ROCKETSHIP EDUCATION AND ITS AFFILIATES Consolidated Audited Financial Statements for the Year Ended June 30, 2016 Operating: California Rocketship Mateo Sheedy Elementary Rocketship Si Se Puede Academy Rocketship Los Suenos Academy Rocketship Mosaic Elementary Rocketship Discovery Prep Rocketship Brilliant Minds Rocketship Alma Academy Rocketship Spark Academy Rocketship Fuerza Community Prep Rocketship Redwood City Prep Rocketship Rising Stars Rocketship Futuro Academy Tennessee Rocketship Nashville Northeast Elementary Rocketship United Academy Wisconsin Rocketship Southside Community Prep DC Rocketship Rise Academy ROCKETSHIP EDUCATION AND ITS AFFILIATES TABLE OF CONTENTS June 30, 2016 Page Independent Auditor's Report ......................................................................................... 1-2 Consolidated Statement of Financial Position ................................................................ 3 Consolidated Statement of Activities .............................................................................. 4 Consolidated Statement of Cash Flows .......................................................................... 5 Notes to the Consolidated Financial Statements ............................................................. 6-24 Local Education Agency Organization Structure ........................................................... 25-26 Consolidating Statement of Financial Position – Schools .............................................. 27-29 Consolidating Statement of Activities – Schools ............................................................ 30-32 Consolidating Statement of Cash Flows – Schools ........................................................ 33-35 Consolidating Statement of Financial Position – Obligated Group ................................ 36 Consolidating Statement of Activities – Obligated Group ............................................. 37 Consolidating Statement of Cash Flows – Obligated Group .......................................... 38 Schedule of Instructional Minutes – California .............................................................. 39-40 Schedule of Average Daily Attendance – California ...................................................... 41 Reconciliation of Annual Financial Report With Audited Financial Statements ........... 42 Schedule of Expenditures of Federal Awards ................................................................. 43-46 Notes to Supplementary Information .............................................................................. 47-48 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 ............................................... 49-50 ROCKETSHIP EDUCATION AND ITS AFFILIATES TABLE OF CONTENTS (continued) June 30, 2016 Page Independent Auditor's Report on Compliance For Each Major Federal Program; and Report on Internal Control Over Compliance Required by the Uniform Guidance .. 51-53 Independent Auditor’s Report on State Compliance - California ................................... 54-55 Schedule of Findings and Questioned Costs ................................................................... 56-57 Status of Prior Year Findings and Questioned Costs ...................................................... 58 INDEPENDENT AUDITOR'S REPORT Board of Directors Rocketship Education and its Affiliates Redwood City, California Report on the Financial Statements We have audited the accompanying consolidated financial statements of Rocketship Education and its Affiliates (RSEA), a non-profit California public benefit corporation, which comprise the consolidated statement of financial position as of June 30, 2016, and the related consolidated statements of activities and cash flows for the year then ended, and the related notes to the financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. - 1 - Board of Directors Rocketship Education and its Affiliates Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of RSEA as of June 30, 2016, and the changes in its net assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Supplementary Information Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying supplementary schedules are presented for purposes of additional analysis and are not a required part of the basic financial statements. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards. 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. Report on Summarized Comparative Information We have previously audited RSEA’s 2015 financial statements, and our report dated October 26, 2015, expressed an unmodified opinion on those financial statements. In our opinion, the summarized comparative information presented herein as of and for the year ended June 30, 2015, is consistent, in all material respects, with the audited financial statements from which it has been derived. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued a report dated November 1, 2016 on our consideration of RSEA’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering RSEA’s internal control over financial reporting and compliance. VICENTI, LLOYD & STUTZMAN LLP Glendora, California November 1, 2016 - 2 - ROCKETSHIP EDUCATION AND ITS AFFILIATES CONSOLIDATED STATEMENT OF FINANCIAL POSITION June 30, 2016 with comparative totals for June 30, 2015 Rocketship Education D.C Rocketship Public Launchpad Rocketship Education Charter Development Education Wisconsin Inc. School, Inc. Company Eliminations 2016 Total 2015 Total ASSETS CURRENT ASSETS: Cash and cash equivalents (notes 1,2) $ 1 3,561,320 $ 386,046 $ 810,445 $ 9 ,815,821 $ - $ 24,573,632 $ 16,072,631 Restricted cash (note 1) - - - 7,624,930 - 7,624,930 5,136,357 Investments - - - - - - 249,350 Accounts receivable (note 3) 7,791,464 80,824 - 54,296 (37,069) 7,889,515 5,838,881 Deferred rent asset - - - 65,636 (65,636) - - Grants receivable (note 4) 257,160 - 246,000 - - 503,160 588,050 Prepaid expenses and deposits 2 ,129,394 62,546 53,849 578,689 (326,964) 2,497,514 1,265,685 Total current assets 2 3,739,338 529,416 1,110,294 1 8,139,372 (429,669) 43,088,751 29,150,954 LONG-TERM ASSETS: Grants receivable (note 4) 40,434 - 195,040 - - 235,474 163,714 Intracompany receivable 4,546,491 - 600,000 - (5,146,491) - - Security deposits 4 00,000 - - - (400,000) - - Note receivable - - - 560,000 - 560,000 560,000 Deferred rent asset - - - 3,080,643 (3,080,643) - - Property, plant and equipment, net (note 5) 5 ,363,093 - - 83,880,130 - 89,243,223 63,644,651 Total long-term assets 1 0,350,018 - 795,040 8 7,520,773 (8,627,134) 90,038,697 64,368,365 Total assets $ 3 4,089,356 $ 529,416 $ 1,905,334 $ 105,660,145 $ (9,056,803) $ 133,127,448 $ 93,519,319 LIABILITIES AND NET ASSETS CURRENT LIABILITIES: Accounts payable and accrued liabilities $ 5,497,500 $ 125,257 $ 49,417 $ 2 ,344,231 $ (37,069) $ 7,979,336 $ 4,971,627 Accrued interest - - - 516,835 - 516,835 417,127 Deferred rent liability 65,636 - - - (65,636) - - Deferred revenues 1 ,341,972 - - 326,964 (326,964) 1,341,972 370,372 Current portion of loans payable (note 6) 312,508 - - 7,305,128 - 7,617,636 6,842,252 Total current liabilities 7,217,616 125,257 49,417 1 0,493,158 (429,669) 17,455,779 12,601,378 LONG-TERM LIABILITIES: Security deposits - - - 400,000 (400,000) - - Accrued interest 149,196 - - - - 149,196 108,256 Deferred rent liability 3,329,536 112,241 - 989,815 (3,080,643) 1,350,949 1,185,092 Intracompany payable 6 00,000 2,161,472 2,385,019 - (5,146,491) - - Loans payable (note 6) 2 ,187,520 - - 95,052,540 - 97,240,060 69,061,846 Total long-term liabilities 6,266,252 2,273,713 2,385,019 96,442,355 (8,627,134) 98,740,205 70,355,194 NET ASSETS: Unrestricted 2 0,311,191 ( 1,869,554) (724,142) (1,275,368) - 16,442,127 10,074,280 Temporarily restricted (note 7) 2 94,297 - 195,040 - - 489,337 488,467 Total net assets 2 0,605,488 (1,869,554) (529,102) (1,275,368) - 16,931,464 10,562,747 Total liabilities and net assets $ 3 4,089,356 $ 529,416 $ 1,905,334 $ 105,660,145 $ (9,056,803) $ 133,127,448 $ 93,519,319 The accompanying notes are an integral part of these financial statements. - 3 - ROCKETSHIP EDUCATION AND ITS AFFILIATES CONSOLIDATED STATEMENT OF ACTIVITIES For the Year Ended June 30, 2016 with comparative totals for the Year Ended June 30, 2015 Rocketship Rocketship Education D.C Launchpad Rocketship Education Public Charter Development Education Wisconsin Inc. School, Inc. Company Eliminations 2016 Total 2015 Total UNRESTRICTED NET ASSETS: Revenues LCFF State Aid $ 36,874,280 $ - $ - $ - $ - $ 36,874,280 $ 29,395,472 Apportionment revenue 8,105,215 3,199,284 - - - 11,304,499 7,039,060 Property taxes 9,388,704 - - - - 9,388,704 7,536,074 Other State revenue 11,742,143 76,361 - - - 11,818,504 9,200,216 Federal revenue 8,843,327 873,360 - 133,549 - 9,850,236 8,136,903 Other local revenue 2,630,736 12,696 160 10,325,970 (12,584,203) 385,359 498,053 Contributions 6,226,687 3,500 1,780,900 1 30,540 - 8,141,627 5,251,662 Amounts released from restriction 299,290 - - - 299,290 851,995 Total unrestricted revenues 84,110,382 4,165,201 1,781,060 10,590,059 (12,584,203) 88,062,499 67,909,435 Program Expenses Educational programs 61,813,865 4,034,032 1,583,763 - (11,561,999) 55,869,661 46,219,562 Supporting Services Site supports and program development 10,102,673 - 14,058 10,010,488 (50,620) 20,076,599 16,955,433 Administration and general 5,363,068 606,651 407,381 342,876 (971,584) 5,748,392 4,933,874 Total supporting services 15,465,741 606,651 421,439 10,353,364 (1,022,204) 25,824,991 21,889,307 Total expenses 77,279,606 4,640,683 2,005,202 10,353,364 (12,584,203) 81,694,652 68,108,869 Increase (decrease) in unrestricted net assets 6,830,776 (475,482) (224,142) 236,695 - 6,367,847 (199,434) TEMPORARILY RESTRICTED NET ASSETS: Amounts released from restriction (299,290) - - - - (299,290) (851,995) Contributions 105,120 - 195,040 - - 300,160 73,366 Increase (decrease) in temporarily restricted net assets (194,170) - 195,040 - - 870 (778,629) Beginning net assets 13,968,882 (1,394,072) (500,000) (1,512,063) - 10,562,747 13,356,528 Adjustment for restatement - - - - - - (1,815,718) Beginning net assets, restated 13,968,882 (1,394,072) (500,000) (1,512,063) - 10,562,747 11,540,810 Ending net assets $ 20,605,488 $ (1,869,554) $ (529,102) $ (1,275,368) $ - $ 16,931,464 $ 10,562,747 The accompanying notes are an integral part of these financial statements. - 4 - ROCKETSHIP EDUCATION AND ITS AFFILIATES CONSOLIDATED STATEMENT OF CASH FLOWS For the Year Ended June 30, 2016 with comparative totals for the Year Ended June 30, 2015 Rocketship Rocketship Education D.C Launchpad Rocketship Education Public Charter Development Education Wisconsin Inc. School, Inc. Company Eliminations 2016 Total 2015 Total CASH FLOWS from OPERATING ACTIVITIES: Change in Net Assets $ 6,636,606 $ ( 475,482) $ (29,102) $ 2 36,695 $ - $ 6,368,717 $ (978,063) Adjustments to reconcile change in net assets to net cash provided (used) by operating activities: Depreciation and amortization 199,099 - - 2,066,044 - 2,265,143 2 ,080,534 Allowance for non-recoverable project costs - - - - 6,365 Debt forgiven through grant agreement - - - (105,540) - (105,540) (550,000) Donated investments - - - - - - (249,350) (Increase) or decrease in operating assets: Accounts receivable 207,407 ( 703) - (31,132) - 175,572 7 ,077,426 Grants receivable 204,170 - (191,040) - 13,130 541,952 Prepaid expenses and other current assets (1,344,573) ( 45,028) (53,849) (115,343) - (1,558,793) 4 70,333 Deferred rent asset - - - (231,544) 231,544 - - Increase or (decrease) in operating liabilities: Accounts payable and accrued liabilities 1,421,393 ( 102,998) 49,417 8 8,841 - 1,456,653 6 97,873 Deferred revenues 971,600 - - 326,964 - 1,298,564 (252,513) Deferred rent liability 26,176 33,755 - 3 37,470 (231,544) 165,857 515,839 Net cash provided (used) by operating activities 8,321,878 ( 590,456) (224,574) 2 ,572,455 - 10,079,303 9,360,396 CASH FLOWS from INVESTING ACTIVITIES: Proceeds from sale of stock 249,350 - - - - 249,350 - Proceeds from disposal of property, plant and equipment 3,611 - - - - 3,611 - Purchases of property, plant and equipment (1,975,720) - - (24,189,927) - (26,165,647) (11,025,976) Net cash used by investing activities (1,722,759) - - (24,189,927) - (25,912,686) (11,025,976) CASH FLOWS from FINANCING ACTIVITIES: Change in restricted cash - - - (2,488,573) - (2,488,573) 1 3,522 Intracompany loans (3,587,120) 307,310 1,035,019 - - (2,244,791) - Proceeds from debt 3,250,000 - - 38,289,443 - 41,539,443 4 00,000 Repayment of debt (3,102,779) - - (9,368,916) - (12,471,695) (15,734,216) Net cash provided (used) by financing activities (3,439,899) 307,310 1,035,019 2 6,431,954 - 24,334,384 (15,320,694) Net increase (decrease) in cash and cash equivalents 3,159,220 ( 283,146) 810,445 4 ,814,482 - 8,501,001 (16,986,274) Cash and cash equivalents at the beginning of the year 10,402,100 669,192 - 5 ,001,339 - 16,072,631 33,058,905 Cash and cash equivalents at the end of the year $ 13,561,320 $ 386,046 $ 810,445 $ 9,815,821 $ - $ 24,573,632 $ 16,072,631 CASH PAID FOR INTEREST (Net) $ 38,459 $ 49,098 $ - $ 5 ,374,480 $ (85,636) $ 5,376,401 $ 4,975,669 CAPITALIZED INTEREST $ - $ - $ - $ 1 67,421 $ (36,563) $ 130,858 $ 130,319 The accompanying notes are an integral part of these financial statements. - 5 - ROCKETSHIP EDUCATION AND ITS AFFILIATES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the Year Ended June 30, 2016 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Nature of Activities – Rocketship Education and its Affiliates (RSEA) are organized to manage, operate, guide, direct, and promote a network of public elementary charter schools. The charter schools are funded principally through public education monies. The charters may be revoked by their sponsor for material violations of the charter, failure to meet generally accepted standards of fiscal management, or violation of any provision of the law. Principles of Consolidation – The accompanying financial statements include the accounts of Rocketship Education (RSED) and its schools. All significant intercompany accounts and transactions within RSED and its schools have been eliminated in the consolidating financial statements. Additionally, the accompanying financial statements include the accounts of Rocketship Education Wisconsin Inc., Rocketship Education D.C. Public Charter School Inc., and Launchpad Development Company (LDC) and its wholly-owned LLCs. All significant intercompany accounts and transactions within LDC have been eliminated in the consolidating financial statements. Finally, all significant intercompany accounts and transactions between RSED and Launchpad have been eliminated in consolidation. Rocketship Education (RSED) Rocketship Education (RSED) is a California nonprofit public benefit corporation that was incorporated in 2006 and is organized to manage, operate, guide, direct, and promote a network of public elementary charter schools. Divisions of RSED include:  Rocketship Support Network (RSN) – Centralized resources providing management, back office support and organizational strategy.  Rocketship Mateo Sheedy Elementary (RMS) – California charter school  Rocketship Si Se Puede Academy (RSSP) – California charter school  Rocketship Los Suenos Academy (RLS) – California charter school  Rocketship Mosaic Elementary School (ROMO) – California charter school  Rocketship Discovery Prep (RDP) – California charter school  Rocketship Brilliant Minds (RBM) – California charter school  Rocketship Alma Academy (RSA) – California charter school  Rocketship Spark Academy (RSK) – California charter school  Rocketship Fuerza Community Prep (RFZ) – California charter school  Rocketship Redwood City Prep (RRWC) – California charter school - 6 - ROCKETSHIP EDUCATION AND ITS AFFILIATES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the Year Ended June 30, 2016 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued) Rocketship Education (RSED) (continued)  Rocketship Rising Stars (RRS) – California charter school (opening in 16/17)  Rocketship Futuro Academy (RFA) – California charter school (opening in 16/17)  Rocketship Nashville Northeast Elementary (RNNE) – Tennessee charter school  Rocketship United Academy (RUA) – Tennessee charter school Rocketship Education Wisconsin Inc. & Rocketship Southside Community Prep (RSCP) RSED incorporated Rocketship Education Wisconsin Inc., as a nonprofit public benefit corporation in October 2012 to hold the charter for its first elementary school in Wisconsin, Rocketship Southside Community Prep (RSCP). The City of Milwaukee Common Council approved a separate charter for RSCP in November 2011. Rocketship Education D.C., Public Charter School, Inc. (RSDC) & Rocketship Rise Academy (RISE) Rocketship Education D.C., Public Charter School, Inc. (RSDC) incorporated as a nonprofit public benefit corporation during 2014 for the purpose of operating charter schools in Washington, D.C. The District of Columbia Public Charter School Board (PCSB) approved RSDC to establish up to eight charter schools beginning in July 2016. Rocketship Education and RSDC entered into a Network Services Agreement to provide services for the DC region. Launchpad Development Company Launchpad Development Company (LDC) was incorporated as a 509(a)(3) nonprofit public benefit corporation in November 2009. LDC is a supporting organization of RSED. LDC provides facilities and development services provided that such services are consistent with RSED’s exempt purpose. Divisions of LDC include:  Launchpad (LP) – investment and asset management and administrative services  Launchpad Development One LLC (LLC1) – RMS facilities  Launchpad Development Two LLC (LLC2) – RSSP facilities  Launchpad Development Three, LLC (LLC3) – RLS facilities  Launchpad Development Four LLC (LLC4) – ROMO facilities  Launchpad Development Five LLC (LLC5) – RDP facilities  Launchpad Development Eight LLC (LLC8) – RSA facilities  Launchpad Development Ten LLC (LLC10) – Facilities development - 7 -