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Kannapolis Charter Academy A Department of North Carolina Charter Educational Foundation, Inc. Basic Financial Statements For the Year Ended June 30, 2018

Kannapolis Charter Academy Table of Contents

Independent Auditor’s Report 1-3 Management's Discussion and Analysis (Not Covered by Independent Auditor’s Report) 4-10 Basic Financial Statements Government-wide Financial Statements: Statement of Net Position (Deficit) 11 Statement of Activities 12 Fund Financial Statements: Balance Sheet - Governmental Funds 13 Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Position (Deficit) 14 Statement of Revenues, Expenditures, and Changes in Fund Balances - Governmental Funds 15 Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities 16 Statement of Net Position - Proprietary Funds 17 Statement of Revenues, Expenses and Changes in Net Position - Proprietary Funds 18 Statement of Cash Flows - Proprietary Funds 19 Notes to the Financial Statements 20-29 Combining and Individual Fund Financial Statements and Schedule Combining Balance Sheet - Nonmajor Governmental Funds 30 Combining Statement of Revenues, Expenditures and Change in Fund Balances - Nonmajor Governmental Funds 31 Schedule of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual 32

Kannapolis Charter Academy Table of Contents (continued)

Supplemental Information Schedule of Expenditures of Federal and State Awards 33 Notes to Schedule of Expenditures of Federal and State Awards 34 Internal Controls and Compliance 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 35-36 Independent Auditor’s Report on Compliance with Requirements Applicable to Each Major State Program and Internal Control over Compliance in Accordance with OMB Uniform Guidance and the State Single Audit Implementation Act 37-38 Schedule of Findings and Questioned Costs 39-40

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INDEPENDENT AUDITOR’S REPORT To the Board of Directors Kannapolis Charter Academy A Department of North Carolina Charter Educational Foundation, Inc. Kannapolis, North Carolina Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of Kannapolis Charter Academy (the “School”), a Department of North Carolina Charter Educational Foundation, Inc. (the “Foundation”), as of and for the year ended June 30, 2018, and the related notes to the financial statements, which collectively comprise the School’s basic financial statements as listed in the table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express opinions 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 financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions.

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Kannapolis Charter Academy Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the School as of June 30, 2018, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter As discussed in Note 1, the financial statements of the School are intended to present the financial position, changes in financial position, and, where applicable, cash flows of only that portion of the governmental activities, the business-type activities, each major fund and the aggregate remaining fund information of the School that is attributable to the transactions of the School. They do not purport to, and do not, present fairly the financial position of the Foundation as of June 30, 2018 and the changes in its financial position, or, where applicable, its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis on pages 4 through 10 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the School's basic financial statements. The combining and individual non-major fund financial statements and budgetary schedule are presented for purposes of additional analysis and are not a required part of the basic financial statements. The schedule of expenditures of federal and state awards is presented for purposes of additional analysis as required by Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards and the State Single Audit Implementation Act, and is also not a required part of the basic financial statements.

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Kannapolis Charter Academy The combining and individual non-major fund financial statements, budgetary schedule and schedule of expenditures of federal and state awards are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the combining and individual non-major fund financial statements, budgetary schedule and schedule of expenditures of federal and state awards are fairly stated, in all material respects, in relation to the basic 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 October 24, 2018 on our consideration of the School's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is 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 the School’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 the School's internal control over financial reporting and compliance. KEEFE McCULLOUGH Fort Lauderdale, Florida October 24, 2018

MANAGEMENT’S DISCUSSION

AND ANALYSIS

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Kannapolis Charter Academy Management’s Discussion and Analysis June 30, 2018

As management of Kannapolis Charter Academy, we offer readers of the School's financial statements this narrative overview and analysis of the financial activities of the School for the fiscal year ended June 30, 2018 and 2017. We encourage readers to read the information presented here in conjunction with additional information that we have furnished in the School’s financial statements which follow this narrative.

Financial Highlights

• As of June 30, 2018, the School's governmental funds reported combined

ending fund balances of $ 1,493,261, as compared to $ 1,632,147 at June 30, 2017.

• The School’s total debt was $ 17,966,659 at June 30, 2018 as compared to

$ 18,254,754 at June 30, 2017. The debt relates to the Series 2016 Bond issuance.

• As of June 30, 2018, the liabilities of the School exceeded its assets at the close of the fiscal year by $ (1,902,100) as compared to $ (1,489,205) net position (deficit) at June 30, 2017.

Overview of the Financial Statements

This discussion and analysis is intended to serve as an introduction to the School’s basic financial statements. The School's basic financial statements consist of three components; 1) government-wide financial statements, 2) fund financial statements, and 3) notes to the financial statements (see Figure 1). The basic financial statements present two different views of the School through the use of government-wide statements and fund financial statements. In addition to the basic financial statements, this report contains other supplemental information that will enhance the reader's understanding of the financial condition of the School.

Required Components of Annual Financial Report

Figure 1

Summary Detail

Government-wide Financial

Statements

Fund Financial Statements

Notes to the Financial

Statements

Basic Financial Statements

Management's Discussion and

Analysis

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Basic Financial Statements

The first two statements (pages 11 through 12) in the basic financial statements are the Government-wide Financial Statements. They provide both short and long-term information about the School’s financial status.

The next statements (pages 13 through 19) are Fund Financial Statements. These statements focus on the activities of the individual parts of the School’s government. These statements provide more detail than the government-wide statements. There are two parts to the Fund Financial Statements: 1) the governmental funds statements; and 2) the proprietary fund statements.

The next section of the basic financial statements is the notes. The notes to the financial statements explain in detail some of the data contained in those statements. After the notes, supplemental information is provided to show details about the School's individual funds. Budgetary information for the School also can be found in this section of the statements.

Government-wide Financial Statements

The government-wide financial statements are designed to provide the reader with a broad overview of the School's finances, similar in format to a financial statement of a private sector business. The government-wide statements provide short and long-term information about the School's financial status as a whole.

The two government-wide statements report the School's net position and how they have changed. Net position is the difference between the School's total assets and total liabilities and deferred inflows of resources. Measuring net position is one way to gauge the School's financial condition.

The government-wide statements are divided into two categories: 1) governmental activities; and 2) business-type activities. The governmental activities include most of the School's basic functions such as instructional services and business services. State, county, and federal funds provide virtually all of the funding for these functions. The business-type activities are those services for which the School charges its students and other customers to provide. This includes the food services offered by the School.

The government-wide financial statements are on pages 11 through 12 of this report.

Fund Financial Statements

The fund financial statements provide a more detailed look at the School's most significant activities. A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The School, like all other governmental entities in North Carolina, uses fund accounting to ensure and reflect compliance (or non-compliance) with finance-related legal requirements, such as the North Carolina General Statutes or the School's budget ordinance. All of the funds of the School can be divided into two categories: governmental funds and proprietary funds.

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Governmental Funds: Governmental funds are used to account for those functions reported as governmental activities in the government-wide financial statements. Most of the School's basic services are accounted for in governmental funds. These funds focus on how assets can readily be converted into cash flow in and out, and what monies are left at year-end that will be available for spending in the next year. Governmental funds are reported using an accounting method called modified accrual accounting that provides a short-term spending focus. As a result, the governmental fund financial statements give the reader a detailed short-term view that helps him or her determine if there are more or less financial resources available to finance the School's programs. The relationship between governmental activities (reported in the Statement of Net Position and the Statement of Activities) and governmental funds is described in a reconciliation that is a part of the fund financial statements. The School adopts an annual budget for each of its funds, although it is not required to do so by the General Statutes. Because the budget is not legally required by the Statutes, the budgetary comparison statements are not included in the basic financial statements, but are part of the supplemental statements and schedules that follow the notes. The budget is a document that incorporates input from the faculty, management, and the Board of Directors of the School in determining what activities will be pursued and what services will be provided by the School during the year. It also authorizes the School to obtain funds from identified sources to finance these current period activities. The budgetary statement provided for the overall entity demonstrates how well the School has complied with the budget and whether or not the School has succeeded in providing the services as planned when the budget was adopted.

Proprietary Fund: The School has one proprietary fund, which is an enterprise fund. An Enterprise fund is used to report the same functions presented as business-type activities in the government-wide financial statements. The School uses the enterprise fund to account for its school food service functions.

Notes to the Financial Statements: The notes provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. The notes to the financial statements begin on page 20 of this report.

Government-Wide Financial Analysis

As noted earlier, net position (deficit) may, over time, serve as a useful indicator of a school's financial condition. The governmental liabilities of the School exceeded the assets by $ (1,902,100) as of June 30, 2018 as compared to $ (1,489,205) at June 30, 2017. The largest portion reflects the School's investment in capital assets (e.g. buildings, furniture, fixtures and equipment and computer equipment), less any related debt still outstanding that was issued to acquire those items. The School uses these capital assets to provide services to its students; consequently, these assets are not available for future spending. Although the School's net investment in capital assets is reported net of the outstanding related debt, the resources needed to repay that debt must be provided by other sources, since the capital assets cannot be used to liquidate these liabilities and a further $ 1,244,697 of the net position (deficit) represents amounts restricted for debt service. The remaining deficit balance of $ (7,732) is unrestricted as of June 30, 2018 as compared to an unrestricted balance of $ 41,834 at June 30, 2017.

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Kannapolis Charter Academy’s Net Position (Deficit) Figure 2

2018 2017 2018 2017 2018 2017

Current and other assets $ 2,386,922 $ 2,260,471 $ - $ 155 $ 2,386,922 $ 2,260,626 Capital assets 14,629,529 15,154,685 - - 14,629,529 15,154,685

Total assets 17,016,451 17,415,156 - - 17,016,451 17,415,311

Long-term liabilities outstanding 17,988,937 18,276,037 - - 17,988,937 18,276,037Other liabilities 929,614 628,324 - 155 929,614 628,479

Total liabilities 18,918,551 18,904,361 - - 18,918,551 18,904,516

Net investment in capital assets (deficit) (3,139,065) (2,805,665) - - (3,139,065) (2,805,665) Restricted for debt service 1,244,697 1,274,626 - - 1,244,697 1,274,626 Unrestricted (deficit) (7,732) 41,834 - - (7,732) 41,834

Total net position (deficit) $ (1,902,100) $ (1,489,205) $ - $ - $ (1,902,100) $ (1,489,205)

Governmental Activities Business-type Activities Total

Current and other assets increased due to an increase in cash and cash equivalents and receivables. Capital assets, net of depreciation decreased as a result of current year depreciation expense. Long-term liabilities outstanding decreased due to principal payments made on the School’s bond payable. Other liabilities increased mainly due to an increase in salaries and wages payable and amounts owed to the School’s management company

Kannapolis Charter Academy Changes in Net Position (Deficit) Figure 3

2018 2017 2018 2017 2018 2017

Revenues: Program revenues: Charges for services $ 87,919 $ 79,234 $ 32,142 $ 28,389 $ 120,061 $ 107,623 Operating grants and contributions 302,361 186,964 136,936 119,130 439,297 306,094 General revenues: County and state funds 3,492,946 3,275,039 - - 3,492,946 3,275,039 Grants and donations not restricted to specific programs 1,299,780 396,383 - - 1,299,780 396,383 Other 14,093 3,585 - - 14,093 3,585 Transfers in (out) (42,548) (23,370) 42,548 23,370 - -

Total revenues 5,154,551 3,917,835 211,626 170,889 5,366,177 4,088,724


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Kannapolis Charter Academy Changes in Net Position (Deficit) Figure 3

(Continued)

2018 2017 2018 2017 2018 2017

Expenses: Instructional services 3,304,641 2,753,190 - - 3,304,641 2,753,190 System-wide support services 1,286,787 1,483,387 - - 1,286,787 1,483,387 Ancillary services 51,371 50,119 - - 51,371 50,119 School food service - - 211,626 170,889 211,626 170,889 Interest and other charges 924,647 1,120,344 - - 924,647 1,120,344

Total expenses 5,567,446 5,407,040 211,626 170,889 5,779,072 5,577,929

Increase in net position (deficit) (412,895) (1,489,205) - - (412,895) (1,489,205)

Net position (deficit), July 1 (1,489,205) - - - (1,489,205) -

Net position (deficit), June 30 $ (1,902,100) $ (1,489,205) $ - $ - $ (1,902,100) $ (1,489,205)


County and state fund revenues increased compared to the previous year as a result of an increase in enrollment. The School’s operating grants and contributions increased as a result of additional Title and IDEA grant funding. The School received a higher contribution which is shown in grants and donations not restricted to specific programs. Total expenses increased as a result of the increase in enrollment and additional spending through use of the grant funds. The increases were offset by a decrease in debt service expenses as a result of bond issuance costs expensed in the previous year.

Financial Analysis of the School's Funds

As noted earlier, the School uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements.

Governmental Funds: The focus of the School's governmental funds is to provide information on near-term inflows, outflows, and balances of usable resources. Such information is useful in assessing the School's financing requirements. Specifically, unassigned fund balance can be a useful measure of a government's net resources available for spending at the end of the fiscal year.

The General Fund is the chief operating fund of the School. As of June 30, 2018, unassigned fund balance of the General Fund was zero, while total fund balance reached $ 1,492,644. At June 30, 2017, unassigned fund balance of the General Fund was zero, while total fund balance reached $ 1,625,653. At June 30, 2018, the governmental funds of the School reported a combined fund balance of $ 1,493,261 as compared to $ 1,632,147 at June 30, 2017.

Proprietary Funds: The School's proprietary fund provides the same type of information found in the government-wide statements but in more detail. The School Food Service Fund did not have any net position at the end of the fiscal year. This fund’s expenses exceeded the food sales and federal reimbursements so the General Fund transferred funds to cover the shortfall.

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Capital Asset and Debt Administration Capital Assets: The School's investment in capital assets for its governmental activities as of June 30, 2018, totals $ 14,629,529 (net of accumulated depreciation). These assets include a building, furniture, fixtures and equipment and computer equipment. At June 30, 2017, the School’s investment in capital assets totaled $ 15,154,685 (net of accumulated depreciation). The major capital asset transaction during the year includes the following addition:

• The School purchased $ 61,111 of furniture, fixtures and equipment and

$40,056 of computer equipment during the year ended June 30, 2018.

Kannapolis Charter Academy’s Capital Assets (Net of Depreciation)

Figure 4

2018 2017

Buildings $ 14,082,487 $ 14,451,460

Furniture, fixtures and equipment 387,302 445,964

Computer equipment 159,740 257,261

Total $ 14,629,529 $ 15,154,685

Governmental Activities

Additional information on the School's capital assets can be found in Note 2 of the Basic Financial Statements.

Long-term Debt: As of June 30, 2018, the School had total debt outstanding of $ 17,966,659. All of the debt relates to the issuance of Education Revenue Bonds, Series 2016 to finance the acquisition of its facilities and equipment. At June 30, 2017, total debt outstanding was $ 18,254,754.

Kannapolis Charter Academy’s Outstanding Debt

Figure 5

2018 2017

Bonds payable $ 17,966,659 $ 18,254,754

Governmental Activities

Budgetary Highlights

State revenues were favorable to the budget due to a higher rate per student than anticipated. Local source revenues were unfavorable to the budget due to lower enrollment than budgeted. Donations and other revenues had a favorable variance due to higher contributions. Instructional services were unfavorable to the budget due to higher personnel costs. System-wide support services were favorable to the budget mainly due to savings in advertising and marketing expenditures. Overall, the School ended the year with a change in fund balance that was favorable to the budget by approximately $ 105,000.

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Economic Factors In fiscal year 2018, the state and local funding decrease was driven by lower enrollment. Fiscal year 2018 also included a merit increase for all staff plus an additional 5% salary increase for teachers. For fiscal year 2019, the Schools are expected to increase enrollment. With no change in per pupil funding or grant allocations expected, overall revenue growth will be proportional to the enrollment increase. Compensation expenses include a merit increase for all staff. Other expenditures are budgeted in proportion to enrollment and include costs required to meet the School’s strategic objectives.

Requests for Information

This report is designed to provide an overview of the School's finances for those with an interest in this area. Questions concerning any of the information found in this report or requests for additional information should be directed to Hillary Daigle, Vice President of Finance; Charter Schools USA; 800 Corporate Drive, Suite 700; Fort Lauderdale, Florida 33334.

BASIC

FINANCIAL STATEMENTS

The accompanying notes to basic financial statements are an integral part of these statements.

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Kannapolis Charter AcademyStatement of Net Position (Deficit)June 30, 2018

Governmental Business-typeActivities Activities Total

Assets:Cash and cash equivalents $ 314,410 $ - $ 314,410Due from other governments 78,792 643 79,435Other receivables 500,279 - 500,279Internal balances 643 (643) - Due from related party 154 - 154Prepaid items 13,929 - 13,929Restricted investments 1,478,715 - 1,478,715Capital assets, net of depreciation 14,629,529 - 14,629,529

Total assets 17,016,451 - 17,016,451

Liabilities:Accounts payable and accrued liabilities 19,240 - 19,240Accrued salaries and wages payable 258,601 - 258,601Due to management company 615,633 - 615,633Accrued interest payable 35,953 - 35,953Due to related party 187 - 187Long-term liabilities: Due within one year 316,709 - 316,709 Due in more than one year 17,672,228 - 17,672,228

Total liabilities 18,918,551 - 18,918,551

Net Position (Deficit):Net investment in capital assets (deficit) (3,139,065) - (3,139,065)Restricted for debt service 1,244,697 - 1,244,697Unrestricted (deficit) (7,732) - (7,732)

Total net position (deficit) $ (1,902,100) $ - $ (1,902,100)

Primary Government


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Operating CapitalCharges for Grants and Grants and Governmental Business-type

Expenses Services Contributions Contributions Activities Activities Total

Primary government: Governmental activities:

Instructional services $ 3,304,641 $ - $ 221,968 $ - $ (3,082,673) $ - $ (3,082,673)System-wide support services 1,286,787 - 80,393 - (1,206,394) - (1,206,394)Ancillary services 51,371 87,919 - - 36,548 - 36,548Interest and other charges 924,647 - - - (924,647) - (924,647)

Total governmental activities 5,567,446 87,919 302,361 - (5,177,166) - (5,177,166)

Business-type activities:School food service 211,626 32,142 136,936 - - (42,548) (42,548)

Total business-type activities 211,626 32,142 136,936 - - (42,548) (42,548)

Total primary government $ 5,779,072 $ 120,061 $ 439,297 $ - (5,177,166) (42,548) (5,219,714)

General revenues: Unrestricted State appropriations 2,789,378 - 2,789,378 Unrestricted County appropriations 703,568 - 703,568 Donations - general 1,299,780 - 1,299,780 Miscellaneous, unrestricted 14,093 - 14,093Transfers (42,548) 42,548 -

Total general revenues 4,764,271 42,548 4,806,819

Change in net position (deficit) (412,895) - (412,895)

Net position - beginning (1,489,205) - (1,489,205)

Net position (deficit) - ending $ (1,902,100) $ - $ (1,902,100)

Functions/Programs

For the Year Ended June 30, 2018

Kannapolis Charter AcademyStatement of Activities

Program Revenues Net (Expense) Revenue andChanges in Net Position


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Total TotalState Public Nonmajor Governmental

General School Funds Funds

Assets:Cash and cash equivalents $ 313,793 $ - $ 617 $ 314,410Due from other governments 78,792 - - 78,792Due from other funds 643 - - 643Due from related party 154 - - 154Other receivables 500,279 - - 500,279Prepaid items 13,929 - - 13,929Restricted investments 1,478,715 - - 1,478,715

Total assets 2,386,305 - 617 2,386,922

Liabilities and Fund Balances: Liabilities:

Accounts payable and accrued liabilities 19,240 - - 19,240Accrued salaries and wages payable 258,601 - - 258,601Due to management company 615,633 - - 615,633Due to related party 187 - - 187

Total liabilities 893,661 - - 893,661

Fund balances: Nonspendable:

Prepaid items 13,929 - - 13,929 Restricted for capital projects 198,065 - - 198,065 Restricted for debt service 1,280,650 - - 1,280,650 Assigned:

Clubs and activities - - 617 617

Total fund balances 1,492,644 - 617 1,493,261

Total liabilities and fund balances $ 2,386,305 $ - $ 617 $ 2,386,922

Kannapolis Charter AcademyBalance Sheet - Governmental FundsJune 30, 2018

Major Funds


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Total Fund Balances - Governmental Funds $ 1,493,261

Amounts reported for governmental activities in the statement of net position (deficit) are different because:

Capital assets used in governmental activities are not financial resources and therefore are not reported in the funds (total capital assets on government-wide statement in governmental activities column). 14,629,529

Liabilities that, because they are not due and payable in the current period, do not require current resources to pay and are therefore not reported in the fund statements:

Compensated absences $ (22,278)Accrued interest payable (35,953)Bonds, leases and installment financing (17,966,659) (18,024,890)

Net Position (Deficit) of Governmental Activities $ (1,902,100)

Kannapolis Charter AcademyReconciliation of the Balance Sheet of the Governmental Fundsto the Statement of Net Position (Deficit)June 30, 2018


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State Total TotalPublic Nonmajor Governmental

General School Funds Funds

Revenues:State of North Carolina $ - $ 2,798,648 $ - $ 2,798,648Boards of Education 703,568 - - 703,568U.S. Government - - 212,698 212,698Childcare 87,919 - - 87,919Donations 1,219,656 - 80,124 1,299,780Other 94,486 - - 94,486

Total revenues 2,105,629 2,798,648 292,822 5,197,099

Expenditures: Current:

Instructional services 850,490 1,910,584 285,222 3,046,296System-wide support services 460,483 443,854 13,477 917,814Ancillary services 51,371 - - 51,371

Capital outlay 29,093 72,074 - 101,167 Debt service:

Principal 274,747 15,253 - 290,000Interest and other charges 529,906 356,883 - 886,789

Total expenditures 2,196,090 2,798,648 298,699 5,293,437

Excess (deficiency) of revenues over expenditures (90,461) - (5,877) (96,338)

Other Financing Sources (Uses):Transfer to other fund (42,548) - - (42,548)

Net change in fund balance (133,009) - (5,877) (138,886)

Fund balances - beginning 1,625,653 - 6,494 1,632,147

Fund balances - ending $ 1,492,644 $ - $ 617 $ 1,493,261

Kannapolis Charter AcademyStatement of Revenues, Expenditures andChanges in Fund Balances - Governmental FundsFor the Year Ended June 30, 2018

Major Funds


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Net Change in Fund Balances - Governmental Funds $ (138,886)

Amounts reported for governmental activities in the statement of activities are different because:

Governmental funds report capital outlays as expenditures; however, in the statement of activities, the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. This is the amount by which capital outlays exceeded depreciation in the current period. (525,156)

Principal payments on long-term debt are reported as expenditures in governmental funds, but as a reduction of long-term liabilities in the statement of net position. 290,000

Some expenses reported in the statement of activities do not require the use of current financial resources and, therefore, are not reported as expenditures in governmental funds:

Change in accrued interest payable $ (35,953)Change in compensated absences (995)Provision for amortization of bond discount (1,905) (38,853)

Change in Net Position (Deficit) of Governmental Activities $ (412,895)


Kannapolis Charter AcademyReconciliation of the Statement of Revenues,

Governmental Funds to the Statement of ActivitiesExpenditures and Changes in Fund Balances of the


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EnterpriseFund

School FoodService

Assets: Current assets:

Due from other governments $ 643

Total assets 643

Liabilities: Current liabilities:

Due to other funds $ 643

Total liabilities 643

Net Position:Unrestricted -

Total net position $ -

Kannapolis Charter AcademyStatement of Net Position -Proprietary FundsJune 30, 2018


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EnterpriseFund

School FoodService

Operating Revenues:Food sales $ 32,142

Total operating revenues 32,142

Operating Expenses:Food cost: Purchase of food 153,639Salaries and benefits 57,987

Total operating expenses 211,626

Operating loss (179,484)

Nonoperating Revenues:Federal reimbursements 136,936Transfer from other fund 42,548

Total nonoperating revenues 179,484

Change in net position -

Total net position - beginning -

Total net position - ending $ -

Kannapolis Charter AcademyStatement of Revenues, Expenses and Changes in Fund Net Position -Proprietary FundsFor the Year Ended June 30, 2018


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EnterpriseFund

School FoodService

Cash Flows from Operating Activities:Cash received from customers $ 32,142Cash paid for goods and services (153,794)Cash paid to employees for services (57,987)

Net cash used by operating activities (179,639)

Cash Flows from Noncapital Financing Activities:Federal reimbursements 140,670Transfer from other fund 42,548Due to other funds (3,579)

Net cash provided by noncapital financing activities 179,639

Net increase (decrease) in cash -

Balances - beginning -

Balances - ending $ -

Reconciliation of operating loss to net cash used by operating activities:

Operating loss $ (179,484)

Adjustments to reconcile operating loss to net cash used by operating activities:

Decrease in accounts payable (155)

Net cash used by operating activities $ (179,639)

Kannapolis Charter AcademyStatement of Cash Flows -Proprietary FundsFor the Year Ended June 30, 2018

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Kannapolis Charter Academy Notes to Basic Financial Statements June 30, 2018

Note 1 - Summary of Significant Accounting Policies The accounting policies of Kannapolis Charter Academy (the “School”) conform to generally accepted accounting principles (GAAP) as applicable to governments. Charter schools are established by non-profit entities. Because of the authority of the State Board of Education (SBE) to unilaterally terminate a school with all the assets reverting to a local education agency, the charter schools in North Carolina follow the governmental reporting model, as used by local education agencies. The following is a summary of the more significant accounting policies. Reporting Entity: The School is a public school and a Department of North Carolina Charter Educational Foundation, Inc. (“NCCEF”), a local non-profit corporation, serving approximately 517 students. The School operates under an approved charter received from the SBE and applied for under the provisions of General Statute (G.S.) 115C-218.1. G.S. 115C-218.30 which states that a charter school shall be subject to the audit requirements adopted by the SBE, which includes the audit requirements established by G.S. 115C-447 of the School Budget and Fiscal Control Act (SBFCA). G.S. 115C-447 also requires financial statements to be prepared in accordance with GAAP. Basis of Presentation: Government-wide Statements: The statement of net position and the statement of activities display information about the School. These statements include the financial activities of the overall government. Eliminations have been made to minimize the double counting of internal activities. These statements distinguish between the governmental and business-type activities of the School. Governmental activities generally are financed through intergovernmental revenues and other non-exchange transactions. Business-type activities are financed in whole or in part by fees charged to external parties. The statement of activities presents a comparison between direct expenses and program revenues for the different business-type activities of the School and for each function of the School's governmental activities. Direct expenses are those that are specifically associated with a program or function and, therefore, are clearly identifiable to a particular function. Indirect expense allocations that have been made in the funds have been reversed for the statement of activities. Program revenues include (a) fees and charges paid by the recipients of goods or services offered by the programs and (b) grants and contributions that are restricted to meeting the operational or capital requirements of a particular program. Revenues that are not classified as program revenues are presented as general revenues. Fund Financial Statements: The fund financial statements provide information about the School's funds. Separate statements for each fund category - governmental and proprietary are presented. The emphasis of fund financial statements is on major governmental and enterprise funds, each displayed in a separate column. All remaining governmental and enterprise funds are aggregated and reported as non-major funds. Proprietary fund operating revenues, such as charges for services, result from exchange transactions associated with the principal activity of the fund. Exchange transactions are those in which each party receives and gives up essentially equal values. Nonoperating revenues, such as subsidies and investment earnings, result from non-exchange transactions or ancillary activities. The School reports the following major governmental funds:

General Fund. The General Fund is the general operating fund of the School. The General Fund accounts for all financial resources except those that are required to be accounted for in another fund. State Public School Fund. The State Public School Fund includes appropriations from the Department of Public Instruction for specific operating needs of the public school system and is reported as a special revenue fund.

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Note 1 - Summary of Significant Accounting Policies (continued) The School reports the following major enterprise fund:

School Food Service Fund. The School Food Service Fund is used to account for the food service program within the school system.

Measurement Focus and Basis of Accounting: Government-wide and Proprietary Fund Financial Statements. The government-wide and proprietary fund financial statements are reported using the economic resources measurement focus. The government-wide and proprietary fund financial statements are reported using the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded at the time liabilities are incurred, regardless of when the related cash flows take place. Nonexchange transactions, in which the School gives (or receives) value without directly receiving (or giving) equal value in exchange, include grants and donations. Revenue from grants and donations is recognized in the fiscal year in which all eligibility requirements have been satisfied. Governmental Fund Financial Statements. Governmental funds are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Under this method, revenues are recognized when measurable and available. The School considers all revenues reported in the governmental funds to be available if the revenues are collected within sixty days after year-end. These could include federal, State, and county grants, and some charges for services. Expenditures are recorded when the related fund liability is incurred, except for principal and interest on general long-term debt, claims and judgments, and compensated absences, which are recognized as expenditures to the extent they have matured. General capital asset acquisitions are reported as expenditures in governmental funds. Proceeds of general long-term debt and acquisitions under capital leases are reported as other financing sources. Under the terms of grant agreements, the School funds certain programs by a combination of specific cost-reimbursement grants and general revenues. Thus, when program expenses are incurred, there is both restricted and unrestricted net position available to finance the program. It is the School's policy to first apply cost-reimbursement grant resources to such programs and then general revenues. Budgetary Data: A unit-wide budget is adopted annually, except for the Club and Activities Fund. The budget is prepared using the modified accrual basis of accounting. Assets, Liabilities, Deferred Outflows and Inflows of Resources, and Fund Equity Cash and Cash Equivalents: The School considers demand deposits and short-term investments purchased with an original maturity of three months or less to be cash and cash equivalents. Prepaid Items: Certain payments to vendors reflect costs applicable to future accounting periods and are recorded as prepaid items. Capital Assets: The School's purchased or constructed capital assets are recorded at cost or estimated historical cost. Donated capital assets are recorded at acquisition value. It is the policy of the School to capitalize all capital assets costing more than $ 750 with an estimated useful life of over one year. Improvements are capitalized and depreciated over the remaining useful lives of the related capital assets. All depreciable assets are depreciated using the straight-line method of depreciation. The cost of normal maintenance and repairs that do not add to the value of the asset or materially extend asset lives are not capitalized.

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Note 1 - Summary of Significant Accounting Policies (continued) Capital assets are depreciated over the following estimated useful lives: Buildings 40 years Furniture, fixtures and equipment 5 years Computer equipment 3 years Deferred Outflows/Inflows of Resources: In addition to assets, the statement of financial position will sometimes report a separate section for deferred outflows of resources. This separate financial statement element, Deferred Outflows of Resources, represents a consumption of net position that applies to a future period and so will not be recognized as an expense or expenditure until then. The School has no items that meet this criterion. In addition to liabilities, the statement of financial position will sometimes report a separate section for deferred inflows of resources. This separate financial statement element, Deferred Inflows of Resources, represents an acquisition of net position that applies to a future period and so will not be recognized as revenue until then. The School has no items that meet the criterion for this category. Long-Term Obligations: In the government-wide financial statements and proprietary fund types in the fund financial statements, long-term debt and other long-term obligations are reported as liabilities in the applicable governmental activities, business-type activities, or proprietary fund-type statement of net position. In the fund financial statements, governmental fund types report the face amount of debt issued as other financing sources. Compensated Absences: The School’s policy permits employees to accumulate earned but unused paid time off, which is eligible for payment upon separation from service. The liability for such leave is reported as incurred in the government-wide and proprietary fund financial statements. A liability for those amounts is recorded in the governmental funds only if the liability has matured as a result of employee resignations or retirements. The liability for compensated absences includes salary-related benefits, where applicable. Payment for compensated absences are generally paid out of the General Fund. Net Position/Fund Balances Net Position: Net position in the government-wide and proprietary fund financial statements are classified in three categories. The general meaning of each is as follows:

Net investment in capital assets - represents the difference between the cost of capital assets, less accumulated depreciation reduced by the outstanding balances of any borrowings used for acquisition, construction or improvements of those assets.

Restricted - consists of net position with constraints placed on their use either by 1) external groups such as creditors, grantors, contributors, or laws or regulations of other governments, or 2) law through constitutional provisions or enabling legislation.

Unrestricted (deficit) - indicates that portion of net position that will need to be funded by future operations.

Fund Balance: In the governmental fund financial statements, fund balance is composed of five classifications designed to disclose the hierarchy of constraints placed on how fund balance can be spent.

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Note 1 - Summary of Significant Accounting Policies (continued) The governmental fund types classify fund balances as follows:

Nonspendable Fund Balance - This classification includes amounts that cannot be spent because they are either (a) not in spendable form or (b) legally or contractually required to be maintained intact.

Prepaid Items and Deposits- portion of fund balance that is not an available resource because it represents the year-end balance that is not expected to be converted to cash.

Restricted Fund Balance - This classification includes amounts that are restricted to specific purposes externally imposed by creditors or imposed by law. Committed Fund Balance - portion of fund balance that can only be used for specific purpose imposed by majority vote of School's governing body (highest level of decision-making authority). Any changes or removal of the specific purpose requires majority action by the governing bodies that approved the original action. Assigned fund balance - portion of fund balance that the School intends to use for specific purposes.

Subsequent year's expenditures - portion of fund balance that is appropriated in the next year's budget that is not already classified in restricted or committed.

Assigned for Clubs and Activities funds - revenue sources restricted for expenditures for the various clubs and organizations, athletic events, and various fund raising activities for which they were collected.

Unassigned fund balance -the portion of fund balance that has not been assigned to another fund or restricted, committed, or assigned to specific purposes within the general fund.

For purposes of fund balance classification, expenditures are to be spent from restricted fund balance first, followed in order by committed fund balance, assigned fund balance, and lastly, unassigned fund balance.

Revenues, Expenditures, and Expenses Funding: The School is funded by the State Board of Education, receiving (i) an amount equal to the average per pupil allocation for the average daily membership (ADM) from the local school administrative unit allotments in which the School is located for each child attending the School except for the allocation for children with special needs and (ii) an additional amount for each child attending the School who is a child with special needs [G.S. 115C-218.105(a)]. Additionally, the School receives, for each student who resides in the local administrative unit and attends the charter school, an amount equal to the per pupil local current expense appropriation to the respective local school administrative unit for the fiscal year which is transferred by the appropriate local school administrative unit(s) [G.S. 115C-218.105(c)]. For the fiscal year ended June 30, 2018, the School received funding from the Board of Education for Kannapolis City Schools, Cabarrus County Schools, Rowan-Salisbury Schools and Charlotte-Mecklenburg Schools.

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Note 1 - Summary of Significant Accounting Policies (continued)

Furthermore, the School has received donations of cash from private organizations. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Date of Management Review: Subsequent events were evaluated by management through October 24, 2018, which is the date the financial statements were available to be issued.

Note 2 - Detail Notes on All Funds Assets Deposits: At June 30, 2018, the School had deposits at a bank with a carrying amount of $ 313,910 and a bank balance of $ 331,741. The bank balance was covered by federal depository insurance up to $ 250,000. The School does not have a deposit policy for custodial credit risk. The School holds $ 500 in petty cash. Restricted investments: In August 2016, NCCEF borrowed funds for the acquisition of facilities for several of their schools, including Kannapolis Charter Academy. The restricted investments of the School are governed by the Bond Indenture. The investments are held by the Trustee and are restricted for debt service and capital projects. At June 30, 2018 the School has $ 1,478,715 invested in a money market mutual fund that is stated at amortized cost which approximates fair value. Credit Risk Concentration of credit risk is the risk of loss attributed to the magnitude of investment in a single issuer. The exposure to credit risk is limited because the money market mutual fund is rated Aaa-mf by Moody’s. Interest rate risk is the risk that changes in interest rate will adversely affect the fair value of an investment. The exposure to declines in fair values is limited because the weighted average maturity of the money market fund is twenty six days. Due From/To Related Parties: The School, Cabarrus Charter Academy (“CABA”), and Langtree Charter Academy (“LANG”) are related, as they share common board membership and are Departments of NCCEF. As of June 30, 2018, the basic financial statements include an amount due from CABA of $ 154, and due to LANG of $ 187 for shared payroll expenses.

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Note 2 - Detail Notes on All Funds (continued)

Capital Assets: Capital asset activity for the year ended June 30, 2018 was as follows:

Beginning EndingBalances Increases Decreases Balances

Governmental activities: Capital assets being depreciated: Buildings $ 14,758,938 $ - $ - $ 14,758,938 Furniture, fixtures and equipment 538,495 61,111 - 599,606 Computer equipment 375,150 40,056 - 415,206

Total capital assets, depreciable 15,672,583 101,167 - 15,773,750

Less accumulated depreciation for: Buildings 307,478 368,973 - 676,451 Furniture, fixtures and equipment 92,531 119,773 - 212,304 Computer equipment 117,889 137,577 - 255,466

Total accumulated depreciation 517,898 626,323 - 1,144,221

Governmental activity capital assets, net $ 15,154,685 $ (525,156) $ - $ 14,629,529

Depreciation expense was charged to governmental functions as follows:

Instructional programs $ 257,350 Supporting services 368,973

$ 626,323

Liabilities Retirement Plan: During the year ended June 30, 2018, the School offered all of its full-time employees, who had attained 21 years of age, a retirement plan (the “Plan”) under Internal Revenue Code Section 401(k). The employee is allowed to contribute up to a maximum of 100% of his/her annual gross compensation, subject to certain limitations. The Plan provides for a discretionary employer matching contribution of the participant’s annual elective deferral to the Plan. As determined annually by the School’s management, the School may also make a discretionary profit sharing contribution, which is allocated among the participants based on a pro rata formula. Participants are immediately vested in their own contributions and earnings on those contributions. Participants become vested in School contributions and earnings on School contributions according to the following schedule: Years of Service Vesting Percentage 1 25% 2 50% 3 75% 4 100% Nonvested contributions are forfeited upon termination of employment and such forfeitures are used to reduce any employer contribution. For the year ended June 30, 2018, the School contributed a matching amount of $ 5,256.

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Risk Management: As disclosed in Note 3, the School has a formal agreement with CSUSA to manage, staff and operate the School. Under that agreement, CSUSA employs all of the employees of the School except teachers who are jointly employed by CSUSA and the School. Teachers are included in the compensation, benefits, payroll administration, and employment policies and practices of CSUSA. In addition, CSUSA carries all required insurance including but not limited to, general liability, errors and omissions and workers’ compensation. Long-Term Obligations Bonds Payable: The Public Finance Authority (the “Authority”) previously issued $ 110,470,000 in Tax Exempt Education Revenue Bonds, Series 2016A and $ 600,000 in Taxable Education Revenue Bonds, Series 2016B pursuant to an Indenture of Trust between the Authority and a Trustee to make a loan to NCCEF, a department of which the School exists to finance the acquisition of the facilities and equipment of four charter schools existing under NCCEF. The Series 2016A Bonds bear interest at 4.10% through June 2026 and then at 5.00% through June 2046. The Series 2016B Bonds bear interest at 6.125% through June 2020. Principal and interest will be paid semi-annually on June 15 and December 15. In order to secure the payment of the principal and interest on the Bonds, the Authority assigned all of its rights and interest in the loan agreement to the Trustee. The Bonds are payable from and secured by a lien upon and pledge of payments to be received by the Trustee. The Series 2016 Indenture requires reserve funds equal to $ 7,130,000 for the Series 2016A Bonds. As of June 30, 2018, NCCEF’s reserve fund account balance was sufficient to satisfy this requirement. NCCEF must also meet a long-term debt service coverage ratio of 1.00 to 1.00 for the Series 2016 Bonds for the year ended June 30, 2018 and 1.15 to 1.00 for each fiscal year thereafter. For the year ended June 30, 2018, NCCEF’s long-term debt service coverage ratio was as follows:

Debt Service Coverage Ratio Cash Flow (Numerator) 2018 increase (decrease) in net position $ (1,759,104) Add: 2018 depreciation expense 3,960,589 2018 interest expense 5,233,940 2018 ground rent 464,597 Less: 2018 investment income (56,427)

$ 7,843,595

Debt Service (Denominator) 2045 portion of long-term debt $ 6,210,000 2045 interest expense 920,000

$ 7,130,000

Cash Flow $ 7,843,595 Debt Service $ 7,130,000 1.10

Required minimum is 1.00. NCCEF is in compliance with the debt service coverage ratio.

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The School’s share of the annual debt service requirements to maturity for the Series 2016 Bond is as follows:

Year EndingJune 30, Principal Interest Total

2019 $ 300,000 $ 873,985 $ 1,173,9852020 315,000 860,874 1,175,8742021 330,000 847,247 1,177,2472022 340,000 833,615 1,173,6152023 355,000 819,573 1,174,573

2024-2028 2,015,000 3,858,778 5,873,7782029-2033 2,570,000 3,314,750 5,884,7502034-2038 3,290,000 2,595,125 5,885,1252039-2043 4,225,000 1,671,625 5,896,6252044-2046 4,280,000 439,000 4,719,000

$ 18,020,000 $ 16,114,572 $ 34,134,572

Changes in General Long-Term Obligations: The following is a summary of changes in the School's long-term obligations for the fiscal year ended June 30, 2018:

Beginning Ending CurrentBalance Additions Retirements Amortization Balance Portion

Governmental activities: Series 2016 Education Revenue Bonds, net of unamortized discount of $ 53,341 $ 18,254,754 $ - $ 290,000 $ 1,905 $ 17,966,659 $ 300,000 Compensated absences 21,283 11,701 10,706 - 22,278 16,709

Total $ 18,276,037 $ 11,701 $ 300,706.00 $ 1,905 $ 17,988,937 $ 316,709

Interfund Balances: These interfund balances result from the time lag between the dates (1) Interfund goods and services are provided or reimbursable expenditures occur, (2) transactions are recorded in the accounting system, and (3) payments are actually made between funds. Due from and to other funds at June 30, 2018 are summarized as follows:

Due FromEnterprise

Funds

Due To: General Fund $ 643

Transfers to/from other funds at June 30, 2018, consist of the following:

From the General Fund to the Enterprise Fund to fund expenses in excess of revenues $ 42,548

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Kannapolis Charter Academy Notes to Basic Financial Statements June 30, 2018 Note 2 - Detail Notes on All Funds (continued)

Transfers are used to move unrestricted revenues to finance various programs that the School must account for in other funds.

Fund Balance: For purposes of fund balance classification expenditures are to be spent from restricted fund balance first, followed in order by committed fund balance, assigned fund balance, and lastly, unassigned fund balance. The following schedule provides management and citizens with information on the portion of General Fund balance that is available for appropriation:

Total fund balance $ 1,492,644Less: Prepaid items 13,929 Restricted for capital projects 198,065 Restricted for debt service 1,280,650

Remaining fund balance $ -

Note 3 - Summary Disclosure of Significant Commitments and Contingencies

Federal and State Assisted Programs: The School has received proceeds from several Federal and State grants. Periodic audits of these grants are required and certain costs may be questioned as not being appropriate expenditures under the grant agreements. Such audits could result in the refund of grant moneys to the grantor agencies. Management believes that any required refunds will be immaterial. No provision has been made in the accompanying financial statements for the refund of grant monies.

Management Agreement: The School has a formal agreement with Charter Schools USA at Kannapolis, LLC (“CSUSA at KCA”) to manage, staff and operate the School. The agreement has an initial term which coincides with the Charter term, including any and all charter renewals, unless terminated by either party. The agreement states that CSUSA at KCA shall be entitled to cost reimbursements and management fees (the “fee”) for its services, subject to availability of funds. The fee is subordinated to all bond payment requirements (Note 2). The fee ranges from $ 790,276 for fiscal year 2019 to $ 2,247,935 for fiscal year 2046. For the year ending June 30, 2018 CSUSA at KCA did not receive a fee and CSUSA at KCA contributed $ 606,562 to the School. The School also has an amount due to CSUSA at KCA of $ 615,633 as of June 30, 2018 for expenses paid on behalf of the School. Land Lease Agreement: Concurrent with the Series 2016 Bond issuance (Note 2), Red Apple Development, LLC and subsidiaries (“RAD”) entered into four land lease agreements with NCCEF. The land which is owned by RAD is leased by NCCEF on behalf of the schools under a fifty year lease. In addition to ground rent, NCCEF shall pay to RAD the total cost of ad valorem taxes, assessments and levies imposed upon the premises. Total cost to the School for the ground rent was $ 93,382 for the year ended June 30, 2018. In addition to the contribution from CSUSA, RAD also contributed $ 613,094 to the School. At June 30, 2018, RAD owes the School $ 476,295 which is included in other receivables.

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Kannapolis Charter Academy Notes to Basic Financial Statements June 30, 2018 Note 3 - Summary Disclosure of Significant Commitments and Contingencies (continued)

The following is a schedule of the School’s future base rent payments as of June 30, 2018:

Year EndingJune 30,

2019 $ 95,2492020 97,1542021 99,0972022 101,0792023 103,100

2024-2028 547,2682029-2033 604,2292034-2038 667,1182039-2043 736,5532044-2048 813,2132049-2053 897,8542054-2058 991,3032059-2063 1,094,4772064-2067 730,777

$ 7,578,471

NON-MAJOR FUNDS

Federal Grants Fund - This fund is used to account for the federal moneys that are passed through the State Department of Public Instruction to the School.

Club and Activities Fund - This fund is used to account for the funds raised and earned by the

various clubs and activities, including any athletic teams, that are part of the School.

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Federal Club andGrants ActivitiesFund Fund Total

Assets:Cash and cash equivalents $ - $ 617 $ 617

Total assets - 617 617

Liabilities and Fund Balances:Liabilities - - -

Total liabilities - - -

Fund balances: Assigned - clubs and activities - 617 617

Total liabilities and fund balances $ - $ 617 $ 617

Kannapolis Charter AcademyNonmajor Governmental Funds -Combining Balance SheetJune 30, 2018

Special Revenue Funds

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Federal Club andGrants ActivitiesFund Fund Total

Revenues:U.S. Government: IDEA, Part B $ 73,906 $ - $ 73,906 Title IV, Part A 5,859 5,859 Title I 122,583 - 122,583 Supporting Effective Instruction 10,350 - 10,350

Total U.S. Government 212,698 - 212,698

Donations - 80,124 80,124

Total revenues 212,698 80,124 292,822

Expenditures:Current: Instructional services 202,348 82,874 285,222 System-wide support services 10,350 3,127 13,477

Total expenditures 212,698 86,001 298,699

Net change in fund balances - (5,877) (5,877)

Fund balances - beginning - 6,494 6,494

Fund balances - ending $ - $ 617 $ 617

Kannapolis Charter AcademyNonmajor Governmental Funds -Combining Statement of Revenues, Expenditures and Changes in Fund BalancesFor the Year Ended June 30, 2018

Special Revenue Funds

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Original Favorableand Final (Unfavorable)Budget Actual Variance

Revenues:State of North Carolina $ 3,382,633 $ 2,798,648 $ (583,985) Boards of Education: Kannapolis City Schools 602,785 168,224 (434,561) Cabarrus County Schools 347,427 333,909 (13,518) Rowan-Salisbury Schools 213,842 181,796 (32,046) Charlotte-Mecklenburg Schools 18,541 19,639 1,098U.S. Government 199,321 212,698 13,377Childcare 115,757 87,919 (27,838)Donations and other 504,164 1,394,266 890,102Operating revenues, food sales 35,375 32,142 (3,233)

Total revenues 5,419,845 5,229,241 (190,604)

Expenditures:Current: Instructional services 3,033,770 3,046,296 (12,526)

System-wide support services 1,089,374 917,814 171,560

Ancillary services 56,094 51,371 4,723

Food service expenditures: Food purchases 177,259 153,639 23,620 Salaries and benefits 52,397 57,987 (5,590)

Total food service 229,656 211,626 18,030

Capital outlay 256,590 101,167 155,423

Debt service: Principal 291,667 290,000 1,667 Interest and other charges 885,747 886,789 (1,042)

Total debt service 1,177,414 1,176,789 625

Total expenditures 5,842,898 5,505,063 337,835

Other financing sources: Federal reimbursements 179,146 136,936 (42,210)

Total other financing sources 179,146 136,936 (42,210)

Excess (deficiency) of revenue over expenditures $ (243,907) $ (138,886) $ 105,021

Kannapolis Charter AcademyAll Fund TypesSchedule of Revenues, Expenditures and Changes in Fund Balance -

For the Year Ended June 30, 2018Budget and Actual

SUPPLEMENTAL INFORMATION

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State/Federal Pass-through

Grantor/Pass-through CFDA Grantor'sGrantor/Program Title Number Number Expenditures

Federal Grants:U.S. Department of Agriculture

Passed-through the N.C. Department of Public Instruction: School Breakfast Program 10.533 - $ 22,843 National School Lunch Program 10.555 - 114,093

Total U.S. Department of Agriculture 136,936

U.S. Department of EducationPassed-through the N.C. Department of Public Instruction: Title I - Grants to Local Educational Agencies 84.010 PRC 050 122,583

Special Education - Grants to States (IDEA, Part B) - Education of the Handicapped 84.027 PRC 060 73,906

Supporting Effective Instruction State Grant 84.367 PRC 103 10,350

Student Support and Academic Enrichment, Program, Title IV, Part A 84.424 PRC 108 5,859

Total U.S. Department of Education 212,698

Total Federal assistance 349,634

State Grants:N.C. Department of Public Instruction

State Public School Fund PRC 036 $ 2,789,378Test Results Bonus PRC 048 4,629Third Grade Reading Teacher Bonus PRC 046 3,563Summer Reading Camps PRC 016 1,078

Total State assistance 2,798,648

Total Federal and State assistance $ 3,148,282

Kannapolis Charter AcademySchedule of Expenditures of Federal and State AwardsFor the Year Ended June 30, 2018

See notes to Schedule of Expenditures of Federal and State Awards.

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Kannapolis Charter Academy Notes to Schedule of Expenditures of Federal and State Awards June 30, 2018

Note 1 - Basis of Presentation

The accompanying Schedule of Expenditures of Federal and State Awards (SEFSA) includes the grant activity of Kannapolis Charter Academy under the programs of the federal government and the State of North Carolina for the year ended June 30, 2018. The information in this SEFSA is presented in accordance with the requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance) and the State Single Audit Implementation Act. Because the Schedule presents only a selected portion of the operations of Kannapolis Charter Academy, it is not intended to and does not present the financial position, changes in net position or cash flows of Kannapolis Charter Academy.

Note 2 - Summary of Significant Accounting Policies Expenditures reported in the SEFSA are reported on the accrual basis of accounting. Such expenditures are recognized following the cost principles contained in Uniform Guidance and the State Single Audit Implementation Act, wherein certain types of expenditures are not allowable or are limited as to reimbursement.

Note 3 - Contingency

The grant revenue amounts received are subject to audit and adjustment. If any expenditures or expenses are disallowed by the grantor agencies as a result of such an audit, any claim for reimbursement to the grantor agencies would become a liability of the School. In the opinion of management, all grant expenditures are in compliance with the terms of the grant agreements and applicable Federal and state laws and other applicable regulations.

Note 4 - Indirect Cost Rate

The School did not elect to use the 10-percent de minimis indirect cost rate allowed under the Uniform Guidance.

INTERNAL CONTROLS AND COMPLIANCE SECTION


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INDEPENDENT AUDITOR’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER

MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS

To the Board of Directors Kannapolis Charter Academy A Department of North Carolina Charter Educational Foundation, Inc. Kannapolis, North Carolina 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 the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of Kannapolis Charter Academy (the “School”), a Department of North Carolina Charter Educational Foundation, Inc. (the “Foundation”), as of and for the year ended June 30, 2018, and the related notes to the financial statements, which collectively comprise the School’s basic financial statements, and have issued our report thereon dated October 24, 2018. Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the School’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 opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the School’s internal control. Accordingly, we do not express an opinion on the effectiveness of the School’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.

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Kannapolis Charter Academy Compliance and Other Matters As part of obtaining reasonable assurance about whether the School’s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. 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. KEEFE McCULLOUGH Fort Lauderdale, Florida October 24, 2018


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REPORT ON COMPLIANCE WITH REQUIREMENTS APPLICABLE TO EACH MAJOR STATE PROGRAM AND INTERNAL CONTROL OVER COMPLIANCE

IN ACCORDANCE WITH OMB UNIFORM GUIDANCE AND THE STATE SINGLE AUDIT IMPLEMENTATION ACT

To the Board of Directors Kannapolis Charter Academy A Department of North Carolina Charter Educational Foundation, Inc. Kannapolis, North Carolina Report on Compliance for Each Major State Program We have audited the Kannapolis Charter Academy (the “School”), a Department of North Carolina Charter Educational Foundation, Inc. (the “Foundation”), compliance with the types of compliance requirements described in the Audit Manual for Governmental Auditors in North Carolina, issued by the Local Government Commission, that could have a direct and material effect on each of the School’s major state programs for the year ended June 30, 2018. The School’s major state programs are identified in the summary of auditor’s results section of the accompanying schedule of findings and questioned costs. Management’s Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts, and grants applicable to its state programs. Auditor’s Responsibility Our responsibility is to express an opinion on compliance for each of the School’s major 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 applicable sections of Title 2 U.S. Code of Federal Regulation Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), as described in the Audit Manual for Governmental Auditors in North Carolina, and the State Single Audit Implementation Act. Those standards, Uniform Guidance, and the State Single Audit Implementation Act 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 state program occurred. An audit includes examining, on a test basis, evidence about the School’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 state program. However, our audit does not provide a legal determination of the School’s compliance.

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Kannapolis Charter Academy Opinion on Each Major State Program In our opinion, the School complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major state programs for the year ended June 30, 2018. Report on Internal Control Over Compliance Management of the School 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 the School’s internal control over compliance with the types of requirements that could have a direct and material effect on a major state program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing our opinion on compliance for each major state program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the School’s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a state program on a timely basis. A material weakness in internal control over compliance is a deficiency, or a 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 state 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 combination of deficiencies, in internal control over compliance with a type of compliance requirement of a state 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 significant deficiencies or material weaknesses. 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 Uniform Guidance. Accordingly, this report is not suitable for any other purpose. KEEFE McCULLOUGH Fort Lauderdale, Florida October 24, 2018

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Financial Statements

Type of auditor's report issued: Unmodified

Internal control over financial reporting:

Material weakness(es) identified? yes X no

Significant deficiency(s) identified that are not considered to be material weaknesses yes X none reported

Noncompliance material to financial statements noted yes X no

State Awards

Internal control over major State programs:

Material weakness(es) identified? yes X no

Significant deficiency(s) identified that are not considered to be material weaknesses yes X none reported

Type of auditor's report issued on compliance for major State programs: Unmodified

Any audit findings disclosed that are required to be reported in accordance with State Single Audit Implementation Act yes X no

Identification of major State programs:

Program Name

State Public School Fund (Charter Schools)

None Reported

None Reported

Section III. State Award Findings and Questioned Costs

Kannapolis Charter AcademySchedule of Findings and Questioned CostsFor the Year Ended June 30, 2018

Section I. Summary of Auditor's Results

Section II. Financial Statement Findings

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Section IV. Other Matters

Kannapolis Charter Academy

(continued)Schedule of Findings and Questioned Costs


During the prior year, our review of the School’s Clubs and Activities Fund ("Fund") indicated that there is a lack of control in the handling of cash in this Fund. We recommended that the School formalize cash receipt and disbursement procedures that would include a review and approval process. During the year ended June 30, 2018, we were able to clear this comment.

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