TRIANGLE RESIDENTIAL OPTIONS FOR SUBSTANCE ABUSERS, INC. AND AFFILIATES CONSOLIDATED FINANCIAL STATEMENTS. for the year ended June 30, 2018

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1 CONSOLIDATED FINANCIAL STATEMENTS for the year ended June 30, 2018

2 TRIANGLE RESIDENTIAL OPTIONS FOR SUBSTANCE ABUSERS INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Independent Auditor's Report Page(s) 1-2 Consolidated Financial Statements: Consolidated Statement of Financial Position Consolidated Statement of Activities Consolidated Statement of Functional Expenses Consolidated Statement of Cash Flows Notes to Consolidated Financial Statements Supplementary Information: Schedule of Expenditures of Federal and State Awards Independent Auditor's Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Independent Auditor's Report on Compliance Each Major Program and on Internal Control Over Compliance Required by the Uniform Guidance Schedule of Findings and Questioned Costs

3 Langdon & Company LL/' Certified Public Accountants INDEPENDENT AUDITOR'S REPORT To the Board of Directors of Triangle Residential Options for Substance Abusers, Inc. and Affiliates Report on the consolidated financial statements We have audited the accompanying consolidated financial statements of Triangle Residential Options for Substance Abusers, Inc. and Affiliates (the "Organization"), which comprise of the consolidated statement of financial position as of June 30, 2018, 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. Auditor's 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. As Discussed in Note 1, Principles of Consolidation, the consolidated financial statements include the amounts of Triangle Residential Options for Substance Abusers, Inc. ("TROSA, Inc."), TROSA Commercial, Inc., and TROSA Residential, Inc. The consolidated financial statements of TROSA Commercial, Inc. and TROSA Residential, Inc. were not audited in accordance with Government Auditing Standards. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the 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. 223 Highway 70, East Pointe, Suite 100, Gamer, NC P [ F: I

4 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Organization as of June 30, 2018, and the changes in its net assets and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Other Matters Other Information 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 State awards, as required by Title 2 U.S. Code of Federal Regulations 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 consolidated 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, the information is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole. Report on Summarized Comparative Iriformation We have previously audited the Organizations' 2017 consolidated financial statements and we expressed an unmodified opinion on those audited consolidated financial statements in our report dated October 10, In our opinion, the summarized comparative information presented herein as of and for the year ended June 30, 2017, 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 October 9, 2018, on our consideration of the Organizations' internal control over financial reporting and on our tests of their compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Organizations' internal control over financial reporting and compliance. ~ ~ a.~~~l~~ Garner, North Carolina October 9,

5 CONSOLIDATED STATEMENT OF FINANCIAL POSITION June 30, 2018 with comparative totals as of June 30, 2017 ASSETS LIABILITIES AND NET ASSETS Current assets: Cash and cash equivalents R.eplacementreserves Accounts receivable (less allowances for doubtful accounts of $56,977 and $7,572 atjune 30, 2018 and 2017, respectively) Grants receivable Current portion of long-term note receivable Other receivables Promises to give Due from residents (less allowances for doubtful accounts of $2,233 and $8,442 at June 30, 2018 and 2017, respectively) Prepaid expenses Inventory Total current assets Property and equipment, net Other assets: Promises to give in one to five years Other assets Total other assets $ ,295, , ,867 17,975 86, ,668 5, ,904 2,104,919 7,426,530 17,207,825 4, ,155 $ ,968, , ,822 14,497 24,213 75, ,668 20, ,544 2,218,567 6,198,588 15,666, ,397 7, ,021 Current liabilities: Accounts payable Accrued expenses Current portion of long-term debt Current maturities of obligations under capital leases R.efundable advances - grant Total current liabilities Long-term liabilities: R.efundable advances Long-term debt, less current portion Obligations under capital leases, less current maturities Total long-term liabilities Total liabilities Net assets: Unrestricted Temporarily restricted Permanently restricted Total net assets $ , , , , ,644 1,504, ,450 1,312,449 37,711 1,840,610 3,344,850 20,763, , ,000 21,325,660 $ , , ,279 63,682 16,320 1,364, ,450 1,518, ,079,182 3,443,976 17,197,367 1,242, ,000 18,539,397 Total assets $ 24,670,510 $ 21,983,373 Total liabilities and net assets $ 24,670,510 $ 21,983,373 The accompanying notes are an integral part of the consolidated.financial statements. 3

6 CONSOLIDATED STATEMENT OF ACTIVITIES for the year ended June 30, 2018 with comparative totals for 2017 Public support and revenue: Public support: Contnbutions Grants Donated materials, services and property Total public support Revenue: Net vocational programs revenue Graduate program revenue Transitional care revenue Other income Interest income Total revenue Unrestricted $ 1,052,940 3,820,629 4,209,350 9,082,919 10,613, , , ,342 5,991 11,278,101 Temporarily Restricted $ 81,500 23, , Permanently Restricted $ $ 1,134,440 3,844,375 4,209,350 9,188,165 10,613, , , ,342 5,991 11,278, $ 2,010,998 3,834,008 4,787,695 10,632,701 10,302, , ,910 14,567 10,784,001 Net assets released from restrictions 885,467 (885,467) Total public support and revenue 21,246,487 (780,221) 20,466,266 21,416,702 Expenses: Program services 16,282,473 16,282,473 15,859,818 Supporting services: Management and general Fundraising Total supporting services 891, ,586 1,397, , ,586 1,397, , ,583 1,291,592 Total expenses 17,680,003 17,680,003 17,151,410 Changes in net assets 3,566,484 (780,221) 2,786,263 4,265,292 Net assets at beginning of year 17,197,367 1,242, ,000 18,539,397 14,274,105 Net assets at end of year $20,763,851 $ 461,809 $ 100,000 $21,325,660 $18,539,397 The accompanying notes are an integral part of the consolidated financial statements. 4

7 CONSOLIDATED STATEMENT OF FUNCTIONAL EXPENSES for the year ended June 30, 2018 with comparative totals for 2017 Program Services 2018 Supporting Services 2017 Salaries, tax and benefits Resident expenses Supplies Insurance Auto expenses Utilities and security Vocational programs expense Maintenance and repairs Equipment rent Telephone Contract services and professional fees Bank fees Interest expense Small equipment Taxes and licenses Bad debt expense Meals and travel Dues and subscriptions Training expense Office expense Advertising Depreciation and amortization Loss on disposal of property and equipment Miscellaneous Total expenses $ Management Fundand General Raising 3,527,925 $ 637,461 $ 348,763 5,155, ,328 9,155 23, ,456 24,403 6, , ,025,430 33,563 5,821 1,318, ,219 1, , ,445 7,968 4, ,774 68,171 64, ,498 8,931 70, ,556 3,716 3, ,490 18,338 4,323 49,405 62,475 11,184 2,495 8,936 6, ,970 9,798 8,822 42,302 14,453 10,512 31, ,441 1,354,802 34,648 19, $ 16,282,473 $ 891,944 $ 505,586 Grand Totals $ 4,514,149 5,155, , , ,125 1,064,814 1,318, , , , , ,429 71, , , ,405 76,154 15,474 33,590 67,267 32,946 1,408, $ 17,680,003 $ $ Totals 4,143,770 5,824, , , ,249 1,019,544 1,091,402 1,000, , , , ,935 83,173 99, ,654 10,791 73,818 13,305 34,667 80,872 18,478 1,184,816 2, ,151,410 The accompanying notes are an integral part of the consolidated financial statements. 5

8 CONSOLIDATED STATEMENT OF CASH FLOWS for the year ended June 30, 2018 with comparative totals for Cash flows from operating activities: Cash received from grantors and contnbutors $ 5,412,036 $ 3,586,182 Cash received from clients and third-party payers 11,378,073 10,590,380 Cash paid to suppliers and employees (12,420,277) (11,273,000) Interest received 5,991 14,567 Interest paid (50,688} (59,603) Net cash provided by operating activities 4,325,135 2,858,526 Cash flows from investing activities: Purchases of property and equipment (2,671,510) (3,400,781) Proceeds from sales of property and equipment 221, Replacement reserve deposits (10, 119) (9,654) Net cash used in investing activities (2,459,645) (3,410,285) Cash flows from fmancing activities: Repayment of debt (474,808) (406,706) Repayment of obligations under capital leases (63,630) (60,561) Contributions restricted for clinical building 1,257,979 Net cash (used in) provided by financing activities (538,438) 790,712 Net increase in cash 1,327, ,953 Cash at beginning of year 2,968,572 2, Cash at end of year $ 4,295,624 $ 2,968,572 (Continued) 6

9 CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) for the year ended June 30, 2018 with comparative totals for 2017 Reconciliation of changes in net assets to net cash provided by operating activities: Changes in net assets Adjustments to reconcile changes in net assets to net cash cash provided by operating activities: Depreciation and amortization Contnbutions restricted for clinical building Bad debt expense Accretion of imputed interest discount In-kind property and equipment donations Loss/( Gain) on disposal of property and equipment Changes in assets and liabilities: Note receivable Accounts receivable Grants receivable Promises to give Other receivables Due from residents Prepaid expenses Inventory Accounts payable Accrued expenses Refundable advance - grant Net cash provided by operating activities Supplemental schedule of noncash investing and financing activities: Acquisition of equipment under capital leases In-kind property and equipment donations 2018 $ 2,786,263 1,408,528 49,405 20,530 (279,136) (148,342) 24,213 82,550 (3,478) 105,533 (11, 126) 14,377 (160,360) 113,648 (328,139) 94, ,324 $ 4,325,135 $ 17, $ 297, $ 4,265,292 1,184,816 (1,257,979) 10,791 23,570 (239,557) 2,242 23,451 (193,556) 37,463 69,041 (6,299) (8,859) 26,474 (55,281) 20,641 10,986 {1,054, 710) $ 2,858,526 $ 75, ,557 $ The accompanying notes are an integral part of the consolidated.financial statements. 7

10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization Triangle Residential Options for Substance Abusers, Inc. and Affiliates (the "Organization") was incorporated on October 8, It is a multi-year residential self-help program for substance abusers located in North Carolina. The Organization serves men and women, age 18 and older, at no cost to the individual. For some, it serves as an alternative to incarceration. The Organization's program emphasizes education, vocational training and communication skills. In order to provide residents with job skills, the Organization operates a number of income-generating vocational training programs. These vocational training programs include moving and storage services, lawn care, Christmas tree lots and a thrift store. The Organization is also supported with significant amounts of contributions, government grants and donated materials, services and property. Principles of Consolidation The consolidated financial statements include the accounts of Triangle Residential Options for Substance Abusers, Inc., ("TROSA, Inc.") TROSA Commercial, Inc., and TROSA Residential, Inc., both of which TROSA, Inc. is the sole member. Cash and Cash Equivalents For the purpose of the consolidated statement of cash flows, the Organization considers cash on hand and deposits in bank and all highly liquid investments with an original maturity of three months or less, excluding cash whose use is restricted by debt covenants, to be cash and cash equivalents. The Organization maintains its cash accounts with financial institutions, which at times, exceed federally insured limits. The Organization has not experienced any losses in such accounts. Accounts Receivable Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a method that approximates 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 reduction of accounts receivable. Contributions, Grants and Federal and State Awards Contributions, grants, and Federal and State awards received by the Organization are recorded as unrestricted, temporarily restricted, or permanently restricted support depending on the existence and/or nature of any donor/grantor restrictions. Contributions that are restricted by the donor are reported as increases in unrestricted net assets if the restrictions expire, that is, the stipulated time restrictions end or a purpose restriction is accomplished, in the reporting period in which the revenue is recognized. All other donor-restricted contributions are reported as increases in temporarily or permanently restricted net assets, depending on the nature of the restrictions. When a restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. 8

11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Contributions, Grants and Federal and State Awards (Continued) Conditional promises to give are recognized when the conditions on which they depend are substantially met. Unconditional promises to give, due in subsequent years, are reported at the present value of their net realizable value using a risk adjusted discount rate. Sixty-nine and seventy percent of grant revenue reflected in the statement of activities for the years ended June 30, 2018 and 2017, respectively, was from one grantor. In addition, approximately 71 % of contributions and grants received and recorded during the year ended June 30, 2017 were restricted or used for capital improvements. Inventory Inventory primarily consists of donated and purchased food and beverages, supplies and items sold in the course of the Organization's vocational training programs. Inventory is valued at the lower of cost or market and cost is determined on the first-in, first-out method. Donated items are recorded at estimated fair value at the date of donation. The Organization receives a significant amount of contributed goods and materials that it processes as merchandise available for sale in its thrift store. The Organization believes that the inventory of these donated items does not possess an attribute that is easily measurable or verifiable with sufficient reliability to determine inventory value at the time of the donation. Instead, the value of inventory at the end of the year is estimated using historical sales of similar inventory. Property and Equipment The Organization capitalizes property and equipment over $2,000. Lesser amounts are expensed. Purchased property and equipment are recorded at cost. Donated property and equipment is recorded as revenue at its estimated fair value as of the date of the donation. Such donations are reported as unrestricted revenue unless the donor has restricted the donated asset to a specific purpose. Assets donated with explicit restrictions regarding their use and contributions of cash that must be used to acquire property and equipment are reported as either temporarily or permanently restricted support. The Organization reclassifies temporarily restricted net assets to unrestricted net assets in conjunction with the recognition of depreciation expense over the useful life of the donated asset. Absent donor stipulations regarding how long those donor assets must be maintained, the Organization reports expirations of donor restrictions when the donated or acquired assets are placed into service as instructed by the donor. The Organization reclassifies temporarily restricted net assets to unrestricted net assets at that time. Depreciation is computed using the straight-line method over the following useful lives: Buildings and improvements Furniture and equipment Vehicles 5-40 years 5-10 years 5-7 years 9

12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Property and Equipment (Continued) Expenditures for repairs and maintenance are charged to expense as incurred. The cost of major renewals and betterments is capitalized and depreciated over their useful lives. Upon disposition of property and equipment, the related asset and accumulated depreciation amounts are removed and any gain or loss is reflected within the statement of activities for the period. Donated Assets and Services Donated materials, property and equipment and services are recorded at their estimated fair market values at date of receipt and are reflected as contributions in the accompanying consolidated financial statements. The Organization benefited from donated labor valued at $273,292 and $227,331 for the years ended June 30, 2018 and 2017, respectively. The Organization recognizes the fair value of contributed services received if such services a) create or enhance a nonfinancial asset orb) require specialized skills that are provided by individuals possessing those skills and would typically need to be purchased if not contributed. The Organization receives services from a large number of volunteers who give significant amounts of their time to the Organization's programs but which do not meet the criteria for financial statement recognition. Functional Classification of Expenses Operating expenses not directly attributable to a specific function are allocated to specific functions by the Organization's management based on what it considers to be the best available objective criteria, such as hours worked or relative benefit. Income Taxes TROSA, Inc. is exempt from income tax under the Internal Revenue Code Section 501(c)(3). TROSA Residential, Inc. and TROSA Commercial, Inc. are exempt from income tax under the Internal Revenue Code Section 501(c)(2). There is no unrelated business income tax for the years ended June 30, 2018 and The Organization evaluates its uncertain tax positions using prov1s10ns of Financial Accounting Standards Board Accounting Standards Codification (ASC) , Recognition of a Tax Position. Accordingly, it is the Organization's policy to record a liability for any tax position taken that is beneficial to the Organization, including any related interest and penalties, when it is more likely than not the position of management with respect to a transaction or class of transactions will be overturned by a taxing authority upon examination. Management believes there are no such positions as of June 30, 2018 or2017. Reclassifications Certain amounts included in the 2017 financial statements have been reclassified to conform to the 2018 presentation. Change in net assets of the Agency previously reported for 2017 was not affected by these reclassifications. 10

13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Accordingly, actual results could differ from those estimates. Management considers the estimates of the valuation of donated inventory, including food, beverages, and supplies, as well as donated services and property to be critical accounting policies requiring extensive subjective judgments. The valuation of donated food, beverages, supplies and services is based on quoted valuations, historical experience and price comparisons for similar products and services. Actual results could differ from these estimates under different assumptions or conditions. Schedule of Expenditures of Federal and State Awards The accompanying Schedule of Federal and State A wards includes the Federal and State grant activity of the Organization and is presented on the accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of Title 2 U.S. Code of Federal Regulation Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Therefore, some amounts presented in this schedule may differ from amounts presented in, or used in the preparation of, the basic financial statements. The Organization has elected to use the 10 percent de minimus indirect cost rate allowed under the Uniform Guidance. Advertising Expenses The cost of advertising is charged to expense as incurred. Advertising expense amounted to $32,946 and $18,478 for the years ended June 30, 2018 and 2017, respectively. 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 the Organization's consolidated financial statements for the year ended June 30, 2017, from which the summarized information was derived. 2. NOTE RECEIVABLE Note receivable consists of a non-interest-bearing note due in six annual payments of $25,000, beginning April 27, 2013 and relates to the sale of certain real property. The last payment was received during the fiscal year ended June 30, At June 30, 2017, management considered this note to be fully collectible and, accordingly, no allowance for doubtful accounts was considered necessary. 11

14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. NOTE RECEIV ABLE(Continued) Note receivable is summarized as follows at June 30, 2018 and 2017: Note Receivable - current portion 2018 $ , PROMISES TO GIVE Promises to give are summarized as follows at June 30, 2018 and 2017: 2018 Promises to give - current portion $ 105,668 Promises to give - one to five years 4,864 Less unamortized discount based on imputed interest rate of 3.25% Promises to give less unamortized discount $ 110,532 $ $ , ,832 (3,435) 110, , PROPERTY AND EQUJPMENT Included in furniture and equipment is the net book value of equipment under capital leases, as referenced in Note 6. Net property and equipment is summarized as follows at June 30, 2018 and 2017: Land Buildings and improvements Furniture and equipment Vehicles Construction in progress Less accumulated depreciation and amortization Net property and equipment 2018 $ 2,277,746 20,308,943 1,380,633 3,506, ,337 27,735,473 (10,527,648) $ 17,207, $ 2,249,223 16,981, 136 1,294,223 2,826,613 1,793,815 25, 145,010 (9,478,246) $ 15,666, REFUNDABLE ADVANCE-GRANT During 2016, the Organization received a two-year restricted grant totaling $3,250,000, which ended on June 30, At June 30, 2017, $16,320 remained unexpended and is classified as a current liability in the accompanying consolidated statement of financial position. During 2018, the Organization received an additional two-year restricted grant totaling $6,450,000, which ends on June 30, At June 30, 2018, $572,644 remains unexpended and is classified as a current liability in the accompanying consolidated statement of financial position. 12

15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. LEASES The Organization leases equipment, buildings, dumpsters, and warehouse space under non-cancelable operating Jease agreements expiring in Lease expense relating to these leases was $71,556 and $53,154forthe years ended June and 2017, respectively. The Organization also leases equipment under capital lease agreements expiring in The assets and liabilities under the capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the assets. The assets are amortized over the related lease term or the estimated productive life. Amortization of the equipment under the capital leases was $38,139 and $30,393 for the years ended June 30, 2018 and 2017 respectively. The equipment and related accumulated amortization as of June 30 are as follows: Assets under capital lease Equipment $ 234,887 $ 231,445 Less accumulated amortization {97,944} {61! 138} $ 136,943 $ 170,307 Future minimum lease payments under the non-cancelable operating leases, including the financial impact of escalation clauses, and the present value of future minimum lease payments under capital leases are as follows: Operating Year ending June 30, Total minimum lease payments Less amount representing interest Present value of net minimum capital lease payments Less current maturities $ Leases 77,820 69,362 56,496 77,326 5, ,277 Obligations under capital leases, less current maturities Capital Leases 41,810 28,613 4,312 3, $ 80,656 (3,838) $ 76,818 (39,107) $ 37,711 13

16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. REFUNDABLE ADVANCES Refundable advances are summarized as follows as of June 30, 2018 and 2017: North Carolina Housing Finance Agency Refundable advance, secured by a deed of trust on the property and assignment of rents and leases. Assuming the Organization complies with applicable restrictions and covenants, the advance will be forgiven in I 0% increments beginning in 2024 and will be entirely forgiven by November North Carolina Housing Finance Agency Refundable advance, secured by a deed of trust on the property and assignment of rents and leases. Assuming the Organization complies with applicable restrictions and covenants, the advance will be forgiven in I 0% increments beginning in 2028 and will be entirely forgiven by November PNC Bank, National Association Refundable advance, secured by a deed of trust on the property and assignment of rents and leases pursuant to the Federal Home Loan Bank Act. Assuming the Organization complies with applicable restrictions and covenants, the advance will be forgiven in full in October Total refundable advances $ 120,000 70, ,000 $ 490,450 $ 120,000 70, ,000 $ 490, LONG-TERM DEBT Long term debt is summarized as follows at June 30, 2018 and 2017: North Carolina Housing Finance Agency Non-interest bearing note payable, due December 2037 in monthly installments of $794, with a face amount of $185,148 net of unaccreted discount of $83,575 (effective interest rate, 6.9%) as of June 30, 2018, secured by a deed of trust on property and assignment of rents and leases. $ 101,573 $ 104,000 14

17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. LONG-TERM DEBT (Continued) City of Durham Non-interest bearing note payable, due April 2035 in monthly installments of $769, with a face amount of $156,633 net of unaccreted discount of $56,035 as of June 30, 2018 (effective interest rate, 5.6%) secured by real property and assignment of rents and leases. Branch Banking and Trust Note payable with a fjxed interest rate of 2.85%, due in monthly installments of $21,657, maturing December 2018, secured by real property. Note was paid off during fiscal year ended June 30, Branch Banking and Trust Acquisition and construction loan 111 the name of TROSA Commercial, Inc. with a fjxed interest rate of 3. 99% due in monthly installments of $15,707, maturing September 2024, secured by real property. Guaranteed by TROSA, Inc. North Carolina Housing Finance Agency Non-interest bearing note payable, due in full at maturity (October 2042), with a face amount of $500,000 net of unaccreted discount of $272,652 as of June 30, 2018 (effective interest rate, 3.25%), secured by real property and assignment of rents. Less current portion Long-term portion 100,598 1,039, ,348 $1,468,622 (156,173) $1,312, , ,319 1,182, ,088 $1,922,900 (404,279) $1,518,621 Future maturities oflong-term debt at June 30, 2018 are summarized as follows: Year ending June Thereafter 156, , , , ,808 1,110,544 $1,959,072 15

18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. LONG-TERM DEBT (Continued) Certain agreements contain various restrictive covenants, including requirements regarding minimum cash to debt ratio, filing of annual compliance certificates, maintaining documentation related to lowcome housing calculations and maintaining replacement reserve deposits. The Organization was in compliance with restrictive covenants contained in the debt agreements at June 30, 2018 and The discount on the applicable loans is accreted to interest expense over the lives of the loans. The aggregate remaining unaccreted discount as of June 30, 2018 and 2017 was $412,262 and $432,342, respectively. Imputed interest expense of $20,080 and $23,570 is reported in the accompanying consolidated statement of functional expenses for the years ended June 30, 2018 and 2017, respectively. 9. LINE OF CREDIT The Organization has available a revolving line of credit in the amount of $750,000 for the years ended June 30, 2018 and Interest accrues at 2.25% above the 30-day LIBOR (2.00% and 1.06% at June 30, 2018 and 2017, respectively). The line is collateralized by a first deed of trust on certain real property, accounts receivable, and inventory. There was no outstanding balance at June 30, 2018 or 2017, and the line expires on March 10, RESTRICTIONS ON ASSETS Temporarily restricted net assets at June 30, 2018 and 2017 respectively, are summarized as follows: Food commodities $ 2,745 $ 8,318 Education 4,999 Clinical Building 9, ,138 Resident Life 32,078 19,232 NCHF A Housing Program 83,575 90,675 City of Durham Housing Program 56,035 61,754 NCHF A Housing Program - Dormitories 272, ,913 $ 461,809 $ 1,242,030 Permanently restricted net assets at June 30, 2018 and 2017 respectively, are summarized as follows: Donated land $ 100,000 $ 100,000 Title of certain land and building, with a carrying value of $100,000, was transferred from Durham County (the "County) in Under the tenns of this agreement, title will revert back to the County if it ceases to be used for the purpose of conducting community education, development, revitalization, drug treatment, and recreational activities or for any other purpose for which the County could use the property as a governmental entity. Net assets released from donor restrictions by accomplishing purpose or time restrictions were $885,467 and $920,558 for the years ended June 30, 2018 and 2017, respectively. 16

19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. RETmEMENT PLAN Employees of the Organization may participate in an Internal Revenue Code section 403(b) retirement savings plan. The plan was funded solely by employee contributions to the plan, pursuant to a salary reduction agreement, until October I, 2014 when the Organization began providing an employer match. The match is dollar for dollar for the first 3% and fifty cents on the dollar for the next 2% with a maximum match of 4%. An employee must contribute to receive the match. Contributions to the plan during the year ended June 30, 2018 and 2017 were $108,097 and $96,913, respectively. Effective July I, 2016, the Organization also sponsors an Internal Revenue Code Section 457(b) defined contribution retirement plan covering key managerial employees who meet eligibility requirements regarding service and age. The fair value of contributions to the plan for the year ended June 30, 2018 and 2017 were $22,800 and $7,624, respectively. 12. SUBSEQUENT EVENTS Management has evaluated subsequent events through October 9, 2018, the date which the consolidated financial statements are available for issue. 17

20 SCHEDULE OF EXPENDITURES OF FEDERAL AND STATE AWARDS for the year ended June 30, 2018 Federal Pass Through Federal & CFDA Grantor's Identifying State Federal/State Grantor/Pass Through Grantor/Program Number Number Expenditures Federal Awards: U.S. Department of Health and Human Service Passed through NC Department ofheahh and Human Services Substance Abuse Prevention and Treatment Federal Block Grant $ 1,600,000 U.S. Department of Agriculture Passed through N.C. Department of Agriculture Emergency Food Assistance Program (Food Commodities) G l 4DFC 29,318 Degartment of Veterans Affairs - VA Health Passed through the Durham VA Medical Center VA Homeless Providers Grant and Per Diem Program NC VA Homeless Providers Grant and Per Diem Program NC 219,388 TOTAL FEDERAL AWARDS 1,848,706 State Awards: NC Department of Heahh and Human Services NIA ,068,675 Alliance Behavioral Heahhcare NIA NIA 350,000 TOTAL STA TE A WARDS 1,418,675 TOTAL AWARDS $ 3,267,381 18

21 Langdon & Company LLP Certified Public Accountants 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 of Triangle Residential Options for Substance Abusers, Inc. and Affiliates 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 consolidated financial statements of Triangle Residential Options for Substance Abusers, Inc. and Affiliates (the "Organization"), which comprise the consolidated statement of financial position as of June 30, 2018, and the related consolidated 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 October 9, The financial statements of TROSA Commercial, Inc., and TROSA Residential, Inc. were not audited in accordance with Government Auditing Standards and accordingly this report does not include reporting on internal control over financial reporting or instances of reportable noncompliance associated with TROSA Commercial, Inc., or TROSA Residential, Inc. Internal Control over Financial Reporting In planning and performing our audit of the consolidated financial statements, we considered the Organization's internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the consolidated financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Organization's internal control. Accordingly, we do not express an opinion on the effectiveness of the Organization's internal control. 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 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. 223 Highway 70, East Pointe, Suite 100, Gamer, NC P I F: I 19

22 Compliance and Other Matters As part of obtaining reasonable assurance about whether the Organization'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 consolidated 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. ~~ ~ '4 e.c """\'~ L, \., ~ October 9,

23 Langdon & Company LLP Certified Public Accountants 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 of Triangle Residential Options for Substance Abusers, Inc. and Affiliates Report on Compliance for Each Major Federal Program We have audited Triangle Residential Options for Substance Abusers, Inc. and Affiliates' (the "Organiz.ation") compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on the Organization's major federal program for the year ended June 30, The Organization's major federal program is identified in the summary of auditor's results section of the accompanying schedule of findings and questioned costs. Management's Responsibility Management is responsible for compliance with federal statutes, regulations, and the terms and conditions of its federal awards applicable to its federal programs. Auditor's Responsibility Our responsibility is to express an opinion on compliance for the Organization's major federal program based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred.. An audit includes examining, on a test basis, evidence about the Organization's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for the major federal program. However, our audit does not provide a legal determination of the Organization's compliance. Opinion on the Major Federal Program In our opinion, the Organization complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal program for the year ended June 30, Highway 70, East Pointe, Suite 100, Garner, NC P / F: / 21

24 Report on Internal Control Over Compliance Management of the Organization is responsible for establishing and maintaining effective internal control over compljance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the Organization's internal control over compliance with the types of requirements that could have a direct and material effect on the major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for the major federal program and to test and report on internal control over compliance in accordance with 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 Organization's internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or a 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. ~~ r::::- t to"'""\>~ LL~ October 9,

25 SCHEDULE OF FINDINGS AND QUESTIONED COSTS for the year ended June 30, 2018 A. SUMMARY OF AUDITOR'S RESULTS 1. The auditor's report expresses an unmodified opinion on whether the consolidated financial statements of Triangle Residential Options for Substance Abusers, Inc. and Affiliates (the "Organization") were prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). 2. No significant deficiencies disclosed during the audit of the consolidated financial statements are reported in the 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. 3. No instances of noncompliance material to the consolidated financial statements of the Organization, which would be required to be reported in accordance with Government Auditing Standards, were disclosed during the audit. 4. No significant deficiencies in internal control over major federal award programs are reported in the Independent Auditor's Report on Compliance for the Major Program and on Internal Control over Compliance Required by the Uniform Guidance. 5. The auditor's report on compliance for the major federal award program expresses an unmodified opinion on the major federal program. 6. Audit findings that are required to be reported in accordance with 2 CFR section (a) are reported in this Schedule. 7. The program tested as a major program is: U.S. Department of Health and Human Services - Social Services Block Grant - CFDA # The threshold used for distinguishing Type A and B programs was $750, The Organization did not qualify as a low-risk auditee. B. FINDINGS-FINANCIAL STATEMENT AUDIT None C. FINDINGS AND QUESTIONED COSTS- MAJOR FEDERAL AW ARD PROGRAMS AUDIT None 23