GATEWAY COMMUNITY CHARTERS (A CALIFORNIA NON-PROFIT PUBLIC BENEFIT CORPORATION) FINANCIAL STATEMENTS AND INDEPENDENT AUDITOR'S REPORT JUNE 30, 2016

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1 (A CALIFORNIA NON-PROFIT PUBLIC BENEFIT CORPORATION) FINANCIAL STATEMENTS AND INDEPENDENT AUDITOR'S REPORT JUNE 30, 2016 COMMUNITY COLLABORATIVE CHARTER SCHOOL (CCCS) COMMUNITY OUTREACH ACADEMY (COA) FUTURES HIGH SCHOOL (FHS) SACRAMENTO ACADEMIC & VOCATIONAL ACADEMY (SAVA) HIGHER LEARNING ACADEMY (HLA) GATEWAY INTERNATIONAL SCHOOL (GIS) EMPOWERING POSSIBILITIES INTERNATIONAL CHARTER (EPIC)

2 TABLE OF CONTENTS JUNE 30, 2016 Page INDEPENDENT AUDITOR'S REPORT 1-2 FINANCIAL STATEMENTS Statement of Financial Position 3 Statement of Activities 4 Statement of Cash Flows 5 Notes to the Financial Statements 6-13 SUPPLEMENTARY INFORMATION History and Organization 14 Schedule of Average Daily Attendance (ADA) 15 Schedule of Instructional Minutes Schedule of Expenditures for Federal Awards 18 Supplemental Statement of Financial Position by Charter School 19 Supplemental Statement of Activities by Charter School Supplemental Statement of Cash Flows by Charter School 23 Supplemental Reconciliation of Annual Financial and Budget Report with Audited Financial Statements by Charter School 24 Notes to Supplementary Information 25 Independent Auditor's Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 26 Independent Auditor's Report on Compliance for Each Major Program and on Internal Control Over Compliance Required by the Uniform Guidance Independent Auditor's Report on State Compliance Schedule of Findings and Questioned Costs Schedule of Prior Year Findings and Recommendations 33

3 MANN URRUTIA NELSON G LEND A LE ROS EVI LLE CPAs & ASSOCIATES, LLP SAC RAM ENT O SO UTH LA KE TA H O E KAUA I, H AWAI I INDEPENDENT AUDITOR'S REPORT To the Board of Directors Gateway Community Charters Report on the Financial Statements We have audited the accompanying financial statements of Gateway Community Charters (a California nonprofit public benefit corporation), which comprise the statement of financial position as of June 30, 2016, and the related statements of activities and cash flows for the year then ended, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gateway Community Charters as of June 30, 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. SACRAMEN TO OFF ICE VEN TURE OAKS WAY, S UITE 135 SACRAMEN TO, CA F

4 Other Matters Other Information Our audit was conducted for the purpose of forming an op1mon on the financial statements as a whole. The accompanying supplementary information is presented for purposes of additional analysis and is not a required part of the financial statements. The accompanying schedule of expenditures of federal awards, as required by Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administration Requirements, Cost Principles, and Audit Requirements for Federal Awards, is presented for purposes of additional analysis and is not a required part of the financial statements. The supplementary information and the schedule of federal awards are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated, in all material respects, in relation to the financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated November 29, 2016, on our consideration of Gateway Community Charters' internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Gateway Community Charters' internal control over financial reporting and compliance. Sacramento, California November 29, 2016

5 STATEMENT OF FINANCIAL POSITION JUNE 30, 2016 ASSETS Current Assets Cash and cash equivalents (Note 2) $ 48,364,520 Investments (Note 5) 5,846,958 Accounts receivable (Note 3) 2,798,280 Prepaid expenses and other assets 1,196,526 Total Current Assets 58,206,284 Non-Current Assets Fixed Assets (Note 4) Land 592,930 Land improvements 6,325,967 Furniture and equipment 1,684,395 Construction in progress 3,783,522 Less: accumulated depreciation (1,262,281) Total Fixed Assets 11,124,533 Total Assets $ 69,330,817 Current Liabilities LIABILITIES AND NET ASSETS Accounts payable $ 2,224,297 Accrued liabilities 924,338 Deferred revenue 32,091 Due to other governments 16,032 Total Current Liabilities 3,196,758 Non-Current Liabilities Loans payable - long term (Note 10) 16,726,633 Net Assets Total Liabilities 19,923,391 Unrestricted - board designated (Note 11) 4,250,000 Unrestricted 30,297,061 Temporarily restricted 14,860,365 Total Net Assets 49,407,426 Total Liabilities and Net Assets $ 69,330,817 The accompanying notes are an integral part of these financial statements. 3

6 STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2016 UNRESTRICTED NET ASSETS Support and Revenues State revenue Education Protection Act $ 4,831,216 Local Control Funding Formula (LCFF) 27,900,950 Other state revenue 2,217,974 Federal revenue 2,667,799 Local revenue In-lieu property tax revenue 4,890,192 Investment income 113,067 Other revenue 347,520 Net Assets Released From Restrictions 1,715,213 Total Unrestricted Support and Revenues 44,683,931 Expenses Program services: Educational programs 32,448,846 Supporting services: General and Administrative 9,022,209 Total Unrestricted Expenses 41,471,055 Change in Unrestricted Net Assets 3,212,876 Unrestricted Net Assets - July 1, ,334,185 Unrestricted Net Assets - June 30, ,547,061 TEMPORARILY RESTRICTED NET ASSETS Support and Revenues State revenue 12,640,035 Net Assets Released From Restrictions (1,715,213) Change in Temporarily Restricted Net Assets 10,924,822 Temporarily Restricted Net Assets - July 1, ,935,543 Temporarily Restricted Net Assets - June 30, ,860,365 TOTAL NET ASSETS Total Change in Net Assets 14,137,698 Net Assets - July 1, ,269,728 Net Assets - June 30, 2016 $ 49,407,426 The accompanying notes are an integral part of these financial statements. 4

7 STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 2016 Cash Flows from Operating Activities Change In Net Assets $ 14,137,698 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation 532,312 Loss on disposal of fixed assets 54,750 Net unrealized gains on investments 186,404 Net realized gains on investments (14,220) Change in operating assets: Accounts receivable (561,756) Deposits and prepaid expenses (973,103) Change in operating liabilities: Accounts payable 1,265,941 Due to other governments (197,048) Accrued liabilities 294,283 Deferred revenue 18,743 Net Cash Provided by Operating Activities 606,306 Cash Flows from Investing Activities Purchase of investments (951,625) Sale of investments 911,386 Purchase of fixed assets (2,667,908) Net Cash Used by Investing Activities (2,708,147) Cash Flows from Financing Activities Proceeds from loans payable 9,694,494 Net Cash Provided by Financing Activities 9,694,494 Net Increase in Cash and Cash Equivalents 21,730,351 Cash and Cash Equivalents, Beginning of Year 26,634,169 Cash and Cash Equivalents, End of Year $ 48,364,520 Supplemental Information Interest Paid $ 728 The accompanying notes are an integral part of these financial statements. 5

8 NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Activities Gateway Community Charters (the Organization) is a tax-exempt non-profit public benefit corporation that was established in The Organization governs seven unique charter schools. Five are originally authorized by Grant Joint Union High School District (now Twin Rivers Unified School District). Gateway International School (GIS) is authorized by the San Juan Unified School District. Empowering Possibilities International Charter opened during the year ended June 30, 2016, and is authorized by the Yolo County Office of Education. Community Collaborative Charter School (CCCS) Community Outreach Academy (COA) Futures High School (FHS) Sacramento Academic & Vocational Academy (SAVA) Higher Learning Academy (HLA) Gateway International School (GIS) Empowering Possibilities International Charter (EPIC) - Established July 1, 2015 Basis of Accounting These financial statements are reported using the current financial resources measurement focus and the accrual basis of accounting in accordance with general accepted accounting principles in the United States of America. Revenues are recorded when susceptible to accrual, i.e., both measurable and available to finance expenditures of the fiscal period. "Available" means collectible within the current period or soon enough thereafter to pay current liabilities. Application of the "susceptibility to accrual" criteria requires consideration of the materiality of the item in question and due regard for the practicality of accrual, as well as consistency in application. The financial statements are presented in conformity with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 958: Not-for-Profit Organizations. Capital Assets Capital assets purchased or acquired with an original cost of $5,000 or more are reported at historical cost or estimated historical cost. Contributed assets are reported at fair market value as of the date received. Additions, improvements, and other capital outlays that significantly extend the useful life of an asset are capitalized. Other costs for repairs and maintenance are expensed as incurred. Depreciation on all assets is provided on the straightline basis over the various estimated useful lives of the assets which range from three to seven years for equipment and five to fifteen years for leasehold improvements. Revenue Recognition Amounts received from the California Department of Education are recognized as revenue by the Organization based on the average daily attendance (ADA) of students. Revenue that is restricted is recorded as an increase in unrestricted net assets if the restriction expires in the reporting period in which the revenue is recognized. All other restricted revenues are reported as increases in temporarily restricted net assets. Cash and Cash Equivalents Gateway Community Charters (GCC) defines its cash and cash equivalents to include only cash on hand, demand deposits, and liquid investments with original maturities of three months or less. 6

9 NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income Taxes GCC is a nonprofit public-benefit corporation and has been recognized as tax-exempt pursuant to Section 501(c)(3) of the Internal Revenue code and Section 23701d of the California Revenue and Taxation Code. Accordingly, no provision has been made for income taxes. Management has evaluated its tax positions and the certainty as to whether those positions will be sustained in the event of an audit by taxing authorities at the federal and state levels. The primary tax positions evaluated are related to GCC's continued qualification as a tax-exempt organization and whether there is unrelated business income activities conducted would be taxable. Management has determined that all income tax positions are more likely than not (>50%) of being sustained upon potential audit or examination; therefore, no disclosures of uncertain income tax positions are required. GCC files informational returns in the U.S. federal jurisdiction, and the state of California. Open tax years subject to examination by the U.S. and state authorities are for the years 2013 to 2015, which statues expire in 2016 to 2018, respectively. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Net Assets Net assets of the organization and changes to net assets are classified and reported as follows: Unrestricted net assets - Net assets that are not subject to donor-imposed stipulations and are available for general operations. Temporarily restricted net assets - Net assets subject to donor-imposed stipulations that may or will be met, either by actions of the Organization and/or the passage of time. When a restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. Permanently restricted net assets - Net assets subject to donor-imposed stipulations that be maintained permanently by the Organization. Generally, the donors of these assets permit the Organization to use all or part of the income earned on related investments for general or specific purposes. All contributions are considered to be for unrestricted purposes unless specifically restricted by the donor. All donorrestricted contributions made in the year ended June 30, 2016, whose restrictions have been met in this period, are included in the statement of activities as unrestricted revenue. Investments Investments are recorded at fair market value. Both unrealized gains and losses from the fluctuation of market value and realized gains and losses from the sale of investments are reflected in the statement of activities if they are material. Subsequent Events All events subsequent to the balance sheet date of June 30, 2016, through November 29, 2016, which is the date these financial statements were available to be issued, have been evaluated. 7

10 NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 2: CASH AND CASH EQUIVALENTS At June 30, 2016, cash and cash equivalents included $108,772 held at one commercial bank, all of which was insured by the Federal Deposit Insurance Corporation (FDIC). GCC believes it is not exposed to any significant credit risk on cash and cash equivalents. GCC also maintains cash in the County Treasury. The County pools these funds with those of other educational organizations in the county and invests the cash. These pooled funds are carried at cost which approximates market value. The fair market value of the GCC's deposits in this pool as of June 30, 2016, as provided by the pool sponsor, was approximately $47,613,122. Interest earned is deposited quarterly into participating funds. Any investment losses are proportionately shared by all funds in the pool. The County is authorized to deposit cash and invest excess funds by California Government Code Section et. seq. The funds maintained by the County are either secured by federal depository insurance or collateralized. NOTE 3: ACCOUNTS RECEIVABLE Accounts receivable consists of funds due from state and federal governments, as well as sponsoring school districts. Therefore, no provisions for uncollectible accounts were recorded. Accounts receivable for the year ended June 30, 2016 totaled $2,798,280. NOTE 4: FIXED ASSETS A summary of changes in general fixed assets are as follows: Beginning Balance Additions Deletions Transfers Ending Balance Land and land improvements $ 5,291,175 $ 1,485,513 $ (6,689) $ 148,899 $ 6,918,898 Furniture and equipment 1,277, ,704 (122,442) - 1,684,395 Construction in progress 3,279, ,691 - (148,899) 3,783,521 Less: accumulated depreciation (804,350) (532,312) 74,381 - (1,262,281) Total fixed assets, net $ 9,043,687 $ 2,135,596 $ (54,750) $ - $ 11,124,533 Depreciation expense for the year ended June 30, 2016 totaled $532,312. 8

11 NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 5: INVESTMENTS Investment securities are reported in the financial statements at fair market value and consisted of the following at June 30, 2016: Mutual funds $ 2,180,464 Government obligations 670,893 Municipal bonds 159,140 Corporate obligations 1,826,099 Corporate stocks 1,010,362 Total $ 5,846,958 Investment income (loss) for the year ended June 30, 2016 was as follows: Dividends and interest $ 197,823 Net unrealized gains (losses) (186,405) Net realized gains (losses) 14,219 Investment fees (54,584) Total $ (28,947) NOTE 6: FAIR VALUE MEASUREMENTS FASB Accounting Standards Codification 820, Fair Value Measurements (Formerly Statement of Financial Accounting Standards No. 157), established a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described below: Level 1 Level 2 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Plan has the ability to access. Inputs to the valuation methodology include: Quoted prices for similar assets or liabilities in active markets; Quoted prices for identical or similar assets or liabilities in inactive markets; Inputs other than quoted prices that are observable for the assets or liability; Inputs that are derived principally from or corroborated by observable market data correlation or other means. If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability. Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement. The asset's or liability's fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. 9

12 NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 6: FAIR VALUE MEASUREMENTS (CONTINUED) Following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at June 30, Mutual funds: Valued using quoted market prices which are available on an active market. Common stocks, municipal bonds, corporate bonds, and U.S. government securities and obligations: Valued at the closing price reported on the active market on which individual securities are traded. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while GCC believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. The following tables set forth by level, within the fair value hierarchy, GCC's assets at fair value as of June 30, 2016: Assets at Fair Value as of June 30, 2016 Level 1 Level 2 Level 3 Total Mutual funds $ 2,180,464 $ - $ - $ 2,180,464 Government obligations - 670, ,893 Municipal bonds - 159, ,140 Corporate obligations - 1,826,099-1,826,099 Corporate stocks 1,010, ,010,362 Total assets at fair value $ 3,190,826 $ 2,656,132 $ - $ 5,846,958 NOTE 7: RETIREMENT PLANS Qualified employees are eligible to participate in a CalPERS Supplemental Income 457 Plan. The plan is funded entirely by voluntary employee contributions. Qualified employees are also covered under multiple-employer defined benefit pension plans maintained by agencies of the State of California. Certificated employees are members of the California State Teachers' Retirement System (CalSTRS) and classified employees are members of the California Public Employees' Retirement System (CalPERS). California State Teachers' Retirement System (CalSTRS) Plan Description GCC contributes to the California State Teachers' Retirement System (CalSTRS), a cost-sharing multiple-employer public employee retirement system defined benefit pension plan administered by CalSTRS. The plan provides retirement, disability and survivor benefits to beneficiaries. Benefit provisions are established by State statutes, as legislatively amended, within the State Teachers' Retirement Law. CalSTRS issues a separate comprehensive annual financial report that includes financial statements and required supplementary information. Copies of the CalSTRS annual financial report may be obtained from CalSTRS, 100 Waterfront Place, West Sacramento, CA

13 NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 7: RETIREMENT PLANS (CONTINUED) Funding Policy Active plan members are required to contribute 9.20% of their salary and GCC is required to contribute an actuarially determined rate. The actuarial methods and assumptions used for determining the rate are those adopted by the CalSTRS' Teachers Retirement Boards. The required employer contribution rate for the fiscal year was 10.73% of annual payroll. The contribution requirements of the plan members are established and may be amended by State statute. California Public Employees' Retirement System (CalPERS) Plan Description GCC contributes to the School Employer Pool under the California Public Employees' Retirement System (CalPERS), a cost-sharing multiple-employer public employee retirement system defined benefit pension plan administered by the CalPERS. The plan provides retirement and disability benefits, annual cost-of-living adjustments, and death benefits to plan members and beneficiaries. Benefit provisions are established by State statutes, as legislatively amended, within the Public Employees' Retirement Law. CalPERS issues a separate comprehensive annual financial report that includes required supplementary information. Copies of the CalPERS' annual financial report by be obtained from the CalPERS Executive Office, 400 P Street, Sacramento, CA Funding Policy Active plan members are required to contribute 7.0% of their salary. Effective January 1, 2013, new plan members that have not contributed to CalPERS in the past are required to contributed 6.0% of their salary. GCC is required to contribute an actuarially determined rate. The actuarial methods and assumptions used for determining the rate are those adopted by the CalPERS Board of Administration. The required employer contribution rate for fiscal year was %. The contribution requirements of the plan members are established and may be amended by State statute. Contributions to CalSTRS and CalPERS GCC's contributions to CalSTRS and CalPERS for each of the last three fiscal years is as follows: Year Ended June 30, CalSTRS Required Contribution CalSTRS Percent Contributed CalPERS Required Contribution CalPERS Percent Contributed 2014 $ 1,007, % $ 409, % 2015 $ 1,269, % $ 526, % 2016 $ 1,587, % $ 599, % 11

14 NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 8: OPERATING LEASES Gateway Community Charters leases its facilities under various operating lease and facility use agreements. Rental expenses for the year ended June 30, 2016 related to these leases totaled $2,239,829. Future minimum commitments under operating leases are as follows: Year Ending June 30 Lease Payments 2017 $ 2,015, ,646, ,187, ,041,540 Thereafter 2,128,458 Total $ 8,020,237 12

15 NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 9: LINE OF CREDIT Gateway Community Charters (GCC) has a line of credit in the amount of $2,000,000 secured by a first lien security interest in GCC's Wells Fargo investment account. The stated interest rate is equal to the lender's prime rate, and at no time shall be less than 1.00% per annum. Minimum interest only payments are due monthly and the line of credit is scheduled to mature in June 2017, at which time any unpaid principal is due. GCC did not have an outstanding balance on the line of credit at June 30, NOTE 10: LOANS PAYABLE In June 2015, the Empowering Possibilities International Charter (EPIC) obtained a $250,000 revolving loan from the California School Finance Authority. The loan has a 0.33% interest rate and is paid through deductions from the August through January apportionment payments. The EPIC loan matures in August As of June 30, 2016 the loan had an outstanding balance of $250,000. In January 2014, GCC was approved and executed a Memorandum of Understanding for funding under the California Charter School Facilities State Prop 1D Program. The terms of the agreements provide that 50% of the Prop 1D funding consists of a grant, and the remaining 50% is a local match which will be repaid to the State as a loan. GCC began receiving the funds during fiscal year 2012 and is not required to make repayments on the match until the completion of the facility project, at which point the repayment terms will be determined. As of June 30, 2016, the Organization had received $11,672,062 in match funding related to projects at Higher Learning Academy (HLA), and $4,804,571 in match funding related to projects at Futures High School (FHS). These balances are included on the statement of financial position as long-term loans payable as of June 30, NOTE 11: BOARD DESIGNATED FUND BALANCE In June 2011, GCC's governing board approved a Committed Facility Acquisition and Improvement reserve designation for three of the schools: Community Outreach Academy ($2,000,000), Community Collaborative Charter School ($750,000) and Futures High School ($1,500,000). The Committed Fund Balance was established to support future facility acquisition, maintenance and building improvement costs and is also intended to mitigate potential risk of long term lease agreements. At June 30, 2016, these reserve designations are maintained in the specified charter school net assets and funds may not be used or re-designated without formal action by the GCC Board of Directors. NOTE 12: CONTINGENCIES GCC has received federal and state funds for specific purposes that are subject to review and audit by the grantor agencies. Although such audits could generate expenditure disallowances under terms of the grants, it is believed that any required reimbursement will not be material. 13

16 SUPPLEMENTARY INFORMATION

17 HISTORY AND ORGANIZATION JUNE 30, 2016 Gateway Community Charters (GCC) is a tax exempt non-profit, public-benefit corporation that was established in GCC governs five charter schools originally authorized by Grant Joint Union High School District (now Twin Rivers Unified School District) under five separate charters. Gateway International School (GIS) is authorized by San Juan Unified School District. Empowering Possibilities International Charter (EPIC) School is authorized by Yolo County Office of Education. The schools and their charter school numbers are as follows: Community Collaborative Charter School (CCCS) - Charter Number: 0699 Established August 2005, expires June 2017 Community Outreach Academy (COA) - Charter Number: 0561 Established September 2003, expires June 2017 Futures High School (FHS) - Charter Number: 0560 Established August 2004, expires June 2017 Sacramento Academic & Vocational Academy (SAVA) - Charter Number: 0878 Established August 2007, expires June 2017 Higher Learning Academy (HLA) - Charter Number: 0862 Established August 2007, expires June 2017 Gateway International School (GIS) - Charter Number: 1563 Established August 2013, expires June 2021 Empowering Possibilities International Charter School (EPIC) - Charter Number: 1746 Established July 2015, expires June 2020 Board of Directors Name Office Term Expires Lillie Campbell President June 30, 2020 Bruce Mangerich Vice President June 30, 2018 Mark Anderson Treasurer June 30, 2020 Jack Turner Secretary June 30, 2018 Harry Block Director June 30, 2018 Administration Superintendent/Chief Executive Officer Cindy Petersen Ed. D Chief Business Official Aaron Thornsberry 14

18 SCHEDULE OF AVERAGE DAILY ATTENDANCE FOR THE YEAR ENDED JUNE 30, 2016 Second Period Report Annual Report Classroom Classroom Charter School Grade Levels Based Total Based Total Community Collaborative TK/K Charter School (CCCS) Grades 4 through Grades 7 through Grades 9 through ADA Totals Community Outreach TK/K Academy (COA) Grades 4 through Grades 7 through ADA Totals 1, , , , Futures High School (FHS) Grades 9 through ADA Totals Sacramento Academic & Grades 7 through Vocational Academy (SAVA) Grades 9 through ADA Totals Higher Learning Academy (HLA) TK/K Grades 4 through Grades 7 through ADA Totals Gateway International School (GIS) TK/K Grades 4 through Grades 7 through ADA Totals Empowering Possibilities TK/K International Charter (EPIC) Grades 4 through Grades 7 through ADA Totals ADA Totals 2, , , , See the accompanying notes to the supplementary information. 15

19 SCHEDULE OF INSTRUCTIONAL MINUTES FOR THE YEAR ENDED JUNE 30, 2016 Effective January 1, 2000, California Education Code Section requires classroom-based charter schools to offer a minimum number of minutes of instruction, as specified in Section This schedule documents the compliance of the Organization's campuses with these requirements Minutes Charter School Grade Level Requirement Reduced Actual Status Community Collaborative Charter School (CCCS) N/A - Nonclassroom based charter school Community Outreach Academy (COA) Kindergarten 36,000 34,971 52,470 In compliance Grade 1 50,400 48,960 53,180 In compliance Grade 2 50,400 48,960 54,600 In compliance Grade 3 50,400 48,960 54,600 In compliance Grade 4 54,000 52,457 56,590 In compliance Grade 5 54,000 52,457 56,590 In compliance Grade 6 54,000 52,457 57,300 In compliance Grade 7 54,000 52,457 57,764 In compliance Grade 8 54,000 52,457 57,764 In compliance Futures High School (FHS) Grade 9 64,800 62,949 64,884 In compliance Grade 10 64,800 62,949 64,884 In compliance Grade 11 64,800 62,949 64,884 In compliance Grade 12 64,800 62,949 64,884 In compliance Sacramento Academic & Vocational Academy (SAVA) N/A - Nonclassroom based charter school Empowering Possibilities International Charter (EPIC) Kindergarten 36,000 34,971 52,950 In compliance Grade 1 50,400 48,960 52,950 In compliance Grade 2 50,400 48,960 52,950 In compliance Grade 3 50,400 48,960 52,950 In compliance Grade 4 54,000 52,457 55,005 In compliance Grade 5 54,000 52,457 55,005 In compliance Grade 6 54,000 52,457 54,925 In compliance Grade 7 54,000 52,457 54,925 In compliance Grade 8 54,000 52,457 54,925 In compliance See the accompanying notes to the supplementary information. 16

20 SCHEDULE OF INSTRUCTIONAL MINUTES (Continued) FOR THE YEAR ENDED JUNE 30, Minutes Charter School Grade Level Requirement Reduced Actual Status Higher Learning Academy (HLA) Kindergarten 36,000 34,971 57,410 In compliance Grade 1 50,400 48,960 60,070 In compliance Grade 2 50,400 48,960 59,385 In compliance Grade 3 50,400 48,960 64,180 In compliance Grade 4 54,000 52,457 58,700 In compliance Grade 5 54,000 52,457 60,070 In compliance Grade 6 54,000 52,457 62,555 In compliance Grade 7 54,000 52,457 62,555 In compliance Grade 8 54,000 52,457 62,555 In compliance Gateway International School (GIS) Kindergarten 36,000 34,971 53,505 In compliance Grade 1 50,400 48,960 53,505 In compliance Grade 2 50,400 48,960 53,505 In compliance Grade 3 50,400 48,960 53,505 In compliance Grade 4 54,000 52,457 53,505 In compliance Grade 5 54,000 52,457 53,505 In compliance Grade 6 54,000 52,457 55,305 In compliance Grade 7 54,000 52,457 56,020 In compliance Grade 8 54,000 52,457 56,735 In compliance See the accompanying notes to the supplementary information. 17

21 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED JUNE 30, 2016 Federal Grantor/Pass-Through Grantor/Program or Cluster Title U.S. Department of Education: Pass through program from California Department of Education: Federal CFDA Number Pass- Through Entity Identifying Number CCCS COA FHS SAVA HLA GIS EPIC Total Title I Grants to Local Education Agencies $ 352,991 $ 581,240 $ 106,585 $ 192,994 $ 122,980 $ 137,893 $ 90,967 $ 1,585,650 Title II, Part A, Improving Teacher Quality State Grants ,677 4,686 2,606 2, ,450 1,491 17,183 Title III, Limited English Proficient Student Program , ,300 7,936 5,344 1,402 25,843 31, ,061 Title III, Immigrant Education Program A ,880 4, ,238-26,515 Charter Schools Grant A , ,759 Charter Schools Facilities Incentive Grant D Not identified - 22,260 28,152-21, , ,748 Special Education Grants to States Not identified ,883-55,883 Total U.S. Department of Education 368, , , , , , ,499 2,667,799 Total Expenditures of Federal Awards $ 368,622 $ 749,366 $ 150,170 $ 201,301 $ 146,875 $ 384,966 $ 666,499 $ 2,667,799 See the accompanying notes to the supplementary information. 18

22 SUPPLEMENTAL STATEMENT OF FINANCIAL POSITION BY CHARTER SCHOOL JUNE 30, 2016 ASSETS CCCS COA FHS SAVA HLA GIS EPIC Total CURRENT ASSETS Cash and cash equivalents $ 3,139,047 $ 5,733,221 $ 14,793,589 $ 3,753,299 $ 20,956,959 $ 237,106 $ (248,701) $ 48,364,520 Investments 774,186 2,810,214 1,788, ,660 47, ,846,958 Accounts receivable 96,628 1,002, , , , , ,757 2,798,280 Prepaid expenses and other assets 20, ,192 8,812 52,761 4, ,823 92,983 1,196,526 Total current assets 4,030,094 9,661,562 16,744,499 4,444,094 21,178,365 1,597, ,039 58,206,284 FIXED ASSETS Land - 592, ,930 Land improvements 337,559 4,589,252 15, ,684 58,993 15, ,304 6,325,967 Furniture and equipment 555, , , ,000 26,123 25,203 15,110 1,684,395 Construction in progress 10,288 4, ,139 8,235 3,250, ,206-3,783,522 Less: accumulated depreciation (148,820) (706,653) (71,443) (268,951) (35,818) (10,895) (19,701) (1,262,281) Total fixed assets 754,227 4,925, ,134 1,034,968 3,299, , ,713 11,124,533 Total assets 4,784,321 14,586,659 17,173,633 5,479,062 24,478,360 1,767,030 1,061,752 69,330,817 LIABILITIES AND NET ASSETS CURRENT LIABILITIES Accounts payable 533, , , ,194 93,229 71, ,006 2,224,297 Accrued liabilities 167, , , ,779 65,653 70,431 78, ,338 Deferred revenue 3,503-1,916 24, ,237 32,091 Due to other governments 8, , ,032 Total current liabilities 712, , , , , , ,855 3,196,758 LONG TERM LIABILITIES Loans payable - long term - - 4,804,571-11,672, ,000 16,726,633 NET ASSETS Unrestricted - board designated 750,000 2,000,000 1,500, ,250,000 Unrestricted 3,234,790 11,594,771 5,978,537 4,710,378 2,804,762 1,580, ,117 30,297,061 Temporarily restricted 86, ,346 4,658,585 87,393 9,842,654 43,678 2,780 14,860,365 Total net assets 4,071,719 13,733,117 12,137,122 4,797,771 12,647,416 1,624, ,897 49,407,426 Total liabilities and net assets $ 4,784,321 $ 14,586,659 $ 17,173,633 $ 5,479,062 $ 24,478,360 $ 1,767,030 $ 1,061,752 $ 69,330,817 See the accompanying notes to the supplementary information. 19

23 SUPPLEMENTAL STATEMENT OF ACTIVITIES BY CHARTER SCHOOL FOR THE YEAR ENDED JUNE 30, 2016 UNRESTRICTED NET ASSETS CCCS COA FHS REVENUES State revenue Education Protection Act $ 648,962 $ 1,961,326 $ 656,437 Local Control Funding Formula (LCFF) 3,296,567 9,715,806 3,158,249 Other state revenue 442,977 2,015,916 32,280 Federal revenue 368, , ,170 Local revenue In-lieu property tax revenue 509,058 1,682, ,313 Investment income 10, ,688 Other revenue 40, ,892 14,897 Net Assets Released From Restrictions 169, , ,865 Total Unrestricted Revenues 5,486,213 16,543,581 4,743,899 EXPENSES Program services: Educational programs 4,208,534 11,530,252 2,382,533 Support services: General and administrative 883,400 3,335,127 1,235,200 Total Unrestricted Expenses 5,091,934 14,865,379 3,617,733 Change In Unrestricted Net Assets 394,279 1,678,202 1,126,166 Unrestricted Net Assets - July 1, ,590,511 11,916,569 6,352,371 Unrestricted Net Assets - June 30, ,984,790 13,594,771 7,478,537 TEMPORARILY RESTRICTED NET ASSETS State revenue Other state revenue 97, ,064 4,600,886 Net Assets Released From Restrictions (169,141) (188,907) (228,865) Change In Temporarily Restricted Net Assets (71,668) 3,157 4,372,021 Temporarily Restricted Net Assets - July 1, , , ,564 Temporarily Restricted Net Assets - June 30, , ,346 4,658,585 TOTAL NET ASSETS Total Change In Net Assets 322,611 1,681,359 5,498,187 Net Assets - July 1, ,749,108 12,051,758 6,638,935 Net Assets - June 30, 2016 $ 4,071,719 $ 13,733,117 $ 12,137,122 See the accompanying notes to the supplementary information. 20

24 SUPPLEMENTAL STATEMENT OF ACTIVITIES BY CHARTER SCHOOL (CONTINUED) FOR THE YEAR ENDED JUNE 30, 2016 UNRESTRICTED NET ASSETS SAVA HLA GIS REVENUES State revenue Education Protection Act $ 1,119,010 $ 293,715 $ 90,816 Local Control Funding Formula (LCFF) 5,332,237 1,469,497 2,806,658 Other state revenue 850,213 (1,636,482) 284,484 Federal revenue 201, , ,966 Local revenue In-lieu property tax revenue 808, , ,689 Investment income 12,864 48,078 3,410 Other revenue 47,564 6,355 7,900 Net Assets Released From Restrictions 89, , ,763 Total Unrestricted Revenues 8,461,462 1,097,148 4,626,686 EXPENSES Program services: Educational programs 6,956,037 1,234,152 3,295,172 Support services: General and administrative 1,296,734 1,003, ,145 Total Unrestricted Expenses 8,252,771 2,238,096 4,073,317 Change In Unrestricted Net Assets 208,691 (1,140,948) 553,369 Unrestricted Net Assets - July 1, ,501,687 3,945,710 1,027,337 Unrestricted Net Assets - June 30, ,710,378 2,804,762 1,580,706 TEMPORARILY RESTRICTED NET ASSETS State revenue Other state revenue 112,685 7,124, ,210 Net Assets Released From Restrictions (89,484) (516,123) (323,763) Change In Temporarily Restricted Net Assets 23,201 6,607,884 (12,553) Temporarily Restricted Net Assets - July 1, ,192 3,234,770 56,231 Temporarily Restricted Net Assets - June 30, ,393 9,842,654 43,678 TOTAL NET ASSETS Total Change In Net Assets 231,892 5,466, ,816 Net Assets - July 1, ,565,879 7,180,480 1,083,568 Net Assets - June 30, 2016 $ 4,797,771 $ 12,647,416 $ 1,624,384 See the accompanying notes to the supplementary information. 21

25 SUPPLEMENTAL STATEMENT OF ACTIVITIES BY CHARTER SCHOOL (CONTINUED) FOR THE YEAR ENDED JUNE 30, 2016 UNRESTRICTED NET ASSETS EPIC Total REVENUES State revenue Education Protection Act $ 60,950 $ 4,831,216 Local Control Funding Formula (LCFF) 2,121,936 27,900,950 Other state revenue 228,586 2,217,974 Federal revenue 666,499 2,667,799 Local revenue In-lieu property tax revenue 441,321 4,890,192 Investment income 5, ,067 Other revenue ,520 Net Assets Released From Restrictions 198,930 1,715,213 Total Unrestricted Revenues 3,724,942 44,683,931 EXPENSES Program services: Educational programs 2,842,166 32,448,846 Support services: General and administrative 489,659 9,022,209 Total Unrestricted Expenses 3,331,825 41,471,055 Change In Unrestricted Net Assets 393,117 3,212,876 Unrestricted Net Assets - July 1, ,334,185 Unrestricted Net Assets - June 30, ,117 34,547,061 TEMPORARILY RESTRICTED NET ASSETS State revenue Other state revenue 201,710 12,640,035 Net Assets Released From Restrictions (198,930) (1,715,213) Change In Temporarily Restricted Net Assets 2,780 10,924,822 Temporarily Restricted Net Assets - July 1, ,935,543 Temporarily Restricted Net Assets - June 30, ,780 14,860,365 TOTAL NET ASSETS Total Change In Net Assets 395,897 14,137,698 Net Assets - July 1, ,269,728 Net Assets - June 30, 2016 $ 395,897 $ 49,407,426 See the accompanying notes to the supplementary information. 22

26 SUPPLEMENTAL STATEMENT OF CASH FLOWS BY CHARTER SCHOOL FOR THE YEAR ENDED JUNE 30, 2016 Cash Flows from Operating Activities CCCS COA FHS SAVA HLA GIS EPIC Total Change in Net Assets $ 322,611 $ 1,681,359 $ 5,498,187 $ 231,892 $ 5,466,936 $ 540,816 $ 395,897 $ 14,137,698 Adjustments to reconcile change in net assets to net cash provided (used) by operating activities: Depreciation 58, ,399 16, ,812 11,199 5,375 19, ,312 Loss on disposal of fixed assets 54, ,750 Net unrealized loss on investments 24,680 89,586 57,021 13,607 1, ,404 Net realized gains on investments (1,883) (6,834) (4,350) (1,038) (115) - - (14,220) Change in operating asset: Accounts receivable 85,822 (23,914) 20,614 (35,185) (21,986) 104,804 (691,911) (561,756) Deposits and prepaid expenses 79,260 (55,495) 17 (18,879) (2,436) (886,891) (88,679) (973,103) Change in operating liabilities: Accounts payable 357, ,220 9, ,111 2,154 (1,413) 333,993 1,265,941 Due to other governments (16,128) (83,326) (22,698) (39,536) (11,749) (23,611) - (197,048) Accrued liabilities 39,633 61,746 33,221 31,516 20,286 29,269 78, ,283 Deferred revenue 3,503 (3,507) (3,927) 23,437 (1,532) (468) 1,237 18,743 Net cash provided (used) by operating activities 685, , , ,845 (2,669) (772,935) (347,047) 606,306 Cash Flows from Investing Activities Purchase of investments (125,994) (457,347) (291,097) (69,473) (7,714) - - (951,625) Sale of investments 120, , ,793 66,531 7, ,386 Purchase of fixed assets (401,117) (807,728) (145,665) (261,315) (381,463) (139,206) (531,414) (2,667,908) Net cash used by investing activities (406,443) (827,063) (157,969) (264,257) (381,795) (139,206) (531,414) (2,708,147) Cash Flows from Financing Activities Proceeds from issuance of debt - - 4,294,280-5,150, ,000 9,694,494 Net increase (decrease) in cash and cash equivalents 601,497 1,352,171 9,740, ,480 10,232,686 (371,325) (232,564) 21,730,351 Cash and cash equivalents, July 1, ,537,550 4,381,050 5,053,183 3,345,819 10,724, ,431 (16,137) 26,634,169 Cash and cash equivalents, June 30, 2016 $ 3,139,047 $ 5,733,221 $ 14,793,589 $ 3,753,299 $ 20,956,959 $ 237,106 $ (248,701) $ 48,364,520 Cash paid for interest $ - $ - $ - $ - $ - $ - $ 728 $ 728 See the accompanying notes to the supplementary information. 23

27 SUPPLEMENTAL RECONCILIATION OF ANNUAL FINANCIAL AND BUDGET REPORT WITH AUDITED FINANCIAL STATEMENTS BY CHARTER SCHOOL FOR THE YEAR ENDED JUNE 30, 2016 CCCS COA FHS SAVA HLA GIS EPIC June 30, 2016 Annual Financial and Budget Report Fund Balance (Net Assets) $ 3,284,275 $ 8,738,978 $ 7,365,924 $ 3,730,232 1,476,583 $ 1,456,046 $ 134,928 Adjustments and Reclassifications: Increasing (Decreasing) the Fund Balance (Net Assets): Cash and cash equivalents - - 9,109,937-19,487, Accounts receivable ,897-61,683 - (23,134) Fixed assets 754,227 4,925, ,134 1,034,969 3,299, , ,713 Accounts payable 33,217 69,042 18,801 32,570 (6,424) (1,061) 22,390 Loans payable - - (4,804,571) - (11,672,062) - (250,000) Net Adjustments and Reclassifications 787,444 4,994,139 4,771,198 1,067,539 11,170, , ,969 June 30, 2016 Audited Financial Statement Fund Balance (Net Assets) $ 4,071,719 $ 13,733,117 $ 12,137,122 $ 4,797,771 $ 12,647,416 $ 1,624,384 $ 395,897 See the accompanying notes to the supplementary information. 24

28 NOTES TO SUPPLEMENTAL INFORMATION FOR THE YEAR ENDED JUNE 30, 2016 Schedule of Average Daily Attendance (ADA) Average daily attendance is a measurement of the number of pupils attending classes of the Schools. The purpose of attendance accounting from a fiscal standpoint is to provide the basis on which apportionments of state funds are made to charter schools. This schedule provides information regarding the attendance of students at various grade levels and in different programs. Schedule of Instructional Minutes This schedule presents information on the amount of instructional time offered by each charter school and whether they complied with the provisions of Education Code Sections through Schedule of Expenditures for Federal Awards OMB's Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards (Uniform Guidance) requires disclosure of the financial activities of all federally funded programs. To comply with the Uniform Guidance, this schedule is presented on the accrual basis of accounting. Because the schedule presents only a selected portion of the operations of Gateway Community Charters, it is not intended to and does not present the financial position, changes in net assets, or cash flows of the Organization. Gateway Community Charters has received federal grants for specific purposes that are subject to review and audit by the Federal Government. Although such audits could result in expenditure disallowance under grant terms, any required reimbursements which have not already been recorded are not expected to be material. Gateway Community Charters allocates certain costs of administration and operations to programs based on Indirect Cost Rates approved by California Department of Education, specific to each of its charters. Accordingly, Gateway Community Charters has elected not to use the 10% de minimis indirect cost rate for federal programs for the year ended June 30, Supplemental Financial Statements and Reconciliation of Annual Financial and Budget Reports with Audited Financial Statements These financial statements consist of a statement of financial position and a statement of activities for each charter school and a reconciliation that provides the information necessary to reconcile the fund balance as reported on the SACS Form to the audited financial statements. 25

29 MANN URRUTIA NELSON GLENDALE ROS EVILLE CPA s & ASSOCIATES, LLP SAC RAM ENT O SOU TH LAK E TA H O E KA UA I, H AWAI I INDEPENDENT AUDITOR'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS To the Board of Directors Gateway Community Charters We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of Gateway Community Charters (a California nonprofit public benefit corporation), which comprise the statement of financial position as of June 30, 2016, and the related statements of activities, and cash flows for the year then ended, and the related notes to the financial statements, and have issued our report thereon dated November 29, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered Gateway Community Charters' 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 Gateway Community Charters' internal control. Accordingly, we do not express an opinion on the effectiveness of the Organization's internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Compliance and Other Matters As part of obtaining reasonable assurance about whether Gateway Community Charters' financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the organization's internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Organization's internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Sacramento, California November 29, 2016 SACRAMENTO OFFICE VENTURE OAKS WAY, S UITE 135. SACRAMENTO, CA MUNCPAS.COM F

30 MANN URRUTIA N ELSON CPAs & ASSOC I ATES, LLP GLENDALE ROSEV I LLE SACRAMENTO SOUTH LAKE TAHOE KAUAI, HAWAII INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE FOR EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE Board of Directors Gateway Community Charters Report on Compliance for Each Major Federal Program We have audited Gateway Community Charters' compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on each of Gateway Community Charters' major federal programs for the year ended June 30, Gateway Community Charters'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 Gateway 'Community Charters' 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 Gateway Community Charters' 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 Gateway Community Charters' compliance. Opinion on Each Major Federal Program In our opinion, Gateway Community Charters complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended June 30, Report on Internal Control Over Compliance Management of Gateway Community Charters is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered Gateway Community Charters' internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of Gateway Community Charters' internal control over compliance. SACRAMENTO OFFICE VENTURE OAKS WAY, SUITE 135. SACRAMENTO, CA F COM

31 A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose. Sacramento, CA November 29, 2016

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