HOSPITALITY HIGH SCHOOL OF WASHINGTON, DC, A PUBLIC CHARTER SCHOOL AUDITED FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION

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1 HOSPITALITY HIGH SCHOOL OF WASHINGTON, DC, A PUBLIC CHARTER SCHOOL AUDITED FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION YEARS ENDED JUNE 30, 2014 AND 2013

2 Table of Contents Page Independent Auditor s Report 1-3 Financial Statements Statements of Financial Position 4 Statements of Activities and Changes in Net Assets 5 Statements of Cash Flows 6 Notes to Financial Statements 7-15 Supplementary Information Schedules of Functional Expenses 16 Independent Auditor s Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards Independent Auditor s Report on Compliance for Each Major Program and on Internal Control over Compliance Required by OMB Circular A Schedule of Expenditures of Federal Awards 22 Notes to Schedule of Expenditures of Federal Awards 23 Schedule of Findings and Questioned Costs Independent Auditor s Report on Compliance with the District of Columbia School Reform Act, As Amended 27

3 Independent Auditor s Report Board of Directors Washington, D.C. We have audited the accompanying financial statements of Hospitality High School of Washington, DC, (a nonprofit School) which comprise the Statements of Financial Position as of June 30, 2014 and 2013, and the related Statements of Activities and Changes in Net Assets and Cash Flows for the years then ended. 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 audits. 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 audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion

4 Independent Auditor s Report (continued) Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of A Public Charter School as of June 30, 2014 and 2013, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Going Concern The accompanying financial statements have been prepared assuming that the School will continue as a going concern. As discussed in Note 10 to the financial statements, the School has relinquished its charter school status and is therefore in default on its debt. These events raise substantial doubt about the School s ability to continue as a going concern. Management s plans regarding this matter also are described in Note 10. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter. Other Matters Other Information Our audits were conducted for the purpose of forming an opinion on the financial statements as a whole. The Schedules of Functional Expenses are presented for purposes of additional analysis and are not a required part of the financial statements. The accompanying Schedule of Expenditures of Federal Awards is presented for purposes of additional analysis as required by U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, and is also not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audits 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

5 Independent Auditor s Report (continued) Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated November 21, 2014, on our consideration of A Public Charter School s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering s internal control over financial reporting and compliance. Rockville, Maryland November 21,

6 Statements of Financial Position June 30, Assets Current assets Cash and cash equivalents $ 124 $ - Restricted cash 59,130 33,721 Accounts receivable 272, ,417 Contributions receivable - 285,000 Loan reserves 24, ,800 Prepaid expenses 31,941 29,366 Deposits 1,400 1,400 Total current assets 389, ,704 Restricted cash, net of current 340, ,073 Contributions receivable, net of current - 10,000 Property and equipment, net 8,170,796 9,790,438 Total assets $ 8,901,602 $ 11,035,215 Liabilities and Net Assets Current liabilities Notes payable $ 6,708,677 $ 247,508 Accounts payable 41,518 47,088 Accrued payroll and related liabilities 57,882 53,606 Deferred revenue 158, ,963 Total current liabilities 6,966, ,165 Notes payable, less current portion - 6,798,676 Total liabilities 6,966,277 7,274,841 Net assets Unrestricted net assets 1,843,182 3,356,481 Temporarily restricted assets 92, ,893 Total net assets 1,935,325 3,760,374 Total liabilities and net assets $ 8,901,602 $ 11,035,215 The accompanying Notes to Financial Statements are an integral part of these financial statements. -4-

7 Statements of Activities and Changes in Net Assets Temporarily Total Temporarily Total Years Ended June 30, Unrestricted Restricted 2014 Unrestricted Restricted 2013 Revenues and support Charter school - per pupil funding $ 3,610,641 $ - $ 3,610,641 $ 3,755,700 $ - $ 3,755,700 Government grants 618, ,723 1,353,813-1,353,813 Contributions 125,403 27, , ,660 28, ,995 Interest 2,621-2,621 9,280-9,280 Other income 27,932-27,932 71,462-71,462 Release from restriction 339,000 (339,000) - 114,518 (114,518) - Total revenues and support 4,724,320 (311,750) 4,412,570 5,425,433 (86,183) 5,339,250 Expenses Program 3,822,052-3,822,052 3,577,390-3,577,390 Management and general 750, , , ,460 Fundraising 76,969-76,969 66,434-66,434 Provision for impairment 1,587,651-1,587, Total expenses 6,237,619-6,237,619 4,247,284-4,247,284 (Decrease) increase in net assets (1,513,299) (311,750) (1,825,049) 1,178,149 (86,183) 1,091,966 Net assets, beginning of year 3,356, ,893 3,760,374 2,178, ,076 2,668,408 Net assets, end of year $ 1,843,182 $ 92,143 $ 1,935,325 $ 3,356,481 $ 403,893 $ 3,760,374 The accompanying Notes to Financial Statements are an integral part of these financial statements

8 Statements of Cash Flows Years Ended June 30, Cash flows from operating activities Change in net assets $ (1,825,049) $ 1,091,966 Adjustments to reconcile change in net assets to net cash provided by operating activities Depreciation and amortization 405, ,700 Provision for doubtful accounts - (11,256) (Gain) loss on disposal of fixed assets (6,578) 21,820 Provision for impairment 1,587,651 - (Increase) decrease in Accounts receivable 99,559 (141,862) Contributions receivable 295,000 68,744 Prepaid expenses (2,575) (8,947) Deposits - (400) Increase (decrease) in Accounts payable (5,570) 18,901 Accrued payroll and related liabilities 4,276 (62,338) Deferred revenue 30,237 13,914 Net cash provided by operating activities 582,868 1,163,242 Cash flows from investing activities Purchase of property and equipment (387,348) (1,937,776) Proceeds from sale of equipment 20,000 - Net cash used in investing activities (367,348) (1,937,776) Cash flows from financing activities Cash restricted under loan terms (35,232) (364,794) Loan reserve received 157,343 1,012,200 Principal payments on note payable (337,507) (211,474) Net cash (used in) provided by financing activities (215,396) 435,932 Net change in cash and cash equivalents 124 (338,602) Cash and cash equivalents, beginning of year - 338,602 Cash and cash equivalents, end of year $ 124 $ - Supplemental cash flow information Payment of interest $ 349,783 $ 324,079 The accompanying Notes to Financial Statements are an integral part of these financial statements

9 Notes to Financial Statements 1. School and significant accounting policies Organization: A Public Charter School (the School) was incorporated in 1996 as a not-for-profit corporation operated in the District of Columbia. The School was opened in 1999 as a fouryear academic public charter high school dedicated to training young people for careers in the hospitality industry. Effective July 25, 2014 the School legally changed its name to Washington Hospitality Foundation. In September 2014, the School allowed its charter school status to expire. The School intends to complete its school year as a public school. Basis of accounting: The School prepares its financial records on the accrual basis of accounting. Under this basis, support and revenue are recognized when earned, and expenses are recognized as incurred. Basis of presentation: The School classifies revenues as restricted or unrestricted based on the existence or absence of donor-imposed restrictions. Accordingly, the net assets of the School and changes therein are classified and reported as follows: Unrestricted net assets - net assets that are not subject to donor-imposed stipulations. Resources are available for general operations. Temporarily restricted net assets - net assets subject to donor-imposed stipulations that will be met either by actions of the School and/or the passage of time. When a donor restriction expires, that is, when a stipulated time restriction ends or a purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the Statements of Activities and Changes in Net Assets as released from restrictions. Cash and cash equivalents: The School considers all checking and savings accounts and highly liquid investments purchased with an original maturity date of three months or less to be cash and cash equivalents. Balances may exceed federally insured limits. Management does not believe that this results in any significant credit risk. Loan reserves: The School closed on the purchase of real property on June 26, 2012, funded by notes payable that restrict a portion of the loan proceeds as cash to be held as collateral (see Note 5). When the note payable is settled, the remaining proceeds will be applied to the debt obligation. At June 30, 2014 and 2013, the restricted cash balances were $24,457 and $181,800, respectively

10 Notes to Financial Statements Property and equipment: Equipment costing $1,000 or more is recorded at cost and depreciated over estimated useful lives of two to seven years using the straight-line method. Building improvements were depreciated over estimated useful lives of 15 years. Property consists of the building and land purchased as the home of the School. Renovations were conducted on the building during the year ended June 30, 2013 and the school moved into the facility in June The building was being depreciated over 39 years. Impairment of long-lived assets: The School periodically evaluates the carrying value of long-lived assets, including but not limited to, property and equipment and other assets where events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flows from such an asset are separately identifiable and are less than its carrying value. In that event, a loss is recognized to the extent that the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. If the property is impaired, its carrying amount is adjusted down to its estimated fair market value. During the year ended June 30, 2014, the School evaluated the property and related assets for recovery, and recorded an impairment charge of $1,587,651 to adjust the carrying value of the assets to their estimated fair values

11 Notes to Financial Statements Fair value: The School values certain assets in accordance with a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: Level 1. Observable inputs such as quoted prices in active markets for identical assets or liabilities; Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. A financial instrument s level within the fair value hierarchy is based on the lowest of any input that is significant to the fair value measurement. Revenue recognition: Charter school per pupil funding A substantial portion of the School s revenue is derived from the District of Columbia Public School system, which is based on a student allocation formula linked to enrollment. Amounts received in advance for summer school are deferred and recognized over the period to which the funding relates. The average cost per student was approximately $25,229 and $21,239 for the years ended June 30, 2014 and 2013, respectively. Government grants The School recognizes grant revenue in amounts equal to total allowable costs. The School determines an allowance for doubtful accounts by identifying troubled accounts and by using historical experience. An allowance is recorded when receivables are deemed uncollectible. Management deemed no allowance necessary as of June 30, 2014 and Contributions The School recognizes all unconditional contributions received as income in the period received or pledged. Contributions receivable are shown net of an allowance for doubtful accounts. The allowance reflects the best estimate of possible losses determined principally on the basis of historical experience. All accounts, or portions thereof, that are deemed uncollectable are written off to the allowance for doubtful accounts. Management determined there was no allowance needed as of June 30, 2014 or

12 Notes to Financial Statements Income taxes: The School is exempt from Federal income tax under Section 501(c)(3) of the Internal Revenue Code and is not classified as a private foundation. Uncertainties in income taxes: The School evaluates uncertainty in income tax positions taken or expected to be taken on a tax return based on a more-likelythan-not recognition standard. If that threshold is met, the tax position is then measured at the largest amount that is greater than 50% likely of being realized upon ultimate settlement. As of June 30, 2014 and 2013, there are no accruals for uncertain tax positions. If applicable, the School records interest and penalties as a component of income tax expense. Tax years from June 30, 2011 through the current year remain open for examination by taxing authorities. Use of accounting estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Functional allocation of expenses: The costs of providing the various programs and other activities have been summarized on a functional basis in the Statements of Activities and Changes in Net Assets. Costs that can be identified with particular programs or support functions are charged directly to the program or function. Accordingly, certain costs have been allocated among the programs and supporting services benefited. Subsequent events: Management has evaluated subsequent events for disclosure in these financial statements through November 21, 2014 which is the date the financial statements were available to be issued. 2. Contributions receivable At June 30, 2014 and 2013, the School had unconditional contributions receivable that included amounts due in: Less than one year $ - $ 285,000 Two to five years - 10,000 Contributions receivable $ - $ 295,

13 Notes to Financial Statements 3. Property and equipment As of June 30, 2014 and 2013, property and equipment consisted of the following: Land $ 1,177,900 $ 1,177,900 Building 5,170,166 6,639,267 Building improvements 1,751,934 1,896,413 Furniture and equipment 523, ,052 Total 8,623,624 10,308,632 Accumulated depreciation (452,828) (518,194) Property and equipment, net $ 8,170,796 $ 9,790,438 Depreciation expense was $405,917 and $172,700 for the years ended June 30, 2014 and 2013, respectively. Depreciation on the acquired building commenced when it was placed in service, after the renovations were substantially complete in the summer of Impairment During the year ended June 30, 2014, the School determined that they would be unable to fully recover the carrying amount of the building and building improvements. An impairment charge of $1,587,651 was recorded to adjust the carrying value of the property and related assets to the School s estimate of fair value. Fair Value Measurements on Non- Recurring Basis Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) June 30, 2014 Total Building $ 5,170,166 $ - $ - $ 5,170,166 Building improvements 1,751, ,751,934 Total $ 6,922,100 $ - $ - $ 6,922,

14 Notes to Financial Statements The fair value of the property and related assets was determined based on Level 3 significant unobservable inputs developed internally, included a review of pricing models. The valuation methodology was based upon a sales comparison approach, which compares the subject with other properties deemed similar which have transferred title within the recent market period, combined with an income capitalization approach, which derives a value indication by converting anticipated benefits (i.e. cash flows and reversions) into property value. The evaluation of the property s value used an 8% capitalization rate to reflect the decisions and requirements of knowledgeable prospective buyers and sellers. Other inputs included research and analysis of similar transactions, interviews conducted with buyers, sellers, property owners, brokers, and a number of other active participants within the marketplace. 5. Notes payable On May 31, 2012, the School entered into a borrowing arrangement for the acquisition and renovation of property located at th Street, NW, Washington, D.C. The School obtained a note payable from a senior creditor in the amount of $6,750,000 which has an interest rate of 5% and is amortized based on a 25 year schedule with a balloon payment due at the maturity date of October 1, Covenants on the loans took effect for the year ended June 30, The School was in compliance with those covenants as of June 30, 2014 and On September 7, 2014, the School defaulted on the note by allowing its charter to expire. As a result of the default, the senior creditor is entitled to pursue remedies available. The senior creditor had chosen not to exercise its remedies for a period of 30 days from the date of default, October 13, 2014, so long as the School engaged in good faith discussions with the senior creditor s representatives about the School s plans to market and sell the building. There has been no subsequent communication from the senior creditor. As a requirement of the borrowing arrangement, the School must make monthly deposits of $1,220 into the reserve accounts. On approval from the senior creditor, portions of the reserve funds may be utilized to renovate the property. At the maturity of the note, any remaining reserve funds may be used towards the balloon payment. This note is collateralized by a security interest on the property and the reserve accounts held. These reserve accounts are included as restricted cash on the accompanying Statements of Financial Position

15 Notes to Financial Statements The School obtained a note payable from the District of Columbia Office of Public Charter School Financing and Support, a subordinate lender, in the amount of $1,320,000 of which $500,000 was disbursed and $820,000 was available to use on renovations but was not used. The note has an interest rate of 4.5% and is amortized over a five year period that commenced January 1, A reserve account was established with required monthly deposits of $8,400 which commenced August 1, 2012 and continued until August 1, This reserve account is included in restricted cash on the accompanying Statements of Financial Position. In addition to regular payments, the School must also make a monthly prepayment in the amount of $7,500. The subordinate lender retains a secondary security interest on the property as collateral. Maintaining status as a charter school was also a requirement of the loan agreement. The balances related to the notes payable are as follows at June 30: Senior creditor note $ 6,543,740 $ 6,685,315 Subordinate lender note 164, ,869 Total $ 6,708,677 $ 7,046,184 Total restricted cash held in reserve accounts was $400,026 and $364,794 at June 30, 2014 and 2013, respectively. Due to subsequent default on the loans, all balances are considered current as of June 30, Interest paid for the years ended June 30, 2014 and 2013 was $349,783 and $324,079, respectively. Interest incurred during construction was capitalized in the amount of $0 and $318,169 during the years ending June 30, 2014 and 2013, respectively. 6. Lease commitments The School is obligated under an operating lease for office equipment. Future rental payments due under this lease total $9,306 for the year ending June 30, Rent expense paid for office equipment was $10,152 for each of the years ended June 30, 2014 and 2013, respectively. On June 8, 2007, the School entered into a memorandum of agreement with the District of Columbia Public Schools (DCPS) to co-locate at Roosevelt Senior High School at th Street, NW, Washington, D.C. As in prior years, the leasing fees for the year ended June 30, 2013 were waived in lieu of renovation and maintenance expenses undertaken by the School

16 Notes to Financial Statements 7. Temporarily restricted net assets Temporarily restricted net assets as of June 30, 2014 and 2013 were comprised of funds held for the following: Scholarships $ 92,143 $ 108,893 Time restricted - 295,000 Total temporarily restricted net assets $ 92,143 $ 403, Retirement plan The School participates in a 401(k) retirement plan. Eligible employees may contribute up to 100% of salary and are vested immediately in their deferrals plus any employer match made. The School matches up to 3% of yearly pay. For the years ended June 30, 2014 and 2013, the School contributed $47,203 and $51,882, respectively. 9. Concentration The School is supported primarily through local and federal allocations and grants. Approximately 82% and 80% of total revenue for the years ended June 30, 2014 and 2013, respectively, was provided through one government agency. 10. Financial condition On September 7, 2014, the School relinquished its charter school status as a condition of plans with the city for future operations. The School plans to complete the school year as a public school, and is still receiving federal and district funding. After the school year ends, the School plans to continue as a foundation operating in support of a hospitality academy within certain schools in the public school system per the plans with the city. Management plans for future funding to be provided through private support and city funding. The students currently enrolled in the School are being placed into schools expected to host the hospitality program for the school year. As a result of relinquishing its charter school status, on October 13, 2014, the School was found to be in violation of its debt covenants with the senior lender, and although current on its debt service payments, in default on its note payable. The effect of this default is that the note payable became due in full and as such is included as a current liability on the June 30, 2014 Statement of Financial Position

17 Notes to Financial Statements The default entitles the senior creditor to pursue remedies available to it including the right to terminate all of its obligations under the loan agreement and the right to exercise its first position lien on the building. The senior creditor had chosen not to exercise its remedies for a period of 30 days from the date of default, October 13, 2014, so long as the School engaged in good faith discussions with the senior creditor s representatives about the School s plans to market and sell the building. There has been no subsequent communication from the senior creditor. Maintaining status as a charter school was also a requirement of the subordinate lender loan agreement and as such, the School is considered in violation of note terms. For this reason, the subordinate lender loan balance is included in the June 30, 2014 Statement of Financial Position as a current liability. The loss of charter status and subsequent loan covenant violations and default raise substantial doubts about the School s ability to continue as a going concern. The School is considering options including the sale of its building to satisfy its debt obligations. The full financial impact of these matters cannot be estimated. In September 2014, the School received a letter of intent from a potential buyer to purchase the property at an amount estimated to approximate fair value. The School and the potential purchaser are engaged in a good faith discussion. The School plans to accept the offer and to negotiate with the potential buyer to allow them to lease back the building for the remainder of the school year If the plans with the potential buyer do not result in the sale of the building, the School plans to actively market the property

18 Schedules of Functional Expenses Years Ended June 30, Management Management Program and 2014 Program and 2013 Services General Fundraising Total Services General Fundraising Total Salaries $ 1,719,576 $ 397,492 $ 43,760 $ 2,160,828 $ 1,777,444 $ 410,869 $ 45,232 $ 2,233,545 Direct student cost 656, , , ,506 Employee benefits 375,020 86,689 9, , ,782 82,935 9, ,847 Depreciation and amortization 323,027 74,670 8, , ,434 31,769 3, ,700 Food service 76, ,806 95, ,839 Occupancy 163,568 37,810 4, , ,960 34,433 3, ,184 Consultants 40, ,761 40, ,586 Legal and accounting 36,868 8, ,328 27,185 6, ,161 Office expenses 48,973 11,321 1,246 61,540 43,891 10,146 1,117 55,154 Insurance 40,512 9,365 1,031 50,908 45,315 10,475 1,153 56,943 Accreditation 23, ,578 27, ,855 Interest 278,355 64,344 7, ,783 4,703 1, ,910 General expenses 38,731 8, ,668 66,890 15,462 1,702 84,054 Bad debt - 51,781-51, Subtotal 3,822, ,947 76,969 4,649,968 3,577, ,460 66,434 4,247,284 Provision for impairment ,587, Total expenses $ 3,822,052 $ 750,947 $ 76,969 $ 6,237,619 $ 3,577,390 $ 603,460 $ 66,434 $ 4,247,284 Refer to Independent Auditor's Report on Supplementary Information

19 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 Board of Directors Washington, D.C. 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 (a nonprofit School), which comprise the Statement of Financial Position as of June 30, 2014, and the related Statements of Activities and Changes in Net Assets, and Cash Flows for the year then ended, and the related notes to the financial statements, and have issued our report thereon dated November 21, Internal Control over Financial Reporting In planning and performing our audit of the financial statements, we considered Hospitality High School of Washington, DC, s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of Hospitality High School of Washington, DC, s internal control. Accordingly, we do not express an opinion on the effectiveness of the School s internal control. Our consideration of internal control was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. However, as described in the accompanying Schedule of Findings and Questioned Costs, we identified certain deficiencies in internal control that we consider to be material weaknesses and significant deficiencies. 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. We consider the

20 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 (Continued) deficiency described in the accompanying Schedule of Findings and Questioned Costs as Finding to be a material weakness. 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. We consider the deficiencies described in the accompanying Schedule of Findings and Questioned Costs as Findings and to be significant deficiencies. Compliance and Other Matters As part of obtaining reasonable assurance about whether Hospitality High School of Washington, DC, s 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. s Response to Findings a Public Charter School s responses to the findings identified in our audit are described in the accompanying Schedule of Findings and Questioned Costs. a Public Charter School s responses were not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on them. 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 School 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 School s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Rockville, Maryland November 21,

21 Independent Auditor s Report on Compliance for Each Major Program and on Internal Control over Compliance Required by OMB Circular A-133 Board of Directors Washington, D.C. Report on Compliance for Each Major Federal Program We have audited s compliance with the types of compliance requirements described in the OMB Circular A-133 Compliance Supplement that could have a direct and material effect on Hospitality High School of Washington, DC, s major federal program for the year ended June 30, A Public Charter School s major federal program is identified in the summary of auditor s results section of the accompanying Schedule of Findings and Questioned Costs. Management s Responsibility Management is responsible for compliance with 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 Hospitality High School of Washington, DC, s major federal program based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 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 Hospitality High School of Washington, DC, s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for the major federal program. However, our audit does not provide a legal determination of s compliance

22 Independent Auditor s Report on Compliance for Each Major Program and on Internal Control over Compliance Required by OMB Circular A-133 (Continued) Opinion on Each Major Federal Program In our opinion, complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on its major federal program for the year ended June 30, Report on Internal Control over Compliance Management of 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 A Public Charter School s internal control over compliance with the types of requirements that could have a direct and material effect on the major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for the major federal program and to test and report on internal control over compliance in accordance with OMB Circular A-133, 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 A Public Charter School s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or 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

23 Independent Auditor s Report on Compliance for Each Major Program and on Internal Control over Compliance Required by OMB Circular A-133 (Continued) 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 OMB Circular A-133. Accordingly, this report is not suitable for any other purpose. Rockville, Maryland November 21,

24 Schedule of Expenditures of Federal Awards Year Ended June 30, 2014 Federal Federal Federal Grantor/Program Title CFDA number Expenditures Pass-through from the D.C. Office of State Superintendent of Education Department of Education Title I Grants to Local Education Agencies A $ 157,614 Carl Perkins Career and Technical Education Act of ,956 Title II - Preparing, Training, and Recruiting High Quality Teachers and Principals A 42,652 Title II - Improving Teacher Quality State Grant B 77,299 Scholarships for Opportunity and Results (SOAR) Act C 116,369 Race to the Top A 19,308 Subtotal Department of Education pass-through programs 496,198 Pass-through from D.C. Public Schools, Division of Food and Nutrition Services, State Agency Department of Agriculture National School Lunch Program ,707 Federal Communications Commission Universal Service Administrative Company Schools and Libraries Division E-Rate ,768 Total expenditures of federal awards $ 594,673 The accompanying Notes to Schedule of Expenditures of Federal Awards are an integral part of this schedule

25 Notes to Schedule of Expenditures of Federal Awards 1. Basis of presentation 2. Summary of significant accounting policies The accompanying Schedule of Expenditures of Federal Awards (the Schedule) includes the federal grant activity of under programs of the federal government for the year ended June 30, The information in this Schedule is presented in accordance with the requirements of OMB Circular A-133, Audits Of States, Local Governments, and Non-Profit Organizations. Because the Schedule presents only a selected portion of the operations of Hospitality High School of Washington, DC,, it is not intended to and does not present the financial position, changes in net assets, or cash flows of Hospitality High School of Washington, DC,. Expenditures reported on the Schedule are reported on the accrual basis of accounting. Such expenditures are recognized following the cost principles contained in OMB Circular A-122, Cost Principles for Non-Profit Organizations, wherein certain types of expenditures are not allowable or are limited as to reimbursement

26 Schedule of Findings and Questioned Costs For The Year Ended June 30, 2014 Section I - Summary of Auditor s Results Financial Statements Type of auditor s report issued: Unmodified Internal control over financial reporting: Material weakness(es) identified? X Yes no Significant deficiency(s) identified? X Yes none reported Noncompliance material to financial statements noted? Yes X no Federal Awards Internal control over major programs: Material weakness(es) identified? Yes X no Significant deficiency(s) identified? Yes X none reported Type of auditor s report issued on compliance for major programs: Unmodified Any audit findings disclosed that are required to be reported in accordance with section 510(a) of Circular A-133? Yes X no Identification of Major Programs: CFDA Federal Grantor A Department of Education Dollar threshold used to distinguish between type A and type B programs: $300,000 Auditee qualified as low-risk auditee? X yes no

27 Schedule of Findings and Questioned Costs (continued) For The Year Ended June 30, 2014 Section II - Financial Statement Findings Finding : Material Weakness Impairment on building Criteria Financial statements should be prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). When required, impairment losses on assets held for use are recognizable based on the excess of the assets carrying amount over the fair value of the assets. Condition Indicators existed at June 30, 2014 that carrying value exceeded fair value. Context When indicators of impairment are present, evaluation is needed. Effect An adjustment to record an impairment loss was needed for financial presentation purposes. Cause Internal processes were not in place to evaluate impairment indicators. Auditor s Recommendation Management should evaluate future cash flows and adjust carrying balances when indicators of impairment exist. Management s response and corrective action plan (unaudited) We have adjusted the carrying value of the building and its improvements to mark it down to fair value based on our evaluation of the appraisal. Finding : Significant Deficiency Depreciation Criteria Financial statements should be prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). Federal expenditures should be reported based on the accrual method in order to best capture the expenditures related to the year reported; this includes proper depreciation of fixed assets. Condition Depreciation expense was understated. Context A formula error in an excel spreadsheet was the cause of the problem. Effect An adjustment was needed for financial presentation purposes. Cause A spreadsheet error. Auditor s Recommendation Additional review is recommended for spreadsheet calculations

28 Schedule of Findings and Questioned Costs (continued) For The Year Ended June 30, 2014 Management s response and corrective action plan (unaudited) We will have the Treasurer provide additional review for all year-end adjusting journal entries. Finding : Significant Deficiency Correction of erroneous entry to accounts receivable Criteria Financial statements should be prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). This includes recording in-kind contributions as a revenue and related expense. Condition Accounts receivable was overstated. Context In-kind revenue was erroneously was recorded as a receivable instead of as an expense. Effect An adjustment was needed for financial presentation purposes. Cause The entry to record in-kind revenue was inadvertently recorded as a receivable instead of an expense. Auditor s Recommendation Additional review is recommended proper recognition of the transactions. Additionally, maintaining an aging receivables report would highlight any similar issue in the future. Management s response and corrective action plan (unaudited) We will have the Finance Committee provide additional year-end closing review. We will maintain an aging receivables report. Section III Federal Award Findings and Questioned Costs None

29 Independent Auditor s Report on Compliance with the District of Columbia School Reform Act, As Amended Board of Directors Washington, D.C. We have examined A Public Charter School s compliance with the types of compliance requirements described in the District of Columbia School Reform Act, as amended, for the year ended June 30, Management is responsible for A Public Charter School s compliance with those requirements. Our responsibility is to express an opinion on A Public Charter School s compliance based on our examination. Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included examining, on a test basis, evidence about s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion. Our examination does not provide a legal determination of A Public Charter School s compliance with specified requirements. In our opinion, complied, in all material respects, with the aforementioned requirements for the year ended June 30, Subsequent to the year ended June 30, 2014, the School relinquished its charter school status as detailed in Note 10 to the accompanying financial statements. This report is intended solely for the information of management, the Board of Directors, the District of Columbia Public Charter School Board, and awarding agencies, and is not intended to be and should not be used by anyone other than these specified parties. Rockville, Maryland November 21,