KEPLER. Neighborhood School. Re: Officers Certification for Kepler Neighborhood School relating to the annual report for 2017

Transcription

1 KEPLER Neighborhood School December 11, 2017 Re: Officers Certification for Kepler Neighborhood School relating to the annual report for 2017 Description: California School Finance Authority, Charter School Revenue Bonds (Kepler Neighborhood School), Series 2017A, $9,840,000, Dated: May 2, 2017 California School Finance Authority, Charter School Revenue Bonds (Kepler Neighborhood School), Series 2017B (Taxable), $390,000, Dated: May 2, Audited Financial Statements 11. Calculation of debt service coverage ratio for previous fiscal year and days cash on hand of the preceding June 30 m. Actual Enrollment and waiting list 1v. Intent to Enroll v. Smarter Balanced Assessments Executive Director Kepler Neighborhood School Kepler Neighborhood School, Serving Downtown Fresno 1462 Broadway St, Fresno CA 93722, (559) ,

2 Kepler Neighborhood School, CA 1 California School Finance Authority, Charter School Revenue Bonds (Kepler Neighborhood School), Series 2017A, $9,840,000, Dated: May 2, California School Finance Authority, Charter School Revenue Bonds (Kepler Neighborhood School), Series 2017B (Taxable), $390,000, Dated: May 2, 2017 Series 2017A,B Copy of the audit report certified by independent public accountants Fiscal Year Ended June 30, 2017 Audited Financial Statements are attached Series 2017A,B Certificate showing calculation of the Debt Service Coverage Ratio of the Corporation for the previous Fiscal Year and the Days Cash on Hand of the Corporation as of the preceding June 30, prepared by the Corporation's auditor Fiscal Year Ended June 30, 2017 PDF document is attached Appendix A - Certain Information Regarding the Borrower, the Lessee and the School Series 2017A,B Kepler Neighborhood School - Student Enrollment and Average Daily Attendance Actual TK/Kindergarten 82 Grade 1 48 Grade 2 46 Grade 3 49 Grade 4 47 Grade 5 48 Grade 6 48 Grade 7 47 Grade 8 47 Total Enrollment 463 Total ADA 95.50%

3 Series 2017A,B Kepler Neighborhood School - Student Retention Kepler Neighborhood School 99% 6 No Shows on the 1st day of school Fresno Unified School District n/a State of California n/a Kepler Neighborhood School - Intent to Enroll ( ) Siblings/Children Percent Re-Enrollment Grade Re-Enrolled Students of Employees New Students Maximum Capacity Total Intents Forms Turned In Transitional Kindergarten NA% Kindergarten % 1st Grade % 2nd Grade % 3rd Grade % 4th Grade % 5th Grade % 6th Grade % 7th Grade % 8th Grade % Total Series 2017A,B Kepler Neighborhood School - Student Waitlist Grade Transitional Kindergarten 11 Kindergarten 11 1st Grade 29 2nd Grade 33 3rd Grade 31 4th Grade 15 5th Grade 26 6th Grade 43 7th Grade 1 8th Grade 2 Total 202 Series 2017A,B Kepler Neighborhood School - Smarter Balanced Assessments - English Language Arts/Literacy Standard Exceeded 12.00% Standard Met 16.70% Standard Nearly Met 24.70% Standard Not Met 46.80%

4 Kepler Neighborhood Schools Charter School #1503 Consolidated Financial Statements June 30, 2017

5 INDEX TO FINANCIAL STATEMENTS Independent Auditor s Report... 1 Consolidated Statement of Financial Position... 3 Consolidated Statement of Activities... 4 Consolidated Statement of Cash Flows... 5 Notes to the Consolidated Financial Statements... 6 Supplementary Information Organization Schedule of Average Daily Attendance Schedule of Instructional Time Statement of Functional Expenses Reconciliation of Charter School Unaudited Actuals Financial Report Alternative Form With Audited Financial Statements Other Independent Auditor s Report Section 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 State Compliance Findings and Recommendations Section Schedule of Audit Findings and Questioned Costs Summary Schedule of Prior Audit Findings... 29

6 INDEPENDENT AUDITOR S REPORT Board of Directors Kepler Neighborhood Schools Fresno, California Report on the Financial Statements We have audited the accompanying consolidated financial statements of Kepler Neighborhood Schools (a nonprofit organization) and Subsidiary, which comprise the consolidated statement of financial position as of June 30, 2017, and the related consolidated statements of activities and cash flows for the fiscal year then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

7 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Kepler Neighborhood Schools and Subsidiary as of June 30, 2017, and the consolidated changes in its net assets and its cash flows for the fiscal year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Other Information Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The supplementary information as listed in the table of contents is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated December 15, 2017, on our consideration of Kepler Neighborhood Schools and Subsidiary 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 Kepler Neighborhood Schools and Subsidiary internal control over financial reporting and compliance. SQUAR MILNER LLP San Diego, California December 15, 2017

8 CONSOLIDATED STATEMENT OF FINANCIAL POSITION June 30, 2017 Kepler Neighborhood Johannes Schools LLC Total ASSETS Current assets: Cash $ 1,211,384 $ 293 $ 1,211,677 Accounts receivable 206, ,049 Prepaid expenses 35,567-35,567 Total current assets 1,453, ,453,293 Fixed assets, net 86,834 10,167,915 10,254,749 TOTAL ASSETS $ 1,539,834 $ 10,168,208 11,708,042 LIABILITIES AND NET ASSETS Current liabilities: Accounts payable $ 21,834 $ - $ 21,834 Accrued expenses 329, ,497 Deferred rent 109, ,594 Revolving loan 62,500-62,500 Total current liabilities 523, ,425 Long-term liabilities: Notes payable - 10,230,000 10,230,000 Total long-term liabilities - 10,230,000 10,230,000 Total liabilities 523,425 10,230,000 10,753,425 Net assets: Unrestricted 1,016,409 (61,792) 954,617 Total net assets 1,016,409 (61,792) 954,617 TOTAL LIABILITIES AND NET ASSETS $ 1,539,834 $ 10,168,208 $ 11,708,042 Page 3 The accompanying notes are an integral part of these consolidated financial statements.

9 CONSOLIDATED STATEMENT OF ACTIVITIES For the Fiscal Year Ended June 30, 2017 Kepler Neighborhood Johannes Schools LLC Eliminations Total REVENUES Revenue limit sources: State aid $ 2,655,813 $ - $ - $ 2,655,813 Education protection account 71, ,378 In-lieu of property taxes 285, ,202 Federal revenues 155, ,861 State revenues 429, ,199 Local revenues: Donations 64, ,085 Fundraising 13, ,185 Miscellaneous - 97,844 (97,844) - Total revenue 3,674,723 97,844 (97,844) 3,674,723 EXPENSES Program services: Education 2,836,023 - (34,245) 2,801,778 Support services: Management and general 630,367 - (63,599) 566,768 Other services: Operating expenses - 159, ,636 Total expenses 3,466, ,636 (97,844) 3,528,182 CHANGE IN NET ASSETS 208,333 (61,792) - 146,541 NET ASSETS, BEGINNING OF YEAR 808, ,077 NET ASSETS, END OF YEAR $ 1,016,409 $ (61,792) $ - $ 954,617 Page 4 The accompanying notes are an integral part of these consolidated financial statements.

10 CONSOLIDATED STATEMENT OF CASH FLOWS For the Fiscal Year Ended June 30, 2017 Kepler Neighborhood Johannes Schools LLC Total CASH FLOWS FROM OPERATING ACTIVITIES: Change in net assets $ 208,333 $ (61,792) $ 146,541 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation 14,143 61,792 75,935 (Increase) decrease in operating assets: Accounts receivable 33,038-33,038 Prepaid expenses 31,624-31,624 Increase (decrease) in operating liabilities: Accounts payable (70,757) - (70,757) Accrued expenses 271, ,326 Deferred rent 109, ,594 Deferred revenue (14,827) - (14,827) Net cash flows provided by operating activities 582, ,474 CASH FLOWS FROM INVESTING ACTIVITES Purchase of fixed assets (91,406) (10,229,707) (10,321,113) Net cash flows used in investing activities (91,406) (10,229,707) (10,321,113) CASH FLOWS FROM FINANCING ACTIVITIES: Payment on revolving loan (62,500) - (62,500) Proceeds from issuance of bonds payable - 10,230,000 10,230,000 Net cash flows (used in) provided by financing activities (62,500) 10,230,000 10,167,500 NET INCREASE IN CASH 428, ,861 CASH, BEGINNING OF YEAR 782, ,816 CASH, END OF YEAR $ 1,211,384 $ 293 $ 1,211,677 SUPPLEMENTAL DISCLOSURES: Cash paid for interest $ 251 $ 97,844 $ 98,095 Page 5 The accompanying notes are an integral part of these consolidated financial statements.

11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, ORGANIZATION AND MISSION Kepler Neighborhood Schools ( Organization ) is a non-profit public benefit corporation. The Organization was petitioned and approved by Fresno Unified School District for a provisional fiveyear term ending June 30, The Organization was approved by the State of California Department of Education on October 12, The Organization is a Grade Kindergarten through 8 charter school that exists to inspire students to find passion and joy in learning and to become ethical, caring, effective, innovative members of their community and informed world citizens who develop and leverage their strengths to achieve educational, personal, civic, and career goals. The Johannes LLC (LLC) was created by the Organization to purchase school facilities to be utilized by the Organization. The Organization is the sole member of the LLC. During the fiscal year ended June 30, 2017, The Organization leased facilities from the LLC. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Consolidation The accompanying consolidated financial statements of the Organization have been prepared on the accrual basis and include the accounts of the Organization and LLC. All significant interorganizational accounts have been eliminated. Financial Statement Presentation The consolidated financial statements are presented in conformity with Accounting Standards Codification (ASC) , Not-For-Profit Entities Presentation of Financial Statements. Under ASC , the Organization reports information regarding its financial position and activities according to three classes of net assets: Unrestricted Net Assets: Unrestricted net assets are available to support all activities of the Organization, and are not subject to donor-imposed stipulations. These generally result from revenues generated by providing services, receiving unrestricted contributions, and receiving interest from investments, less expenses incurred in providing program-related services, raising contributions, and performing administrative functions. Temporarily Restricted Net Assets: Net assets that are subject to donor-imposed stipulations that will be met either by actions of the Organization and/or the passage of time. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and are reported in the statement of activities as net assets released from restrictions. There were no temporarily restricted net assets as of June 30, Page 6

12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Financial Statement Presentation (continued) Permanently Restricted Net Assets: Net assets that are subject to donor-imposed stipulations that the restrictions 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 the related investments for general or specific purposes. There were no permanently restricted assets as of June 30, Accounting Method - Basis of Accounting The consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America as applicable to not-for-profit organizations. Basis of accounting refers to when revenues and expenses are recognized in the accounts and reported on the consolidated financial statements. Basis of accounting relates to the timing of measurement made, regardless of the measurement focus applied. The Organization uses the accrual basis of accounting. Revenues are recognized when they are earned and expenditures are recognized in the accounting period in which the liability is incurred. Use of Estimates The preparation of consolidated 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. Income Taxes The Organization is exempt from income taxes under Internal Revenue Code Section 501(c)(3). It is, however, subject to income taxes from activities unrelated to its tax-exempt purpose. The Organization uses the same accounting methods for tax and financial reporting. Generally accepted accounting principles (GAAP) provides accounting and disclosure guidance about positions taken by an entity in its tax returns that might be uncertain. Management has considered its tax positions and believes that all of the positions taken in its federal and state exempt organization tax returns are more likely than not to be sustained upon examination. The Organization s returns are subject to examination by federal and state taxing authorities, generally for three years and four years, respectively, after they are filed. Cash and Cash Equivalents Cash from time to time is variously composed of cash on hand and in banks. The Organization considers all highly liquid instruments with maturities of three months or less at time of Page 7

13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Cash and Cash Equivalents (continued) acquisition to be cash equivalents. As of June 30, 2017 there were no cash equivalents. Fixed Assets Fixed assets are recorded at cost and depreciated under the straight-line method over their estimated useful lives of 5 to 10 years. Repair and maintenance costs, which do not extend the useful lives of the asset, are charged to expense. The cost of assets, sold or retired, and related amounts of accumulated depreciation are eliminated from the accounts in the year of disposal, and any resulting gain or loss is included in the earnings. Management has elected to capitalize and depreciate all assets costing $5,000 or more; all other assets are charged to expense in the year incurred. Deferred Revenue Deferred revenue represents federal and state grant/contract funds received, but not expended. These funds must be expended in accordance with the provisions of the contract to which they apply or refunded if not expended under the terms of the contract. Revenue sources and recognition The Organization primarily receives funds from the California Department of Education (CDE). Revenue limit sources received from the CDE are determined based on the Organization s average daily attendance (ADA) of students and recognized in the period the ADA occurs. In addition, the Organization receives federal, state and local revenues for the enhancement of various educational programs. This assistance is generally received based on applications submitted to and approved by various granting agencies. The Organization recognizes federal revenue to the extent that eligible expenditures have been incurred. 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. Functional allocation of expenses The costs of providing the program services have been summarized on a functional basis in the statement of activities. Accordingly, certain costs have been allocated among the program services based on employees time incurred and management s estimates of the usage of resources. Page 8

14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) New Accounting Pronouncements In February 2016, FASB issued Accounting Standards Update (ASU) , Leases (ASU ). ASU requires a lessee to recognize a lease asset representing its right to use the underlying asset for the lease term, and a lease liability for the payments to be made to lessor, on its statement of financial position for all operating leases greater than 12 months. ASU will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, Although the full impact of this Update on the Organization s financial statements has not yet been determined, the future adoption of this guidance will require the Organization to record assets and liabilities on its statement of financial position relating to facility and other leases currently being accounted for as operating leases (See Note 10). In August 2016, The FASB issued ASU No , Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities (ASU ). ASU change presentation and disclosure requirements for not-for-profit entities to provide more relevant information about their resources (and the changes in those resources) to donors, grantors, creditors, and other users. These include qualitative and quantitative requirements in the following areas: (1) net asset classes; (2) investment return; (3) expenses; (4) liquidity and availability of resources; and (5) presentation of operating cash flows. ASU will be effective for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, Early application of the amendments is permitted. The Organization has not yet completed its assessment of the impact of this guidance on its financial statements. Under this guidance, the Organization will be required to present two classes of net assets (net assets with donor restrictions and net assets without donor restrictions) and changes in each of these two classes, on the face of the statement of financial position and statement of activities, respectively, rather than the current required three classes (unrestricted, temporarily restricted and permanently restricted). 3. CASH Cash at June 30, 2017, consisted of the following: Kepler Neighborhood Johannes Schools LLC Total Cash in county treasury $ 206,942 $ - $ 206,942 Cash in banks 1,004, ,004,335 Petty cash Total cash $ 1,211,384 $ 293 $ 1,211,677 Page 9

15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, CASH (continued) Cash in County Treasury The Organization maintains a portion of its cash in the Fresno County Treasury ( County ) as part of the common investment pool ($206,942 as of June 30, 2017). Cash may be added or withdrawn from the investment pool without limitation. The County is restricted by Government Code Section pursuant to Section to invest in time deposits, U.S. Government Securities, State registered warrants, notes or bonds, State Treasurer s investment pool, bankers acceptance, commercial paper, negotiable certificates of deposits, and repurchase or reverse repurchase agreements. The County Treasurer s investments consist of 9.8% U.S. Treasury notes, 21.5% Federal National Mortgage Association, 17.5% Federal Home Loan Banks, 8.8% Federal Home Loan Mortgage Corporation, 4.5% Federal Farm Credit Banks, 5.90% Bank of the West checking, 2.70% Bank of the New York, 2.2% JP Morgan, 2.30% Wells Fargo, 1.70% US Bank and 12.90% miscellaneous investments. The credit ratings for these investments included A1+/A1 by Moody s Investor Service, and AAA/AA+ by Standard and Poor s. Cash in Banks Cash balances held in banks are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC). The Organization maintains its cash in bank deposit accounts that at times may exceed federally insured limits. At June 30, 2017, the Organization had $815,315 in excess of FDIC insured limits. 4. ACCOUNTS RECEIVABLE Accounts receivable at June 30, 2017, consisted of the following: Revenue limit sources: In-lieu of property taxes $ 75,321 Federal revenues 22,188 State revenues 93,430 Local revenues 15,110 Total accounts receivable $ 206,049 Page 10

16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, FIXED ASSETS Fixed assets at June 30, 2017, consisted of the following: Kepler Neighborhood Johannes Schools LLC Total Buildings $ 78,769 $ 9,639,707 $ 9,718,476 Land - 590, ,000 Land improvements 22,591-22,591 Equipment 12,636-12,636 Less: accumulated depreciation (22,184) (61,792) (83,976) Total fixed assets, net $ 91,812 $ 10,167,915 $ 10,259,727 During the fiscal year ended June 30, 2017, a total of $75,935 was charged to depreciation expense. 6. ACCRUED EXPENSES Accrued expenses at June 30, 2017, consisted of the following: Accrued special education $ 126,839 District fee 5,506 Accrued expense - miscellaneous 128,542 Accrued payroll 68,610 Total accrued expenses $ 329, REVOLVING LOAN Charter School Revolving Loan In June 2013 the Organization entered into a four year Charter School Revolving Loan with the California Department of Education in the principal amount of $250,000 with interest at 0.24% per annum. Principal payments of $62,500 plus interest will be deducted from August through January apportionments by the CDE and the loan will mature in January Page 11

17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, REVOLVING LOAN (continued) Debt service requirements for this note payable are as follows: Year ending June 30, Principal Interest Total 2018 $ 62,500 $ 113 $ 62,613 $ 62,500 $ 113 $ 62,613 Changes in revolving loan for the fiscal year ended June 30, 2017, are as follows: Balance Balance Due in June 30, 2016 Additions Payments June 30, 2017 One Year Revolving Loan $ 125,000 $ - $ (62,500) $ 62,500 $ 62,500 Total $ 125,000 $ - $ (62,500) $ 62,500 $ 62, JOHANNES LLC LOAN In May 2017 the Organization entered into a forty year Johannes LLC Loan with BB&T Capital Markets in the principal amount of $10,230,000 with interest at 0.24% per annum. Principal payments plus interest will be deducted from August through January apportionments by the CDE and the loan will mature in May Debt service requirements for this loan are as follows: Year Ending June 30, Principal Interest Total 2018 $ - $ 588,977 $ 588, , , , , , , , , , , , ,848 Thereafter 9,714,167 2,917,476 12,631,643 $ 10,230,000 $ 5,834,952 $ 16,064,952 Page 12

18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, JOHANNES LLC LOAN (continued) Changes in Johannes LLC Loan for the fiscal year ended June 30, 2017, are as follows: Balance Balance Due in June 30, 2016 Additions Payments June 30, 2017 One Year LLC Loan $ - $ 10,230,000 $ - $ 10,230,000 $ - Total $ - $ 10,230,000 $ - $ 10,230,000 $ - 9. EMPLOYEE RETIREMENT SYSTEMS Qualified employees are covered under multiple-employer defined benefit pension plans maintained by agencies of the State of California. Certificated employees are members of the State Teachers' Retirement System (STRS). Plan Description and Funding Policy STRS Plan Description The Organization contributes to STRS, a cost-sharing multiple-employer public employee retirement system defined benefit pension plan administered by STRS. 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. According to the most recently available actuarial valuation report as of June 30, 2016, total plan net assets are $177.9 billion, the total actuarial present value of accumulated plan benefits is $333.3 billion, contributions from all employers totaled $3.2 billion and the plan is 63.7% funded. The Organization did not contribute more than 5% of the total contributions to the plan. Copies of the STRS annual financial reports may be obtained from STRS, 7667 Folsom Boulevard, Sacramento, CA and Funding Policy Active plan members are required to contribute 9.20% of their salary and the Organization is required to contribute an actuarially determined rate. The actuarial methods and assumptions used for determining the rate are those adopted by the STRS Teachers Retirement Board. The required employer contribution rate for fiscal year was 12.58% of annual payroll. The contribution requirements of the plan members are established by state statute. The Organization s contributions to STRS for the fiscal year ending June 30, 2017, was $151,040 and equal 100% of the required contributions for the year. Page 13

19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, OPERATING LEASES The Organization entered into a lease agreement with the LLC for school facilities through June The payment for the lease is paid solely by Kepler Neighborhood Schools. The Organization leases office equipment under operating lease agreements in excess of one year. The future minimum lease payments are as follows: Year Ending LLC Lease Other Lease June 30, Payments Payments Total 2018 $ 589,251 $ 21,140 $ 610, ,177 7, , ,369 3, , , , , ,727 Thereafter 33,619,881-33,619,881 Total future minimum lease payments $ 37,066,645 $ 31,850 $ 37,098,495 The Organization receives no sublease rental revenues nor pays any contingent rentals associated with these leases. For the fiscal year ended June 30, 2017, operating lease expense was $344, COMMITMENTS AND CONTINGENCIES State Allowances, Awards, and Grants The Organization has received 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, management believes that any required reimbursement will not be material. 12. SUBSEQUENT EVENTS The Organization s management has evaluated events or transactions that may occur for potential recognition or disclosure in the consolidated financial statements from the balance sheet date through December 15, 2017, which is the date the consolidated financial statements were available to be issued. Page 14

20 SUPPLEMENTARY INFORMATION

21 ORGANIZATION JUNE 30, 2017 Kepler Neighborhood Schools [#1503] is a Grade K through 8 Charter School and was granted its charter by the Fresno Unified School District on July , pursuant to the terms of the Charter School Act of 1992, as amended. The Board of Directors for the fiscal year ended June 30, 2017, was comprised of the following members: Name Office Term Term Expiration Dr. Jim Mullooly Secretary 3 years December 05, 2019 Christina Soto Member 2years December 05, 2019 Barbara Fiske Member 3 years September 12, 2019 Timothy Yeager Chair 3 years December 15, 2019 Dr. Nathan Carson Member 3 years May 18, 2018 Coreen Campos Vice Chair 3 years March 16, 2020 Jessica Mast-Foss Member 3 years August 28, 2019 Name Dr. Christine Montanez Shiela Skibbie Administration Position President, CEO CFO Page 15 See Independent Auditor s Report.

22 SCHEDULE OF AVERAGE DAILY ATTENDANCE June 30, 2017 Second Period Report Annual Report Transitional Kindergarten/ Kindergarten - Grade Grades Grades Total Elementary The Organization is 100% classroom-based and generates no ADA from a full-time independent study program. Page 16 See Independent Auditor s Report.

23 SCHEDULE OF INSTRUCTIONAL TIME For the Fiscal Year Ended June 30, 2017 Number of Days Minutes Traditional Grade Level Requirements Actual Minutes Calendar Status Kindergarten 36,000 35, Not in compliance Grade 1 50,400 52, In compliance Grade 2 50,400 54, In compliance Grade 3 50,400 54, In compliance Grade 4 54,000 54, In compliance Grade 5 54,000 54, In compliance Grade 6 54,000 54, In compliance Grade 7 54,000 54, In compliance Grade 8 54,000 54, In compliance Page 17 See Independent Auditor s Report.

24 SCHEDULE OF INSTRUCTIONAL TIME For the Fiscal Year Ended June 30, Number of Minutes Traditional Grade Level Requirements Actual Minutes Calendar Status Kindergarten 36,000 35, Not in compliance Grade Spans K Affected grade level(s) Kindergarten 2 Affected grade level ADA Derived Value of ADA by Grade Span $8, Instructional Minutes Penalty Calculation 4 Number of required minutes 36,000 50,400 54,000 64,800 5 Number of minutes short Percentage of Minutes Not Offered 1.00% 7 Affected LCFF Apportionment by Grade Span $353,495 8 Instructional Time Penalty by Grade Span $3,535 9 Total Instructional Time Penalty $3,535 Page 18 See Independent Auditor s Report.

25 STATEMENT OF FUNCTIONAL EXPENSES For the Fiscal Year Ended June 30, 2017 Program Support Services Services Management Education and General Total Certificated salaries $ 1,151,966 $ 50,089 $ 1,202,055 Classified salaries 355, ,359 Employee benefits 343,070 14, ,347 Books and supplies 261,813 32, ,893 Travel and conferences 4,885-4,885 Dues and Memberships 3,839-3,839 Operation and housekeeping services 46,419-46,419 Rental, leases, repairs, and non-capitalized improvements 175, , ,253 Professional/consulting services and operating expenditures 469, , ,883 Communications 23,451 5,863 29,314 Depreciation - 14,143 14,143 Total expenses $ 2,836,023 $ 630,367 $ 3,466,390 Page 19 See Independent Auditor s Report.

26 RECONCILIATION OF CHARTER SCHOOL UNAUDITED ACTUALS FINANCIAL REPORT - - ALTERNATIVE FORM WITH AUDITED FINANCIAL STATEMENTS For the Fiscal Year Ended June 30, 2017 June 30, 2017, Charter School Unaudited Actuals Financial Report -- Alternative Form, Ending Fund Balance $ 1,001,475 Adjustments and reclassifications: Increasing (decreasing) the fund balance: Cash understatement 14,931 Fixed assets understatement (2) Rounding adjustment 5 Net adjustments and reclassifications 14,934 June 30, 2017, audited financial statement net assets $ 1,016,409 Page 20 See Independent Auditor s Report.

27 OTHER INDEPENDENT AUDITOR S REPORT SECTION

28 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 Kepler Neighborhood Schools Fresno, California We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the consolidated financial statements of Kepler Neighborhood Schools (a nonprofit Organization) and Subsidiary, which comprise the consolidated statement of financial position as of June 30, 2017, and the related consolidated statements of activities and cash flows for the year then ended, and the related notes to the consolidated financial statements, and have issued our report thereon dated December 15, Internal Control Over Financial Reporting In planning and performing our audit of the consolidated financial statements, we considered Kepler Neighborhood Schools internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the consolidated financial statements, but not for the purpose of expressing an opinion on the effectiveness of Kepler Neighborhood Schools internal control. Accordingly, we do not express an opinion on the effectiveness of Kepler Neighborhood Schools and Subsidiary s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity s consolidated financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified.

29 Compliance and Other Matters As part of obtaining reasonable assurance about whether Kepler Neighborhood Schools consolidated financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of 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. SQUAR MILNER LLP San Diego, California December 15, 2017

30 INDEPENDENT AUDITOR S REPORT ON STATE COMPLIANCE Board of Directors Kepler Neighborhood Schools Fresno, California Report on Compliance for Each State Program We have audited Kepler Neighborhood Schools compliance with the types of compliance requirements described in the Guide for Annual Audits of K-12 Local Education Agencies and State Compliance Reporting, published by the Education Audit Appeals Panel, that could have a direct and material effect on each of Kepler Neighborhood Schools state programs for the fiscal year ended June 30, Kepler Neighborhood Schools state programs are identified below. Management s Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts, and grants applicable to its state programs. Auditor s Responsibility Our responsibility is to express an opinion on compliance for each of Kepler Neighborhood Schools state 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 State s Audit Guide, Guide for Annual Audits of K-12 Local Education Agencies and State Compliance Reporting, published by the Education Audit Appeals Panel. Those standards 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 state program occurred. An audit includes examining, on a test basis, evidence about Kepler Neighborhood Schools 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 state program. However, our audit does not provide a legal determination of Kepler Neighborhood Schools compliance. In connection with the audit referred to above, we selected transactions and records to determine the Organization's compliance with the state laws and regulations applicable to the following items:

31 Description Educator Effectiveness California Clean Energy Jobs Act After School Education and Safety Program Proper Expenditure of Education Protection Account Funds Unduplicated Local Control Funding Formula Pupil Counts Local Control and Accountability Plan Independent Study-Course Based Immunizations Attendance Mode of Instruction Nonclassroom-Based Instruction/Independent Study for Charter Schools Determination of Funding for Nonclassroom-Based Instruction Annual Instructional Minutes - Classroom Based Charter School Facility Grant Program Procedures Performed Yes Not Applicable Not Applicable Yes Yes Yes Not Applicable Yes Yes Yes Not Applicable Not Applicable Yes Yes The term Not Applicable is used above to mean either that the Organization did not offer the program during the current fiscal year, or that the program applies only to a different type of local education agency. Opinion on State Programs (Modified Opinion) Basis for Modified Opinion on Instructional Time As described in the accompanying schedule of findings and questioned costs, Kepler Neighborhood Schools did not comply with requirements regarding Instructional Time, as described in finding number Compliance with such requirements is necessary, in our opinion, for Kepler Neighborhood Schools comply with the requirements applicable to that program. Modified Opinion on Instructional Time In our opinion, except for the noncompliance described in the Basis for Modified Opinion paragraph, Kepler Neighborhood Schools complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on Instructional Time for the fiscal year ended June 30, 2017.

32 Unmodified Opinion on Each of the Other State Programs In our opinion Kepler Neighborhood Schools 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 other state programs identified above for the fiscal year ended June 30, The purpose of this report on state compliance is solely to describe the scope of our testing of state compliance and the results of that testing based on the requirements of Guide for Annual Audits of K-12 Local Education Agencies and State Compliance Reporting. Accordingly, this report is not suitable for any other purpose. SQUAR MILNER LLP San Diego, California December 15, 2017

33 SCHEDULE OF AUDIT FINDINGS AND QUESTIONED COSTS For the Fiscal Year Ended June 30, 2017 A. Summary of Auditor's Results 1. Financial Statements Type of auditor's report issued: Unmodified Internal control over financial reporting: One or more material weaknesses identified? Yes X No One or more significant deficiencies identified that are not considered to be material weaknesses? Yes X None Reported Noncompliance material to financial statements noted? Yes X No 2. Federal Awards Internal control over major programs: One or more material weaknesses identified? Yes N/A No One or more significant deficiencies identified that are not considered to be material weaknesses? Yes N/A None Reported Type of auditor's report issued on compliance for major programs: N/A Any audit findings disclosed to be reported under Section Audit Findings paragraph (a) of OMB Uniform Guidance? Yes N/A No Identification of major programs: CFDA Number(s) Name of Federal Program or Cluster The Organization did not have over $750,000 in Federal Expenditures. Dollar threshold used to distinguish between Type A and Type B programs: N/A Auditee qualified as low-risk auditee? Yes N/A No Page 26 See Independent Auditor s Report.

34 SCHEDULE OF AUDIT FINDINGS AND QUESTIONED COSTS For the Fiscal Year Ended June 30, 2017 A. Summary of Auditor's Results (continued) 3. State Awards Internal control over state programs: One or more material weaknesses identified? Yes X No One or more significant deficiencies identified that are not considered to be material weaknesses? Yes X None Reported Type of auditor's report issued on compliance for state programs: Unmodified B. Financial Statement Findings None C. Federal Award Findings and Questioned Costs None Page 27 See Independent Auditor s Report.

35 SCHEDULE OF AUDIT FINDINGS AND QUESTIONED COSTS For the Fiscal Year Ended June 30, 2017 D. State Award Findings and Questioned Costs Finding State Compliance (1) Criteria: Schools are required to have a minimum number of instructional minutes per grade level. (2) Condition: The Organization s Kindergarten class had less than the required 36,000 instructional minutes for the year. (3) Effect: Kindergarten students received less instructional time than what the state requires. The calculated instructional minute penalty is $3,535 for Kindergarten. (4) Cause: The Organization did not properly keep track of the number of instructional minutes being offered at the school for Kindergarten classes. (5) Effect on ADA: There is no effect on ADA (6) Recommendation: We recommend that the school implement an internal review process to keep track of all instructional minutes being offered at all grade levels to ensure compliance with California state requirements. (7) Organization Corrective Action Plan: The Organization has reviewed all of their instructional minutes and ensured that they are compliant with the minimum requirements. The Organization has added 10 minutes to the lenth of the day for TK and Kindergarten. This will ensure that the school has the required number of minutes. The Executive Director has also initiated an internal audit of all grade level instructional minutes upon return in January. A self-check system will be integrated as part of the Organization's regular protocol. An analysis will also be done to determine where additional minutes can be added to ensure adequate time is occurring. Page 28 See Independent Auditor s Report.

36 SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS For the Fiscal Year Ended June 30, 2017 Explanation If Findings/Recommendations Current Status Not Implemented None N/A N/A Page 29 See Independent Auditor s Report.

37 December 15, 2017 RE: Certificate for Kepler Neighborhood School. Relating to the Audit. CALIFORNIA SCHOOL FINANCE AUTHORITY CHARTER SCHOOL REVENUE BONDS (KEPLER NEIGHBORHOOD SCHOOL) SERIES 2017A CALIFORNIA SCHOOL FINANCE AUTHORITY CHARTER SCHOOL REVENUE BONDS (KEPLER NEIGHBORHOOD SCHOOL) SERIES 2017B (TAXABLE) I hereby certify that Kepler Neighborhood School has met the requirements of the continuing disclosure agreement in regard to Days Cash on Hand and Debt Service Coverage. Please see attached calculations. If you have any further questions, please feel free to reach out. Kelly Ellis ~ fj" ~ x319

38 Kepler Neighborhood School DEBT COVERAGE RATIO & DAYS CASH ON HAND CALCULATION FY16-17 (Based on 16/17 Audit) Audited YE 6/30/17 Debt Service Coverage: Annual Surplus 208,333 Plus: Depreciation & Deferred Rent 123,697 Plus: Lease expense 310,679 Available for Debt Service 642,709 Debt Service 310,679 Debt Coverage Ratio 2.07 Required debt coverage 1.2 OK Required Days cash on hand 30 OK Days cash on hand calculated as: Total available cash divided by 1,211,384 Annual operating expenses* divided by 365 9, *Annual operating expenses = total expenses, less depreciation, less deferred rent Unrestricted Cash: Total Cash - all funds 1,211,384 - Unrestricted Cash 1,211,384 Maximum Annual Debt Service (MADS) Total Annual expenses 3,466,390 Less: depreciation (14,143) less: deferred rent (109,554) Annual operating expenes - i/c eliminations incl. 3,342,693