ARIZONA BEHAVIORAL HEALTH CORPORATION AND RELATED ENTITY

Transcription

1 COMBINED FINANCIAL STATEMENTS, ADDITIONAL INFORMATION AND UNIFORM GUIDANCE SUPPLEMENTAL REPORTS Years Ended December 31, 2016 and 2015

2 COMBINED FINANCIAL STATEMENTS, ADDITIONAL INFORMATION AND UNIFORM GUIDANCE SUPPLEMENTAL REPORTS Years Ended December 31, 2016 and 2015 CONTENTS Pages INDEPENDENT AUDITORS' REPORT 1-2 COMBINED FINANCIAL STATEMENTS Combined Statements of Financial Position 3 Combined Statements of Activities 4 Combined Statements of Cash Flows 5 Notes to Combined Financial Statements 6-15 UNIFORM GUIDANCE SUPPLEMENTAL REPORTS Schedule of Expenditures of Federal Awards 16 Notes to Schedule of Expenditures of Federal Awards 17 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 Independent Auditors Report on Compliance for Each Major Federal Program and Report on Internal Control Over Compliance Required by the Uniform Guidance Schedule of Findings and Questioned Costs Corrective Action Plan and Summary Schedule of Prior Audit Findings 27-29

3 3101 N. Central Ave., Suite 300 Phoenix, AZ Main: Fax: INDEPENDENT AUDITORS' REPORT To the Board of Directors of ARIZONA BEHAVIORAL HEALTH CORPORATION Report on the Combined Financial Statements We have audited the accompanying combined financial statements of Arizona Behavioral Health Corporation and Related Entity, which comprise the combined statements of financial position as of December 31, 2016 and 2015 and the related combined statements of activities and cash flows for the years then ended, and the related notes to the combined financial statements. Management s Responsibility for the Combined Financial Statements Management is responsible for the preparation and fair presentation of these combined 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 combined 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 combined financial statements based on our audits. We did not audit the financial statements of Topaz Information, LLC, an equity method investment subsidiary, which statements reflect Arizona Behavioral Health Corporation and Related Entity s partnership interest of $1,289,853 and $1,458,287 as of December 31, 2016 and 2015, respectively, and the Organization s share of the partnership losses of $168,434 and $78,320 for the years ended December 31, 2016 and 2015, respectively. Those statements were audited by other auditors, whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Topaz Information, LLC, is based solely on the report of the other auditors. We conducted our audits 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 audits to obtain reasonable assurance about whether the combined financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the combined 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 combined 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 combined financial statements. Member of Kreston International a global network of independent accounting firms

4 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, based on our audits and the report of the other auditors, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of Arizona Behavioral Health Corporation and Related Entity as of December 31, 2016 and 2015 and the changes in their net assets and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Other Matters Supplemental Information Our audits were conducted for the purpose of forming an opinion on the combined financial statements of Arizona Behavioral Health Corporation and Related Entity as a whole. The accompanying Schedule of Expenditures of Federal 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 combined 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 combined financial statements. The information has been subjected to the auditing procedures applied in the audit of the combined financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the combined financial statements or to the combined 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 combined financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated November 27, 2017 on our consideration of Arizona Behavioral Health Corporation and Related Entity s internal control over financial reporting and on our tests of their compliance with certain provisions of laws, regulations, contracts, grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Arizona Behavioral Health Corporation and Related Entity s internal control over financial reporting and compliance. November 27, 2017

5 COMBINED STATEMENTS OF FINANCIAL POSITION December 31, 2016 and 2015 A S S E T S CURRENT ASSETS Cash and cash equivalents $ 1,171,379 $ 439,697 Accounts receivable 154, ,789 Provider advances 1,792,298 1,581,697 Prepaid expenses 28,571 25,187 TOTAL CURRENT ASSETS 3,146,424 2,281,370 INVESTMENTS 7,897,710 6,984,780 INVESTMENT IN JOINT VENTURE 1,289,853 1,458,287 NOTE RECEIVABLE FROM JOINT VENTURE 600, ,000 PROPERTY AND EQUIPMENT, net 2,016,424 2,080,305 PROPERTY HELD FOR SALE - 667,827 OTHER ASSETS 275, ,332 TOTAL ASSETS $ 15,225,418 $ 14,358,901 L I A B I L I T I E S A N D N E T A S S E T S CURRENT LIABILITIES Line of credit $ 1,500,000 $ 1,500,000 Accounts payable 23,587 87,338 Accrued expenses 464, ,809 Deferred revenue 1,928,825 1,650,878 TOTAL CURRENT LIABILITIES 3,916,534 3,717,025 SECURITY DEPOSITS 18,147 21,807 TOTAL LIABILITIES 3,934,681 3,738,832 UNRESTRICTED NET ASSETS 11,290,737 10,620,069 TOTAL LIABILITIES AND NET ASSETS $ 15,225,418 $ 14,358,901 See Notes to Combined Financial Statements -3-

6 COMBINED STATEMENTS OF ACTIVITIES Years Ended December 31, 2016 and REVENUES Housing revenue $ 22,379,525 $ 22,018,598 Contributions revenue 309,696 21,260 Rental income and other revenues 242, ,059 Investment income 201, ,989 Net realized/unrealized gains (losses) 325,009 (663,970) Loss on sale of property (21,181) - Loss on joint venture (168,434) (78,320) TOTAL REVENUES 23,268,140 21,739,616 EXPENSES Housing program 20,871,033 20,318,828 Management and general 1,726,439 1,882,630 TOTAL EXPENSES 22,597,472 22,201,458 CHANGE IN UNRESTRICTED NET ASSETS 670,668 (461,842) UNRESTRICTED NET ASSETS, BEGINNING OF YEAR 10,620,069 11,081,911 UNRESTRICTED NET ASSETS, END OF YEAR $ 11,290,737 $ 10,620,069 See Notes to Combined Financial Statements -4-

7 COMBINED STATEMENTS OF CASH FLOWS Years Ended December 31, 2016 and CASH FLOWS FROM OPERATING ACTIVITIES Change in unrestricted net assets $ 670,668 $ (461,842) Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation 113, ,795 Net realized/unrealized (gains) losses (325,009) 663,970 Loss on sale of property 21,181 - Loss on joint venture 168,434 78,320 Change in value of annuity contract (13,383) 2,230 Changes in operating assets and liabilities: Decrease (increase) in: Accounts receivable 80,613 76,437 Provider advances (210,601) (43,618) Prepaid expenses (3,384) (2,871) Increase (decrease) in: Accounts payable (63,751) (58,838) Accrued expenses 10,021 (4,140) Deferred revenue 277,947 50,567 Net cash provided by operating activities 726, ,010 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of investments (1,750,987) (3,703,650) Proceeds from sale of investments 1,163,066 3,138,711 Additonal investment in joint venture - (900,000) Issuance of note receivable to joint venture - (600,000) Distributions on annuity contract (24,708) (24,708) Purchases of property and equipment (50,000) (23,802) Proceeds from sale of property and equipment 646,646 - Change in security deposits (3,660) (5,125) Proceeds from annuity contract 24,708 24,708 Net cash provided by (used in) investing activities 5,065 (2,093,866) CASH FLOWS FROM FINANCING ACTIVITIES Payments on line of credit (1,126,000) - Draws on line of credit 1,126,000 1,500,000 Net cash provided by financing activities - 1,500,000 NET CHANGE IN CASH AND CASH EQUIVALENTS 731,682 (153,856) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 439, ,553 CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,171,379 $ 439,697 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest $ 40,831 $ 9,432 SUPPLEMENTAL DISCLOSURE OF NONCASH OPERATING AND INVESTING ACTIVITIES During 2015, the Organization transferred a building with a net book value of $667,827 to property held for sale. See Notes to Combined Financial Statements -5-

8 NOTES TO COMBINED FINANCIAL STATEMENTS Year ended December 31, 2016 and 2015 (1) Organization operations and summary of significant accounting policies Nature of operations - Arizona Behavioral Health Corporation (the "Corporation") was organized in 1997 as a non-profit behavioral health care corporation to foster, provide, consult with, facilitate, and/or advocate for residents of the state of Arizona with behavioral health needs. The Corporation received its initial funding from the Arizona Department of Health Services. Arizona Foundation for Behavioral Health (the Foundation ) was organized in 1998 as a non-profit corporation with the purpose of promoting and enhancing the behavioral health and well-being of Arizona residents by funding ongoing and innovative projects that develop new services or improved methods of delivering services and supporting studies that will produce long-lasting benefits. On May 12, 2015, the Boards of Directors approved a plan of dissolution for the Foundation. All of the remaining net assets of the Foundation were distributed to the Corporation in The Corporation and the Foundation (collectively the Organization ) had common members of their respective boards of directors. Management of the Corporation also managed the Foundation. The significant accounting policies followed by the Organization are as follows: Principles of combination - The accompanying combined financial statements include the accounts of the Corporation and the Foundation (through May 12, 2015). All significant intercompany transactions and accounts have been eliminated in combination. Basis of presentation - The accompanying combined financial statements have been prepared in accordance with the guidelines for presentation of financial statements prescribed by Financial Accounting Standards Board ( FASB ) Accounting Standards Codification ( ASC ) 958, Not-for-Profit Organizations. Under FASB ASC 958, the Organization is required to report information regarding their combined financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. As of December 31, 2016 and 2015 there were no temporarily restricted or permanently restricted net assets. Management s use of estimates - The preparation of combined financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the combined financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Cash - Cash includes cash and, at times, cash equivalents which consist of highly liquid financial instruments purchased with original maturities of three months or less. Cash deposits in each institution are insured in limited amounts by the Federal Deposit Insurance Corporation ( FDIC ). At times, the Organization maintains cash balances in excess of FDIC limits. Accounts receivable - Accounts receivable are stated at the amount management expects to collect. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on the assessment of the current status of individual balances. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. Management considers the accounts receivable balances at December 31, 2016 and 2015 to be fully collectible, and therefore, an allowance for doubtful accounts is not deemed necessary. -6-

9 NOTES TO COMBINED FINANCIAL STATEMENTS Year ended December 31, 2016 and 2015 (1) Organization operations and summary of significant accounting policies (continued) Provider advances - The Organization may advance monies to providers based on cash flow needs and timing of payments. Advances are stated at the amount management expects to collect or offset against future payments. The amount at December 31, 2016 and 2015 represents advances made in 2016 and 2015 for services to be provided in the following month. Advances are non-interest bearing and are expected to be settled within the next month. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual balances. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to provider advances. Management considers the provider advances balance at December 31, 2016 and 2015 to be fully collectible, and therefore, an allowance for doubtful accounts is not considered necessary. Investments and fair value - The Organization accounts for its investments in accordance with FASB ASC , Not-for-Profit Entities Investments Debt and Equity Securities. Under FASB ASC , the Organization reports investments in equity securities that have readily determinable fair value, and all investments in debt securities, at fair value. The fair values are based on quoted market prices. Investments are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in risks in the near term would materially affect account balances and the amounts reported in the accompanying combined financial statements. FASB ASC 820, Fair Value Measurements, establishes a common definition for fair value to be applied to accounting principles generally accepted in the United States of America requiring use of fair value, establishes a framework for measuring fair value, and expands disclosures about such fair value measurements. It also establishes a hierarchy for ranking the quality and reliability of the information used to determine fair values by requiring that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories: Level 1: Unadjusted quoted market prices in active markets for identical assets or liabilities. Level 2: Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability. Level 3: Unobservable inputs for the asset or liability. Property and equipment and related depreciation - Purchased property and equipment is recorded at cost, and donated property and equipment is recorded at fair market value at the date of the gift to the Organization. Maintenance and repairs are charged to operations when incurred. Betterments, renewals, and equipment greater than $1,000 are capitalized. When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations. Depreciation of property and equipment is computed using the straight-line method over the following estimated useful lives: Buildings Equipment 30 years 3-7 years -7-

10 NOTES TO COMBINED FINANCIAL STATEMENTS Year ended December 31, 2016 and 2015 (1) Organization operations and summary of significant accounting policies (continued) Impairment of long-lived assets - The Organization accounts for long-lived assets in accordance with the provisions of FASB ASC 360, Property, Plant, and Equipment. FASB ASC 360 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. No impairment charges were recorded during the years ended December 31, 2016 and Revenue recognition - Housing revenue consists of contracts with government agencies to provide housing assistance. Rental income and other revenues consist primarily of rental receipts from tenants and rental receipts from the lease of rooftop and building space. All such leases are classified as operating leases whereby rent is reported as income over the lease term as it becomes receivable. Revenues are recognized monthly in accordance with the contracts or lease agreements. The major source of revenue for the Corporation is received under contracts with the U.S. Department of Housing and Urban Development ( HUD ). Revenue received from HUD represented approximately 70% and 76% of total housing revenue for the years ended December 31, 2016 and 2015, respectively. Management believes a loss of its contract with HUD would be significant. The Corporation has a contract with Mercy Maricopa Integrated Care ( Mercy Maricopa ), the Maricopa County Regional Behavioral Health Authority ( RBHA ), to provide services through March 31, The contract automatically renews annually unless terminated by either party. Management believes a loss of its contract with the RBHA would be significant. During 2016 and 2015, the Corporation received management fee income totaling $1,149,616 and $1,126,862, respectively, from Mercy Maricopa, related to the Corporation s administration of its housing programs. Management fee income is included in housing revenue in the accompanying combined statements of activities and is recognized as management services are provided. Contributions - The Organization accounts for contributions in accordance with FASB ASC , Notfor-Profit Entities Revenue Recognition. In accordance with FASB ASC , contributions received are recorded as unrestricted, temporarily restricted, or permanently restricted support, depending on the existence and/or nature of any donor restrictions. All donor-restricted support is reported as an increase in temporarily or permanently restricted net assets, depending on the nature of the restriction. When a restriction expires (that is, when a stipulated time restriction ends or purpose restriction is accomplished), temporarily restricted net assets are reclassified to unrestricted net assets and reported in the combined statement of activities as net assets released from restrictions. When restrictions are met in the same period as the donation is made, restricted support is shown as additions to unrestricted support. Functional expense - Program expenses are recorded based on direct expenses incurred by each specific program and an allocation of allowable indirect costs based on the amount of time directly billed to each program. Management and general expenses include those expenses that are not directly identifiable with any specific program, but provide for the overall support and direction of the Organization. -8-

11 NOTES TO COMBINED FINANCIAL STATEMENTS Year ended December 31, 2016 and 2015 (1) Organization operations and summary of significant accounting policies (continued) Income tax status - The Corporation qualifies as a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code ( IRC ) and, accordingly, there is no provision for income taxes. In addition, the Corporation qualifies for the charitable contribution deduction under Section 170 of the IRC and has been classified as an organization that is not a private foundation. Income determined to be unrelated business taxable income ( UBTI ) would be taxable. The Corporation evaluates its uncertain tax positions, if any, on a continual basis through review of its policies and procedures, review of its regular tax filings, and discussions with outside experts. At December 31, 2016 and 2015, the Corporation did not have any uncertain tax positions. The Corporation s Return of Organization Exempt from Income Tax (Form 990) for 2013, 2014, and 2015 are subject to examination by the IRS, generally for the three years after they were filed. The return for the year ended December 31, 2016 was filed prior to issuance of the financial statements. As noted above, the Foundation was dissolved on May 12, The Foundation qualified as a tax-exempt organization under Section 501(c)(3) of the IRC and, accordingly, there is no provision for income taxes. In addition, the Foundation qualified for the charitable contribution deduction under Section 170 of the IRC and had been classified as an organization that was not a private foundation. Income determined to be unrelated business taxable income would have been taxable. The Foundation evaluated its uncertain tax positions, if any, on a continual basis through review of its policies and procedures, review of its regular tax filings, and discussions with outside experts. At May 12, 2015, the Foundation did not have any uncertain tax positions. The Foundation s Return of Organization Exempt from Income Tax (Form 990) for 2013, 2014 and 2015 are subject to examination by the IRS, generally for the three years after they were filed. The Foundation s final return for the stub period ended May 12, 2015 has been filed as of the date of this report and is subject to examination by the IRS for a period of three years from the filing date. Recent accounting pronouncement - In May 2014, the FASB issued Accounting Standards Update ( ASU ) No ( ASU ), Revenue from Contracts with Customers. The core principle of ASU is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, ASU will require an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. For nonpublic entities, the ASU will be effective for annual reporting periods beginning after December 15, 2017 and interim periods within annual periods beginning after December 15, Nonpublic entities may elect to early adopt the ASU, however, adoption is not permitted prior to the public entity effective date. In August 2015, the FASB issued FASB ASU No , Revenue from Contracts with Customers (Topic 606), which changed the effective date of the provisions of FASB ASU No As a result, the new effective dates for public business entities, certain not-for-profit entities, and certain employee benefit plans to apply the guidance in FASB ASU No is for annual reporting periods beginning after December 15, All other entities should apply the guidance in FASB ASU No to annual reporting periods beginning after December 15, Earlier application is permitted only as of annual reporting periods beginning after December 15, Transition to the new guidance may be done using either a full or modified retrospective method. The Organization is currently evaluating the full effect that the adoption of this standard will have on the combined financial statements. -9-

12 NOTES TO COMBINED FINANCIAL STATEMENTS Year ended December 31, 2016 and 2015 (1) Organization operations and summary of significant accounting policies (continued) In February 2016, the FASB issued ASU No Leases (Topic 842). ASU requires that a lease liability and related right-of-use-asset representing the lessee s right to use or control the asset be recorded on the combined statement of financial position upon the commencement of all leases except for short-term leases. Leases will be classified as either finance leases or operating leases, which are substantially similar to the classification criteria for distinguishing between capital leases and operating in existing lease accounting guidance. As a result, the effect of leases in the combined statement of activities and the combined statement of cash flows will be substantially unchanged from the existing lease accounting guidance. The ASU is effective for fiscal years beginning after December 15, Early adoption is permitted. The Organization is currently evaluating the effect that the adoption of this standard will have on the combined financial statements. In August 2016, the FASB issued ASU No , Not-for-Profit Entities (Topic 958), Presentation of Financial Statements of Not-for-Profit Entities. ASU improves the current net asset classification requirements and the information presented in financial statements and notes about a not-for-profit entity s liquidity, financial performance, and cash flows. ASU is effective for annual financial statements issued for fiscal years beginning after December 15, Early application is permitted. The amendments of this ASU are to be applied on a retrospective basis in the year that the ASU is first applied. The Organization is currently evaluating the full effect that the adoption of this standard will have on the combined financial statements. In August 2014, the FASB issued ASU , Presentation of Financial Statements Going Concern (Subtopic ): Disclosure of Uncertainties about an Entity s Ability to Continue as a Going Concern. The amendments in ASU are intended to define management s responsibility to evaluate whether there is substantial doubt about an organization s ability to continue as a going concern and to provide related footnote disclosures. FASB ASU is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, The Organization adopted ASU in 2017 with no significant impact to the combined financial statements. Subsequent events - The Organization has evaluated subsequent events through November 27, 2017, which is the date the combined financial statements were available to be issued. On July 20, 2017, the Company purchased a new building at a purchase price of approximately $1.1 million in cash. The Organization will not sell the current office building until the new office building is ready to be moved into. (2) Accounts receivable Accounts receivable consists of: Grant funds earned but not received $ 117,599 $ 228,572 Accrued interest receivable 18,563 - Due from providers 18,014 6,217 Total accounts receivable $ 154,176 $ 234,789 In the course of providing funding to providers of supportive housing and continuum of care programs, the Organization draws money from the funding grant and advances it to the providers. As of December 31, 2016 and 2015, the Organization had drawn from funding sources and paid out to providers $1,792,298 and $1,581,697 for expenses to be incurred in January 2017 and 2016, respectively. The advances are classified as provider advances and the draws are classified as deferred revenue in the accompanying combined financial statements.

13 NOTES TO COMBINED FINANCIAL STATEMENTS Year ended December 31, 2016 and 2015 (3) Other assets During 2013, the Organization s key-man life insurance policy under Section 457(f) of the Internal Revenue Code, in which the Organization was the owner and the beneficiary, was cashed out. The proceeds from the policy were used to purchase an annuity, with the Organization s CEO as the beneficiary. Beginning in July 2014, the CEO began receiving $2,059 per month and these payments will continue for 15 years. The policy allows for the commutation of the future payments into a lump sum distribution calculated based on a formula specified in the agreement and subject to current market rates for new annuity agreements at the time of the commutation. The commutation value of this policy was $275,007 and $286,332 as of December 31, 2016 and 2015, respectively, which is included in other assets in the accompanying combined statements of financial position. The total obligation at December 31, 2016 and 2015 was $275,007 and $286,332, respectively, which is included in accrued expenses in the accompanying combined statements of financial position. (4) Investments At December 31, 2016 and 2015, investments consist of: Cash and cash equivalents $ 631,957 $ 689,912 Mutual funds Corporate bonds 308,833 2,056,858 Intermediate term bond 1,555,427 49,667 High yield bond 438,856 - Large blend 777, ,643 Foreign large blend 833, ,145 Other 2,868,949 2,081,528 Total mutual funds 6,782,999 5,885,841 Common stock Other 482, ,027 Total common stock 482, ,027 Total investments $ 7,897,710 $ 6,984,780 Investment fees incurred were $44,373 and $42,850 for 2016 and 2015, respectively. These fees are included in management and general expenses in the accompanying combined statements of activities. In February 2014, the Organization purchased an interest in Behavioral Health Information Network of Arizona, LLC ( BHIN ). The Organization subscribed as a member in BHIN for 300 units and paid $300,000 for the subscription. The Organization s investment is less than 20% and accordingly, the Organization accounted for its investment in BHIN under the cost method of accounting in accordance with FASB ASC 325, Investments Cost Method Investments. Under this method, the investment balance is initially measured at cost and reviewed for impairment if there are indicators that a decrease in the investment value has occurred. During 2015, the Organization recorded an other than temporary impairment loss of $300,000 related to their investment in BHIN, which is included in net realized/unrealized gains (losses) in the accompanying combined statements of activities. During August 2016, BHIN operations were shut down effectively dissolving the company. -11-

14 NOTES TO COMBINED FINANCIAL STATEMENTS Year ended December 31, 2016 and 2015 (5) Investment in joint venture The Organization has a 50% interest in Topaz Information, LLC ( Topaz ) and does not have a controlling financial interest in Topaz. Accordingly, the Organization accounts for its investment in Topaz under the equity method of accounting in accordance with FASB ASC 272, Limited Liability Companies, and FASB ASC 323, Investments Equity Method and Joint Ventures. Under this method, the investment balance is adjusted based on a percentage of the income and losses realized by Topaz in proportion to the Organization s ownership interest. The following is a condensed summary of financial position and results of operations for Topaz at December 31, 2016 and 2015: Cash $ 1,366,419 $ 2,198,981 Accounts receivable 1,319, ,236 Prepaid expenses 44,155 38,347 Inventory and deposits 322, ,701 Equipment, net of depreciation 2,651,935 2,052,848 Total assets 5,703,599 6,087,113 Accounts payable 1,234, ,610 Licenses payable 19, ,814 Accrued payroll 256, ,169 Interest payable 19,250 - Deferred revenue 93, ,946 Line of credit 300,000 - Note payable - Corporation 1,200,000 1,200,000 Partners capital 2,579,706 2,916,574 Total liabilities and partners capital 5,703,599 6,087,113 Total revenue 7,964,078 6,213,942 Cost of sales 5,429,114 2,756,664 Gross margin 2,534,964 3,457,278 Total expenses 2,871,832 3,613,918 Net loss $ (336,868) $ (156,640) In 2015, the Organization entered into an agreement with the managing member of Topaz to invest an additional $900,000 in Topaz. The Organization s ownership interest was not affected as a result of the additional investment. Additionally, the Organization extended a loan of $600,000 to Topaz in November The terms of the loan include interest only payments with the principal due four years from the origination date. Interest accrues at 2.75% and the loan is secured by all assets of Topaz under a joint security arrangement with the managing member. The first interest payment was payable May 15, 2017 with annual interest payments due thereafter until the loan matures and is paid in full. Accrued interest receivable of $18,563 is included in accounts receivable at year end. If Topaz is unable to repay the loan at maturity or it is not beneficial to do so, Topaz may request that the parties to the loan meet to discuss settlement of the loan in another manner as set forth in the loan agreement. These options include the potential for the note to be converted to equity or for the loan to be extended under new terms. However, no such changes shall be made in the settlement terms unless mutually agreed to by the parties of the agreement. If the members cannot reach an agreement on settlement terms, the member that requires repayment under the original terms will grant the other member the right to purchase the loan. The balance is included in note receivable from joint venture in the accompanying combined statements of financial position. -12-

15 NOTES TO COMBINED FINANCIAL STATEMENTS Year ended December 31, 2016 and 2015 (6) Property and equipment Property and equipment consists of: Cost or donated value: Land $ 466,580 $ 466,580 Buildings 2,441,251 2,441,251 Equipment 188, ,696 Total cost or donated value 3,096,527 3,046,527 Accumulated depreciation (1,080,103) (966,222) Net property and equipment $ 2,016,424 $ 2,080,305 Depreciation expense charged to operations was $113,881 and $139,795 for 2016 and 2015, respectively. (7) Property held for sale In October 2015, the Corporation s Board of Directors approved selling one of their buildings. Property held for sale is carried at the lesser of the book value or fair value. No impairment charge was recorded for On June 3, 2016, the property was sold for $700,000 with net proceeds approximating $647,000 after selling costs. The sale resulted in a loss of approximately $21,000 which is included in net realized/unrealized gains (losses) in the accompanying statements of activities. (8) Leasing income The Organization has entered into agreements to lease rooftop space to be used as an antenna site for cell phone companies and also leases a building to a tax-exempt organization. The non-cancellable lease terms expire through July 2015 and include renewal options. The lease term for the building lease was extended through July 2018 with monthly payments of $3,580; however, as part of the sale of the property described in Note 7, the lease was transferred to the buyer of the property in June (9) Deferred revenue Grant advances received $ 1,792,298 $ 1,581,697 Draws for Supportive Housing and Continuum of Care 136,527 69,181 Total deferred revenue $ 1,928,825 $ 1,650,878 Grant advances represent monies drawn from funding sources and paid out to providers in December 2016 for January 2017 expenses. The deferred revenue related to draws for Supportive Housing and Continuum of Care were the result of year-end draws in 2016 that pertained to the following year. -13-

16 NOTES TO COMBINED FINANCIAL STATEMENTS Year ended December 31, 2016 and 2015 (10) Line of credit In February 2014, the Organization entered into a line of credit agreement with a financial institution with a maximum borrowing capacity of $2,275,000. The line of credit matured February 2015 and was extended through February The line of credit bears interest at a rate of the greater of 2% or the financial institution s prime rate minus 1% (2.75% at December 31, 2016). The line is collateralized by investment funds held in an account with the financial institution and the Organization is required to maintain a minimum balance in the account as determined in accordance with the line of credit agreement. During 2015, the line of credit agreement was amended to increase the borrowing base to $3,500,000 and extend the maturity date to September During 2016, the line was extended under the same terms until September During 2017, the line was extended under the same terms until September At both December 31, 2016 and 2015, $1,500,000 was outstanding under the line of credit. (11) Contingencies Unrestricted net assets include funding in total of $2,277,526 received in 2007 and prior years through grant agreements with a RBHA to acquire rental properties. Use of the properties is restricted by Declarations of Covenants, Conditions and Restrictions ( CCRs ), limiting the usage of the properties for extended use periods of 15 to 25 years to housing for individuals who are seriously mentally ill. Failure to abide by the CCRs would put the Organization in a breach of contract with the RBHA, allowing the State of Arizona to take possession of the properties. The CCRs expire at various times from March 2017 through May Contract compliance - At December 31, 2016, the Organization reported less housing assistance expenditures than amounts received from certain contracts. Accordingly, the Organization recorded a liability of $7,358 and $6,949 as of December 31, 2016 and 2015, respectively, related to the unspent housing assistance receipts which is included in accounts payable in the accompanying combined statements of financial position. (12) Pension plan The Organization participates in a 403(b) retirement plan (tax deferred annuity) for its employees who meet specified age and service requirements. The Organization makes its employees aware of the plan, withholds voluntary contributions from paychecks on a pretax basis, and remits the contributions to an independent trustee. Employer contributions are made annually at the discretion of the Boards of Directors. No employer contributions were made for 2016 or (13) Provider concentrations The Corporation s payments to two of its providers represented approximately 94% and 90% of disbursements for the years ended December 31, 2016 and 2015, respectively. If the Corporation s relationship with these providers ended, it could impact the Corporation s ability to meet performance requirements under its grant agreements with state and federal agencies until new providers could be found. -14-

17 NOTES TO COMBINED FINANCIAL STATEMENTS Year ended December 31, 2016 and 2015 (14) Fair value measurements The following table summarizes the valuation of the Corporation s financial instruments by the above FASB ASC 820 categories as of December 31, 2016: Total Level 1 Level 2 Level 3 Mutual funds Corporate bonds $ 308,833 $ 308,833 $ - $ - Intermediate term bond 1,555,427 1,555, High yield bond 438, , Large blend 777, , Foreign large blend 833, , Other 2,868,949 2,868, Total mutual funds 6,782,999 6,782, Common stock Other 482, , Total investments reported at fair value $ 7,265,753 $ 7,265,753 $ - $ - The following table summarizes the valuation of the Organization s financial instruments by the above FASB ASC 820 categories as of December 31, 2015: Total Level 1 Level 2 Level 3 Mutual funds Corporate bonds $ 2,056,858 $ 2,056,858 $ - $ - Intermediate term bond 49,667 49, High yield bond Large blend 729, , Foreign large blend 968, , Other 2,081,528 2,081, Total mutual funds 5,885,841 5,885, Common stock Other 409, , Total investments reported at fair value $ 6,294,868 $ 6,294,868 $ - $ - The Organization had no other assets and liabilities subject to fair value measurements other than at initial recognition. -15-

18 UNIFORM GUIDANCE SUPPLEMENTAL REPORTS

19 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS Year Ended December 31, 2016 Federal CFDA Contract Pass-through Federal Federal Grantor/Pass-Through Grantor/Program or Cluster Title Number Number Number Expenditures U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT: Continuum of Care: SG HRE 15 AZ0070L9T $ 84,758 SG Village 15 AZ0100L9T ,806 HUD AZ0071L9T ,795 HUD AZ0071L9T ,185 Casa Mia 15 AZ0056L9T ,649 Casa de Paz 15 AZ0070L9T ,798 PSH AZ0050L9T ,455 PSH AZ0082L9T ,079 Casa de Luz 15 AZ0111L9T ,039 PSH AZ0107L9T , AZ0050L9T , AZ0087L9T , AZ0086L9T ,519,981 Another Chance 15 AZ0052L9T ,992 SG Village 16 AZ0100L9T ,696,480 HUD AZ0071L9T ,075 HUD AZ0072L9T ,497 Casa Mia 16 AZ0056L9T ,313 Casa de Paz 16 AZ0055L9T ,136 PSH AZ0050L9T ,980 PSH AZ0082L9T ,562 Casa de Luz 16 AZ0111L9T ,857 PSH AZ0107L9T , AZ0086L9T ,384, AZ0087L9T ,019, AZ0088L9T ,551,119 Another Chance 16 AZ0052L9T ,499 Subtotal Continuum of Care 14,846,893 Supportive Housing for Persons with Disabilities: Mainstream 125 AZ880DV 783,600 Subtotal Supportive Housing for Persons with Disabilities 783,600 TOTAL EXPENDITURES OF FEDERAL AWARDS $ 15,630,

20 NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS Year Ended December 31, 2016 (1) Basis of presentation The accompanying Schedule of Expenditures of Federal Awards includes the federal award activity of Arizona Behavioral Health Corporation and Related Entity under programs of the federal government for the year ended December 31, The information in this schedule is presented in accordance with the requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards ( Uniform Guidance ). Because the schedule presents only a selected portion of the operations of Arizona Behavioral Health Corporation and Related Entity, it is not intended to and does not present the combined financial position, changes in net assets or cash flows of Arizona Behavioral Health Corporation and Related Entity. Arizona Behavioral Health Corporation and Related Entity did not provide federal awards to subrecipients during the year ended December 31, (2) Summary of significant accounting policies Expenditures reported on the Schedule of Expenditures of Federal Awards are reported on the accrual basis of accounting. Such expenditures are recognized following as applicable either the cost principles contained in OMB Circular A-122, Cost Principles for Non-Profit Organizations or the cost principles contained in the Uniform Guidance, wherein certain types of expenditures are not allowable or are limited as to reimbursement. Arizona Behavioral Health Corporation and Related Entity have not elected to use the ten percent de minimus indirect cost rate allowed under the Uniform Guidance. (3) Catalog of Federal Domestic Assistance ( CFDA ) numbers The program titles and CFDA numbers were obtained from the 2016 Catalog of Federal Domestic Assistance. -17-

21 3101 N. Central Ave., Suite 300 Phoenix, AZ Main: Fax: 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 Boards of Directors of ARIZONA BEHAVIORAL HEALTH CORPORATION We have audited, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the combined financial statements of Arizona Behavioral Health Corporation and Related Entity, which comprise the combined statement of financial position as of December 31, 2016 and the related combined statements of activities and cash flows for the years then ended, and the related notes to the combined financial statements, and have issued our report thereon dated November 27, Internal Control Over Financial Reporting In planning and performing our audit of the combined financial statements, we considered Arizona Behavioral Health Corporation and Related Entity 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 combined financial statements, but not for the purpose of expressing an opinion on the effectiveness of Arizona Behavioral Health Corporation and Related Entity s internal control. Accordingly, we do not express an opinion on the effectiveness of Arizona Behavioral Health Corporation and Related Entity 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 combined 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. Member of Kreston International a global network of independent accounting firms -18-

22 Compliance and Other Matters As part of obtaining reasonable assurance about whether Arizona Behavioral Health Corporation and Related Entity s combined financial statements are free from material misstatement, we performed tests of their 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 combined financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. November 27,