs have been allocated between the program and supporting service benefited. NOTE 3 -- CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the School to concentrations of credit risk consist principally of cash in banks. The amounts exceeding the FDIC insurance level were $615,000 as of June 30, State of Arizona law requires banks to pledge certain securities to accounts of non-profits, thus establishing a priority claim for the non-profit in the case of default by the bank. 8

11 NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2016 NOTE 4 -- PROPERTY AND EQUIPMENT Property and equipment consisted of the following: Useful Lives Vehicles, furniture and equipment $820, yrs. Leasehold improvements 40, yrs. 860,988 Less accumulated depreciation (462,822) $398,166 Depreciation expense for 2016 was $115,074. NOTE 5 -- LINE OF CREDIT The School has a $40,000 unsecured, variable interest rate line of credit with a bank. Payments of all accrued and unpaid interest are due monthly. The interest rate was 12.75% and the outstanding balance was $17,403 at June 30, NOTE 6 -- CAPITAL LEASES The school has acquired educational and business equipment under capital lease agreements. The original cost of leased assets, totaled $335,906 and has been capitalized as furniture and equipment. Related accumulated depreciation was $76,686 at June 30, Fiscal year end 2016 depreciation expense for assets under capital leases is $64,609 and is included in depreciation expense. The future minimum lease payments under capital lease obligations at June 30, 2016, are as follows: Year ending June 30, 2017 $ 88, , , , ,687 Total minimum lease payments 296,145 Less amount representing interest (55,197) Present value of minimum lease payments $240,948 9

12 NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2016 NOTE 7 -- NOTES PAYABLE Notes payable consisted of the following at June 30, 2016: Loan for a Vehicle (Bus). The loan matures over a 60 month period with an interest rate of 6.41%. Note is payable in monthly principal and interest payments of $1,932 through August The loan is secured by the bus purchased. $ 3,834 Loan for a Vehicle (Bus). The loan matures over a 60 month period with an interest rate of 4.80%. Note is payable in monthly principal and interest payments of $2, through July The loan is secured by the bus purchased. 107,351 Loan for operating expenses. The loan matures over a 13 month period with an interest rate of 9.25%. Note is payable in monthly principal and interest payments of $5,562 through January Unsecured. 37,783 Total 148,968 Less current portion of notes payable 66,558 Notes Payable, net of current portion $82,410 Future maturities of notes payable are as follows: Year ending June 30, 2017 $ 66, , , ,795 $148,968 10

13 NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2016 NOTE 8 -- DEFERRED RENT AND OPERATING LEASES South Mountain Campus In 2011, the School entered into a lease for a school campus. The lease term is 20 years from July 2011 through June 2031 and calls for increasing monthly rates each 12 months with reduced rental rates in the early months of the lease. Rent expense is recognized on a straight-line basis for accounting purposes. Deferred rent was $646,686 at June 30, Chandler Campus In 2014, the School entered into a lease for a school campus. The lease term is 20 years from July 2015 through June 2035 and calls for increasing monthly rates each 12 months with reduced rental rates in the early months of the lease. Rent expense is recognized on a straight-line basis for accounting purposes. Deferred rent was $230,167 at June 30, San Tan Campus In 2015, the School entered into a lease for a school campus. The lease term is 20 years from August 2016 through June 30, Future minimum operating lease commitments for these leases are as follows: Year ending June 30, 2017 $ 2,413, ,450, ,508, ,567, ,627,000 Thereafter 41,467,477 $54,032,477 In February 2017, the School entered into a long-term financing arrangement through issuance of Educational Facility Revenue Bonds through the Industrial Development Authority of the County of Pima for the purchase of the South Mountain campus. The lease was terminated at that time, removing the deferred rent liability. NOTE 9 LEASE INCENTIVES Chandler Campus As part of the lease agreement for the Chandler Campus, the Lessee provided lease incentives in the form of cash reimbursements and direct paid expenses. This amount is recognized as a lease incentive asset and is amortized, straight-line, over the term of the lease as a reduction to lease expense. For the fiscal year ended June 30, 2016, amortization was $12,

14 NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2016 NOTE 10 TEMPORARILY RESTRICTED NET ASSETS Temporarily restricted net assets, at June 30, 2016, are available for classroom site improvement and instructional improvement. NOTE 11 COMMITMENTS AND CONTINGENT LIABILITIES Compliance: The School s compliance with certain laws and regulations is subject to review by the State of Arizona, Office of the Auditor General and Department of education. Such reviews could result in adjustments or withholding of the School s State Equalization. Litigation: The School is subject of various claims, legal proceedings, and investigations covering a wide range of matters that arise in the ordinary course of business. In the opinion of management, all such matters are adequately covered by insurance or by accruals, and if not so covered, are without merit or are of such kind, or involve such amounts, as would not have a significant effect on the financial position or results of operations of the School if disposed of unfavorably. NOTE 12 ECONOMIC DEPENDENCY A total of $6,727,592, or 78.4% of the School s revenue for the year ended June 30, 2016 was derived from the State of Arizona through payments of State Equalization, Classroom Site Funds (Proposition 301) and Instructional Improvement Funds. Funds that are paid from the state of Arizona are subject to funding approval from the state legislature. Changes in state funding levels for charter schools could have a significant impact on the School s future revenues. NOTE 13 RESTATEMENT OF FINANCIAL STATEMENTS Subsequent to the issuance of the School s 2015 financial statements, management became aware that as a result of improperly recognizing lease incentives, the statements reported incorrect liabilities, assets, expenses and net assets. At June , deferred lease incentives were overstated 554,165, net fixed assets were overstated 340,103. The inclusion of corrections in the restated financial statements increased net assets $214,062 at June 30,

15 NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2016 NOTE 14 RELATED PARTY TRANSACTIONS The School is related to multiple businesses through common stockholders, board members, and/or family members. During the year ended June 30, 2016, the following transactions occurred between the School and related parties: Accounting Services: One member of the Board of Directors is the owner of an accounting services company. During the year ended June 30, 2016, the School paid $26,400 to the company for accounting services. Consulting Services: One member of the Board of Directors is an owner of a consulting company. During the year ended June 30, 2016, the School paid $15,500 to the company for consulting services. Advertising: A family member of the Executive Director is an owner of a marketing company that handles all advertising and consulting for the School. During the year ended June 30, 2016, the School paid $153,000 to the company for advertising services. NOTE SUBSEQUENT EVENTS The School did not have any subsequent events, other than that noted in note 8, through March 27, 2016, which is the date the financial statements were available to be issued, for events requiring recording or disclosure in the financial statements for the year ended June 30,

16 , SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED JUNE 30, 2016 Federal Grantor / Federal Federal Grant/ Pass-through Grantor ID/ CFDA Pass-through Total FY 16 Program Title Number Number Expenditures U.S. Department of Agriculture Pass-through program from State of Arizona Department of Education National School Lunch Program School ID: $656,903 Fresh Fruit and Vegetable Program FNFFVP A 6,100 Fresh Fruit and Vegetable Program FFFVP C 24,400 Total Fresh Fruit and Vegetable Program 30,500 Total U.S. Department of Health and Human Services Grants and Awards 687,403 U.S. Department of Education Pass-through program from State of Arizona Department of Education Title I Grants to Local Educational Agencies (LEAs) FT1TTI A 500,175 IDEA Charter School Expansion A 16FESCSE B 78,274 IDEA Basic A 16FESCBG A 73,172 Total IDEA 151,446 Twenty-First Century Community Learning Centers FLCCY A 137,621 Title III English Language Acquisition A 16FWLLWP A 12,285 Title II Improving Teacher Quality A 16FT1TII A 6,118 Total U.S. Department of Education 807,645 Total Federal Grants and Awards $1,495,048 14

17 , NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED JUNE 30, 2016 NOTE A - BASIS OF PRESENTATION The accompanying schedule of expenditures of federal awards (the Schedule) includes the federal grant activity of Fit Kids Inc., (the School) for the year ended June 30, 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). Because the Schedule presents only portions of the operations of the School, it is not intended to and does not present the financial position, changes in net assets, or cash flows of the School. NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Expenditures reported on the Schedule are reported on the accrual basis of accounting. Such expenditures are recognized following the cost principles contained in the Uniform Guidance, wherein certain types of expenditures are not allowable or are limited as to reimbursement. The School has elected not to use the 10 percent de minimis indirect cost rate allowed under the Uniform Guidance. NOTE C CATALOG OF FEDERAL DOMESTIC ASSISTANCE (CFDA) NUMBERS The program titles and CFDA numbers were obtained from the pass-through grantor, Arizona Department of Education. When there was no federal contract number, the School s identification number was utilized. NOTE D SUBRECIPIENTS Fit Kids did not pass any funds on to sub-recipients during the year ended June 30,

18 Board of Directors Scottsdale, Arizona 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 We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of (a non-profit organization) which comprise the statement of financial position as of June 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 March 27, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered Fit Kids. Inc. 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 Fit Kid Inc. s internal control. Accordingly, we do not express an opinion on the effectiveness of the Organization s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the School s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of the internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Compliance and Other Matters As part of obtaining reasonable assurance about whether Fit Kids Inc. s financial statements are free of 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 that are required to be reported under Government Auditing Standards. 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 do not 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. LaVoie & Co., P.C. Phoenix, Arizona March 27,

19 INDEPENDENT AUDITOR S REPORT ON COMPLIANCE FOR EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY UNIFORM GUIDANCE Board of Directors Scottsdale, Arizona Report on Compliance for Each Major Federal Program We have audited s compliance with the types of compliance requirements described in the U.S. OMB Compliance Supplement that could have a direct and material effect on each of s major federal programs for the year ended June 30, major federal programs are 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 the federal statutes, regulations, contracts, 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 compliance for each of 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 Fit Kids. Inc. 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 Fit Kids Inc. s compliance. Opinion on Each Major Federal Program In our opinion, 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 June 30,

20 Report on Internal Control Over Compliance Management of 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 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 the 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 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. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. 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. Mara G, Mann, CPA Phoenix, Arizona March 27,

21 , SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED JUNE 30, 2016 SECTION I SUMMARY OF AUDITOR S RESULTS Financial Statements Type of auditor s report issued: Unqualified Internal control over financial reporting: Material weakness(es) identified? Yes X No Significant deficiency(ies) identified, not considered to be material weaknesses? Yes X None reported Noncompliance material to financial statements noted? Yes X No Federal Awards Internal control over major programs: Material weaknesses identified? Yes X No Significant deficiency(ies) identified, not considered to be material weaknesses? Yes X None reported Type of auditor s report issued on compliance for major Federal programs: Unqualified Any audit findings disclosed that are required to be reported in accordance with 2 CFR (a)? Yes X No Identification of major programs: CFDA A IDEA Basic Entitlements / IDEA Charter School Expansion CFDA Title I, Grants to Local Education Agencies CFDA A Title II, Improving Teacher Quality Dollar threshold used to distinguish between Type A and Type B programs: $750,000 Auditee qualified as a low-risk auditee? X Yes No SECTION II FINANCIAL STATEMENT FINDINGS None reported SECTION III FEDERAL AWARD FINDINGS AND QUESTIONED COSTS None reported 19