THE LIGHTHOUSE FINANCIAL STATEMENTS AND REPORTS REQUIRED BY THE UNIFORM GUIDANCE JUNE 30, 2017

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1 FINANCIAL STATEMENTS AND REPORTS REQUIRED BY THE UNIFORM GUIDANCE

2 TABLE OF CONTENTS PAGE Independent Auditor s Report 1 Statement of Financial Position 3 Statement of Activities 4 Statement of Cash Flows 5 Statement of Functional Expenses 6 Notes to Financial Statements 7 Supplementary Information: Schedule of Expenditures of Federal Awards 20 Notes to Schedule of Expenditures of Federal Awards 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 22

3 TABLE OF CONTENTS PAGE Independent Auditor s Report on Compliance for Each Major Program and on Internal Control over Compliance Required by the Uniform Guidance 24 Schedule of Findings and Questioned Costs 26 Summary Schedule of Prior Audit Findings 28 Management Response 29 Independent Auditor s Report on Compliance with Specified Indirect Cost Allocation Requirements 30

4 WENTZEL and COMPANY, PC Certified Public Accountant INDEPENDENT AUDITOR S REPORT To The Board of Directors The Lighthouse Report on the Financial Statements We have audited the accompanying financial statements of The Lighthouse (a nonprofit organization), which comprise the statement of financial position as of June 30, 2017, and the related statements of activities, functional expenses, and cash flows for the year then ended, and the related notes to the 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 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. PO Box 156, Fleetwood, PA Tel Fax

5 INDEPENDENT AUDITOR S REPORT Page two Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Lighthouse as of June 30, 2017, 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. Emphasis-of-Matter Regarding Going Concern The accompanying financial statements have been prepared assuming that the Organization will continue as a going concern. As discussed in Note 17 to the financial statements, the Organization has suffered recurring significant reductions in revenues and has a net deficiency in net assets that raise substantial doubt about its ability to continue as a going concern. Management s plans regarding those matters are also described in Note 17. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter. 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 28, 2018, on our consideration of The Lighthouse 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 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 Lighthouse s internal control over financial reporting and compliance. Wentzel and Company, PC Fleetwood, Pennsylvania March 28,

6 STATEMENT OF FINANCIAL POSITION AS OF Assets: Cash and cash equivalents $ 209,563 Investments 22,951 Accounts receivable 261,009 Prepaid expenses 85,735 Property and equipment 866,807 Total assets $ 1,446,065 Liabilities: Accounts payable $ 29,072 Accrued payroll and vacation 158,049 Other payable 195,000 Notes payable 791,115 Capital lease payable 3,637 Underfunded pension obligation 267,717 Total liabilities 1,444,590 Net assets: Unrestricted (20,525) Temporarily restricted 22,000 Total net assets 1,475 Total liabilities and net assets $ 1,446,065 See Notes to Financial Statements. -3-

7 STATEMENT OF ACTIVITIES FOR THE YEAR ENDED Temporarily Unrestricted Restricted Totals Revenues, gains and other support: Contributions $ 117,004 $ 22,000 $ 139,004 Government grants and contracts 177, ,217 Day care revenues 3,127,402 3,127,402 Fundraising 66,499 66,499 Rentals 11,750 11,750 Gift in Kind Income 173, ,911 Miscellaneous 1,000 1,000 Interest income Investment income 2,501 2,501 Net assets released from restrictions 2,632 (2,632) 0 Total revenues, gains, and other support 3,680,550 19,368 3,699,918 Expenses: Day care 3,199,712 3,199,712 Family and youth programs 186, ,522 Administration 206, ,286 Fundraising 12,482 12,482 Total expenses 3,605, ,605,002 Change in net assets from operating activities 75,548 19,368 94,916 Non-operating: Other income 25, ,800 Change in net assets 101,348 19, ,716 Net assets at beginning of year (121,873) 2,632 (119,241) Net assets at end of year $ (20,525) $ 22,000 $ 1,475 See Notes to Financial Statements. -4-

8 STATEMENT OF CASH FLOWS FOR THE YEAR ENDED Cash flows from operating activities: Change in net assets $ 120,716 Adjustments to reconcile the change in net assets to net cash provided by operating activities: Depreciation $ 100,080 Unrealized (gains) losses on investments (1,542) (Increase) decrease in accounts receivable 10,955 (Increase) decrease in prepaid expenses (44) Increase (decrease) in accounts payable (189,568) Increase (decrease) in accrued expenses 131,755 Increase (decrease) in accrued retirement 293 Total adjustments 51,929 Net cash provided (used) by operations 172,645 Cash flows from investing activities: Purchase of fixed assets (129,263) Purchase of investments (959) Net cash provided (used) by investing activities (130,222) Cash flows from financing activities: Proceeds from issuance of debt 332,787 Principal payments on debt (310,582) Net cash provided (used) by financing activities 22,205 Net increase (decrease) in cash and cash equivalents 64,628 Cash and cash equivalents at the beginning of the year 144,935 Cash and cash equivalents at the end of the year $ 209,563 Supplemental Disclosure: Cash paid for interest expense $ 49,803 See Notes to Financial Statements. -5-

9 STATEMENT OF FUNCTIONAL EXPENSES FOR THE YEAR ENDED Family & Youth Day Care Programs Administration Fundraising Totals Salaries $ 1,844,887 $ 65,461 $ 110,269 $ 9,000 $ 2,029,617 Employee benefits 141,494 5,021 8, ,662 Payroll taxes 141,040 5,004 8, ,162 Professional fees 132,549 4,703 7, ,822 Payroll fees 17, , ,580 Bank fees Supplies 35,274 1,252 2, ,804 Occupancy 177,791 6,308 11, ,593 Equipment rent & maintenance 35,716 1,122 1,788 38,626 Insurance 37,923 3,677 36,553 78,153 Program costs 387,024 84,554 2, ,431 License & permits 2, ,538 Depreciation 90,971 3,228 5, ,080 Pension Contribution 84,689 3,005 5, ,169 Net periodic pension cost 23, , ,093 Interest 45,270 1,606 2, ,803 Totals $ 3,199,712 $ 186,522 $ 206,286 $ 12,482 $ 3,605,002 See Notes to Financial Statements. -6-

10 NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Organization The Lighthouse was founded as a Settlement House in the late 1800 s and provides a variety of programs and services to low-income area residents. Funding for the Agency is derived from, among other resources, government contracts, private foundations/corporations, and an annual allocation from the United Way of Southeastern Pennsylvania. The Lighthouse provides a variety of programs in Northeast Philadelphia, including a Child Day Care Center (both pre-school and school age); Youth Services Programs, Emergency Assistance, an Adult Basis Education Program and a Job Resources Center. Accounts receivable/allowance for doubtful accounts Accounts receivable is stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a provision for bad debt expense and an adjustment to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. Management considers accounts to be past due after 90 days. An allowance for doubtful accounts has not been established currently since management believes that all are collectible. Basis of accounting The financial statements of The Lighthouse have been prepared on the accrual basis of accounting and accordingly reflect all significant receivables, payables and other liabilities. Basis of presentation The Organization reports 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. Cash and cash equivalents The Lighthouse considers all short-term securities purchased with a maturity of six months or less to be cash equivalents. Donated materials and services Materials and other assets received as donations are recorded and reflected in the accompanying financial statements at their fair values at the date of receipt. -7-

11 NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Expense allocation Expenses are charged to programs and supporting services on the basis of periodic time and expense studies. Management and general expenses include those expenses that are not directly identifiable with any other specific function but provide for the overall support and direction of the Organization. Fair Value Option for Financial Assets The Organization adopted Fair Value Measurements which defines fair value, establishes a framework for measuring fair value under accounting principles generally accepted in the United States of America, and enhances disclosures about fair value measurements. The adoption did not have a material effect on the financial statements, but expanded disclosure with respect to fair value measurement. Fair value is defined as the price that would be received to sell an asset or the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The framework measuring fair value includes a hierarchy prioritizes the inputs used in determining valuations into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows: Level 1- Fair value is based on unadjusted quoted prices in active markets that are accessible to the Organization for identical assets. These generally provide the most reliable evidence and are used to measure fair value whenever available. Level 2- Fair Value is based on significant inputs, other than Level 1 inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets, quoted market prices in markets that are not active for identical or similar assets, and other observable inputs. Level 3- Fair value would be based on significant unobservable inputs. Examples of valuation methodologies that would result in Level 3 classification include option pricing models, discounted cash flows, and other similar techniques. Grants and contracts revenue Revenue from grants or contracts is recognized as earned to the extent such funds are currently expended. Receipts in excess of amounts earned and contract advances are recorded as an increase in temporarily restricted net assets. -8-

12 NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income tax status The Organization is exempt from federal income tax under Section 501(c) (3) of the Internal Revenue Code. However, income from certain activities not directly related to the Organization s tax-exempt purpose is subject to taxation as unrelated business income. In addition, the Organization qualifies for the charitable contribution deduction under Section 170(b) (1) (A) and has been classified as an organization that is not a private foundation under Section 509(a) (2). There were no uncertain income tax positions identified that would have a material effect on the financial statements for the period ended June 30, Investments The Organization reports investments in marketable securities with readily determinable fair values and all investments in debt securities at their fair values in the statement of financial position. Unrealized gains and losses are included in net assets in the accompanying statement of activities. Property and equipment Major expenditures for buildings, equipment and automobiles are capitalized and depreciated on a straight-line basis over their estimated useful lives. Buildings acquired prior to 1967 are recorded at estimated cost. Subsequent additions are recorded at cost when purchased or if donated, at the approximate fair value at the date of donation. It is the policy of the organization to capitalize the cost of acquiring property and equipment when the cost exceeds $1,500. Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. -9-

13 NOTES TO FINANCIAL STATEMENTS 2. CASH AND CASH EQUIVALENTS Cash and cash equivalents are comprised of the following: Total Demand Deposits $ 209,563 Total Cash and Cash Equivalents $ 209,563 Of the above amounts, $22,000 is held subject to various restrictions of donors. 3. INVESTMENTS Investments are stated at market value and consist of 560 shares of a mutual fund. The investment balance consists of the original amount acquired by gifts increased by subsequent dividends reinvested and reduced by subsequent liquidations. The fair market value of the shares at June 30, 2017 was $22,951. The following summarizes the investment return in the statement of activities for the year ended June 30, 2017: Interest and Dividends $ 959 Market Value Adjustment 1,542 Total $ 2, PENSION PLAN The Agency sponsors a defined benefit pension plan that covers substantially all salaried employees with one year of service and attainment of age 21. During the plan year beginning July 1, 2003 the Pension plan for employees of the Lighthouse was amended to end any future pension accruals. The Lighthouse uses June 30 of the current fiscal year as the measurement date for its plan. A liability (unfunded pension benefit obligation) has been recognized representing the underfunded status of the pension plan in the amount of $267,717 as of June 30, 2017: Projected benefit obligation for service rendered to date $ (735,457) Plan Assets at fair value 467,740 Funded status $ (267,717) -10-

14 NOTES TO FINANCIAL STATEMENTS 4. PENSION PLAN (CONTINUED) The accumulated benefit obligation as of June 30, 2017 $ 735,457 Item not yet recognized as a component of net periodic pension costs: Net loss $ 448,669 The amounts recognized in the statement of activities for the year ended June 30, 2017 are as follows: Net periodic benefit cost, included in functional expenses: Interest cost on projected benefit obligation $ 37,515 Actual return on plan assets (8,262) Net Amortization and deferral (3,160) Net periodic pension costs $ 26,093 Employer Contributions to the Plan $ 93,169 The following weighted-average assumptions are used in the accounting for the plan: Discount rate Net periodic pension cost 5.00% Benefit obligations 5.00% Expected return on plan assets, beginning of fiscal year 5.00% Rate of compensation increase, beginning of fiscal year N/A Rate of compensation increase, end of fiscal year N/A Measurement date June 30, 2017 The expected return on plan assets assumption is based on historical experience and by evaluating input from the trustee managing the plan s assets. The expected return on plan assets is also impacted by the target allocation of assets, which is based on the goal of earning the highest rate of return while maintaining risk at acceptable levels. Asset category: Equity Securities 100% Debt Securities 0% Real Estate 0% Other 0% The plan strives to have assets sufficiently diversified so that adverse or unexpected results from one security class will not have an unduly detrimental impact on the entire portfolio. -11-

15 NOTES TO FINANCIAL STATEMENTS 4. PENSION PLAN (CONTINUED) New accounting rules and reporting requirements for defined benefit pension plans did not change the computation of periodic pension cost, interest cost, expected return on pension plan assets and amortization of unrecognized items. It did however impact the reporting of comprehensive income. Specifically, actuarial gains or losses and prior service costs that arise during the period are recognized as components of comprehensive income. During the year ended June 30, 2017 the Organization recognized $25,800 of income as a result of income reporting under the new accounting rules. For the year ended June 30, 2017, benefits paid from the plan were $374,423. The following benefits payments, which reflect expected future services, as appropriate, are expected to be paid in future years: For the year ended: Amounts 5. PROPERTY AND EQUIPMENT 2018 $ 560, , , , thru ,377 Property and equipment consisted of the following at June 30, 2017: Land $ 101,450 Buildings & Improvements 2,417,866 Furniture and Equipment 579,853 Vehicles 55,073 Sub-Total 3,154,242 Less: Accumulated Depreciation 2,287,435 Land, Buildings & Equipment, Net $ 866,807 Depreciation expense for the fiscal year ended June 30, 2017 was $ 100,080. Land and Buildings are recorded at historical costs of the assets and consist of the following: Lot, Front Street & Erie Avenue, 17 Acres Undeveloped and Continuous Youth Services Building, Somerset Street Administration, Classroom and Day Care Building, Macher & Lehigh Streets -12-

16 NOTES TO FINANCIAL STATEMENTS 6. NOTES PAYABLE Notes payable at June 30, 2017 consist of the following: ESSA Bank and Trust A mortgage note in the amount of $615,000 and secured by a first lien and security interest in the properties located at 152 West Lehigh Avenue, 141 West Somerset Street, and 101 East Erie Avenue; Philadelphia, Pennsylvania; and a security interest in all assets owned by the Organization. Monthly installments of approximately $3,998, including principal and interest at 6%, are payable through May, 2020, with a final payment of approximately $558,115 due in June, $ 590,913 ESSA Bank and Trust A revolving line of credit in the amount of $200,000 and secured by a second lien and security interest in the properties located at 152 West Lehigh Avenue, 141 West Somerset Street, and 101 East Erie Avenue; Philadelphia, Pennsylvania; and a security interest in all assets owned by the Organization. Subsequent to the financial statement date, the line of credit was increased to $300,000. Interest is assessed at prime plus 1%. At June 30, 2017, the interest rate was 5.25%. 200,202 Total notes payable $ 791,115 Interest payments for fiscal year 2017 for indebtedness amounted to $49,803. Future principal requirements relating to notes payable are approximately: Fiscal Year Amount 2018 $ 12, , ,603 Total $ 791, TEMPORARILY RESTRICTED NET ASSETS Temporarily restricted net assets as of June 30, 2017 consist of the following: Classroom Furniture and Supplies $ 22,

17 NOTES TO FINANCIAL STATEMENTS 8. NET ASSETS RELEASED FROM RESTRICTIONS Net assets were released from donor restrictions by incurring expenses satisfying the restricted purpose or by the occurrence of other events specified by the donors as follows: 9. LEASES Rental Rebate Program $ 2,632 Operating Leases: The Lighthouse rents certain office equipment under various lease agreements classified as operating leases which expire through Equipment rental expense totaled $13,364 for Future minimum payments required under these non-cancelable operating leases are as follows: Capital Leases: 2018 $ 11, , Total $ 18,204 The Lighthouse rents phone equipment under a capital lease agreement which expires in May The equipment is recorded as an asset of The Lighthouse, and the related obligation is recorded as a liability, in an amount equal to the present value of the minimum lease payments payable during the remaining term of the lease. Capital lease payments totaled $4,224 for Future minimum payments required under this non-cancelable capital lease are as follows: 2018 $ 3,872 Future Minimum Payments 3,872 Less: Interest 235 Present Value of Future Minimum Payments $ 3,

18 NOTES TO FINANCIAL STATEMENTS 10. DAY CARE REVENUES Day Care revenues consist of the following: Head Start Program $ 2,769,414 CACFP 247,729 DPW, LMA, Extended Service Fees 110,259 Total Day Care Revenues $ 3,127, GIFT IN KIND INCOME The ability to provide services is greatly enhanced by the service efforts of volunteers as well as the receipt of donated items. For the year ended June 30, 2017, the Organization recognized $173,911 as revenue for donated food, food supplies and delivery services. 12. CONCENTRATION OF RISK Deposits with Financial Institutions The Organization maintains its cash balances in financial institutions and occasionally the balances aggregate to amounts which exceed the federally insured limits. Accordingly, those balances would have been at risk of loss in the event of nonperformance by the institutions. The subject financial institutions are banks and management of the Organization does not anticipate any nonperformance. Sources Of Funding Contributions and grants are received from individuals, foundations, corporations and government agencies throughout the United States. During the current fiscal year, government contracts represented approximately 89% of total revenue and two agencies represented approximately 65% of total revenue. Accounts Receivable One agency represented approximately 84% of the accounts receivable at June 30,

19 NOTES TO FINANCIAL STATEMENTS 13. FAIR VALUE OF FINANCIAL INSTRUMENTS The Organization measures its investments on a recurring basis at fair value. These items were measured using the following inputs as of June 30, 2017: Quoted Prices Other Other in Active Observable Unobservable Markets Inputs Inputs Total Fair (Level 1) (Level 2) (Level 3) Value Assets: Mutual Funds Equity $ 22,951 $ 0 $ 0 $ 22,951 Following is a description of the valuation methodologies used for assets and liabilities measured at fair value. There have been no changes in the methodologies used at June 30, The carrying amounts of cash and cash equivalents and accounts payable approximate fair value at year-end due to the short-term nature of those instruments. Mutual funds are valued at the net asset value ( NAV ) of shares held by the Organization at year-end, which are considered Level 1 inputs. Long term debt is valued at amortized cost, which approximates fair value. Accrued retirement is valued at the projected benefit obligation less the actuarial value of the plan assets. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Organization believes its valuation methods are appropriate and consistent, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. -16-

20 NOTES TO FINANCIAL STATEMENTS 14. ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES The Organization adopted the additional disclosure requirements relating to accounting for uncertainty in income taxes which includes nonpublic entities. Organizations are required to disclose positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of the reporting date. Generally speaking, a nonprofit organization s exposure to the additional disclosure requirement is limited to tax positions taken which would affect their tax-exempt status and/or the reporting of unrelated business income. Management is unaware of any positions taken that would affect its tax-exempt status or require it to file and report unrelated business income. With few exceptions, the Organization is no longer subject to federal or state income tax examinations by tax authorities for years before 2013 and there are no known examinations in progress as of the audit report date. 15. RELATED PARTY TRANSACTIONS At June 30, 2017, The Lighthouse has an outstanding payable in the amount of $195,000 due to a member of management. 16. CONTINGENCIES The Lighthouse has received notice that their certificate of compliance is not valid for the after school programming at the Somerset Street property. Management has moved the after school program to the main property located on Lehigh Avenue and is taking steps to resolve the issue. Management does not believe programming or revenues will be negatively impacted by the issue. 17. MANGEMENT PLANS Over the past several years, the Organization has suffered recurring significant reductions in revenues and increases in expenditures which has resulted in a net deficiency in net assets that raises substantial doubt about its ability to continue as a going concern. Management has taken necessary steps to address the negative working capital. The Lighthouse has moved aggressively to increase the capacity of existing contracts and develop a new contract in order to increase revenue. Revenues from contributions and fundraising events increased substantially for the year ended June 30, In addition, The Lighthouse enacted a plan with its second largest line item expense, its food vendor, to reduce the cost of the food purchased and also secured an in kind donation of food products to the organization in order to further reduce the expense of the food provided to the organization. -17-

21 NOTES TO FINANCIAL STATEMENTS 17. MANGEMENT PLANS (CONTINUED) During the fiscal year management has also put the following plans into effect: a) The Lighthouse terminated its relationship with their subcontracted provider of fiscal services and hired a fulltime Controller to perform all aspects of fiscal management in a timely and accurate manner. This change also resulted in a reduction in the total expenses related to fiscal operations. b) The Lighthouse implemented a plan to reduce the liability of the accrued compensated absences by modifying the employee policies and procedures regarding the limits of accrued absences and enacting a plan to reduce the present accruals. c) The Lighthouse employed the expertise of a marketing consultant to increase the organization s ability to generate unrestricted revenue. These steps have resulted in significant improvement in the organization s fiscal position. 18. SUBSEQUENT EVENTS Management has evaluated subsequent events through March 28, 2018, the date which the financial statements were available to be issued. -18-

22 SUPPLEMENTARY INFORMATION

23 SCHEDULE OF EXPENDITUES OF FEDERAL AWARDS FOR THE YEAR ENDED Pass-Through Federal Entity Total Federal Grantor/Pass-Through Grantor/ CFDA Identifying Federal Program or Cluster Title Number Number Expenditures U.S. Department of Health & Human Services Passed through Norris Square Head Start CH3368 $ 1,486,914 Passed through The School District of Philadelphia Head Start /F17 1,282,500 Passed through Child Care Information Services Child Care and Development Fund ,682 Total U.S. Department of Health & Human Services 2,856,096 U.S. Department of Education Passed through Pennsylvania Department of Education Child & Adult Care Food Program ,729 Total U.S. Department of Education 247,729 TOTAL EXPENDITURES OF FEDERAL AWARDS $ 3,103,825 See Notes to Schedule of Expenditures of Federal Awards. -20-

24 NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED NOTE 1 BASIS OF PRESENTATION The accompanying schedule of expenditures of federal awards (the Schedule) includes the federal award activity of The Lighthouse under programs of the federal government 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 Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Because the Schedule presents only a selected portion of the operations of The Lighthouse, it is not intended to and does not present the financial position, changes in net assets, or cash flows of The Lighthouse. NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. Expenditures reported on the Schedule are reported on the accrual basis of accounting. 2. Pass-through entity identifying numbers are presented where available. 3. The accompanying schedule of expenditures of federal awards is presented using the accrual basis of accounting for revenues and expenditures. The amounts reported in this schedule as expenditures may differ from certain financial reports submitted to federal funding agencies due to those reports being submitted on either cash or modified accrual basis of accounting. The Lighthouse has elected not to use the 10 percent de minimis indirect cost rate allowed under the Uniform Guidance. NOTE 3 RELATIONSHIP TO BASIC FINANCIAL STATEMENTS Federal awards expenditures are reported on the statement of functional expenses as program services. In certain programs, the expenditures reported in the basic financial statements may differ from the expenditures reported in the schedule of federal expenditures due to program expenditures exceeding grant or contract budget limitations not included as federal awards. Program expenditures on the schedule of expenditures of federal awards may also differ from government revenues in the financial statements because of changes in restricted net assets resulting from unexpended revenues. -21-

25 WENTZEL and COMPANY, PC Certified Public Accountant INDEPENDENT AUDITOR S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS To The Board of Directors The Lighthouse 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 The Lighthouse (a nonprofit organization), which comprise the statement of financial position as of June 30, 2017, and the related statements of activities, functional expenses, and cash flows for the year then ended, and the related notes to the financial statements, and have issued our report thereon dated March 28, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered The Lighthouse 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 Lighthouse s internal control. Accordingly, we do not express an opinion on the effectiveness of the organization s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified PO Box 156, Fleetwood, PA Tel Fax

26 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 Page two Compliance and Other Matters As part of obtaining reasonable assurance about whether The Lighthouse 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. 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. Wentzel and Company, PC Fleetwood, Pennsylvania March 28,

27 WENTZEL and COMPANY, PC Certified Public Accountant INDEPENDENT AUDITOR S REPORT ON COMPLIANCE FOR EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE To The Board of Directors The Lighthouse Report on Compliance for Each Major Federal Program We have audited The Lighthouse 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 Lighthouse s major federal programs for the year ended June 30, The Lighthouse s 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 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 compliance for each of The Lighthouse 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 Lighthouse 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 Lighthouse s compliance. Opinion on Each Major Federal Program In our opinion, The Lighthouse complied, in all material respects, with the 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, PO Box 156, Fleetwood, PA Tel Fax

28 INDEPENDENT AUDITOR S REPORT ON COMPLIANCE FOR EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE Page two Report on Internal Control Over Compliance Management of The Lighthouse 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 Lighthouse 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 the Lighthouse 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. However, material weaknesses may exist that have not been identified. 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. Wentzel and Company, PC Fleetwood, Pennsylvania March 28,

29 SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED Section I: Summary of Auditors Results 1. The auditor s report expresses an unmodified opinion on the financial statements of The Lighthouse. 2. No significant deficiencies relating to the audit of the financial statements is reported in the schedule of findings and questioned costs. 3. No instances of noncompliance material to the financial statements of The Lighthouse were disclosed during the audit. 4. No significant deficiencies relating to the audit of the major federal award programs are reported in the financial statements and reports. 5. The auditor s report on compliance for the major federal award programs for The Lighthouse expresses an unmodified opinion on all major federal programs. 6. There are no audit findings related to major programs that are required to be reported under the Uniform Guidance for Federal Awards requirements. 7. The programs tested as major programs included: U S Department of Health and Human Services Head Start Contract CFDA # U S Department of Education Child and Adult Care Food Program CFDA# The threshold used for distinguishing between Type A and B programs was $750, The Lighthouse was determined to be a non-low-risk auditee. -26-

30 SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR YEAR ENDED Section II: Findings Financial Statement Audit There are no findings related to the government auditing standards that are required to be reported under government auditing standards generally accepted in the United States of America. Section III: Findings and Questioned Costs Major Federal Award Programs Audit There are no findings and questioned costs that relate to the Head Start Program, CFDA # of the US Department of Health and Human Services, and the Child and Adult Care Food Program, CFDA #10.558, of the U S Department of Education for the year ended June 30,

31 SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS FOR THE YEAR ENDED Finding : Monthly Reporting Condition: Procedures and controls on monthly reporting are inadequate. Corrective Action Taken: Corrected: The outside consulting firm which was expected to complete the procedures necessary to provide accurate monthly reports to management did not follow through as anticipated. Management has terminated the relationship with the outside consulting firm and hired a fulltime controller. With the implementation of new staff, accuracy of monthly reporting has improved. Reconciliations are completed timely and monthly estimates are recorded for depreciation, and other similar accruals. A complete analysis of all vendors, customers, and employees has been completed to verify the accuracy of all purchases, receipts of donations, and payroll. -28-

32 MANAGEMENT RESPONSE FOR THE YEAR ENDED Management is not required to provide a response since no significant deficiencies were disclosed during the audit of the financial statements. -29-

33 WENTZEL and COMPANY, PC Certified Public Accountant INDEPENDENT AUDITOR S REPORT ON COMPLIANCE WITH SPECIFIED INDIRECT COST ALLOCATION REQUIREMENTS To The Board of Directors The Lighthouse We have examined The Lighthouse s compliance with allocating indirect costs reflected in the City of Philadelphia, Department of Human Services Report of Functional Expenditures as required by the Commonwealth of Pennsylvania, Department of Public Welfare, Section of the Chapter 3170 Regulations; and the Indirect Cost Allocations Section of the city of Philadelphia Sub-recipient Audit Guide - Instructions For Completing the Report of Functional Expenditures (Section 2000, Exhibit B) during the year ended June 30, Management is responsible for The Lighthouse s compliance with those requirements. Our responsibility is to express an opinion on The Lighthouse s compliance based on our examination. Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants, and accordingly, including examining, on a test basis, evidence about The Lighthouse s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion. Our examination does not provide a legal determination on The Lighthouse s compliance with specified requirements. In our opinion, The Lighthouse complied, in all material respects, with the aforementioned requirements for the year ended June 30, This report is intended solely for the information and use of the audit committee, management, and the City of Philadelphia Department of Human Services and is not intended to be and should not be used by anyone other than these specified parties. Wentzel and Company, PC Fleetwood, Pennsylvania March 28, PO Box 156, Fleetwood, PA Tel Fax