CENTER FOR EMPLOYMENT TRAINING AND SUBSIDIARY. CONSOLIDATED FINANCIAL STATEMENTS and SUPPLEMENTARY INFORMATION JUNE 30, 2017

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1 CENTER FOR EMPLOYMENT TRAINING AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS and SUPPLEMENTARY INFORMATION JUNE 30, 2017

2 C O N T E N T S Independent Auditors Report 1-2 Consolidated Statement of Financial Position 3 Consolidated Statement of Activities 4 Consolidated Statement of Functional Expenses 5 Consolidated Statement of Cash Flows 6 Notes to Consolidate Financial Statements 7-16 Supplementary Information: Statement of Revenue and Expenditures for the Community Services Block Grant 17 U.S. Department of Education Review of Non-profit Statements in Accordance with 34 CFR 668 Subpart L 18

3 INDEPENDENT AUDITORS REPORT To the Board of Directors Center for Employment Training and Subsidiary Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of Center for Employment Training (a nonprofit organization) and Subsidiary (a for-profit organization), which comprise the Consolidated Statement of Financial Position as of June 30, 2017, and the related Consolidated Statements of Activities, Functional Expenses, and Cash Flows for the year then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Center for Employment Training and Subsidiary as of June 30, 2017, and the changes in their net assets and their cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

4 INDEPENDENT AUDITORS REPORT continued Supplementary Information Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying Statement of Revenue and Expenditures for the Community Services Block Grant and U.S. Department of Education Review of Non-profit Statements in Accordance with 34 CFR 668 Subpart L are presented for purposes of additional analysis are 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 consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements as a whole. Other Matter Report on Summarized Comparative Information We have previously audited Center for Employment Training and Subsidiary s 2016 consolidated financial statements, and we expressed an unmodified audit opinion on those audited consolidated financial statements in our report dated November 29, In our opinion, the summarized comparative information presented herein as of and for the year ended June 30, 2016, is consistent, in all material respects, with the audited consolidated financial statements from which it has been derived. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated December 8, 2017, on our consideration of Center for Employment Training and Subsidiary 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 solely 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 effectiveness of Center for Employment Training and Subsidiary s 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 Center for Employment Training and Subsidiary s internal control over financial reporting and compliance. San Francisco, California December 8, 2017

5 CONSOLIDATED STATEMENT OF FINANCIAL POSITION June 30, 2017 With comparative totals at June 30, 2016 Temporarily Unrestricted Restricted ASSETS CURRENT ASSETS Cash and cash equivalents (Note 2) $ 5,892,535 $ 10,000 $ 5,902,535 $ 6,038,719 Accounts receivable - net of allowance of $2,485,930 5,078,345 5,078,345 5,496,692 Prepaid expenses and deposits 476, , ,433 TOTAL CURRENT ASSETS 11,447,447 10,000 11,457,447 12,000,844 NON-CURRENT ASSETS Property and equipment (Note 3) 22,409,635 22,409,635 23,061,850 TOTAL NON-CURRENT ASSETS 22,409,635-22,409,635 23,061,850 TOTAL ASSETS $ 33,857,082 $ 10,000 $ 33,867,082 $ 35,062,694 LIABILITIES AND NET ASSETS CURRENT LIABILITIES Accounts payable $ 734,556 $ - $ 734,556 $ 613,005 Current portion accrued liabilities (Note 4) 1,182,265 1,182,265 1,442,821 Accrued unemployment liability (Note 5) 256, , ,341 Deferred revenue (Note 6) 3,284,348 3,284,348 3,812,337 Current portion of notes payable (Note 7) 276, , ,271 Capital leases (Note 9) 121, , ,720 Line of credit (Note 8) 613, ,005 - TOTAL CURRENT LIABILITIES 6,467,983-6,467,983 6,647,495 NON-CURRENT LIABILITIES Accrued liabilities (Note 4) 3,086,910 3,086,910 2,901,647 Notes payable (Note 7) 10,158,770 10,158,770 10,431,740 Capital leases ,269 TOTAL NON-CURRENT LIABILITIES 13,245,680-13,245,680 13,457,656 TOTAL LIABILITIES 19,713,663-19,713,663 20,105,151 NET ASSETS Unrestricted 14,143,419 14,143,419 14,947,543 Temporarily restricted (Note 11) 10,000 10,000 10,000 TOTAL NET ASSETS 14,143,419 10,000 14,153,419 14,957,543 TOTAL LIABILITIES AND NET ASSETS $ 33,857,082 $ 10,000 $ 33,867,082 $ 35,062,694 The accompanying notes are an integral part of these consolidated financial statements. 3

6 CONSOLIDATED STATEMENT OF ACTIVITIES For the year ended June 30, 2017 With comparative totals for the year ended June 30, 2016 Temporarily Unrestricted Restricted REVENUE AND SUPPORT Government contracts (Note 12) $ 27,680,264 $ - $ 27,680,264 $ 29,214,253 Other revenue 2,593,047 2,593, ,380 Program service fees 750, ,600 59,266 Rental income 299, , ,333 Contributions 61,651 61,651 79,372 Contributions - in kind (Note 2) 58,282 58,282 54,845 Interest and dividends 4,947-4,947 25,420 TOTAL REVENUE AND SUPPORT 31,448,034-31,448,034 30,032,869 EXPENSES Program services 24,022,937 24,022,937 24,141,374 Management and general 8,192,598 8,192,598 7,446,521 Fundraising 38,982 38,982 27,398 TOTAL EXPENSES 32,254,517-32,254,517 31,615,293 CHANGE IN NET ASSETS BEFORE GAIN ON DISPOSAL OF PROPERTY AND EQUIPMENT (806,483) - (806,483) (1,582,424) Gain on disposal of equipment and property 2,359 2,359 3,130,723 CHANGE IN NET ASSETS (804,124) - (804,124) 1,548,299 NET ASSETS, BEGINNING OF YEAR 14,947,543 10,000 14,957,543 13,409,244 NET ASSETS, END OF YEAR $ 14,143,419 $ 10,000 $ 14,153,419 $ 14,957,543 The accompanying notes are an integral part of these consolidated financial statements. 4

7 CONSOLIDATED STATEMENT OF FUNCTIONAL EXPENSES For the year ended June 30, 2017 With comparative totals for the year ended June 30, 2016 Total Program Services Program Management Total Expenses Training Non Training Services and General Fundraising Salaries $ 9,785,366 $ 720,859 $ 10,506,225 $ 2,414,088 $ - $ 12,920,313 $ 12,820,863 Payroll taxes and benefits 2,726, ,228 2,916, ,026 3,732,751 3,522,853 Total personnel costs 12,511, ,087 13,422,950 3,230,114-16,653,064 16,343,716 Consumables 1,922, ,754 2,074,497 42,535 15,838 2,132,870 2,085,250 Professional services 469, , , ,941 1,513 1,566,116 1,415,897 Participant support 100,732 1,426,289 1,527,021 24,494 3,724 1,555,239 1,201,758 Depreciation and amortization 85, ,888 1,362,095 1,448,983 1,429,057 Trainee allowance 1,323,489 1,323,489 1,323,489 1,334,380 Building rent 726, , , ,292 1,143,041 1,366,457 Advertising 729,092 43, ,831 61,739 3, ,760 1,147,818 Utilities 549,441 1, , , , ,960 Bad debts expense 118, , , , ,521 Equipment lease and maintenance 301,401 22, , ,847 5, , ,649 Building maintenance and security 501,966 2, , , , ,868 Communication 405,848 3, , , , ,100 Interest 9,290 9, , , ,218 Insurance 377,351 11, , , , ,961 Miscellaneous 300,751 25, ,277 55,227 8, , ,220 Travel 258,322 6, ,374 23, , ,066 Printing and publications 144,414 16, ,263 25, , ,752 Equipment purchase 89,124 67, ,078 22, , ,661 In-kind expenses 11,716 11,716 46,566 58,282 54,845 Subcontract/grant 54,250 54,250 54,250 54,175 Staff training and business meeting 47,361 47,361 3,073 50,434 46,964 TOTAL 2017 FUNCTIONAL EXPENSES $ 21,027,761 $ 2,995,176 $ 24,022,937 $ 8,192,598 $ 38,982 $ 32,254,517 TOTAL 2016 FUNCTIONAL EXPENSES $ 21,765,734 $ 2,375,640 $ 24,141,374 $ 7,446,521 $ 27,398 $ 31,615,293 The accompanying notes are an integral part of these consolidated financial statements. 5

8 CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended June 30, 2017 With comparative totals for the year ended June 30, CASH FLOWS FROM (TO) OPERATING ACTIVITIES: Change in net assets $ (804,124) $ 1,548,299 Adjustments to reconcile change in net assets to net cash provided (used) by operating activities: Change in value of allowance for doubtful receivables (1,406,967) 502,141 Depreciation and amortization 1,448,983 1,429,057 (Gain) on sale of property and equipment (2,359) (3,130,723) (Increase) decrease in operating assets: Accounts receivable 1,825,314 (1,250,307) Prepaid expenses and deposits (11,134) 450,128 Increase (decrease) in operating liabilities: Accounts payable 121,551 (186,668) Accrued liabilities (75,293) (595,830) Accrued unemployment liability (106,341) 18,122 Deferred revenue (527,989) 654,547 NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 461,641 (561,234) CASH FLOWS (TO) FROM INVESTING ACTIVITIES: Purchase of property and equipment (796,768) (34,111) Proceeds on sale of property and equipment 2,359 3,400,000 Proceeds on sale of investments - 413,650 NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (794,409) 3,779,539 CASH FLOWS FROM (TO) FINANCING ACTIVITIES: Proceeds from new borrowings on notes payable 474, ,000 Proceeds from line of credit 613,005 - Payments on notes payable (736,067) (894,684) Payments on capital leases (154,766) (154,700) NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 196,584 (338,384) NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (136,184) 2,879,921 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 6,038,719 3,158,798 CASH AND CASH EQUIVALENTS, END OF YEAR $ 5,902,535 $ 6,038,719 SUPPLEMENTAL DISCLOSURE: Operating activities reflect interest paid of: $ 584,875 $ 616,100 NON-CASH FINANCING ACTIVITIES TRANSACTION: Payment of note payable through refinancing: $ - $ 2,357,624 The accompanying notes are an integral part of these consolidated financial statements. 6

9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization Center for Employment Training is a nonprofit organization that was established in Center for Employment Training operates employment training centers in several cities throughout the states of California, Virginia, Texas and North Carolina. In addition, Center for Employment Training also operates and manages Dura Enterprises, Inc., a wholly-owned subsidiary of the Center for Employment Training, which manages real estate and other activities not related to skill training. Center for Employment Training and its wholly owned subsidiary shall be collectively referred to as ( CET ). 2. Summary of Significant Accounting Policies A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements is as follows: Principles of Consolidation The consolidated financial statements include the accounts of its subsidiary, Dura Enterprises, Inc. All inter-company accounts and transactions have been eliminated. Basis of Presentation The accompanying consolidated financial statements have been prepared on the accrual basis of accounting. Accounting To ensure observance of certain constraints and restrictions placed on the use of resources, the accounts of CET are maintained in accordance with the principles of net asset accounting. This is the procedure by which resources for various purposes are classified for accounting and reporting purposes into net asset classes that are in accordance with specified activities or objectives. Accordingly, all financial transactions have been recorded and reported by net asset class as follows: Unrestricted. These generally result from revenues generated by receiving unrestricted contributions, providing services, and receiving interest from investments less expenses incurred in providing program-related services, raising contributions, and performing administrative functions. Temporarily Restricted. CET reports gifts of cash and other assets as temporarily restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or the purpose of the restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the Consolidated Statement of Activities as net assets released from program or capital restrictions. At June 30, 2017, CET had temporarily restricted net assets of $10,000. continued 7

10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies, continued Permanently Restricted. These net assets are restricted by donors who stipulate that resources are to be maintained permanently, but permit CET to expend all of the income (or other economic benefits) derived from the donated assets. CET had no permanently restricted net assets at June 30, Cash and Cash Equivalents CET has defined cash and cash equivalents as cash in banks, money market funds, and certificates of deposits, with an original maturity of six months or less. Accounts Receivable CET uses the allowance method in order to reserve for potential uncollectible accounts receivable. Investments Investments consist of money market funds. Money market funds are carried at cost, which approximates fair value. Realized and unrealized gains and losses are reflected in the Consolidated Statement of Activities. Investment income and gains and losses on investments are reported as increases or decreases in unrestricted net assets unless their use is restricted by explicit donor stipulation. Money market funds held at securities institutions and not used for operations are included in investments. Fair Value Measurements Generally accepted accounting principles provide guidance on how fair value should be determined when financial statement elements are required to be measured at fair value. Valuation techniques are ranked in three levels depending on the degree of objectivity of the inputs used with each level: Level 1 inputs quoted prices in active markets for identical assets Level 2 inputs quoted prices in active or inactive for the same or similar assets Level 3 inputs estimates using the best information available when there is little or no market CET is required to measure non-cash contributions at fair value. The specific technique used to measure fair value for this consolidated financial statement element is described in the note below that relates to the element. continued 8

11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies, continued Concentration of Credit Risks CET places its temporary cash investments with high-credit, quality financial institutions. At times, such investments may be in excess of the Federal Deposit Insurance Corporation insurance limit. CET has not incurred losses related to these investments. The primary receivable balance outstanding at June 30, 2017 consists of government contract receivables due from county, state, and federal granting agencies. Concentration of credit risks with respect to trade receivables are limited, as the majority of CET s receivables consist of earned fees from contract programs granted by governmental agencies. For the year ended June 30, 2017, revenues derived from governmental agencies represent approximately 92% of total revenue and support. Property and Equipment Property and equipment are recorded at cost if purchased or at fair value at the date of donation if donated. Depreciation is computed on the straight-line basis over the estimated useful lives of the related assets. Maintenance and repair costs are charged to expense as incurred. Property and equipment are capitalized if the cost of an asset is greater than or equal to five thousand dollars and the useful life is greater than three years. Revenue Recognition CET recognizes the earning of tuition revenue in five months from the date of enrollment as follows: 1 st month 30% of total tuition 2 nd month 25% of total tuition 3 rd month 20% of total tuition 4 th month 15% of total tuition 5 th month 10% of total tuition CET earns the entire tuition when the student completes more than 60% of the scheduled hours. CET records tuition as accounts receivable and deferred revenue and amortizes deferred revenue and recognizes revenue based on the above schedule. continued 9

12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies, continued Donated Materials and Services Contributions of donated non-cash assets are measured on a non-recurring basis and recorded at fair value in the period received. Contributions of donated services that create or enhance non-financial assets or that require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation, are recorded at fair value in the period received. For the year ended June 30, 2017, CET recorded in-kind contributions of $58,282 (see Note 13). Income Taxes CET is exempt from taxation under Internal Revenue Code Section 501(c)(3) and California Revenue and Taxation Code Section 23701d. Generally accepted accounting principles provide accounting and disclosure guidance about positions taken by an organization in its tax returns that might be uncertain. Management has considered its tax positions and believes that all of the positions taken by CET in their federal and state exempt organization tax returns are more likely than not to be sustained upon examination. CET s returns are subject to examination by federal and state taxing authorities, generally for three and four years, respectively, after they are filed. Functional Allocation of Expenses Costs of providing CET s programs and other activities have been presented in the Consolidated Statement of Functional Expenses. During the year, such costs are accumulated into separate groupings as either direct or indirect. Indirect or shared costs are allocated among program and support services by a method that best measures the relative degree of benefit. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets, liabilities, revenues, and expenses as of the date and for the period presented. Actual results could differ from those estimates. continued 10

13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies, continued Comparative Totals The consolidated financial statements include certain prior-year summarized comparative information in total but not by net asset class. Such information does not include sufficient detail to constitute a presentation in conformity with accounting principles generally accepted in the United States of America. Accordingly, such information should be read in conjunction with CET s consolidated financial statements for the year ended June 30, 2016, from which the summarized information was derived. Reclassifications Certain amounts from the June 30, 2016 consolidated financial statements have been reclassified for comparative purposes to conform to June 30, 2017 presentation. Subsequent Events Management has evaluated subsequent events through December 8, 2017, the date which the consolidated financial statements were available for issue. No events or transactions have occurred during this period that appear to require recognition or disclosure in the consolidated financial statements. 3. Property and Equipment Property and equipment at June 30, 2017 consist of the following: Building improvements $ 29,202,265 Buildings 8,738,941 Equipment 7,020,090 Land 4,170,738 Leasehold improvements 846,439 Furniture 312,073 50,290,546 Less: accumulated depreciation (27,880,911) $ 22,409,635 Depreciation and amortization expense for the year ended June 30, 2017 was $1,448,983. continued 11

14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. Accrued Liabilities Accrued liabilities at June 30, 2017 consist of the following: Current liabilities Accrued vacation $ 636,093 Accrued payroll 397,901 Other accrued liabilities 148,271 1,182,265 Long-term liabilities Long-term severance 2,057,510 Refundable to Department of Education (Note 10) 1,029,400 3,086,910 Total accrued liabilities $4,269, Accrued Unemployment Liability CET has elected to be self-insured for the purposes of California state unemployment insurance. Accrued unemployment liability at June 30, 2017 of $256,000 represents estimated future claims arising from payroll paid within the year ended June 30, Deferred Revenue Deferred revenue represents contract advances on various contracts. This amount will be recognized as revenue in the next fiscal year as the services are performed. Department of Education $2,009,951 Contract advances 481,246 Other 421,342 Department of Labor 315,139 La Cooperativa 56,670 $3,284,348 continued 12

15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. Notes Payable Notes payable at June 30, 2017 consist of the following: Note payable to a financial institution, secured by real property, equipment, fixtures, and deposit accounts, monthly payments of $28,251, including interest at 4.000%, due June $ 5,297,504 Note payable to a credit union, secured by real property, equipment, fixtures, and deposit accounts, monthly payments of $12,282, including interest at 3.875%, due October ,255,258 Note payable to a financial institution, secured by real property, monthly payments of $5,204, including interest at 4.058%, due November ,475 Note payable to a financial institution, secured by real property, monthly payments of $3,979, including interest at 4.500% due, March ,327 Note payable to a financial institution, secured by real property, monthly payments of $3,278, including interest at 4.700%, due December ,050 Note payable to a corporation, in the amount of $500,000, bearing an annual interest of 5.500%, due December ,607 Promissory note issued to the City of San Jose for $375,000. The terms of the note require CET to pay the note upon sale or change in the use of the facility located in San Jose, California, if prior to December ,135 $10,435,356 Maturities for notes payable are as follows: Year ending June 30, 2018 $ 276, , , , ,241,679 Thereafter 4,014,444 $10,435,356 continued 13

16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. Line of Credit CET has a revolving, non-interest bearing, line of credit with a leasing institution, in the amount of $500,000. The outstanding balance on the line of credit at June 30, 2017 was $473,412. The line of credit is used for capital equipment purchases and will convert into a capital lease once the line of credit is fully utilized for the amount of $500,000. CET has a revolving line of credit with a financial institution, in the amount of $2,000,000, bearing interest at 4.750%. The outstanding balance on the line of credit at June 30, 2017, was $139, Capital Lease Obligations CET leases equipment and software under capital leases. Future minimum payments, by year, and in the aggregate, under these leases consist of the following: Total minimum lease payments remaining $124,083 Less: portion representing interest (2,860) Present value of net minimum lease payments $121,223 The cost of equipment and software under capital leases at June 30, 2017 consists of the following: Computers and training equipment $121, Commitments and Contingencies Obligations Under Operating Leases CET leases various facilities under operating leases with varying terms. Future minimum payments, by year and in the aggregate, under these leases with initial or remaining terms of one year or more, consist of the following: Year ended June 30, 2018 $1,224, ,091, , , ,993 $3,492,185 Building rent expenses and equipment rent expenses under operating leases for the year ended June 30, 2017 were $1,132,546 and $558,877, respectively. continued 14

17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. Commitments and Contingencies, continued Litigation CET is a defendant in three lawsuits and management intends to defend the organization vigorously in these matters. As of the date of our report, it is not possible to predict the probable outcome of CET s liability, if any. Contracts CET s grants and contracts are subject to inspection and audit by the appropriate governmental funding agency. The purpose is to determine whether program funds were used in accordance with their respective guidelines and regulations. The potential exists for disallowance of previously funded program costs. The ultimate liability, if any, which may result from these governmental audits cannot be reasonably estimated and, accordingly, CET has no provisions for the possible disallowance of program costs on its consolidated financial statements. At the end of September 2013, as a result of an internal compliance review on its Chicago Center, CET learned that inaccurate attendance records were generated and entered into CET s management information system by certain employees. As a result of those actions, some students may have received excess federal student aid. During the year ended June 30, 2017, CET reassessed that the total refunds to the Department of Education was $1,824,855. As of June 30, 2017, the outstanding balance refundable to the Department of Education is $1,029,400 (see Note 4). 11. Temporarily Restricted Net Assets Temporarily restricted net assets at June 30, 2017 consist of the following: Economic assistance $10, Government Contracts Fees from government contracts for the year ended June 30, 2017 consist of the following: Farmworkers program $ 8,037,633 Student financial aid Pell grants (school and student) 6,654,030 Community Services Block Grant (CSBG) 3,515,732 Workforce Investment Act (WIA) 1,262,747 Other contracts 8,210,122 $27,680,264 continued 15

18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. Fair Value Measurements The table below presents transactions measured at fair value on a non-recurring basis during the year ended June 30, 2017: Level 1 Level 2 Level 3 Total Contributed services $ - $58,282 $ - $58,282 The fair value of contributed services has been measured on a non-recurring basis using quoted prices for similar assets in inactive markets (Level 2 inputs). 14. Retirement Plan In November 2008, CET converted its Tax Shelter Annuity ( TSA ) into a 401k plan. The 401k plan is available to all employees who have completed two or more years of continuous service and are eligible for a matching contribution by CET. Employees may contribute any whole percentage of their annual compensation (minimum of $200 per calendar year), provided that it does not exceed maximum amounts as permitted by law. Effective January 1, 2015, employees who have one year of service and completed 1,000 hours of continued employment are eligible to participate in the 401k plan. Effective June 1, 2015, CET discontinued its matching of employee contributions; prior to then, CET had contributed a maximum of 3.34% to 6.66% of the employee s gross salary, depending on the employee s length of service, with a total matching contribution maximum of $5,000. On October 1, 2017 CET s management updated the eligibility requirement. As of said date, employees are eligible to participate in the 401k plan on the first day of the month following 60 days of employment. 15. Investment in Subsidiary CET has invested $210,000 in the common stock of Dura Enterprises, Inc., a for-profit subsidiary that manages real estate and other activities not related to skill training. The investment in this subsidiary was approved by CET s Board of Directors. This amount has been eliminated in the consolidation. 16

19 SUPPLEMENTARY INFORMATION

20 STATEMENT OF REVENUE AND EXPENDITURES FOR THE COMMUNITY SERVICES BLOCK GRANT For the year ended June 30, 2017 CSD Contract CSD Contract CSD Contract CSD Contract No: 16O-7004 No: 16F-5204 No: 16F-5507 No: 17F-2204 Aug 1, June 30, 2017 Jan 1, Dec 31, 2016 June 15, Dec 31, 2016 Jan 1, Dec 31, 2017 Revenue and support Grant revenue $ 1,382,539 $ 1,094,504 $ 32,078 $ 1,006,610 Total revenue and support 1,382,539 1,094,504 32,078 1,006,610 Expenses Program Salaries and wages 50, ,962 Fringe benefits 5, ,722 Operating expenses and equipment - 30,981 - (192) Space (rent/lease) - 176, ,233 Equipment lease/purchase Subcontractors - 27,125-27,125 Other 1,222, MSFW Drought Program expenses Program expenses 1,277, , ,850 Administrative Salaries and wages 33, ,967 27, ,080 Fringe benefits 9, ,748 8, ,113 Operating expenses and equipment - 90, ,585 Other 69,849 66,701-61,863 Administrative expenses 112, ,108 35, ,641 Total expenses 1,390,452 1,107,420 35,791 1,006,491 Revenue (under) costs $ (7,913) $ (12,916) $ (3,713) $ 119 (a) (a) The overrun funds of $119 was used to supplement additional tuition fees. See independent auditors' report 17

21 U.S. DEPARTMENT OF EDUCATION REVIEW OF NON-PROFIT STATEMENTS IN ACCORDANCE WITH 34 CFR 668 SUBPART L For the year ended June 30, 2017 Enter Calculated Accounts Amounts Amounts Primary Reserve Ratio (Expendable Net Assets/Total Expenses): Total Assets $ 33,867,082 Total Liabilities $ 19,713,663 Net Assets $ 14,153,419 Intangibles Unsecured Related Party Receivables Net Fixed Assets $ 22,409,635 Permanently Restricted Net Assets $ 10,000 Annuity, Life Income & Term Long-Term Debt $ 11,585,979 $ 11,585,979 Post-Emp or Rtrmnt Liab $ 2,057,510 Expendable Net Assets $ 5,377,273 Total Expenses $ 32,254,517 $ 32,254,517 Equity Ratio (Modified Net Assets/Modified Assets): Modified Net Assets $ 14,153,419 Modified Assets $ 33,867,082 Net Income Ratio (Change in Unrest. Net Assets/Unrest. Rev.): Change in Unrestricted Net Assets $ (804,124) Total Unrestricted Revenues $ 31,450,393 $ 31,450,393 If Composite Score < 1.5, HEA Program Funds: Primary Reserve: Composite Ratios Strength Factors Weights Scores % Equity: % Net Income: ### % Composite Score 1.7 See independent auditors' report 18

22 CENTER FOR EMPLOYMENT TRAINING AND SUBSIDIARY SINGLE AUDIT REPORTS JUNE 30, 2017

23 C O N T E N T S Independent Auditors Reports Independent Auditors Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards 1 Independent Auditors Report on Compliance for Each Major Program; Report on Internal Control Over Compliance; and Report on the Schedule of Expenditures of Federal and Non-federal Awards in Accordance with the Uniform Guidance 2-3 Schedule of Expenditures of Federal and Non-federal Awards 4 Notes to Schedule of Expenditures of Federal and Non-federal Awards 5 Schedule of Findings and Questioned Costs 6

24 Independent Auditors Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards To the Board of Directors Center for Employment Training and Subsidiary 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 Center for Employment Training and Subsidiary collectively referred to as ( CET ), which comprise the Consolidated Statement of Financial Position as of June 30, 2017, and the related Consolidated Statements of Activities, Functional Expenses, and Cash Flows for the year then ended, and the related notes to the consolidated financial statements, and have issued our report thereon dated December 8, Internal Control Over Financial Reporting In planning and performing our audit of the consolidated financial statements, we considered CET 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 CET s internal control. Accordingly, we do not express an opinion on the effectiveness of CET s internal control. Accordingly, we do not express an opinion on the effectiveness of CET 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 CET s consolidated financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Compliance and Other Matters As part of obtaining reasonable assurance about whether CET s consolidated financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of 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 entity 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 entity s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. San Francisco, California December 8, 2017

25 Independent Auditors Report on Compliance for Each Major Program; Report on Internal Control Over Compliance; and Report on the Schedule of Expenditures of Federal and Non-federal Awards in Accordance with the Uniform Guidance To the Board of Directors Center for Employment Training and Subsidiary Report on Compliance for Each Major Federal Program We have audited Center for Employment Training and Subsidiary collectively referred to as ( CET ) compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on each of CET s major federal programs for the year ended June 30, CET 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. Auditors Responsibility Our responsibility is to express an opinion on compliance for each of CET 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 CET 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 CET s compliance. Opinion on Each Major Federal Program In our opinion, CET 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, Report on Internal Control Over Compliance Management of CET 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 CET s internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of CET s internal control over compliance.

26 Independent Auditors Report on Compliance for Each Major Program; Report on Internal Control Over Compliance; and Report on the Schedule of Expenditures of Federal and Non-federal Awards in Accordance with the Uniform Guidance continued 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. Report on Schedule of Expenditure of Federal and Non-Federal Awards Required by the Uniform Guidance We have audited the consolidated financial statements of CET as of and for the year ended June 30, 2017, and have issued our report thereon dated December 8, 2017, which contained an unmodified opinion on those consolidated financial statements. Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying schedule of expenditures of federal and non-federal awards is presented for the purpose of additional analysis as required by the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance) 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 consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, schedule of expenditures of federal and non-federal awards is fairly stated in all material respects in relation to the consolidated financial statements as a whole. San Francisco, California December 8, 2017

27 SCHEDULE OF EXPENDITURES OF FEDERAL AND NON-FEDERAL AWARDS For the year ended June 30, 2017 Federal Pass-through Contact CFDA Governmental Revenue to Federal Grantor Agency/Pass-Through Grantor/Program Title Number Number Federal Non-federal Total Sub-recipients Federal Awards U.S. Department of Labor - direct: Migrant and Seasonal Farmworkers - CA AC A $ 7,799,430 $ - $ 7,799,430 $ - 7,799,430-7,799,430 - U.S. Department of Health and Human Services: Pass-through, State of California: Community Services Block Grant 16O ,382,539 1,382,539 Community Services Block Grant 17F ,006,610 1,006,610 27,125 Community Services Block Grant 16F ,078 32,078 Community Services Block Grant 16F ,094,504 1,094,504 27,125 3,515,731-3,515,731 54,250 U.S. Department of Veteran Affairs - direct: Post - 9/11 Veterans Educational Assistance Yellow Ribbon Program ,216,417 1,216,417 1,216,417-1,216,417 - U.S. Department of Labor: Pass-through, Upper Rio Grande WIA Workforce Investment Act ,982 8,982 Pass-through, Sacramento Employment & Training Agency: Workforce Investment Act SWTC ,483 38,483 Pass-through, County of San Bernardino Employment and Training Agency: Workforce Investment Act ,531 53,531 Pass-through, City of San Jose Work2Future: Workforce Investment Act ,377 32,377 Pass-through, County of Monterey Workforce Investment Act ,808 4,808 Pass-through, County of Ventura Workforce Investment Act ,473 35,473 Pass-through, County of Santa Barbara Workforce Investment Act ,965 18,965 Pass-through, La Cooperativa Campesina de California: Employment and Training Assistance WIOA-DWEERE CET , ,808 Employment and Training Assistance WIOA-DS CET , ,026 Rapid Response Program WIOA-RR CET Temporary Housing Assistance Program 167 THSNG CET , ,913 Drought Temporary Jobs Program NDWDrought CET ,941 60,941 1,516,307-1,516,307 - U.S. Department of Education - direct: Federal Pell Grant Program ,913,811 7,913,811 Supplemental Educational Opportunity Grant , ,343 Federal Work Study Program ,334 77,334 8,109,488-8,109,488 - Total Federal Awards 22,157,373-22,157,373 54,250 Non-federal Awards County of Santa Clara: Citizen, Immigration and Legal Services MCGF-CET , ,864 County of Santa Barbara Out Of School Youth 1,900 1,900 County of Santa Cruz 5,000 5,000 Total Non-federal Awards - 253, ,764 - Total Federal and Non-federal Awards $ 22,157,373 $ 253,764 $ 22,411,137 $ 54,250 See independent auditors' report and notes to Schedule of Expenditures of Federal and Non-federal Awards. 4

28 NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AND NON-FEDERAL AWARDS FOR THE YEAR ENDED JUNE 30, Basis of Presentation The accompanying Schedule of Expenditures of Federal and Non-federal Awards ( the Schedule ) includes the federal award activity of Center for Employment Training and Subsidiary collectively referred to as ( CET ), under programs of the federal government for the year ended June 30, The Schedule is presented in accordance with requirements of Title 2 U. S. Code of Federal Regulations Part 200, Uniform Administrative Requirement, Cost Principles, and Audit requirement for Federal Award (Uniform Guidance). Because the Schedule presents only a selected portion of the operations of CET, it is not intended to and does not present the financial position, changes in net assets, or cash flows of CET. 2. Basis of Accounting Expenditures reported on the Schedule are reported on the accrual basis of accounting. Such expenditures are recognized following the cost principles contained in 2 CFR 200, Subpart E (Cost principles), wherein certain types of expenditures are not allowed or are limited as to reimbursement. CET did not elect to use the 10% de minimis indirect cost rate allowed under the Uniform Guidance. 3. Pass-through to Sub-recipients The following list includes sub-recipients and expenditure amounts per Catalog of Federal Domestic Assistance ( CFDA ) as of June 30, 2017: La Cooperativa Campesina de California CFDA $54, Other Information CET did not receive federal insurance, loan, or non-cash assistance during the year ended June 30,