LOS ANGELES CLEANTECH INCUBATOR FINANCIAL STATEMENTS DECEMBER 31, 2016

Transcription

1 FINANCIAL STATEMENTS DECEMBER 31, 2016

2 TABLE OF CONTENTS DECEMBER 31, 2016 Page Independent Auditors' Report 1-2 Financial Statements Statement of Financial Position 3 Statement of Activities 4 Statement of Functional Expenses 5 Statement of Cash Flows 6 Notes to Financial Statements 7-15 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

3 July 18, 2017 INDEPENDENT AUDITORS' REPORT To The Board of Directors Los Angeles Cleantech Incubator Los Angeles, California Report on the Financial Statements We have audited the accompanying financial statements of Los Angeles Cleantech Incubator (a nonprofit organization), which comprise the statement of financial position as of December 31, 2016, and the related statements of activities, functional expenses, and cash flows for the year then ended, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of 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 financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1

4 INDEPENDENT AUDITORS' REPORT (CONT.) Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Los Angeles Cleantech Incubator as of December 31, 2016, and the changes in its net assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Report on Summarized Comparative Information We have previously audited Los Angeles Cleantech Incubator's 2015 financial statements, and our report dated September 27, 2016, expressed an unmodified opinion on those audited financial statements. In our opinion, the summarized comparative information presented herein as of and for the year ended December 31, 2015, is consistent, in all material respects, with the audited financial statements from which it has derived. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated July 18, 2017, on our consideration of Los Angeles Cleantech Incubator's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Governmental Auditing Standards in considering Los Angeles Cleantech Incubator's internal control over financial reporting and compliance. NSBN LLP NSBN LLP Los Angeles, California 2

5 STATEMENT OF FINANCIAL POSITION DECEMBER 31, 2016 WITH COMPARATIVE TOTALS AT DECEMBER 31, ASSETS Cash and cash equivalents $ 507,913 $ 375,589 Grants and contracts receivable 1,147, ,495 Notes receivable 41,324 - Prepaid expenses and other assets 40,647 24,007 Property and equipment, net 148,562 29,430 TOTAL ASSETS $ 1,886,188 $ 1,215,521 LIABILITIES Accounts payable and accrued expenses $ 380,390 $ 318,124 Deferred revenue 761, ,244 Line of credit 225,000 - TOTAL LIABILITIES 1,366, ,368 NET ASSETS Unrestricted 421, ,087 Temporarily restricted 97,344 15,066 TOTAL NET ASSETS 519, ,153 TOTAL LIABILITIES AND NET ASSETS $ 1,886,188 $ 1,215,521 See accompanying independent auditors' report. The notes are an integral part of these financial statements. 3

6 STATEMENT OF ACTIVITIES FOR THE YEAR ENDED DECEMBER 31, 2016 WITH COMPARATIVE TOTALS AT DECEMBER 31, REVENUES, SUPPORT AND OTHER CHANGES Temporarily Permanently Unrestricted Restricted Restricted Total Total Program revenue $ 3,561,829 $ - $ - $ 3,561,829 $ 1,371,548 Government grants 1,374, ,374,652 1,303,643 Contributions and private grants 161, , , ,418 Investment and interest income 1, , Loss on disposal of property and equipment (11,487) - - (11,487) - Net assets released from restrictions: Restriction satisfied by program expenditures 151,685 (151,685) TOTAL REVENUES, SUPPORT AND OTHER CHANGES 5,239,183 82,278-5,321,461 2,927,730 EXPENSES Program services 4,372, ,372,410 3,015,075 Management and general 744, , ,012 Fundraising 306, , ,205 TOTAL EXPENSES 5,423, ,423,369 3,893,292 CHANGE IN NET ASSETS (184,186) 82,278 - (101,908) (965,562) NET ASSETS, Beginning of year 606,087 15, ,153 1,586,715 NET ASSETS, End of year $ 421,901 $ 97,344 $ - $ 519,245 $ 621,153 See accompanying independent auditors' report. The notes are an integral part of these financial statements. 4

7 STATEMENT OF FUNCTIONAL EXPENSES FOR THE YEAR ENDED DECEMBER 31, 2016 WITH COMPARATIVE TOTALS AT DECEMBER 31, Program Management Services and General Fundraising Total Total Salaries $ 1,665,191 $ 340,309 $ 213,521 $ 2,219,021 $ 1,810,393 Payroll taxes 129,035 26,371 16, , ,381 Employee benefits 64,356 27,515 8, ,123 44,425 Total salary related expense 1,858, , ,319 2,491,096 1,984,199 Facilities and equipment 1,087, ,240 8,214 1,198, ,925 Professional fees 331, ,624 23, , ,200 Consulting fees 494, , ,418 Fiscal sponsorship 171, , ,542 Marketing and communication 126,970 25,949 16, ,200 29,099 Travel expense 126, , ,892 Operations expense 91,149 18,628 11, ,465 60,633 Information and technology 39,912 8,157 5,118 53,187 49,215 Insurance expense 30,216 6,175 3,875 40,266 16,510 Other expense 14,054 24,613-38,667 11,722 Interest expense - 3,441-3,441 4,797 Meetings and conferences ,808 Bad debt ,000 Expenses before depreciation 4,372, , ,631 5,410,063 3,879,960 Depreciation - 13,306-13,306 13,332 Total expenses $ 4,372,410 $ 744,328 $ 306,631 $ 5,423,369 $ 3,893,292 See accompanying independent auditors' report. The notes are an integral part of these financial statements. 5

8 CASH FLOWS FROM OPERATING ACTIVITIES STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2016 WITH COMPARATIVE TOTALS AT DECEMBER 31, Change in net assets $ (101,908) $ (965,562) Adjustments to reconcile change in net assets to net cash provided by (used in) operating activities: Depreciation 13,306 13,332 Bad debt expense - 6,458 Loss on disposal of property and equipment 11,487 - Increase (decrease) in assets: Grants and contracts receivable (361,247) 381,078 Notes receivable (41,324) - Prepaid expenses and other assets (16,640) (18,074) Increase (decrease) in liabilities: Accounts payable 62, ,217 Deferred revenue 485,309 90,450 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 51,249 (313,101) CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of property and equipment - 22,061 Purchase of property and equipment (143,925) (12,218) NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (143,925) 9,843 CASH FLOWS FROM FINANCING ACTIVITIES Borrowings on line of credit 225,000 - Principal payments on capital lease obligations - (20,781) NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 225,000 (20,781) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 132,324 (324,039) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 375, ,628 CASH AND CASH EQUIVALENTS, END OF YEAR $ 507,913 $ 375,589 SUPPLEMENTAL CASH FLOW INFORMATION CASH PAID DURING THE YEAR: Interest paid $ 3,441 $ 4,797 See accompanying independent auditors' report. The notes are an integral part of these financial statements. 6

9 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 NOTE 1: ORGANIZATION Los Angeles Cleantech Incubator (the Organization) is a nonprofit organization founded by the Community Redevelopment Agency of the City of Los Angeles ("CRA/LA") and the Los Angeles Department of Water and Power ("LADWP") for the City of Los Angeles. In partnership with the city's exceptional educational and research organizations - UCLA, USC, Caltech and Jet Propulsion Laboratory - the Organization helps accelerate the commercialization of their clean technologies in addition to accelerating new products developed by independent entrepreneurs. The Organization is a result of the Clean Tech Los Angeles ("CTLA") alliance among the Mayor's office, the City's universities, the Los Angeles County Economic Development Corporation, the Los Angeles Business Council, the Los Angeles Area Chamber of Commerce, LADWP and the CRA/LA. The Organization is located in the City's Cleantech Corridor in downtown Los Angeles. Located in a four-mile long strip between the Los Angeles River and Alameda in the eastern part of downtown, the Cleantech Corridor is the cornerstone of the City's green economy strategy. The Corridor will be home to the cleantech ecosystem that Los Angeles is building to support the green economy. The following is a description of the programs the organization offers: Core Program The Organization's core program, a globally recognized suite of incubation, acceleration and commercialization service, that helps to remove barriers to increase the market success of early stage technology businesses to facilitate new cleantech products and services, and the jobs that come with them. Satellites Programs Satellites programs bring the Organization's core services and methodology to additional physical locations in partnership with key stakeholders in order to drive innovation, incubation, acceleration and commercialization through an expanded network. Cluster Development Programs Cluster Development activities seek to research the viability of and deliver actionable plans to cultivate innovation, entrepreneurship and technology commercialization in specific geographic region. Cluster Management Programs Cluster Management programs facilitate the active participation and cooperation of key stakeholders in clean technology clusters to facilitate technology commercialization and market adoption of sustainable and energy efficient products and services. Components of cluster Management currently include the Leadership Council, Cleantech Global Showcase ("GloSho") and the Network for Global Innovation ("NGIN"). 7

10 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 NOTE 1: ORGANIZATION (CONT.) Market Development Programs Market Development programs seek to understand and align market needs with the clean technologies being developed at the Organization in order to increase opportunities for commercialization and market adoption of cleantech products and services. Fiscal Sponsorship Programs Fiscal Sponsorship programs facilitate the receipt and management of philanthropic and impact funds for specific programs that support the Organization's mission, achieved through for-and nonprofit partners in Los Angeles and the companies receiving Core services. La Kretz Innovation Campus Program The La Kretz Innovation Campus program supports the Organization's core services and related programs through a state-of-the-art and multi-use facility. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting The financial statements of the Organization have been prepared on the accrual basis of accounting and accordingly reflect all significant receivables, payables and other liabilities. Basis of Presentation The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require that the Organization report information regarding its financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. The three classes are differentiated by donor restrictions: Unrestricted Net assets that are not subject to donor-imposed restrictions, or donor-restricted contributions whose restrictions are met within the same reporting period. Temporarily Restricted Net assets that are subject to donor-imposed time or use restrictions that have not been met as of year-end. Temporarily restricted net assets are restricted for time (e.g. multi-year pledges) or specific programs. Permanently Restricted Net assets subject to donor-imposed restrictions that are maintained in perpetuity. There were no permanently restricted net assets at December 31,

11 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) Cash and Cash Equivalents Cash and cash equivalents include all funds in banks and highly liquid investments in other financial institutions, with initial maturity of three months or less. The carrying value approximates fair value. Grants and Contracts Receivable The Organization closely monitors outstanding grants and contracts receivable and charges off to expense any balances that are determined to be uncollectible. At December 31, 2016, the allowance for doubtful accounts was $5,050. Contributions and Pledges The Organization accounts for contributions in accordance with accounting principles generally accepted in the United States of America. Contributions received are recorded as unrestricted, temporarily restricted, or permanently restricted support, depending on the existence and/or nature of any donor restrictions. Donated Services and Materials Consistent with accounting principles generally accepted in the United States of America, the Organization recognizes as support only those donated services which create or enhance non-financial assets or which require skill the Organization would otherwise have paid for. Property and Equipment Property and equipment are recorded at historical cost and are being depreciated using the straight-line method over the estimated useful life of the assets. The cost of maintenance and repairs is charged to operations as incurred; significant renewals and betterments are capitalized. The following lives have been assigned: Classification Computer software Computer equipment Furniture and equipment Life 5 Years 3 Years 5 Years Advertising Advertising costs are charged to operations when incurred and are included in functional expenses. 9

12 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) Portfolio Company Securities The Organization has stock ownership and limited liability interests in private operating companies. The Organization has also entered into share purchase or ownership interest warrant agreements with portfolio companies with expiration dates ranging from February 2019 through May These warrants provide the Organization the right to purchase specified percentages of shares of common stock or limited liability company interests of the portfolio companies. These percentages range from 1% to 10%. As of December 31, 2016, the Organization has determined the stock, limited liability company interests, or warrants have no measurable value, see Note 9. Income Tax Status The Organization is exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code and Section 2370(1)(d) of the California Revenue and Taxation Code, therefore, no provision has been made for income taxes. The Organization files IRS Form 990 and State Forms 199 and RRF-1. Generally accepted accounting principles provide accounting and disclosure guidance about positions taken by an organization in its tax returns that might be uncertain. The Organization recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Management of the Organization does not believe the financial statements include any uncertain tax positions. With few exceptions, the Foundation is no longer subject to U.S. federal and state examinations by tax authorities for the years before 2013 and 2012, respectively. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Functional Allocation of Expenses The costs of providing the program and the supporting services have been summarized on a functional basis in the statement of activities, and in the statement of functional expenses. Accordingly, certain costs have been allocated between the program and the supporting services in reasonable ratios determined by management. 10

13 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) Reclassification Certain 2015 financial information has been reclassified to conform to the 2016 presentation. The reclassifications have no impact on the previously reported changes in net assets. Summarized Comparative Financial Information The 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 financial statements for the year ended December 31, 2015, from which the summarized information was derived. Subsequent events Date of Management's Review - Subsequent events have been evaluated through July 18, 2017, the date that these financial statements were available to be issued. NOTE 3: GRANTS AND CONTRACTS RECEIVABLE Grants and contracts receivable consist of the following at December 31, 2016: Governmental grants $ 713,685 Other contracts receivable 439,107 1,152,792 Less allowance for doubtful accounts (5,050) Total contracts and grants receivable $ 1,147,742 All contracts and grants are expected to be collected in within one year. NOTE 4: NOTES RECEIVABLE During 2016, the Organization entered into a convertible promissory note receivable with a portfolio company for $40,000 for value received in the form of forgiven membership and usage fees. The promissory note maturing March 4, 2020, carries an interest rate of 4% per annum. Accrued interest receivable as of December 31, 2016 is $1,324. Upon maturity the principal balance and the accrued interest shall be due and payable. 11

14 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 NOTE 5: PROPERTY AND EQUIPMENT Property and equipment consists of the following: Computer software $ 132,225 Computer equipment 23,558 Furniture and equipment 11, ,483 Less: Accumulated depreciation (18,921) Total property and equipment, net $ 148,562 NOTE 6: DEFERRED REVENUE Deferred revenue represents revenue collected but not earned as of December 31, This is primarily composed of revenue generated from membership fees paid by companies for a period of two overlapping fiscal years. The deferred revenue as of December 31, 2016 is $703,086. NOTE 7: LINE OF CREDIT The Organization has an available $500,000 line of credit with a bank. The line of credit has a variable interest rate which is 1.75% over the index. At December 31, 2016, the interest rate is 5.5%. The balance as of December 31, 2016 was $225,000. NOTE 8: TEMPORARILY RESTRICTED NET ASSETS Temporarily restricted net assets at December 31, 2016, consist of the following: Fiscal sponsorship - Divining Lab $ 81,110 Los Angeles Better Buildings Challenge 11,215 Fiscal sponsorship - OurCycle LA 5,019 Total $ 97,344 12

15 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 NOTE 8: TEMPORARILY RESTRICTED NET ASSETS (CONT.) Net assets were released from donor restrictions by incurring expenses satisfying the restricted purposes or by occurrences of other events specified by donors. Net assets released from temporary restriction: Fiscal sponsorship - Isadore $ 76,500 Fiscal sponsorship - OurCycle LA 30,285 Los Angeles Better Buildings Challenge 26,010 Fiscal sponsorship - Divining Lab 18,890 Total $ 151,685 NOTE 9: PORTFOLIO COMPANIES OWNERSHIP AND WARRANTS The Organization has stock ownership and limited liability interests in private operating companies. The Organization has also entered into share purchase or ownership interest warrant agreements with portfolio companies with expiration dates ranging from February 2019 through May These warrants provide the Organization the right to purchase specified percentages of shares of common stock or limited liability company interests of the portfolio companies. These percentages range from 1% to 10%. As of December 31, 2016, the Organization has determined the stock, limited liability company interests, or warrants have no measurable value. The fair value of the Organization s financial instruments reflect the amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e. the exit price ). The statement utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels: Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. Level 3: Unobservable inputs that reflect the reporting entity s own assumptions. Fair value is a market-based measure based on assumptions of prices and inputs considered from the perspective of a market participant rather than an entity specific measure. When market assumptions are not readily available, the Organization s own assumptions are set to value the asset at measurement date. The availability of valuation techniques can vary from security to security and are affected by a variety of factors including type of security, liquidity of markets, and other characteristics specific to the transaction. 13

16 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 NOTE 9: PORTFOLIO COMPANIES OWNERSHIP AND WARRANTS (CONT.) Following is a description of the valuation methodologies used for assets measured at fair value. Securities of private operating companies, either in the form of stock or limited liability interests, are valued using the transaction price. When evidence supports a change in carrying value, adjustments are made to reflect the expected exit values of the securities. Ongoing reviews by the Organization s management of the fair value of the securities is conducted based on the performance and financial results of the companies and/or recent rounds of financing. Warrants to purchase stock or limited liability interests are valued using the Black-Scholes option pricing model, a technique that follows the income approach. This pricing model takes into account the warrant contract terms, volatility of equity prices, interest rates, etc. All of the Organization s securities are classified in Level 3 of the fair value hierarchy as they are all securities valued using unobservable inputs at December 31, 2016 and there were no reclassifications from to and from Level 3 classifications during the year then ended. NOTE 10: COMMITMENTS AND CONTIGENCIES The Organization entered into a new lease agreement for a satellite office facility. The lease expires in June Total rental expense paid on this facility during the year ended December 31, 2016 was $30,000. The total future minimum rental payments due are as follows for the year ending: 2017 $ 60, ,900 $ 91,800 In October 2015, the Organization entered into a 20 years, $1 a year lease with the City of Los Angeles, acting by and through its Department of Water and Power for the La Kretz Innovation Campus. The Organization also has an operating lease on equipment which will expire in NOTE 11: CASH IN BANK - CONCENTRATION OF CREDIT RISK LACI maintains its cash balances at a bank. At December 31, 2016, the balances maintained in these accounts did not exceed the $250,000 insurance limit as set by the Federal Deposit Insurance Corporation. 14

17 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 NOTE 12: INCENTIVE PLAN Effective January 1, 2015, the Organization adopted an Annual Incentive Plan ("Plan") in order to attract, retain and incentivize the continued service and performance of key employees. Annual incentive awards are performance-based for each eligible participant, subject to the sole determination of the Board of Directors, and wholly contingent upon funding of the plan. The Plan may only be funded exclusively from liquidation of portfolio company stock, if any. If no funds become available for a period of time, any potential accrued incentives are automatically forfeited. The Plan has been designed as such to minimize risk for the organization by avoiding any funding obligation whatsoever beyond this contingency. The Board of Directors credited eligible participants with annual bonus accruals which are contingent upon funding for the Plan totaling $5,483,

18 July 18, 2017 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 Los Angeles Cleantech Incubator Los Angeles, California We have audited, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial statement audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of Los Angeles Cleantech Incubator (a nonprofit organization), which comprise the statement of financial position as of December 31, 2016, and the related statements of activities functional expenses, and cash flows for the year then ended, and the related notes to the financial statements and have issued our report thereon dated July 18, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered Los Angeles Cleantech Incubator 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 Los Angeles Cleantech Incubator's internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the Organization's internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements that will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or 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 exists that have not been identified. 16

19 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 (CONT.) Compliance and Other Matters As part of obtaining reasonable assurance about whether Los Angeles Cleantech Incubator's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of this Report This 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. NSBN LLP NSBN LLP Los Angeles, California 17

20 SINGLE AUDIT REPORTS DECEMBER 31, 2016

21 SINGLE AUDIT REPORTS DECEMBER 31, 2016 TABLE OF CONTENTS Page Independent Auditors' Report on Internal Control over Financial 1-2 Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Independent Auditors' Report on Compliance for Each Major 3-5 Program and on Internal Control over Compliance Required by the Uniform Guidance Schedule of Findings and Questioned Costs 6-9 Schedule of Expenditures of Federal Awards 10 Notes to Schedule of Expenditures of Federal Awards 11

22 July 18, 2017 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 The Board of Directors Los Angeles Cleantech Incubator Los Angeles, California We have audited, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial statement audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of Los Angeles Cleantech Incubator (a nonprofit organization), which comprise the statement of financial position as of December 31, 2016, and the related statements of activities functional expenses, and cash flows for the year then ended, and the related notes to the financial statements and have issued our report thereon dated July 18, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered Los Angeles Cleantech Incubator'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 Los Angeles Cleantech Incubator's internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the Organization's internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements that will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or 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 exists that have not been identified. 1

23 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 (CONT.) Compliance and Other Matters As part of obtaining reasonable assurance about whether Los Angeles Cleantech Incubator's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of this Report This 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. NSBN LLP NSBN LLP Los Angeles, California 2

24 July 18, 2017 INDEPENDENT AUDITORS' REPORT ON COMPLIANCE FOR EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE The Board of Directors Los Angeles Cleantech Incubator Los Angeles, California Report on Compliance for Each Major Federal Program We have audited Los Angeles Cleantech Incubator's compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on each of Los Angeles Cleantech Incubator's major federal programs for the year ended December 31, Los Angeles Cleantech Incubator'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 the requirements of laws, regulations, contracts and grants applicable to its federal programs. Auditor's Responsibility Our responsibility is to express an opinion on compliance for each of Los Angeles Cleantech Incubator'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 Los Angeles Cleantech Incubator'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 Los Angeles Cleantech Incubator's compliance. 3

25 INDEPENDENT AUDITORS' REPORT ON COMPLIANCE FOR EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE (CONT.) Opinion on Each Major Federal Program In our opinion, Los Angeles Cleantech Incubator 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 December 31, Report on Internal Control Over Compliance Management of Los Angeles Cleantech Incubator is responsible for establishing and maintaining effective internal control over compliance with the types of requirements referred to above. In planning and performing our audit of compliance, we considered Los Angeles Cleantech Incubator's internal control over compliance with requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness Los Angeles Cleantech Incubator'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 the 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. 4

26 INDEPENDENT AUDITORS' REPORT ON COMPLIANCE FOR EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE (CONT.) Report on Schedule of Expenditure of Federal Awards Required by the Uniform Guidance We have audited the financial statements of the Los Angeles Cleantech Incubator as of and for the year ended December 31, 2016, and have issued our report thereon dated July 18, 2017, which contained unmodified opinion on those financial statements. Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by the Uniform Guidance and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the schedule of expenditures of federal awards is fairly stated in all material respects in relation to the financial statements as a whole. NSBN LLP NSBN LLP Los Angeles, California 5

27 SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED DECEMBER 31, 2016 Section I - Summary of Auditor's Results Financial Statements Type of auditor's report issued: Unmodified Internal control over financial reporting: Material weakness(es) identified? Yes X No Significant deficiencies identified that are not considered to be material weakness(es)? Yes X None reported Noncompliance material to financial statements noted? Yes X No Federal Awards Type of auditors' report issued on compliance for major programs: Unmodified Internal control over major programs: Material weakness(es) identified? Yes X No Significant deficiencies identified that are not considered to be material weakness(es)? Yes X None reported Any audit findings disclosed that are required to be reported in accordance with 2 CFR section (a)? Yes X No Major program: CFDA Number(s) Name of Federal Program or Cluster Community Development Block Grant Dollar threshold used to distinguish between type A and type B programs: $ 750,000 Auditee qualified as low-risk? Yes X No See accompanying independent auditors' reports. 6

28 SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED DECEMBER 31, 2016 Section II - Financial Statement Findings None See accompanying independent auditors' reports. 7

29 SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED DECEMBER 31, 2016 Section III - Federal Award Findings and Questioned Costs None See accompanying independent auditors' reports. 8

30 SCHEDULE OF PRIOR AUDIT FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED DECEMBER 31, 2016 Section IV - Prior Audit Findings and Questioned Costs None See accompanying independent auditors' reports. 9

31 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED DECEMBER 31, 2016 Federal CFDA Contract Federal Agency/ Program Grant Title Number Number Expenditures Department of Housing and Urban Development Passed through City of Los Angeles Office of Community Planning and Development: Community Development Block Grants/Entitlement Grants CF S8 $ 814,205 Department of Energy Energy Efficiency and Renewable Energy Information Dissimination, Training, and Technical Assistance DE-EE (NIICE DOE) 186,435 Conservation Research and Development DE-EE (TDI DOE) 126,493 TOTAL EXPENDITURES OF FEDERAL AWARDS $ 1,127,133 See accompanying independent auditors' reports. 10

32 NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS DECEMBER 31, 2016 NOTE 1: BASIS OF PRESENTATION The schedule of expenditures of federal awards includes contract activity of the Organization and is presented on the accrual basis of accounting, which is the same basis of accounting used in the preparation of the financial statements. The information is this schedule is presented in accordance with the requirements of the Uniform Guidance and agrees with the amounts in the financial statements. NOTE 2: INDIRECT COST RATE The Organization has elected not to use the 10% de minimis indirect cost rate allowed under the Uniform Guidance. NOTE 3: AMOUNTS PROVIDED TO SUBRECIPIENTS Of the federal expenditures presented in the accompanying schedule of expenditures of federal awards, the Organization provided federal awards to subrecipients as follows: CFDA Number Federal Grantor /Program Title Amount Department of Energy Conservation Research and Development $ 110, Energy Efficiency and Renewable Energy $ 39,985 Information Dissimination, Training, and Technical Assistance 11