PENCIL FOUNDATION

FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITOR’S REPORT

JUNE 30, 2020 AND 2019

 PENCIL FOUNDATION

FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITOR’S REPORT

JUNE 30, 2020 AND 2019

TABLE OF CONTENTS

PAGE

INDEPENDENT AUDITOR’S REPORT .............................................................................. 1-2

FINANCIAL STATEMENTS

Statements of Financial Position ............................................................................................. 3

Statements of Activities .......................................................................................................... 4

Statements of Functional Expenses......................................................................................... 5

Statements of Cash Flows ....................................................................................................... 6

Notes to Financial Statements ................................................................................................. 7 - 22

 INDEPENDENT AUDITOR’S REPORT

To the Board of Directors

PENCIL Foundation
Nashville, Tennessee

REPORT ON THE FINANCIAL STATEMENTS

We have audited the accompanying financial statements of PENCIL Foundation (“PENCIL”), a Tennessee not-
for-profit corporation, which comprise the statements of financial position as of June 30, 2020 and 2019, and the
related statements of activities, functional expenses and cash flows for the years 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 audits. We conducted our
audits in accordance with auditing standards generally accepted in the United States of America. 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.

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OPINION

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of PENCIL Foundation as of June 30, 2020 and 2019, and the changes in its net assets and its cash flows
for the years then ended in accordance with accounting principles generally accepted in the United States of
America.

Nashville, Tennessee
October 22, 2020

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 PENCIL FOUNDATION

STATEMENTS OF FINANCIAL POSITION

JUNE 30, 2020 AND 2019

2020 2019

ASSETS
Cash and cash equivalents $ 392,372 $ 256,662
Contributions, grants and other receivables 295,547 200,514
Inventory 440,263 383,076
Prepaid expenses and other assets 69,044 28,017
Investments 652,056 665,739
Beneficial interest in agency endowment fund held by the
Community Foundation of Middle Tennessee 59,344 60,715
Property and equipment, net 127,186 180,724

TOTAL ASSETS $ 2,035,812 $ 1,775,447

LIABILITIES AND NET ASSETS

LIABILITIES
Paycheck Protection Program loan $ 222,915 $ -
Accounts payable 17,341 31,465
Payroll liabilities 90,333 66,069
Other liabilities - 3,840

TOTAL LIABILITIES 330,589 101,374

NET ASSETS
Without donor restrictions:
Board-designated 823,670 851,618
Undesignated 509,402 553,624

Total without donor restrictions 1,333,072 1,405,242

With donor restrictions 372,151 268,831

TOTAL NET ASSETS 1,705,223 1,674,073

TOTAL LIABILITIES AND NET ASSETS $ 2,035,812 $ 1,775,447

See accompanying notes to financial statements.

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 PENCIL FOUNDATION

STATEMENTS OF ACTIVITIES

FOR THE YEARS ENDED JUNE 30, 2020 AND 2019

2020
Without Donor With Donor
Restrictions Restrictions Total

REVENUES AND SUPPORT

Government grants and contracts $ 350,999 $ - $ 350,999
Corporate and foundation contributions 291,512 354,298 645,810
Individual contributions 246,784 1,433 248,217
United Way and other grants 89,745 - 89,745
In-kind contributions 2,038,287 - 2,038,287
Special events 265,770 8,500 274,270
Consulting and fiscal services 47,815 - 47,815
Other revenue 6,138 - 6,138
Investment income 19,117 - 19,117
Change in value of beneficial interest in agency endowment fund
held by the Community Foundation of Middle Tennessee 1,605 - 1,605
Net assets released from restrictions 260,911 (260,911) -

TOTAL REVENUES AND SUPPORT 3,618,683 103,320 3,722,003

EXPENSES
Program services 3,243,647 - 3,243,647
Supporting services:
Management and general 93,432 - 93,432
Fundraising 353,774 - 353,774

TOTAL EXPENSES 3,690,853 - 3,690,853

CHANGE IN NET ASSETS (72,170) 103,320 31,150

NET ASSETS - BEGINNING OF YEAR 1,405,242 268,831 1,674,073

NET ASSETS - END OF YEAR $ 1,333,072 $ 372,151 $ 1,705,223

See accompanying notes to financial statements.

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 2019
Without Donor With Donor
Restrictions Restrictions Total

$ 302,670 $ - $ 302,670
285,054 231,375 516,429
237,912 2,333 240,245
209,635 - 209,635
1,543,567 - 1,543,567
345,603 7,200 352,803
84,732 - 84,732
882 - 882
32,072 - 32,072

2,988 - 2,988
275,197 (275,197) -

3,320,312 (34,289) 3,286,023

2,852,215 - 2,852,215

78,521 - 78,521
371,948 - 371,948

3,302,684 - 3,302,684

17,628 (34,289) (16,661)

1,387,614 303,120 1,690,734

$ 1,405,242 $ 268,831 $ 1,674,073

 PENCIL FOUNDATION

STATEMENTS OF FUNCTIONAL EXPENSES

FOR THE YEARS ENDED JUNE 30, 2020 AND 2019

2020
Supporting Services
Management Total
Program and Supporting
Services General Fundraising Services Total

Personnel $ 1,002,101 $ 51,115 $ 189,525 $ 240,640 $ 1,242,741

Equipment 38,127 1,740 2,632 4,372 42,499
Depreciation 46,578 2,677 4,283 6,960 53,538
Travel and shipping 18,090 1,539 546 2,085 20,175
Professional services 94,522 5,965 10,501 16,466 110,988
Program expenses 48,738 418 609 1,027 49,765
Grant to Metro Nashville Public Schools 28,341 - - - 28,341
Supplies 960 1,281 767 2,048 3,008
Supplies - donated 1,817,722 - - - 1,817,722
Facility expenses 7,741 9,099 16,378 25,477 33,218
Communications 29,647 5,787 8,853 14,640 44,287
Commercial insurance 13,006 2,554 1,343 3,897 16,903
Staff development and community events 10,555 5,033 1,868 6,901 17,456
Donor cultivation 288 174 1,319 1,493 1,781
Events 3,338 824 37,929 38,753 42,091
Events - donated - - 62,375 62,375 62,375
Fees & bank charges 2,284 536 7,341 7,877 10,161
Miscellaneous - - - - -
Occupancy - donated 81,609 4,690 7,505 12,195 93,804

TOTAL EXPENSES $ 3,243,647 $ 93,432 $ 353,774 $ 447,206 $ 3,690,853

See accompanying notes to financial statements.

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 2019
Supporting Services
Management Total
Program and Supporting
Services General Fundraising Services Total

$ 961,392 $ 50,820 $ 173,994 $ 224,814 $ 1,186,206

46,188 1,804 2,587 4,391 50,579
46,579 2,677 4,283 6,960 53,539
28,405 1,321 3,051 4,372 32,777
113,314 5,504 17,782 23,286 136,600
64,295 105 532 637 64,932
15,528 - - - 15,528
1,332 204 24 228 1,560
1,422,673 - - - 1,422,673
16,666 7,015 12,627 19,642 36,308
39,644 1,355 8,388 9,743 49,387
11,775 685 1,232 1,917 13,692
20,165 486 2,895 3,381 23,546
444 - 4,123 4,123 4,567
184 - 64,699 64,699 64,883
- - 61,277 61,277 61,277
860 2,945 8,694 11,639 12,499
131 - - - 131
62,640 3,600 5,760 9,360 72,000

$ 2,852,215 $ 78,521 $ 371,948 $ 450,469 $ 3,302,684

 PENCIL FOUNDATION

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED JUNE 30, 2020 AND 2019

2020 2019

CASH FLOWS FROM OPERATING ACTIVITIES

Change in net assets $ 31,150 $ (16,661)
Adjustments to reconcile change in net assets to net cash (used in) provided by
operating activities:
Depreciation 53,538 53,539
Net realized and unrealized (gains) losses on investments 1,183 (10,586)
Grant received from agency endowment fund 3,101 -
Contributions made to agency endowment fund (125) (100)
Change in value of beneficial interest in agency endowment fund (1,605) (2,988)
(Increase) decrease in:
Contributions, grants and other receivables (95,033) 111,441
Inventory (57,187) 16,782
Prepaid expenses and other assets (41,027) 11,785
Increase (decrease) in:
Accounts payable (14,124) 23,274
Payroll liabilities 24,264 14,647
Other liabilities (3,840) (10,943)

TOTAL ADJUSTMENTS (130,855) 206,851

NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (99,705) 190,190

CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds from sale or maturity of investments 169,947 365,727
Purchases of investments (157,447) (399,431)

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 12,500 (33,704)

CASH FLOWS FROM FINANCING ACTIVITIES

Net change in line of credit - (39,824)
Proceeds from Paycheck Protection Program loan 222,915 -

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 222,915 (39,824)

NET INCREASE IN CASH AND CASH EQUIVALENTS 135,710 116,662

CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 256,662 140,000

CASH AND CASH EQUIVALENTS - END OF YEAR $ 392,372 $ 256,662

See accompanying notes to financial statements.

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 PENCIL FOUNDATION

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2020 AND 2019

NOTE 1 - GENERAL

PENCIL Foundation (“PENCIL”) is a not-for-profit organization formed in 1982 to link

community resources to Nashville public schools to help young people achieve academic success
and prepare for life.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The financial statements of PENCIL have been prepared in accordance with generally accepted
accounting principles (“GAAP”), which require PENCIL to report information regarding its
financial position and activities according to the following net asset classifications:

Net assets without donor restrictions: Net assets that are not subject to donor-imposed
restrictions and may be expended for any purpose in performing the primary objectives of the
organization. These net assets may be used at the discretion of PENCIL’s management and
the Board of Directors.

Net assets with donor restrictions: Net assets subject to stipulations imposed by donors, and
grantors. Some donor restrictions are temporary in nature; those restrictions will be met by
actions of PENCIL or by the passage of time. There are currently no donor restrictions that
are perpetual in nature.

PENCIL reports contributions restricted by donors as increases in net assets without donor
restrictions if the restrictions expire (that is, when a stipulated time restriction ends or
purpose restriction is accomplished) in the reporting period in which the revenue is
recognized. All other donor-restricted contributions are reported as increases in net assets
with donor restrictions, depending on the nature of the restrictions. When a restriction
expires, net assets with donor restrictions are reclassified to net assets without donor
restrictions and reported in the statements of activities as net assets released from restrictions.

Revenue Recognition

Contributions - Contributions are recognized when cash, securities or other assets, or an

unconditional promise to give are received. A contribution is conditional if an agreement includes
a barrier that must be overcome and either a right of return of assets transferred or a right of
release of promisor’s obligation to transfer assets exists. The presence of both a barrier and a right
of return or right of release indicates that a recipient is not entitled to the contribution until it has
overcome the barrier(s) in the agreement. Conditional promises to give are not recognized until
the barrier(s) in the agreement are overcome.

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 PENCIL FOUNDATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2020 AND 2019

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Revenue Recognition (continued)

Government grants and contracts - A portion of PENCIL’s revenue is derived from cost-
reimbursable grants and contracts, which are conditioned upon certain performance requirements
and/or the incurrence of allowable qualifying expenses. Amounts received are recognized as
revenue when PENCIL has incurred expenditures in compliance with specific contract or grant
provisions. Amounts received in advance of the expenditure are recorded as deferred revenue.
Additionally, certain grants qualify as exchange transactions. PENCIL recognizes grant revenue
for exchange transactions at the time the services are provided.

In-kind contributions - PENCIL reports any gifts of property, equipment, or materials at the
estimated fair value at the date of gift as support without donor restrictions unless explicit donor
restrictions specify how the assets must be used. Gifts of long-lived assets with explicit
restrictions as to how the assets are to be used or funds restricted for the acquisition of long-lived
assets are reported as support with donor restrictions. Expirations of donor restrictions are
recognized when the donated or acquired long-lived assets are placed in service. Donated services
are recognized if they create or enhance non-financial assets, or the donated service requires
specialized skills, were performed by a donor who possesses such skills, and would have been
purchased by PENCIL if not donated. Such services are recognized at fair value as support and
expense in the period the services are performed.

Special events - Special event revenue is generated from sponsorships, ticket sales and sale of
auction items at events held during the year and are recognized when the events occur, which is
when PENCIL completes its performance obligation.

Consulting and fiscal services - Consulting revenue is generated from services provided to
communities across the nation that are interested in building a network of strong partnerships
within their school district, as well as for accounting services provided to another organization.
PENCIL recognizes revenue at the time the services are provided, which is when PENCIL’s
performance obligation is fulfilled.

Donated services

A substantial number of unpaid volunteers have made contributions of their time to serve as
tutors, mentors, teacher supply store volunteers and in other capacities in order to serve Nashville
public school students. The total value of time contributed by these volunteers for the year ended
June 30, 2020 has been estimated to be approximately $1,363,780 ($2,557,000 for the year ended
June 30, 2019). This amount has not been recorded in the accompanying financial statements as it
does not meet GAAP recognition criteria.

Other individuals volunteer their time and perform a variety of tasks that assist PENCIL with
other program services and fundraising events. No amounts have been reflected in the financial
statements for volunteer time since these donated services do not meet the criteria for recognition
under GAAP.

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 PENCIL FOUNDATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2020 AND 2019

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Cash and Cash Equivalents

PENCIL considers all highly liquid investments with an original maturity of three months or less
to be cash equivalents.

Contributions Receivable

Unconditional contributions receivable that are expected to be collected within one year are
recorded at their net realizable value. Unconditional contributions receivable that are expected to
be collected in future years are recorded at the present value of estimated future cash flows. The
discount on those amounts is computed using a risk-free interest rate applicable to the year in
which the promise is received. Conditional promises to give are not included as support until such
time as the conditions are substantially met.

An allowance for uncollectible contributions is provided based on management’s estimate of

uncollectible pledges and historical trends. Contributions receivable are written off when deemed
to be uncollectible. In management’s opinion, no allowance for uncollectible contributions was
necessary as of June 30, 2020 and 2019.

Inventory

Inventory consists of donated school supplies received primarily from school supply drives and
supply distributors. Inventory is recorded at its estimated fair value at the time the goods are
received from the donor. Provision is made to reduce any excess, obsolete or slow-moving
inventory to net realizable value.

Investments

Investments consist of money market funds, certificates of deposit, bonds, mutual funds, equities
and exchange traded funds. Money market funds and certificates of deposit are carried at cash
value plus accrued interest. Bonds, mutual funds, equities and exchange traded funds are carried at
their quoted market value on the last business day of the reporting period. Interest and dividends,
as well as changes in unrealized gains and losses are recognized currently in the statement of
activities.

PENCIL has invested in certificates of deposit with a financial institution with maturities ranging
from fiscal year 2021 to 2023. These certificates of deposits have an average yield of 2.31% as of
June 30, 2020 (2.54% as of June 30, 2019).

Agency Endowment Fund

PENCIL’s beneficial interest in an agency endowment fund held by the Community Foundation of
Middle Tennessee (“CFMT”) is recognized as an asset. Investment income and changes in the
value of the fund are recognized in the statement of activities, and distributions received from the
fund are recorded as increases (decreases) in the beneficial interest.

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 PENCIL FOUNDATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2020 AND 2019

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Property and Equipment

Property and equipment are recorded at cost at the date of purchase, or at estimated fair value at
the date of gift. Depreciation expense is calculated using the straight-line method over the
estimated useful lives of the assets, except for leasehold improvements, which are depreciated
over the shorter of their estimated useful lives or the expected lease term.

Fair Value Measurements

PENCIL classifies its assets based on a hierarchy consisting of: Level 1 (valued using quoted
prices from active markets for identical assets), Level 2 (not traded on an active market but for
which observable market inputs are readily available), and Level 3 (valued based on significant
unobservable inputs).

An asset’s or liability’s fair value measurement level within the fair value hierarchy is based on
the lowest level of any input that is significant to the fair value measurement. Valuation
techniques used maximize the use of observable inputs and minimize the use of unobservable
inputs.

Following is a description of the valuation methodologies used for assets measured at fair value on a
recurring basis.

Investments - Mutual funds, equities and exchange traded funds are classified within Level 1 where
quoted market prices are available in an active market for identical assets. If quoted market prices
are unavailable, fair value is estimated using quoted market prices of investments with similar
characteristics, and the investments are classified within Level 2. Bonds are valued on the basis of
information provided by pricing services that employ valuation matrices that may incorporate both
broker/dealer-supplied valuations as well as valuation models reflecting factors such as benchmark
yields, reported trades, broker/dealer quotes, bid/offer data and other relevant elements, and are
classified within Level 2 of the valuation hierarchy

Beneficial interest in agency endowment fund held by the Community Foundation of Middle
Tennessee - The agency endowment fund held at the CFMT represents PENCIL’s interest in pooled
investments with other participants in the funds. The CFMT prepares a valuation of the fund based
on the fair value of the underlying investments using quoted market prices and allocates income or
loss to each participant based on market results. PENCIL reflects this asset within Level 2 of the
valuation hierarchy.

There have been no changes in the valuation methodologies used at June 30, 2020 or 2019.

The methods described above may produce a fair value calculation that may not be indicative of net
realizable value or reflective of future fair values. Furthermore, while PENCIL believes its valuation
methodologies are appropriate and consistent with that of other market participants, the use of
different methodologies or assumptions to determine the fair value of certain financial instruments
could result in different fair value measurements at the reporting date.

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 PENCIL FOUNDATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2020 AND 2019

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Income Taxes

PENCIL qualifies as a not-for-profit organization exempt from federal income taxes under Section
501(c)(3) of the Internal Revenue Code. Accordingly, income taxes are not provided.

Management performs an evaluation of all income tax positions taken or expected to be taken in
the course of preparing PENCIL’s income tax returns to determine whether the income tax
positions meet a “more likely than not” standard of being sustained under examination by the
applicable taxing authorities. Management has performed its evaluation of all income tax positions
taken on all open income tax returns and has determined that there were no positions taken that do
not meet the “more likely than not” standard. Accordingly, there are no provisions for income
taxes, penalties or interest receivable or payable relating to uncertain income tax positions in the
accompanying financial statements.

Program and Supporting Services

The following program and supporting services are included in the accompanying financial
statements:

Program Services

PENCIL Partners and PENCIL Academy Partners are businesses and organizations
committed to student success through organized, coordinated activities that match the unique
attributes of each Partner with the specific needs of each school or academy. Schools turn to
us and our wide network of business contacts to help them find Partners that are a good
match for their school. Businesses and organizations turn to us and our comprehensive
knowledge of Nashville Public Schools when they want to connect with a school where they
can help students. PENCIL also serves as the coordinator of these ongoing Partnership
relationships. We facilitate communication, provide activity ideas, advise on volunteer
management and help the school and Partner develop a year-long strategic plan. In addition,
PENCIL hosts the PENCILMeIn.org website where schools, Partners and individuals log
their volunteer hours and in-kind gifts.

PENCIL’s Family Resource Centers (“FRCs”) act as a hub for community resources, helping
families navigate outside agencies that can assist with social, emotional and physical needs.
FRCs stock emergency food/clothing and develop services tailored to their school population,
such as GED and English-language classes, parenting classes, eye exams and glasses,
individual counseling and student leadership groups.

The LP PENCIL Box makes sure students have the school supplies necessary for success in
the classroom - and that teachers do not have to spend their own money to buy those supplies.
Through generous donations from businesses, organizations and individuals, the Box is
stocked with school supplies such as pencils, pens, notebooks, crayons, scissors, reading
books, backpacks and much more. Every Metro teacher can make four shopping trips per
school year for free supplies.
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 PENCIL FOUNDATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2020 AND 2019

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Program and Supporting Services (continued)

Supporting Services

Management and General relates to the overall direction of PENCIL. These expenses are not
identifiable with a particular program or event, or with fundraising, but are indispensable to
the conduct of those activities and are essential to PENCIL. Specific activities include
organization oversight, business management, recordkeeping, budgeting, financing and other
administrative activities.

Fundraising includes costs of activities directed toward appeals for financial support,
including special events. Other activities include the creation and distribution of f undraising
materials.

Allocation of Functional Expenses

The costs of program and supporting service activities have been summarized on a functional
basis in the statements of activities. The statements of functional expenses presents the natural
classification detail of expenses by function. Expenses that can be directly attributed to a
particular function are charged to that function. Certain costs have been allocated among the
programs and supporting services benefited. The expenses that are allocated include personnel,
equipment, travel, professional services, supplies, facility expenses, occupancy, communications,
commercial insurance, staff development and community events, donor cultivation, event
expenses, fees and bank charges which are allocated on the basis of estimates of time and effort.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual results could differ from those
estimates.

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 PENCIL FOUNDATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2020 AND 2019

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

New Accounting Pronouncements

On July 1, 2019, PENCIL adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from
Contracts with Customers (Topic 606) and all subsequent amendments to the ASU (collectively,
“ASC 606”), which supersedes most existing revenue recognition guidance and outlines a single
comprehensive standard for revenue recognition across all industries. ASC 606 requires revenue
to be recognized in an amount that reflects the considerations to which the entity expects to be
entitled in an exchange of goods or services. PENCIL adopted ASC 606 using the modified
retrospective method applied to all contracts not completed as of July 1, 2019. PENCIL performed
an analysis of revenue streams and transactions to determine in-scope applicability. The revenue
streams considered in-scope for purposes of ASC 606 include certain grant revenues and most
revenues associated with performance of special events (sponsorships, ticket sales and sales of
items). PENCIL recognizes revenues that fall within the scope of ASC 606 as it satisfies its
obligation to the customer. The adoption of ASC 606 did not result in a material change to the
accounting for any of the in-scope revenue streams; as such, PENCIL did not record a cumulative
effect adjustment.

On July 1, 2019, PENCIL adopted ASU 2018-08, Clarifying the Scope and the Accounting
Guidance for Contributions Received and Contributions Made (Topic 605). This guidance is
intended to clarify and improve the scope and the accounting guidance for contributions received
and contributions made. Key provisions in this guidance include clarification regarding the
accounting for grants and contracts as exchange transactions or contributions and improve
guidance to better distinguish between conditional and unconditional contributions. This standard
did not result in a change to the financial statements or the timing of revenue recognition for
PENCIL's contributions and grants.

Recent Authoritative Accounting Guidance

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance in this ASU
supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are
required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms
longer than 12 months. Leases will be classified as either finance or operating, with classification
affecting the pattern of expense recognition in the statement of activities. In June 2020, in
response to the COVID-19 pandemic, the FASB issued ASU 2020-05, allowing certain entities to
defer implementation of ASU 2016-02 for an additional year. As a result, the standard will now be
effective for fiscal years beginning after December 15, 2021. PENCIL is currently evaluating the
impact of the pending adoption of the new standard on the financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820):
Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement,
which modifies the disclosure requirements for fair value measurements by removing, modifying,
or adding certain disclosures. ASU 2018-13 is effective for all entities for fiscal years beginning
after December 15, 2019. PENCIL is currently evaluating the impact of this new standard on its
financial statements.

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 PENCIL FOUNDATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2020 AND 2019

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Events Occurring After Reporting Date

PENCIL has evaluated events and transactions that occurred between June 30, 2020 and
October 22, 2020, the date the financial statements were available to be issued, for possible
recognition or disclosure in the financial statements.

Reclassifications

Certain amounts in prior year financial statements have been reclassified to conform to the current
year’s presentation. Such reclassifications had no effect on the results of operations or net assets
as previously reported.

NOTE 3 - LIQUIDITY AND AVAILABILITY

The following reflects PENCIL’s financial assets as of June 30, 2020 and 2019, reduced by
amounts not available for general use within one year of the statement of financial position date
because of donor-imposed restrictions. Amounts not available include amounts set aside by the
Board of Directors that could be drawn upon if the governing board approves that action.

2020 2019
Financial assets at year end:
Cash and cash equivalents $ 392,372 $ 256,662
Contributions, grants and other receivables 295,547 200,514
Investments 652,056 665,739
Total financial assets 1,339,975 1,122,915

Less amounts not available to be used within one year:

Net assets with donor restrictions - capacity campaign - 19,410
Board designations 823,670 851,618
823,670 871,028

Financial assets available to meet general expenditures

over the next twelve months $ 516,305 $ 251,887

In addition, PENCIL has a $100,000 line of credit available to meet cash flow needs.

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 PENCIL FOUNDATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2020 AND 2019

NOTE 4 - CONTRIBUTIONS, GRANTS AND OTHER RECEIVABLES

Contributions, grants and other receivables consisted of the following at June 30:

2020 2019

Contributions receivable $ 23,440 $ 49,260

Grants receivable 251,250 138,125
Other receivables 20,857 13,129

$ 295,547 $ 200,514

As of June 30, 2020 and 2019, all contributions receivable were due within one year.

NOTE 5 - INVESTMENTS

Investments consisted of the following at June 30:

2020 2019

Money market funds $ 25,000 $ 70,000

Certificates of deposit 77,345 45,197
Bonds 64,244 82,470
Mutual funds 91,979 97,390
Equities 34,055 23,635
Exchange traded funds 359,433 347,047

$ 652,056 $ 665,739

NOTE 6 - PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at June 30:

2020 2019

Vehicle $ 35,532 $ 35,532

Leasehold improvements 241,112 241,112
276,644 276,644
Less: Accumulated depreciation (149,458) (95,920)
$ 127,186 $ 180,724

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 PENCIL FOUNDATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2020 AND 2019

NOTE 7 - AGENCY ENDOWMENT FUND

PENCIL established and holds a beneficial interest in an agency endowment fund held by CFMT.
PENCIL has granted variance power to CFMT and CFMT has the ultimate authority and control
over the Fund and the income derived therefrom. The Fund is charged a .4% administrative fee by
CFMT annually. Upon request by PENCIL, income may be distributed to PENCIL annually.

A schedule of changes in PENCIL’s beneficial interest in this fund for the years ended June 30,
2020 and 2019 follows:

2020 2019

Beginning balance $ 60,715 $ 57,627

Contributions to the fund 125 100

Grants paid to the agency (3,101) -

Change in value of beneficial interest in agency endowment fund:

Investment income - net 2,008 3,358
Administrative expenses (403) (370)
1,605 2,988

Ending balance $ 59,344 $ 60,715

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 PENCIL FOUNDATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2020 AND 2019

NOTE 8 - FAIR VALUE MEASUREMENTS

The following table summarizes financial assets measured at fair value on a recurring basis,
segregated by level of valuation inputs within the fair value hierarchy utilized to measure fair
value as of June 30:
Level 1 Level 2 Level 3 Total
2020 Inputs Inputs Inputs Value
Investments:
Bonds $ - $ 64,244 $ - $ 64,244
Mutual Funds:
High Yield Bond 7,336 - - 7,336
Market Neutral 17,850 - - 17,850
Foreign Large Blend 13,267 - - 13,267
Multialternative 19,633 - - 19,633
Foreign Stock 18,103 - - 18,103
Mid-Cap Growth 15,790 - - 15,790
91,979 - - 91,979
Equities:
Communication Services 18,983 - - 18,983
Utilities 15,072 - - 15,072
34,055 - - 34,055
Exchange Traded Funds:
Foreign Large Blend 31,820 - - 31,820
Diversified Emerging Markets 18,226 - - 18,226
Large Growth 139,038 - - 139,038
Large Value 99,590 - - 99,590
Mid-Cap Blend 25,406 - - 25,406
Real Estate 2,749 - - 2,749
Short Government Fund 15,089 - - 15,089
Small Blend Fund 15,320 - - 15,320
Small Value 12,195 - - 12,195
359,433 - - 359,433

Total investments at fair value $ 485,467 $ 64,244 $ - $ 549,711

Beneficial interest in agency endowment fund $ - $ 59,344 $ - $ 59,344

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 PENCIL FOUNDATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2020 AND 2019

NOTE 8 - FAIR VALUE MEASUREMENTS (CONTINUED)

Level 1 Level 2 Level 3 Total
2019 Inputs Inputs Inputs Value
Investments:
Bonds $ - $ 82,470 $ - $ 82,470

Mutual Funds:
High Yield Bond 5,779 - - 5,779
Emerging Markets Bond 11,439 - - 11,439
Market Neutral 11,803 - - 11,803
Foreign Large Blend 14,360 - - 14,360
Foreign Large Value 4,343 - - 4,343
Multialternative 17,800 - - 17,800
Foreign Stock 15,885 - - 15,885
Mid-Cap Growth 15,981 - - 15,981
97,390 - - 97,390

Equities:
Communication Services 17,194 - - 17,194
Utilities 6,441 - - 6,441
23,635 - - 23,635
Exchange Traded Funds:
Commodities Broad Basket 5,320 - - 5,320
Foreign Large Blend 34,376 - - 34,376
Diversified Emerging Markets 14,288 - - 14,288
Ultrashort Bond 10,066 - - 10,066
Financial 5,520 - - 5,520
Large Growth 107,213 - - 107,213
Large Value 108,789 - - 108,789
Mid-Cap Blend 19,223 - - 19,223
Real Estate 3,059 - - 3,059
Energy Limited Partnership 5,910 - - 5,910
Short Government Fund 15,093 - - 15,093
Small Blend Fund 11,663 - - 11,663
Small Value 6,527 - - 6,527
347,047 - - 347,047

Total investments at fair value $ 468,072 $ 82,470 $ - $ 550,542

Beneficial interest in agency endowment fund $ - $ 60,715 $ - $ 60,715

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 PENCIL FOUNDATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2020 AND 2019

NOTE 9 - LINE OF CREDIT

PENCIL has a $100,000 revolving line of credit maturing in November 2020. Interest is payable
monthly at a variable rate of Prime + 1.00% (4.25% at June 30, 2020), with the outstanding
principal balance payable at maturity. The line is secured by PENCIL’s investments. As of
June 30, 2020 and 2019, there was an outstanding balance of $0 under this line of credit.

NOTE 10 - PAYCHECK PROTECTION PROGRAM LOAN

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was
signed into law. The CARES Act provides an economic relief package to many businesses in the
U.S. as a direct response to the adverse impacts of COVID-19. Section 1102 of CARES Act
establishes the Paycheck Protection Program (“PPP”), which is implemented by the Small
Business Administration, and is intended to provide small businesses (generally those with 500 or
less employees) with funds to pay up to 24 weeks of payroll costs and benefits, interest on
mortgages, rent and utilities. The funds are available in the form of a loan which is fully
forgivable if at least 60% of the funds are used for payroll costs. Any unforgiven funds will
convert to a note with a 1.0% interest rate and payable over 24 months. On April 30, 2020,
PENCIL received $222,915 from a PPP loan and it is management’s intention to have the loan
fully forgiven based upon preliminary estimation of the forgiveness calculation. As of the date
these financial statements were available to be issued, the amount of loan forgiveness has not been
determined. PENCIL has elected to record the portion of the note forgiven as revenue once the
forgiveness amount is determined. Annual principal maturities under the note are as follows:

Year ending June 30,

2021 $ 99,073
2022 123,842

$ 222,915

NOTE 11 - LEASES

PENCIL leases certain office equipment under non-cancelable operating leases which expire at
various dates through August 2021. During 2016, PENCIL entered into a new office equipment
lease for which the lessor advanced PENCIL funds to offset future payments required under an
existing lease agreement for similar equipment. The funds received from the lessor are recorded as
a liability on PENCIL’s books which will be reduced as payments are made over the remainder of
the original lease term. The remaining liability as of June 30, 2020 was $0 ($3,840 as of June 30,
2019).

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 PENCIL FOUNDATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2020 AND 2019

NOTE 11 - LEASES (CONTINUED)

PENCIL receives rent-free office and warehouse space under a lease that expires in October 2022.
Either party may terminate the lease upon 90 days advance written notice. The estimated fair
market value of the space is $7,817 per month in 2020 ($6,000 per month in fiscal year ended
2019) and is recorded as an in-kind contribution. During 2020, PENCIL received a new
calculation of the square footage of the space being leased, which was more than originally
thought, therefore PENCIL increased the fair value of the space recorded.

In June 2020, PENCIL entered into a restated lease agreement extending the cancellable lease
through October 2027. Subsequently, PENCIL began utilizing the entire building.

Lease expense paid for all operating leases was $11,832 for the year ended June 30, 2020
($11,832 for the year ended June 30, 2019).

A summary of future minimum lease payments for equipment as of June 30, 2020, follows:

Year ending June 30,

2021 $ 11,832
2022 1,972

$ 13,804

NOTE 12 - NET ASSETS

Board-designated net assets consisted of the following at June 30:

2020 2019

Education of future healthcare providers $ 37,491 $ 44,990

Reserve fund 667,061 670,913
Beneficial interest in agency endowment fund 59,344 60,715
Capacity campaign 59,774 75,000

$ 823,670 $ 851,618

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 PENCIL FOUNDATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2020 AND 2019

NOTE 12 - NET ASSETS (CONTINUED)

Net assets with donor restrictions consisted of the following at June 30:

2020 2019

Future year partnerships $ 294,884 $ 168,907

LP PENCIL Box 65,000 65,000
Capacity campaign - 19,410
Back to School Breakfast 3,500 7,000
Eyecare 7,920 8,514
Other 847 -

$ 372,151 $ 268,831

NOTE 13 - RETIREMENT PLAN

PENCIL sponsors a Section 401(k) defined contribution plan for the benefit of eligible employees.
The plan provides for PENCIL to make a matching contribution for each employee deferral
contribution, subject to limitations. Total contributions by PENCIL to the plan amounted to
$16,676 in 2020 ($14,977 in 2019).

NOTE 14 - CONCENTRATIONS OF CREDIT RISK

Financial instruments that potentially subject PENCIL to concentrations of credit risk consist
principally of cash and cash equivalents, and various contributions, grants, contracts and related
receivables. PENCIL maintains cash and cash equivalents and investments in certificates of
deposit at reputable financial institutions insured by the Federal Deposit Insurance Corporation
(“FDIC”) up to statutory limits. PENCIL’s balances may, at times, exceed statutory limits.
PENCIL has not experienced any losses in these accounts and management considers this to be a
normal business risk.

Contributions received from one source totaled approximately $129,500, or 13%, of total
contribution revenue received for the year ended June 30, 2020. There were no contribution
concentrations for the year ended June 30, 2019.

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 PENCIL FOUNDATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2020 AND 2019

NOTE 15 - RELATED PARTIES

PENCIL has certain members of its board of directors who are employed by or have financial
interests in entities which engage in business transactions with PENCIL. These entities include a
financial institution, higher education institutions, a communications company, an entertainment
facility, an insurance broker, and a construction aggregate company from which PENCIL receives
free rent (see Note 11 for lease details).

NOTE 16 - COVID-19

On January 30, 2020, the World Health Organization declared the coronavirus outbreak a “Public
Health Emergency of International Concern” and on March 10, 2020, declared it to be a pandemic.
Actions taken around the world to help mitigate the spread of the coronavirus included restrictions
on travel, quarantines in certain areas and forced closures for certain types of public places and
businesses. The coronavirus and actions taken to mitigate it have had and are expected to continue to
have an adverse impact on the economies and financial markets of many countries including the
geographical area in which PENCIL operates. While it is unknown how long these conditions will
last and what the complete financial effect will be to PENCIL, management is continuing to
evaluate the evolving situation and will implement appropriate countermeasures as needed.

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