Financial Statements (With Summarized Comparative Information for 2016) YEO & YEO CPAs & BUSINESS CONSULTANTS
Table of Contents Page Independent Auditors Report 1 Basic Financial Statements Balance Sheet 3 Statement of Operations 5 Statement of Cash Flows 6 Notes to the Financial Statements 8 Supplementary Information Combining Balance Sheet 17 Combining Schedule of Operations 19 Combining Schedule of Cash Flows 21
Independent Auditors Report Management and Board of Directors Family Health Center Inc. Kalamazoo, Michigan Report on the Financial Statements We have audited the accompanying financial statements of Family Health Center Inc., which comprise the balance sheet as of, and the related statements of operations and cash flows for the year then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1
Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Family Health Center Inc., as of, and the changes in its net assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Report on Summarized Comparative Information The financial statements of Family Health Center Inc. as of December 31, 2016, were audited by other auditors whose report dated March 13, 2017, expressed an unmodified opinion on those statements. The summarized comparative information presented herein as of and for the year ended December 31, 2016 is consistent, in all material respects, with the audited financial statements from which it has been derived. Report on Supplementary Information Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The Combining Balance Sheet, Combining Schedule of Operations, and Combining Schedule of Cash Flows is presented for purposes of additional analysis and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated, in all material respects, in relation to the financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated March 28, 2018 on our consideration of Family Health Center Inc. 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 solely 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 the effectiveness of Family Health Center Inc. s 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 Family Health Center Inc. s internal control over financial reporting and compliance. Kalamazoo, Michigan March 28, 2018 2
Balance Sheet (With Summarized Comparative Information for 2016) 2017 2016 Assets Current assets Cash and cash equivalents $ 15,807,491 $ 12,327,591 Cash - construction financing 1,659,815 9,463,042 Patient services receivable, net 1,479,899 955,519 Grants receivable 33,608 51,062 Third party cost settlements receivable 1,829,131 - Other receivable 211,353 104,888 Other investments - mutual funds 5,023,943 4,974,785 Inventory 339,886 385,742 Prepaid expenses 68,597 54,854 Total current assets 26,453,723 28,317,483 Property and equipment, net 24,732,444 21,144,688 Total assets $ 51,186,167 $ 49,462,171 Liabilities and net assets Current liabilities Accounts payable $ 985,663 $ 2,456,417 Accrued liabilities and other 1,791,193 1,532,057 Accrued compensated absences 462,941 418,165 Third party cost settlements payable - 8,366 Unearned revenue 96,440 35,743 Capital lease payable, current portion 13,076 - Total current liabilities 3,349,313 4,450,748 See Accompanying Notes to the Financial Statements 3
Balance Sheet (With Summarized Comparative Information for 2016) 2017 2016 Long-term liabilities Long-term debt, less current portion $ 8,262,000 $ 8,262,000 Capital lease payable 18,493 - Total long-term liabilities 8,280,493 8,262,000 Total liabilities 11,629,806 12,712,748 Net assets Unrestricted Designated for financial reserves 5,405,992 4,082,447 Unassigned 33,417,740 30,548,777 Temporarily restricted 732,629 2,118,199 Total net assets 39,556,361 36,749,423 Total liabilities and net assets $ 51,186,167 $ 49,462,171 See Accompanying Notes to the Financial Statements 4
Statement of Operations Year Ended (With Summarized Comparative Information for 2016) Unrestricted Temporarily Restricted 2017 2016 Operating revenue Patient service revenue, net $ 28,187,569 $ - $ 28,187,569 $ 24,145,939 Federal grants 4,026,111-4,026,111 2,959,851 State and local grants 422,386 5,352 427,738 397,453 Other revenue 1,052,943-1,052,943 860,329 Net assets released from restrictions 1,390,922 (1,390,922) - - Total operating revenue 35,079,931 (1,385,570) 33,694,361 28,363,572 Operating expenses Salaries and wages 14,847,718-14,847,718 12,581,626 Employee benefits 3,079,743-3,079,743 2,454,581 Operating supplies 3,612,466-3,612,466 1,724,998 Medical supplies and drugs 4,127,095-4,127,095 4,547,330 Purchased services 3,900,539-3,900,539 2,713,031 Depreciation 996,053-996,053 538,470 Interest 222,940-222,940 29,023 Total expenses 30,786,554-30,786,554 24,589,059 Total operating income 4,293,377 (1,385,570) 2,907,807 3,774,513 Nonoperating income (loss) Interest income 6,632-6,632 62,022 Investment income (loss) 49,159-49,159 (9,342) Other nonoperating loss (156,660) - (156,660) (30,490) Total nonoperating income (loss) (100,869) - (100,869) 22,190 Change in net assets 4,192,508 (1,385,570) 2,806,938 3,796,703 Net assets, beginning of year 34,631,224 2,118,199 36,749,423 32,952,720 Net assets, end of year $ 38,823,732 $ 732,629 $ 39,556,361 $ 36,749,423 See Accompanying Notes to the Financial Statements 5
Statement of Cash Flows Year Ended (With Summarized Comparative Information for 2016) 2017 2016 Cash flows from operating activities Change in net assets $ 2,806,938 $ 3,796,703 Adjustments to reconcile changes in net assets to net cash provided by operating activities: Depreciation 996,053 538,470 Loss on sale of assets 153,046 35,400 Realized and unrealized (gain) loss on investments 7,880 (6,999) Non-cash donation - (209,648) (Increase) decrease in: Patient services receivable (524,380) (12,868) Grants receivable 17,454 (11,224) Other receivable (106,465) (36,134) Third party cost settlements (1,829,131) 880,688 Inventory 45,856 122,577 Other current assets (13,743) (18,967) Increase (decrease) in: Accounts payable (205,919) 173,972 Accrued liabilities and other 259,136 347,924 Accrued compensated absences 44,776 83,686 Third party cost settlements payable (8,366) 8,366 Unearned revenue 60,697 35,743 Net cash provided by operating activities 1,703,832 5,727,689 Cash flows from investing activities Purchases of property and equipment (5,962,493) (6,617,244) Proceeds from the sale of investments 760,198 97,308 Purchases of investments (817,236) (80,964) Net cash used by investing activities (6,019,531) (6,600,900) See Accompanying Notes to the Financial Statements 6
Statement of Cash Flows Year Ended (With Summarized Comparative Information for 2016) 2017 2016 Cash flows from financing activities Proceeds from issuance of long-term debt $ - $ 8,262,000 Principal payments on capital lease (7,628) - Net cash provided (used) by financing activities (7,628) 8,262,000 Net change in cash and cash equivalents (4,323,327) 7,388,789 Cash and cash equivalents, beginning of year 21,790,633 14,401,844 Cash and cash equivalents, end of year $ 17,467,306 $ 21,790,633 Cash and cash equivalents $ 15,807,491 $ 12,327,591 Cash - construction financing 1,659,815 9,463,042 Total cash and cash equivalents $ 17,467,306 $ 21,790,633 Cash paid for interest $ 222,940 $ - Noncash investing activity Donated capital assets $ - $ 209,648 Capital leases 39,197 - Capital assets in accounts payable 226,948 1,491,783 See Accompanying Notes to the Financial Statements 7
Notes to the Financial Statements (With Summarized Comparative Information for 2016) Note 1 Summary of Significant Accounting Policies Reporting Entity and Corporate Structure Family Health Center Inc., (the Organization ) is a not for profit and Federally Qualified Health Center ( FQHC ) providing health services to persons in Kalamazoo County and surrounding areas in Michigan. The Organization provides a broad range of health services to a largely medically underserved population at numerous locations. These services are provided to area residents, regardless of ability to pay. The United States Department of Health and Human Services ( DHHS ) provides substantial support to the Organization for providing health services. The Organization is obligated under the terms of the DHHS grants to comply with specified conditions and program requirements as set forth by the grantor. Basis of Accounting The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. Financial Statement Presentation Net assets of the Organization and changes therein, are classified and reported as follows: Unrestricted net assets Net assets that are not subject to donorimposed stipulations. The Organization has enacted a policy that the Board of Directors review its plans for future unrecorded liabilities, property and equipment improvements and acquisitions, from time to time, and designate appropriate sums of unrestricted net assets to assure adequate financing and planning for such events or projects. These funds are designated as board designated for financial reserves. Permanently restricted net assets Net assets subject to donorimposed stipulations that they be maintained permanently by the Organization. Generally, the donors of these assets permit the Organization to use all or part of the income earned on related investments for general or specific purposes. The Organization has no permanently restricted net assets. Revenues without donor-imposed restrictions and revenues with donor-imposed time or purpose restrictions that are met in the same period as the gift are both reported as unrestricted support. Other restricted gifts are reported as restricted support and temporarily or permanently restricted net assets. Expenses are reported as decreases in unrestricted net assets. Gains and losses on assets or liabilities are reported as increases or decreases in unrestricted net assets unless their use is restricted by explicit donor stipulation or by law. Expirations of temporary restrictions on net assets (i.e., the donor-stipulated purpose has been fulfilled and/or the stipulated time period has elapsed) are reported as net assets released from restrictions. Cash and Cash Equivalents The Organization considers all highly liquid investments available for current use with an initial maturity of three months or less to be cash and cash equivalents. The Organization maintains deposit accounts in local financial institutions for its cash and cash equivalents, which may at times exceed the FDIC insured limits. The carrying amount of the Organization s deposits with financial institutions at year end was $17,457,806. The actual bank balance amounted to $17,582,395, of which $17,077,395 was uninsured by the FDIC. Temporarily restricted net assets Net assets subject to donorimposed stipulations that will be met either by actions of the Organization and/or the passage of time. 8
Notes to the Financial Statements (With Summarized Comparative Information for 2016) Accounts Receivable The Organization records patient service receivables at the time of service, according to fees charged. These amounts are often reduced because of the patient s inability to pay or because of contractual adjustments from third party payers. Accounts receivable are stated at unpaid balances, net of an allowance for doubtful accounts. The allowance for doubtful accounts is established on an aggregate basis by using historical loss rate factors applied to unpaid accounts based on an aging schedule. Loss rate factors are based upon historical loss experience and are adjusted for macroeconomic trends affecting the Center s ability to collect outstanding amounts. All adjustments to the gross accounts receivable are recorded upon receipt of related information and bad debts are periodically written off throughout the year. An estimated provision for contractual adjustments is included in the current year; however, any difference in the estimated provision recorded and actual settlement is recorded in the year of the settlement. Inventory Inventory represents pharmaceuticals in inventory, which are stated at the lower of cost or market as determined by the first-in, first-out method of inventory valuation. Investments Investments are stated at fair value based on quoted prices in active markets. Realized gains and losses on sales of investments represent the difference between the net sales price and the cost of securities sold. Unrealized gains and losses on investments represent the net change for the reported year in unrealized appreciation between the balance at the beginning and the end of the year. Donated investments are reflected as contributions at their fair values at date of receipt. 9 Property and Equipment The Organization follows the practice of capitalizing all expenditures in excess of $5,000 for property and equipment at cost; the fair value of donated fixed assets is similarly capitalized. Furniture and equipment are stated at cost or fair market value at the date received. Major improvements are capitalized while ordinary maintenance and repairs are expensed. The Organization evaluates long-lived assets for impairment using a discounted cash flow method whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with accounting principles generally accepted in the United States of America. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets as follows: Buildings and improvements Furniture and equipment Leasehold improvements 5 to 40 years 3 to 20 years 10 to 30 years Gifts of land, buildings, equipment and other long-lived assets are also reported as unrestricted revenue and net assets, unless subject to time restrictions. Absent explicit donor stipulations for the time longlived assets must be held, expirations of restrictions resulting in reclassification of temporarily restricted net assets as unrestricted net assets are reported when the long-lived assets are placed in service. Accrued Compensated Absences Employees of the Organization are entitled to paid time off depending on job classification, length of service and other factors. The Organization expenses the compensated absences as the benefit is earned. Staff of the Organization can accrue annually up to a maximum of 240 hours of paid time off. Balances at year end up to a maximum of 240 hours can be carried forward to the next fiscal year.
Notes to the Financial Statements (With Summarized Comparative Information for 2016) Net Patient Service Revenue Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payers, and others for services rendered, including estimated retroactive adjustments, if any, under reimbursement agreements with third-party payers. A significant portion of net patient service revenue is generated by patients covered by the Medicaid and Medicare programs. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Management believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation, as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs. Charity Care The Organization provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than established rates. Because the Organization does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue. Based on the cost of patient services, charity care amounted to approximately amounted to approximately $1,230,000 and $1,200,000 for the years ended and 2016, respectively. Income Tax Status Family Health Center Inc., is exempt from Federal income taxes under Section 501(c)(3) of the Internal Revenue Code and, therefore, has made no provision for Federal income taxes in the accompanying financial statements. In addition, Family Health Center Inc. has been determined by the Internal Revenue Service not to be a private foundation within the meaning of Section 509(a) of the Internal Revenue Code. The Organization files information returns in the U.S. Federal and Michigan jurisdiction. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Comparative Financial Information The financial information for the year ended December 31, 2016, presented for comparative purposes, is not intended to be a complete financial statement presentation. Subsequent Events Management has evaluated subsequent events through March 28, 2018, which is the date the financial statements were available to be issued. 10
Notes to the Financial Statements (With Summarized Comparative Information for 2016) Note 2 Patient Services Receivable, Net Patient services receivable, net, consisted of the following as of December 31: 2017 2016 Commercial and other $ 286,046 $ 421,562 Medicaid 2,700,165 1,893,642 Medicare 623,719 526,512 Self-pay 615,645 485,994 Pharmacy 387,100 391,702 4,612,675 3,719,412 Less allowance for uncollectible accounts and contractual (3,132,776) (2,763,893) Note 3 Third Party Cost Settlements $ 1,479,899 $ 955,519 Third party cost settlements by settlement year are as follows at December 31: Year Ended 2017 2016 2016 $ 379,345 $ (8,366) 2017 1,449,786 - $ 1,829,131 $ (8,366) Third party cost settlements consist of the following receivable and payable on the balance sheet: 2017 2016 Third party cost settlements receivable $ 1,829,131 $ - Third party cost settlements payable - (8,366) Note 4 Investments $ 1,829,131 $ (8,366) The fair value at December 31 of the investments is summarized as follows: 2017 2016 Money market funds $ 12,046 $ 22,033 Mutual funds 5,011,897 4,952,752 Total investments $ 5,023,943 $ 4,974,785 Investment income is composed of the following at December 31: 2017 2016 Dividends and interest $ 68,748 $ 53,184 Realized gain (loss) (3,668) 543 Unrealized gain (loss) (4,212) 6,456 Distributions - (58,000) Investment fees (11,709) (11,525) $ 49,159 $ (9,342) 11
Notes to the Financial Statements (With Summarized Comparative Information for 2016) Note 5 Property and Equipment Property and equipment, net, consists of the following as of December 31: 2017 2016 Land and improvements $ 936,597 $ 612,729 Buildings and improvements 25,073,269 21,697,890 Leasehold improvements 3,479,206 2,647,727 29,489,072 24,958,346 Less accumulated depreciation (4,756,628) (3,813,658) $ 24,732,444 $ 21,144,688 Depreciation of these assets was $996,053 and $538,470 for the year ended and 2016, respectively. Construction Commitments The Organization has an active construction project as of December 31, 2017. At year end, the Organization s commitment with contractors is as follows: Total Contract Construction Commitment at Year End Note 6 Capital Lease The Organization leases computer hardware and software under a capital lease. The lease terms expire May 2020. The lease requires monthly payments of $1,090. Interest is deemed immaterial. Future commitments for the leases are as follows for the years ending December 31: Year Ending Amount 2018 $ 13,076 2019 13,076 2020 5,417 Total minimum lease payments $ 31,569 Note 7 Line of Credit The Organization has established a line of credit in the amount of $1,500,000, bearing interest at the prime rate or not less than the onemonth daily adjusting LIBOR plus 2.50 percent. The rate at December 31, 2017 was 4.25%. The Organization has not drawn upon this line of credit as of and 2016. Project Alcott Facility $ 10,568,550 $ 226,946 12
Notes to the Financial Statements (With Summarized Comparative Information for 2016) Note 8 Long-Term Debt Long-term debt consists of the following obligations at December 31: Scheduled principal maturities of long-term debt for each of the five years succeeding, and thereafter are summarized as follows: 2017 2016 Year Ending Amount Installment note, bearing interest at 3.99% annually with monthly payments, including interest, of $18,691. The note is due on November 2023 with a balloon payment. Collateralized by a mortgage on a building. $ 2,970,000 $ 2,970,000 Installment note, bearing interest at 3.99% annually with monthly payments, including interest, of $33,304. The note is due on November 2023 with a balloon payment. Collateralized by a mortgage on a building. 5,292,000 5,292,000 8,262,000 8,262,000 Less current portion - - Notes payable, net of current portion $ 8,262,000 $ 8,262,000 2018 $ - 2019 169,630 2020 301,093 2021 314,426 2022 327,390 Thereafter 7,149,461 8,262,000 Under the agreements with the bank, the Organization is subject to various financial covenants, including debt-to-tangible net worth and debt service coverage ratios. As of and 2016, Family Health Center Inc. was in compliance with all required covenants. Mortgage Notes Payable Mortgage notes payable represent mortgage notes payable in the amount of $2,970,000 to MS New Markets XII LLC (MS CDE) and $5,292,000 to Capital Fund NMTC CDE#4 LLC (Capital Fund CDE).; The notes call for monthly payments of interest only through May 1, 2019. Commencing on June 1, 2019, monthly principal and interest payments in the amount of $18,691 and $33,304, respectively, are due through November 2023. In November 2023, balloon payments of $1,755,448 and $3,127,888 will be due, leaving a remaining principal balance of $712,800 and $1,270,080 at that time. The notes bear interest at 3.9917 percent per annum. The notes are collateralized by a mortgage on the primary health clinic on Alcott Street, and is guaranteed by the Organization. $ 13
Notes to the Financial Statements (With Summarized Comparative Information for 2016) New Markets Tax Credit Transaction Summary of Transaction - In November 2016, the Organization entered into an agreement with MS CDE and Capital Fund CDE in order to obtain financing through New Markets Tax Credits for construction and equipping of a primary health clinic to be completed by the Organization. The New Markets Tax Credits are enabled when a Community Development Entity provides an equity contribution or a loan to a qualified active low-income community business, of which the portion of the Organization s business that is constructing and operating qualifies as. Flow of Funds - The Organization utilized debt proceeds of $5,292,000 from Capital Fund CDE and $2,970,000 from MS CDE to fund the acquisition, construction and operation costs of the primary health clinic. Project Status - Payments on the construction contracts of the primary health clinic at Alcott Street were completed as of March 2017. Compliance Period - At the end of the New Market Tax Credit compliance period, which is November 2023, Capital Fund CDE and MS CDE shall have the right to require the Organization to purchase the remaining outstanding principal balance of the Notes ($1,270,080 and $712,800, respectively) for $1,000 on each note. If these options are not exercised within six months after the expiration of the New Markets Tax Credits compliance period, it can be extended if mutually agreed upon by both parties. Note 9 Patient Service Revenue, Net Patient service revenue, net recognized during the period is as follows for the years ended December 31: 2017 2016 Patient service revenue $ 43,653,468 $ 40,067,468 Allowance and contractual adjustments (15,465,899) (15,921,529) Patient service revenue, net $ 28,187,569 $ 24,145,939 Note 10 Federally Qualified Health Center Status Family Health Center Inc. qualifies as a Federally Qualified Health Center (FQHC) under provisions of the Omnibus budget Reconciliation Act of 1989 and 2000. Beginning January 1, 2001 the Medicaid program changed from reimbursing full reasonable costs of services provided to a prospective payment system which pays a fixed amount per encounter. The initial fixed amount for 2001 was based on the Organization s average cost per encounter from 1999 and 2000. The fixed amount is to be increased by a Medicaid economic indicator annually thereafter. Final settlements are determined after submission of the annual cost report by the Organization and reviewed by the appropriate fiscal intermediary. 14
Notes to the Financial Statements (With Summarized Comparative Information for 2016) Note 11 Retirement Plan The Organization sponsors a defined contribution plan for substantially all employees. Employees may defer a portion of their salary up to IRS limits for such plans. The Organization s portion of the contributions to the plan for years ended and 2016 were $156,176 and $115,801 respectively. Note 12 Internally Designated Net Assets The Board of Directors of Family Health Center Inc. has designated at and 2016, $5,405,992 and $4,082,447 respectively, to be used for future financial reserves. Note 13 Restricted Net Assets Temporarily restricted net assets are available for the following purposes at December 31: 2017 2016 Property and equipment $ 732,629 $ 2,118,199 All net assets released from restrictions were used for property and equipment. Note 14 Functional Expenses The Organization provides general health care services to residents within its geographic location. Expenses related to providing these services is as follows for the years ended December 31: 2017 2016 Program services $ 24,896,594 $ 20,296,265 General and administrative 5,889,960 4,292,794 Note 15 Medical Malpractice Coverage $ 30,786,554 $ 24,589,059 The Organization maintains its medical malpractice coverage under the Federal Tort Claims Act ("FTCA"). FTCA provides malpractice coverage to eligible PHS-supported programs and applies to the Organization and its employees while providing services within the scope of employment included under grant-related activities. The Attorney General, through the U.S. Department of Justice, has the responsibility for the defense of the individual and/or grantee for malpractice cases approved for FTCA coverage. Note 16 Commitments and Contingencies The Organization has contracted with various funding agencies to perform certain healthcare services, and receives Medicaid and Medicare revenue from federal, state and local governments. Reimbursements received under these contracts and payments from Medicaid and Medicare are subject to audit by federal, state and local governments and other agencies. Upon audit, if discrepancies are discovered, the Organization could be held responsible for refunding the amounts in question. 15
Notes to the Financial Statements (With Summarized Comparative Information for 2016) Amounts received or receivable from grantor agencies are subjected to audit and adjustment by grantor agencies, principally the federal government. Any disallowed claims, including amounts already collected, may constitute a liability of the applicable funds. The amount, if any, of costs which may be disallowed by the grantor cannot be determined at this time although the Organization expects such amounts, if any, to be immaterial. Note 17 Fair Value Measurements The following tables represent information about the Organization s assets and liabilities measured at fair value on a recurring basis at and 2016, and the valuation techniques used by the Organization to determine those fair values. In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Organization has the ability to access. Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability. Disclosures concerning assets and liabilities measured at fair value on a recurring basis are as follows as of and 2016: Balance at December 31, 2017 Quoted Prices in Active Markets for Identical Assets (Level 1) Money market funds $ 12,046 $ 12,046 Mutual funds 5,011,897 5,011,897 $ 5,023,943 $ 5,023,943 Balance at December 31, 2016 Quoted Prices in Active Markets for Identical Assets (Level 1) Money market funds $ 22,033 $ 22,033 Mutual funds 4,952,752 4,952,752 $ 4,974,785 $ 4,974,785 In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in the entirety are categorized based on the lowest level input that is significant to the valuation. The Organization s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability. 16
Combining Balance Sheet Assets 2017 Non-Portion of Business 2017 Portion of Business 2017 Combined Cash and cash equivalents Cash and cash equivalents $ 15,795,565 $ 11,926 $ 15,807,491 Cash - construction financing - 1,659,815 1,659,815 Total cash and cash equivalents 15,795,565 1,671,741 17,467,306 Accounts receivable Clinic receivables 718,324 374,475 1,092,799 Pharmacy receivables 317,127 69,973 387,100 Medicaid PPA receivables 1,552,641 276,490 1,829,131 Grants receivables 180,293 64,668 244,961 Total accounts receivable 2,768,385 785,606 3,553,991 Investments Other investments - mutual funds 5,023,943-5,023,943 Other current assets Pharmacy inventory 232,068 107,818 339,886 Prepaid expenses 57,492 11,105 68,597 Total other current assets 289,560 118,923 408,483 Property & equipment Cost 16,895,946 12,564,116 29,460,062 Construction in progress - Alcott 29,010-29,010 Accumulated depreciation (4,423,998) (332,630) (4,756,628) Total property and equipment 12,500,958 12,231,486 24,732,444 Total assets $ 36,378,411 $ 14,807,756 $ 51,186,167 17
Combining Balance Sheet 2017 Non-Portion of Business 2017 Portion of Business 2017 Combined Liabilities and net assets Current liabilities Accounts payable $ 532,924 $ 452,739 $ 985,663 Accrued salaries, compensated absences and taxes 1,538,010 716,124 2,254,134 Unearned revenue 96,440-96,440 Total current liabilities 2,167,374 1,168,863 3,336,237 Long term liabilities Intercompany (6,675,298) 6,675,298 - Construction loan - 8,262,000 8,262,000 Other long term liabilities 31,569-31,569 Total long term liabilities (6,643,729) 14,937,298 8,293,569 Net assets Unrestricted 34,815,235 1,201,559 36,016,794 Temporarily restricted 345,480 387,149 732,629 Revenues over expense - YTD 5,694,051 (2,887,113) 2,806,938 Total net assets 40,854,766 (1,298,405) 39,556,361 Total liabilities and net assets $ 36,378,411 $ 14,807,756 $ 51,186,167 Note: The Portion of Business is the Alcott facility. The Non-Portion of Business is all other facilities. 18
Combining Schedule of Operations Year Ended 2017 Non-Portion of Business 2017 Portion of Business 2017 Combined Revenue Gross service revenues $ 20,200,767 $ 6,077,206 $ 26,277,973 Contractual adjustments (10,375,202) (2,670,554) (13,045,756) Self pay & sliding fee adjustments (803,191) (291,781) (1,094,972) Bad debt adjustments (926,610) (331,257) (1,257,867) Net service revenue 8,095,764 2,783,614 10,879,378 Medicaid PPA 8,145,928 1,919,610 10,065,538 Pharmacy revenues 6,325,471 917,182 7,242,653 Grant revenue 3,291,079 1,162,770 4,453,849 Other income/contributions 792,276 159,798 952,074 18,554,754 4,159,360 22,714,114 Total revenues 26,650,518 6,942,974 33,593,492 Expenses Salaries 11,155,172 3,382,343 14,537,515 Salaries - overtime 231,739 78,464 310,203 Employee benefits 2,435,780 643,965 3,079,745 Professional development 49,514 6,535 56,049 Meetings and travel 185,742 7,070 192,812 Medical and professional services 1,626,940 406,553 2,033,493 Temporary employee services 185,311 34,870 220,181 Employee relations 46,063 2,164 48,227 License, fees and dues 173,427 39,809 213,236 Total human resources 16,089,688 4,601,773 20,691,461 19
Combining Schedule of Operations Year Ended 2017 Non-Portion of Business 2017 Portion of Business 2017 Combined Medical supplies $ 780,988 $ 180,033 $ 961,021 Dental supplies 89,705 236,315 326,020 Office & janitorial supplies 158,076 71,908 229,984 Cost of goods sold - pharmacy 2,350,850 488,854 2,839,704 Building & grounds 370,501 75,771 446,272 Equipment purchases, rental & repairs 303,003 1,623,849 1,926,852 Depreciation 666,864 329,190 996,054 Total physical resources 4,719,987 3,005,920 7,725,907 Accounting/legal services 45,003 432 45,435 Other contractual services 1,369,472 232,307 1,601,779 Total purchased services 1,414,475 232,739 1,647,214 Insurance 58,895 21,413 80,308 Telephone & Communication 111,898 9,498 121,396 Advertising and promotions 61,073 11,744 72,817 Board of directors expense 45,758-45,758 Other expenses (1,545,307) 1,947,000 401,693 Total general and admin (1,267,683) 1,989,655 721,972 Total expenses 20,956,467 9,830,087 30,786,554 Change in net assets $ 5,694,051 $ (2,887,113) $ 2,806,938 Note: The Portion of Business is the Alcott facility. The Non-Portion of Business is all other facilities. 20
Combining Schedule of Cash Flows Year Ended 2017 Non-Portion of Business 2017 Portion of Business 2017 Combined Cash flows from operating activities Change in net assets $ 5,694,051 (2,887,113) $ 2,806,938 Adjustments to reconcile changes in net assets to net cash provided by operating activities: Depreciation 666,863 329,190 996,053 Gain on sale of assets 153,046-153,046 Realized and unrealized loss on investments 7,880-7,880 (Increase) decrease in: Patient services receivable (79,933) (444,447) (524,380) Grants receivable and other receivables (24,342) (64,669) (89,011) Third party cost settlements (1,561,007) (276,490) (1,837,497) Other current assets 150,607 (118,494) 32,113 Accounts payable and accrued liabilities (938,498) 1,036,491 97,993 Unearned revenue 60,697-60,697 Net cash provided (used) by operating activities 4,129,364 (2,425,532) 1,703,832 Cash flows from investing activities Purchases of property and equipment (129,488) (5,833,005) (5,962,493) Proceeds from the sale of investments 760,198-760,198 Purchases of investments (817,236) - (817,236) Net cash used by investing activities (186,526) (5,833,005) (6,019,531) Cash flows from financing activities Principal payments on long-term debt (7,628) - (7,628) Net change in cash and cash equivalents 3,935,210 (8,258,537) (4,323,327) Cash and cash equivalents, beginning of year 12,223,327 9,567,306 21,790,633 Cash and cash equivalents, end of year $ 16,158,537 $ 1,308,769 $ 17,467,306 Cash paid for interest $ - $ 222,940 $ 222,940 Noncash investing activity Capital leases $ 39,197 $ - $ 39,197 Capital assets in accounts payable - 226,948 226,948 Note: The Portion of Business is the Alcott facility. The Non-Portion of Business is all other facilities. 21
Single Audit Report YEO & YEO CPAs & BUSINESS CONSULTANTS
Table of Contents 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 1 Report on Compliance For Each Major Federal Program; Report on Internal Control Over Compliance; and Report on Schedule of Expenditures of Federal Awards Required by the Uniform Guidance 3 Schedule of Expenditures of Federal Awards 5 Notes to the Schedule of Expenditures of Federal Awards 6 Schedule of Findings and Questioned Costs 7 Summary Schedule of Prior Audit Findings 9 Page
Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards Independent Auditors Report Management and the Board of Directors Family Health Center Inc. Kalamazoo, Michigan 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 Family Health Center Inc., which comprise the balance sheet as of, and the related statements of operations and cash flows for the year then ended, and the related notes to the financial statements, and have issued our report thereon dated March 28, 2018. Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered Family Health Center Inc.'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 Family Health Center Inc. s internal control. Accordingly, we do not express an opinion on the effectiveness of Family Health Center Inc. s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Compliance and Other Matters As part of obtaining reasonable assurance about whether Family Health Center Inc.'s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, 1
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 entity s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Kalamazoo, Michigan March 28, 2018 2
Report on Compliance for Each Major Federal Program; Report on Internal Control Over Compliance; and Report on Schedule of Expenditures of Federal Awards Required by the Uniform Guidance Management and the Board of Directors Family Health Center Inc. Kalamazoo, Michigan Independent Auditors Report Report on Compliance for Each Major Federal Program We have audited Family Health Center Inc. s compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on each of Family Health Center Inc. s major federal programs for the year ended. Family Health Center Inc. s major federal programs are identified in the summary of auditor s results section of the accompanying schedule of findings and questioned costs. Management s Responsibility Management is responsible for compliance with federal statutes, regulations, and the terms and conditions of its federal awards applicable to its federal programs. Auditor s Responsibility Our responsibility is to express an opinion on compliance for each of Family Health Center Inc. s major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about Family Health Center Inc. s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of Family Health Center Inc. s compliance. Opinion on Major Federal Program In our opinion, Family Health Center Inc. 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. 3
Report on Internal Control over Compliance Management of Family Health Center Inc. 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 Family Health Center Inc. s internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of Family Health Center Inc. 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. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose. Report on Schedule of Expenditures of Federal Awards Required by the Uniform Guidance We have audited the financial statements of Family Health Center Inc. as of and for the year ended December 31, 2017, and have issued our report thereon dated March 28, 2018, which contained an unmodified opinion on those financial statements. Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by the Uniform Guidance and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the schedule of expenditures of federal awards is fairly stated in all material respects in relation to the financial statements as a whole. Kalamazoo, MI March 28, 2018 4