University of Kansas Medical Center Research Institute, Inc.

Transcription

1 University of Kansas Medical Center Research Institute, Inc. Independent Auditor s Report and Consolidated Financial Statements June 30, 2017 and 2016

2 University of Kansas Medical Center Research Institute, Inc. June 30, 2017 and 2016 Contents Independent Auditor s Report... 1 Consolidated Financial Statements Statements of Financial Position... 3 Statements of Activities... 4 Statements of Cash Flows... 6 Notes to Financial Statements... 7 Supplementary Information Consolidating Statement of Financial Position as of June 30, Consolidating Statement of Activities for the Year Ended June 30, Functional Expenses for the Year Ended June 30, Schedule of Expenditures of Federal Awards Notes to Schedule of Expenditures of Federal Awards Independent Auditor s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of the Financial Statements Performed in Accordance with Government Auditing Standards Report on Compliance for Each Major Federal Program and Report on Internal Control Over Compliance Independent Auditor s Report Schedule of Findings and Questioned Costs Summary Schedule of Prior Audit Findings... 46

3 Independent Auditor s Report Board of Directors University of Kansas Medical Center Research Institute, Inc. Kansas City, Kansas Report on the Financial Statements We have audited the accompanying consolidated financial statements of the University of Kansas Medical Center Research Institute, Inc., which comprise the consolidated statements of financial position as of June 30, 2017 and 2016, and the related consolidated statements of activities and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits 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 audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

4 Board of Directors University of Kansas Medical Center Research Institute, Inc. Page 2 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the University of Kansas Medical Center Research Institute, Inc. as of June 30, 2017 and 2016, 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. Supplementary Information Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying supplementary information, including the consolidating financial statements, functional expenses and the schedule of expenditures of federal awards required by Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards, as listed in the table of contents, is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated September 28, 2017 on our consideration of the University of Kansas Medical Center Research Institute, Inc. s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is 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 the University of Kansas Medical Center Research Institute, Inc. s internal control over financial reporting and compliance. Kansas City, Missouri September 28, 2017

5 Consolidated Statements of Financial Position June 30, 2017 and 2016 Assets Cash and cash equivalents $ 7,431,259 $ 6,261,345 Accounts receivable, net 15,219,431 12,971,559 Investments 55,885,077 50,269,197 Precede Fund, L.C. investments 336, ,755 Kansas Life Sciences Development Company, Inc. investment 419, ,000 Interest receivable 164, ,160 Prepaid expenses 145, ,914 Property and equipment, net 266, ,646 Total assets $ 79,867,380 $ 70,717,576 Liabilities and Net Assets Liabilities Accounts payable $ 3,463,292 $ 3,702,550 Accrued expenses 6,152,889 4,293,869 Deferred revenue 2,213,502 1,047,751 Bonds payable 16,992,633 19,607,714 Total liabilities 28,822,316 28,651,884 Net Assets Unrestricted 48,064,298 38,707,994 Temporarily restricted 2,980,766 3,357,698 Total net assets 51,045,064 42,065,692 Total liabilities and net assets $ 79,867,380 $ 70,717,576 See Notes to Consolidated Financial Statements 3

6 Consolidated Statement of Activities Year Ended June 30, 2017 Temporarily Unrestricted Restricted Total Revenues, Gains and Other Support Direct research income $ 55,865,309 $ - $ 55,865,309 Clinical trials 12,335,815-12,335,815 Clinical trial IRB and administrative fees 1,465,574-1,465,574 Facilities and administrative revenue 22,207,437-22,207,437 Research facilities renovation grants - 2,640,000 2,640,000 Contributions 6,087,597 5,920,510 12,008,107 Research Properties, Inc. rental income 223, ,503 Support for KU Center for Technology Commercialization, Inc. 740, ,000 Royalties and technology income 1,846,970-1,846,970 Investment return 73,632-73,632 Other income 533, ,329 Net assets released from restrictions 8,937,442 (8,937,442) - Total revenues, gains and other support 110,316,608 (376,932) 109,939,676 Expens es Direct research 87,548,675-87,548,675 Facilities 595, ,962 University support 4,593,862-4,593,862 Royalties and technology 1,461,354-1,461,354 Research Properties, Inc. 429, ,453 KU Center for Technology Commercialization, Inc. 1,420,262-1,420,262 Kansas Life Sciences Development Company, Inc. 1,904-1,904 Management and general 4,908,832-4,908,832 Total expenses 100,960, ,960,304 Change in Net Assets 9,356,304 (376,932) 8,979,372 Net Assets, Beginning of Year 38,707,994 3,357,698 42,065,692 Net Assets, End of Year $ 48,064,298 $ 2,980,766 $ 51,045,064 See Notes to Consolidated Financial Statements 4

7 Consolidated Statement of Activities Year Ended June 30, 2016 Temporarily Unrestricted Restricted Total Revenues, Gains and Other Support Direct research income $ 60,590,669 $ - $ 60,590,669 Clinical trials 11,167,347-11,167,347 Clinical trial IRB and administrative fees 1,102,038-1,102,038 Facilities and administrative revenue 21,642,230-21,642,230 Research facilities renovation grants - 2,640,000 2,640,000 Contributions 5,320,000 8,719,545 14,039,545 Research Properties, Inc. rental income 215, ,610 Support for KU Center for Technology Commercialization, Inc. 740, ,000 Royalties and technology income 1,570,735-1,570,735 Investment return 995, ,293 Other income 841, ,109 Net assets released from restrictions 10,059,339 (10,059,339) - Total revenues, gains and other support 114,244,370 1,300, ,544,576 Expenses Direct research 90,262,016-90,262,016 Facilities 1,128,319-1,128,319 University support 7,950,660-7,950,660 Royalties and technology 817, ,451 Research Properties, Inc. 577, ,114 KU Center for Technology Commercialization, Inc. 1,877,778-1,877,778 Management and general 4,801,319-4,801,319 Total expenses 107,414, ,414,657 Change in Net Assets 6,829,713 1,300,206 8,129,919 Net Assets, Beginning of Year 31,878,281 2,057,492 33,935,773 Net Assets, End of Year $ 38,707,994 $ 3,357,698 $ 42,065,692 See Notes to Consolidated Financial Statements 5

8 Consolidated Statements of Cash Flows Years Ended June 30, 2017 and Operating Activities Cash received from direct research, clinical trials, facility and administrative fees and contributions $ 102,630,798 $ 106,364,645 Cash received from royalties, technology, rents and other 3,343,802 4,184,829 Investment income received 1,385,680 1,143,938 Cash paid to employees and suppliers (98,685,563) (107,292,263) Interest paid (801,959) (917,469) Net cash provided by operating activities 7,872,758 3,483,680 Investing Activities Purchase of investments (23,424,513) (25,961,774) Proceeds from disposition of investments 16,511,669 19,017,615 Net cash used in investing activities (6,912,844) (6,944,159) Financing Activities Principal payments on bonds payable (2,430,000) (2,310,000) Proceeds from research facilities renovation grants 2,640,000 2,640,000 Net cash provided by financing activities 210, ,000 Change in Cash and Cash Equivalents 1,169,914 (3,130,479) Cash and Cash Equivalents, Beginning of Year 6,261,345 9,391,824 Cash and Cash Equivalents, End of Year $ 7,431,259 $ 6,261,345 Reconciliation of Change in Net Assets to Net Cash Provided by Operating Activities Change in net assets $ 8,979,372 $ 8,129,919 Items not requiring (providing) operating activities cash flows Depreciation 341 1,362 Amortization of bond premium and issuance costs (185,081) (170,673) Net realized and unrealized losses on investments 1,296, ,528 Change in value of Precede Fund, L.C. investments 30,455 43,234 Change in investment in KLSD (169,323) (250,000) Grants restricted for research facilities renovations (2,640,000) (2,640,000) Changes in Accounts and other receivables (2,263,243) (347,151) Prepaid expenses 37,760 16,053 Accounts payable and accrued expenses 1,619, ,872 Deferred revenue 1,165,751 (1,617,464) Net cash provided by operating activities $ 7,872,758 $ 3,483,680 See Notes to Consolidated Financial Statements 6

9 Notes to Consolidated Financial Statements June 30, 2017 and 2016 Note 1: Nature of Operations and Summary of Significant Accounting Policies Nature of Operations The University of Kansas Medical Center Research Institute, Inc. (RI), a not-for-profit organization, manages grants and contracts and earns facilities and administration (F&A) reimbursement and contract administration fees in connection with projects conducted by principal investigators who serve as faculty at the University of Kansas Medical Center (KUMC). The mission of RI is to promote additional medical research at KUMC. RI was established by KUMC in 1992; it is governed by a Board of Directors whose membership includes the KU Chancellor, KUMC faculty, KUMC administrators and community members. Funding for research activities of RI is derived from federal and state grants, privately funded grants provided by corporations and from other not-for-profit organizations and royalties and licensing fees. RI has four subsidiary corporations: Research Properties, Inc. (RP), KU Center for Technology Commercialization, Inc. (KUCTC), d/b/a University of Kansas Innovation and Collaboration (KUIC), Precede Fund, L.C. (PF) and Kansas Life Sciences Development Company, Inc. (KLSD). All entities are collectively referred to as the Organization in the accompanying consolidated financial statements. RP is tax exempt under IRC Section 501(c)(2) as a title holding corporation. KUCTC is tax exempt under IRC Section 501(c)(3). KUCTC was organized effective July 1, 2008 to facilitate and support the research and technology transfer operations of the University of Kansas and its affiliated tax exempt research institutions. Precede Fund, L.C. is a limited liability company established to invest in start-up companies associated with medical research and technology. Precede Fund, L.C. is a majority owned subsidiary as RI holds a 67% interest in the capital (73% income interest) of the corporation. The minority interest of Precede Fund, L.C., included in net assets as of June 30, 2017 and 2016, was $114,029 and $122,252, respectively. KLSD is a for-profit corporation established to invest in start-up companies associated with medical research and technology. KLSD is a wholly-owned subsidiary of RI. Although RI is a not-for-profit organization, which is exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code (IRC), the consolidated accounts of RI are reported in the consolidated financial statements of KUMC due to the commonality of management, control and mission shared by the two organizations. The consolidated financial statements of KUMC are in turn reported in the consolidated financial statements of the University of Kansas (University). 7

10 Notes to Consolidated Financial Statements June 30, 2017 and 2016 Principles of Consolidation The accompanying consolidated financial statements include the accounts of RI, its wholly owned subsidiaries, RP, KUCTC and KLSD and its majority-owned subsidiary, Precede Fund, L.C. All intercompany transactions and balances have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect 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 revenues, expenses, gains, losses and other changes in net assets during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents RI considers all liquid investments with original maturities of three months or less to be cash equivalents. At June 30, 2017 and 2016, cash equivalents consisted primarily of money market funds. At times during the year, RI may hold deposits in excess of federal depository insurance limits, resulting in a concentration of credit risk. At June 30, 2017, RI s cash accounts exceeded federally insured limits by approximately $7.7 million. Investments and Investment Return Investments in equity securities having a readily determinable fair value and in all debt securities are carried at fair value. Other investments, including interests in start-up companies that do not have a readily determinable fair value, are recorded at cost, which is evaluated for impairment. Investment return includes dividend, interest and other investment income; realized and unrealized gains and losses on investments carried at fair value; and realized gains and losses on other investments. Investment return that is originally restricted by the donor and for which the restriction is met in the same time period is recorded as temporarily restricted and then released from restriction. Other investment return is reflected in the consolidated statements of activities as unrestricted, temporarily restricted or permanently restricted based upon the existence and nature of any donor or legally imposed restrictions. 8

11 Notes to Consolidated Financial Statements June 30, 2017 and 2016 Precede Fund, L.C. and Kansas Life Sciences Development Company, Inc. Investments Investments held by Precede Fund, L.C. and KLSD typically have no readily determinable fair value, and thus are recorded using the cost method of accounting and evaluated and adjusted for impairment on an annual basis. Certain investments may convert to having a readily determinable fair value, such as after an initial public offering. When that occurs, a value is established for the investment based on a quoted market price, and the investment is recorded at fair value. The aggregate cost of investments held by Precede Fund, L.C. and KLSD at June 30 totaled: Precede Fund, L.C. $ 336,300 $ 366,755 KLSD 419, ,000 $ 755,623 $ 616,755 The evaluation of impairment requires the use of estimates. It is reasonably possible that changes in events could occur that would change this estimate materially in the near term. RI did not estimate the fair value of these investments as management does not consider it practicable to do so since quoted market prices are not available. RI did not identify any events or changes in circumstances that would have a significant adverse effect on the fair value of the investments. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and consist of land held for development by RP, as well as leasehold improvements, furniture and fixtures associated with the administrative offices occupied by RI in the KUMC facility and the life sciences incubator managed by RP, and computers and software. Depreciation is charged to expense using the straight-line method over the estimated useful lives of each asset. Assets under leasehold improvements are depreciated over the shorter of the lease term or their respective estimated useful lives. The estimated useful lives for each major depreciable classification of property and equipment are as follows: Leasehold improvements Furniture and equipment Computers and software 15 years 7 years 3 years 9

12 Notes to Consolidated Financial Statements June 30, 2017 and 2016 Research Revenue Recognition and Accounts Receivable RI receives grant revenues from federal, state and private sources, as well as from clinical trials. Research revenues from federal, state and certain private grants considered to be sponsored research are received in connection with exchange transactions wherein RI is obligated to provide certain goods and/or services. Receipts for research projects received in advance of costs incurred are recorded as deferred revenue. Reimbursable costs incurred in excess of research revenues received are recorded as a receivable. Clinical trials are considered exchange transactions since the resource provider generally designates the specific research plan and retains the rights to any results of the trials. Support may be received either on a fee-for-service or cost reimbursement basis. To the extent that support exceeds expenses, RI s policy is to commit 100% of such nonrefundable excess, if any, to extended research in pursuit of its mission. Facilities and administrative revenue represents indirect costs recovered on clinical trials and direct research grants and are based on cost reimbursement rates. Rates are negotiated with the U.S. Department of Health and Human Services or the respective private grant donor, as included in each grant agreement. An allowance for uncollectible receivables is provided for based on management s evaluation of potential uncollectible amounts at year end. Collectability is considered potentially impaired for invoices exceeding six months past due. Factors management considers in establishing the allowance for uncollectible receivables include an aging of accounts receivable and the likelihood of collection of individual accounts based on historical experience and established action plans for collections. The allowance as of June 30, 2017 and 2016, was $450,391 and $117,850, respectively. Grant activities and outlays are subject to audit and acceptance by the granting agency and, as a result of such audit, adjustments could be required. Contributions Certain other private grants generally provide support that is considered contributions. Gifts of cash and other assets received without donor stipulations are reported as unrestricted revenue and net assets. Gifts received with a donor stipulation that limits their use are reported as temporarily or permanently restricted revenue and net assets. When a donor stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the consolidated statements of activities as net assets released from restrictions. Gifts that are originally restricted by the donor and for which the restriction is met in the same time period are recorded as temporarily restricted and then released from restriction. Conditional gifts depend on the occurrence of a specified future and uncertain event to bind the potential donor and are recognized as assets and revenue when the conditions are substantially met and the gift becomes unconditional. 10

13 Notes to Consolidated Financial Statements June 30, 2017 and 2016 Temporarily Restricted Net Assets Temporarily restricted net assets consist of research grant funds or other contributions that are subject to donor-imposed restrictions that expire with the passage of time or specific actions undertaken by RI, at which time they are released and reclassified to unrestricted support. Functional Allocation of Expenses The costs of supporting the various programs and other activities have been summarized on a functional basis in the consolidated statements of activities. Certain costs have been allocated among the program and management and general categories based on estimates of time incurred, usage and other relevant factors. Transfers Between Fair Value Hierarchy Levels Transfers in and out of Level 1 (quoted market prices), Level 2 (other significant observable inputs) and Level 3 (significant unobservable inputs) are recognized on the period ending date. Income Taxes RI is exempt from income taxes under Section 501 of the Internal Revenue Code and similar provision of state law. However, RI is subject to federal income tax on any unrelated business taxable income. RI files tax returns in the U.S. federal jurisdiction. RI follows accounting requirements related to uncertain tax positions. Tax positions taken may include positions that RI is exempt from income taxes or how RI determines its unrelated business income. Uncertain tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon an examination by the relevant tax authority. No amounts have been recorded at June 30, 2017 and 2016, with respect to uncertain tax positions. Subsequent Events Subsequent events have been evaluated through the date of the Independent Auditor s Report, which is the date the consolidated financial statements were available to be issued. 11

14 Notes to Consolidated Financial Statements June 30, 2017 and 2016 Note 2: Investments and Fair Value Measurements Investments Investments at June 30 consisted of the following: U.S. government and agency obligations $ 3,398,395 $ 5,991,352 Municipal bonds 2,599,541 3,395,000 Certificates of deposit 11,659,562 12,908,537 Collateralized mortgage obligations 38,217,994 27,945,223 Common stock 9,585 29,085 $ 55,885,077 $ 50,269,197 Investment Return Total investment return is comprised of the following: Interest and dividend income $ 1,401,051 $ 1,236,055 Net realized and unrealized losses (1,296,964) (197,528) Other (30,455) (43,234) $ 73,632 $ 995,293 Recurring Fair Value Measurements Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value: Level 1 Level 2 Level 3 Quoted prices in active markets for identical assets or liabilities Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities Unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities 12

15 Notes to Consolidated Financial Statements June 30, 2017 and 2016 Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. The following tables present the fair value measurements of assets recognized in the accompanying consolidated statement of financial position measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at: Fair Value Measurements Using Fair Value Level 1 Level 2 Level 3 June 30, 2017 U.S. government and agency obligations $ 3,398,395 $ - $ 3,398,395 $ - Municipal bonds 2,599,541-2,599,541 - Certificates of deposit 11,659,562-11,659,562 - Collateralized mortgage obligations 38,217,994-38,217,994 - Common stock 9,585 9, $ 55,885,077 $ 9,585 $ 55,875,492 $ - Fair Value Measurements Using Fair Value Level 1 Level 2 Level 3 June 30, 2016 U.S. government and agency obligations $ 5,991,352 $ - $ 5,991,352 $ - Municipal bonds 3,395,000-3,395,000 - Certificates of deposit 12,908,537-12,908,537 - Collateralized mortgage obligations 27,945,223-27,945,223 - Common stock 29,085 29, $ 50,269,197 $ 29,085 $ 50,240,112 $ - 13

16 Notes to Consolidated Financial Statements June 30, 2017 and 2016 Note 3: Bonds Payable and Facility Renovation Grant During 2014, RI completed a $34,000,000 project to renovate the Wahl Hixon Research Complex for Basic and Translational Cancer Research. Construction was partially financed through the issuance of Series 2010N Revenue Bonds by the Kansas Development Finance Authority in the amount of $30,160,000. The bonds have maturity dates from April 2011 through April 2030, and carry interest rates ranging from 3.50% to 5.0%. The bonds are secured by a pledge of RI s operating and nonoperating unrestricted revenues and RI s rights, title and interest in its operating agreement with the University (see Note 6). Bonds payable as reflected on the consolidated statements of financial position at June 30 consisted of the following balances: Principal payments due on bonds payable $ 16,140,000 $ 18,570,000 Add unamortized bond premium 1,000,476 1,217,649 Less unamortized bond issuance costs (147,843) (179,935) $ 16,992,633 $ 19,607,714 Annual maturities of bonds payable are as follows: 2018 $ 2,550, , , , ,020,000 Thereafter 9,740,000 $ 16,140,000 Additional funding for costs of construction, as well as the repayment of debt service on the bonds is provided by an agreement with the Kansas Bioscience Authority (KBA) for a grant that would cover up to $26,400,000 of the total project cost. The grant is contingent upon RI meeting certain milestones as outlined in the agreement relating to the construction plan, recruitment and retention of research scholars, and continuing use of the facility for research. Receipt of payments is also contingent upon the KBA maintaining sufficient funding to meet commitments going forward. KBA is funded by the State of Kansas based on a formula outlined in Kansas statutes. The statutes have been amended in recent years to place further limits on the amount of funding provided to the KBA. Due to these contingencies, the funding has not been reflected on the consolidated statements of financial position as a receivable. 14

17 Notes to Consolidated Financial Statements June 30, 2017 and 2016 RI has received annual installments from Assuming all conditions and milestones are achieved, the final installments of $2,640,000 is expected to be disbursed in Research facilities renovation grant revenue recognized from the KBA for both years ended June 30, 2017 and 2016 was $2,640,000. Note 4: Conditional Grants RI expects to receive future funding as a result of conditional grants relating to its research projects and other programs. Conditional grants promised for future fiscal years ending June 30 are summarized as follows: 2018 $ 12,693, ,711, , ,897 $ 16,016,494 Included in the above schedule are the anticipated payments from the KBA associated with the facility renovation grant discussed in Note 3. Note 5: Temporarily Restricted Net Assets Temporarily restricted net assets at June 30, 2017 and 2016 were $2,980,766 and $3,357,698, respectively, and are restricted for various types of research projects. Net assets were released from donor restrictions by incurring expenses satisfying the restricted purposes or occurrence of other events specified by donors Debt service payments $ 2,640,000 $ 2,640,000 Research projects 6,297,442 7,419,339 $ 8,937,442 $ 10,059,339 15

18 Notes to Consolidated Financial Statements June 30, 2017 and 2016 Note 6: Related Party Transactions University of Kansas and KUMC Operating Agreement RI has an operating agreement with the University and KUMC. Significant provisions of the agreement are as follows: RI will manage and administer all KUMC extramural grants and contracts (including clinical trials); certain facilities and administrative (indirect) costs collected will be utilized by RI as directed by KUMC; and RI will occupy and use facilities of KUMC based on its agreement that the recovery of facilities and administrative costs and contract administration fees be shared with or used as designated by KUMC. A significant portion of RI s grant expenditures are paid through KUMC s payroll and procurement system, and RI reimburses all such expenditures to KUMC. For the years ended June 30, 2017 and 2016, the following amounts were paid to KUMC and are reflected as University Support in the accompanying consolidated statements of activities: Facilities and administrative revenue distributions $ 3,899,999 $ 3,905,656 Debt service payments 693,863 4,045,004 Total University support $ 4,593,862 $ 7,950,660 RI acquires a significant amount of equipment for use through its research projects program. Under the operating agreement noted above, after purchase, ownership of the equipment is transferred to KUMC for further use by its faculty. No depreciation expense is recognized by RI with respect to equipment acquired for use in research projects; instead, the entire amount of such equipment acquisitions are charged to expense and reflected as capital asset donations to KUMC in the statement of functional expenses. Capital asset donations to KUMC for the years ended June 30, 2017 and 2016 were $979,585 and $3,016,009, respectively. Total personnel and fringe benefit expenses incurred on behalf of RI by KUMC during the years ended June 30, 2017 and 2016 were $48,544,721 and $49,475,192, respectively, of which $5,561,232 and $3,547,098 was payable to KUMC at June 30, 2017 and 2016, respectively. Additional amounts incurred on behalf of RI by KUMC related to grant expenditures during the years ended June 30, 2017 and 2016 were $8,803,869 and $10,224,657, respectively, of which $533,344 and $943,455 was payable to KUMC at June 30, 2017 and 2016, respectively. 16

19 Notes to Consolidated Financial Statements June 30, 2017 and 2016 KUCTC Affiliation Agreement KUCTC has an agreement to provide technology transfer services to all campuses of the University of Kansas. The University of Kansas Center for Research, Inc. (KUCR) and RI share the cost of operations of KUCTC, based on services provided at each campus. During the years ended June 30, 2017 and 2016, KUCR provided $740,000 and $740,000, respectively, of support to KUCTC to fund operations, and RI provided $447,375 and 447,375, respectively, of support, which was eliminated in consolidation. KUCR also reimbursed RI $461,375 and $433,375 related to their support provided to KUCTC which is included in other income in the consolidated statements of activities for the years ended June 30, 2017 and 2016, respectively. KUCTC has a revenue sharing agreement with the University and RI. Annually, a calculation is done of net assets in excess of KUCTC s operating expenses for the following fiscal year as defined by the agreement. Such excess is to be distributed to the University and RI, as agreed-upon between the parties. For the years ended June 30, 2017 and 2016, it was agreed-upon by the parties that no amounts would be distributed. KUCR Sub-Agreements KUCR enters into various subaward agreements with RI in order for RI to perform certain objectives under the research agreements. During the years ended June 30, 2017 and 2016, KUCR provided $2,361,029 and $2,032,054, respectively, under these subawards of which $1,122,915 and $337,042, was outstanding from KUCR at June 30, 2017 and 2016, respectively. Kansas University Endowment Association Research Support The Kansas University Endowment Association (KUEA) receives funding from other departments under KUMC to provide funding to the Research Institute. Total amounts received from KUEA on behalf of other affiliated departments to support general research activities during the years ended June 30, 2017 and 2016 were $5,971,378 and $7,802,035, respectively. Other RI is affiliated with several other entities through its relationship with the University and KUMC. Significant transactions with these entities for the years ended June 30, 2017 and 2016, include purchasing supplies and services (e.g. supplies and service fees under research projects, hospital services and lab fees associated with clinical trials, etc.) and entering into subaward agreements under certain research projects. Total amounts paid to other affiliated entities under these transactions during the years ended June 30, 2017 and 2016 were $3,070,533 and $4,759,947, respectively, of which $260,866 and $393,212 was outstanding and payable to such affiliates at June 30, 2017 and 2016, respectively. 17

20 Notes to Consolidated Financial Statements June 30, 2017 and 2016 Note 7: Defined Contribution Retirement Plan RI provides a mandatory, contributory funded 403(b) retirement plan for employees. All employees are eligible except students, seasonal, temporary and part-time employees who work less than 1,000 hours in a 12-month period. When an employee becomes eligible to participate in the plan, participation is a condition of employment or continuing employment. Eligible employees are required to contribute 5.5% of gross earnings by payroll deduction (pre-tax). In addition, RI contributes 8.5% of the employee s gross earnings. For the years ended June 30, 2017 and 2016, the retirement plan expense was $257,843 and $250,175, respectively. RI provides a voluntary tax-sheltered annuity program which is separate from the Defined Contribution Retirement Plan. Employees who have not yet completed the one-year waiting period for participation in the Defined Contribution Retirement Plan and/or employees who want to defer additional salary may do so in a Principal Voluntary Retirement Annuity. Note 8: Significant Estimates and Concentrations Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Those matters include the following: Accounts Receivable As of June 30, 2017, approximately 17% of accounts receivable was due from one customer. Estimates associated with the allowance for uncollectible receivables are discussed in Note 1. Direct Research Income and Facilities and Administrative Revenue During the year ended June 30, 2017, approximately 45% of direct research income and the related facilities and administrative revenue were from four grantors. Clinical Trials and IRB and Administrative Fee Revenues During the year ended June 30, 2017, approximately 10% of clinical trial and the related IRB and administrative fee revenue was from one sponsor. Contributions During the year ended June 30, 2017, approximately 51% of contribution revenue was from one donor. 18

21 Notes to Consolidated Financial Statements June 30, 2017 and 2016 Investments RI invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such change could materially affect the amounts reported in the accompanying consolidated statements of financial position. Precede Fund, L.C. and Kansas Life Sciences Development Company, Inc. Investments Estimates associated with the value of Precede Fund, L.C. and KLSD investments are discussed in Note 1. Functional Allocation of Expenses Estimates used to allocate certain costs on a functional basis are discussed in Note 1. 19

22 Supplementary Information

23 Consolidating Statement of Financial Position June 30, 2017 Assets Research Research Institute Properties KUCTC KLSD Consolidated Cash and cash equivalents $ 6,548,999 $ 63,928 $ 812,059 $ 6,273 $ 7,431,259 Accounts receivable, net 15,204,396 15, ,219,431 Investments 55,875,492-9,585-55,885,077 Precede Fund, L.C. investments 336, ,300 Kansas Life Sciences Development Company, Inc. investment 1, , ,323 Interest receivable 164, ,531 Prepaid expenses 145, ,154 Property and equipment, net - 266, ,305 Total assets $ 78,275,872 $ 345,268 $ 821,644 $ 424,596 $ 79,867,380 Liabilities and Net Assets Liabilities Accounts payable $ 3,319,628 $ 70,148 $ 73,516 $ - $ 3,463,292 Accrued expenses 6,082,744-70,145-6,152,889 Deferred revenue 2,204,687 8, ,213,502 Bonds payable 16,992, ,992,633 Total liabilities 28,599,692 78, ,661-28,822,316 Net Assets Unrestricted 46,695, , , ,596 48,064,298 Temporarily restricted 2,980, ,980,766 Total net assets 49,676, , , ,596 51,045, Total liabilities and net assets $ 78,275,872 $ 345,268 $ 821,644 $ 424,596 $ 79,867,380

24 Consolidating Statement of Activities Year Ended June 30, 2017 Research Research Institute Research Institute Temporarily Properties KUCTC KLSD Unrestricted Restricted Unrestricted Unrestricted Unrestricted Eliminations Consolidated Revenues, Gains and Other Support Direct research income $ 55,865,309 $ - $ - $ - $ - $ - $ 55,865,309 Clinical trials 12,335, ,335,815 Clinical trial IRB and administrative fees 1,465, ,465,574 Facilities and administrative revenue 22,207, ,207,437 Research facilities renovation grants - 2,640, ,640,000 Contributions 6,087,597 5,920, ,500 (176,500) 12,008,107 Research Properties, Inc., rental income , (205,915) 223,503 Support for KU Center for Technology Commercialization, Inc ,187,375 - (447,375) 740,000 Royalties and technology income 1,838, ,070 - (487,445) 1,846,970 Investment return 93, (19,500) ,632 Other income 530, , ,329 Net assets released from restrictions 8,937,442 (8,937,442) Total revenues, gains and other support 109,361,609 (376,932) 429,453 1,666, ,500 (1,317,235) 109,939,676 Expenses Direct research 87,548, ,548,675 Facilities 595, ,962 University support 4,593, ,593,862 Royalties and technology 1,948, (487,445) 1,461,354 Research Properties, Inc. 205, , (205,915) 429,453 KU Center for Technology Commercialization, Inc. 447, ,420,262 - (447,375) 1,420,262 Kansas Life Sciences Development Company, Inc. 176, ,904 (176,500) 1,904 Management and general 4,908, ,908,832 Total expenses 100,425, ,453 1,420,262 1,904 (1,317,235) 100,960,304 Changes in Net Assets 8,935,689 (376,932) - 246, ,596-8,979,372 Net Assets, Beginning of Year 37,759,725 3,357, , , ,000-42,065,692 Net Assets, End of Year $ 46,695,414 $ 2,980,766 $ 266,305 $ 677,983 $ 424,596 $ - $ 51,045,064 21

25 Functional Expenses Year Ended June 30, 2017 Program Expenses Direct University Royalties and Research Management Total Research Facilities Support Technology Properties KUCTC KLSDC and General Expenses Personnel $ 39,406,547 $ - $ - $ - $ - $ 729,039 $ - $ 3,350,811 $ 43,486,397 Fringe benefits 9,138, , ,608 10,169,088 Contract services 119, , ,766 Travel, food and meetings 1,887, ,648-59,628 1,969,912 Professional fees 2,111, , , ,761 1, ,484 3,326,380 Subaward payments 9,207, ,302 9,357,464 Supplies 6,577, ,066 6,610,958 Depreciation Payments to students and subjects 1,825, ,825,993 Fees, dues and charges 13,827, , ,918 13,953,304 Capital asset donation to KUMC 970,126 9, ,585 Equipment and other non-capital items 481, , ,610 Services 1,565, ,737 15,825-49,981 1,815,053 F&A transfer for University operations - - 4,593, ,593,862 Royalty distributions ,133,552-6, ,140,078 Interest expense - 586, ,503 Bad debt expense 425, ,028 Insurance 5, ,982 70,982 Totals $ 87,548,675 $ 595,962 $ 4,593,862 $ 1,461,354 $ 429,453 $ 1,420,262 $ 1,904 $ 4,908,832 $ 100,960,304 22

26 Schedule of Expenditures of Federal Awards Year Ended June 30, 2017 Federal Grantor/Pass-Through Grantor/Program or Cluster Federal CFDA Number Pass-Through Entity Identifying Number Passed through to Subrecipient Total Federal Expenditure Title Research and Development Cluster Department of Agriculture Passed through Arkansas Children's Hospital Research Institute Food Insecurity Nutrition Incentive (FINI) $ - $ 29,975 Passed through Mid-America Regional Council Food Insecurity Nutrition Incentive (FINI) N/A - 91,699 Total CFDA # ,674 Department of Defense s Military Medical Research and Development W81XWH ,235 Military Medical Research and Development W81XWH ,228 Military Medical Research and Development W81XWH ,355 Military Medical Research and Development W81XWH ,389 Military Medical Research and Development W81XWH ,254 Military Medical Research and Development W81XWH ,569 Military Medical Research and Development W81XWH ,251 Passed through Case Western Reserve University Military Medical Research and Development W81XWH ,186 Passed through University of Kansas Center for Research Military Medical Research and Development W81XWH ,282 Military Medical Research and Development W81XWH ,424 Passed through Weill Cornell Medical College Military Medical Research and Development J Total CFDA # ,188 National Aeronautics and Space Administration Space Operations NNX13AM62G - 95,906 Space Operations NNX15AB48G - 61,241 Total CFDA # ,147 National Science Foundation Education and Human Resources DGE ,201 Passed through University of Florida Education and Human Resources ,119 Total CFDA # ,320 Department of Health and Human Services Passed through University of Kansas Center for Research Advancing System Improvements for Key Issues in Women's Health NIH ,613 Food and Drug Administration Research R01FD Food and Drug Administration Research R01FD , ,886 Food and Drug Administration Research R01FD Food and Drug Administration Research R01FD A2-43,362 Total CFDA # , ,556 Maternal and Child Health Federal Consolidated Programs T73MC ,783 Maternal and Child Health Federal Consolidated Programs T73MC ,982 Maternal and Child Health Federal Consolidated Programs T73MC Passed through University of Massachusetts Maternal and Child Health Federal Consolidated Programs WA RFS ,861 Passed through Arkansas Children's Hospital Research Institute Maternal and Child Health Federal Consolidated Programs ,590 Total CFDA # ,813 23

27 Schedule of Expenditures of Federal Awards (Continued) Year Ended June 30, 2017 Federal Grantor/Pass-Through Grantor/Program or Cluster Title Federal CFDA Number Pass-Through Entity Identifying Number Passed through to Subrecipient Total Federal Expenditure Research and Development Cluster Environmental Health T32ES $ - $ 97,558 Environmental Health R01ES ,160 Environmental Health R56ES ,716 Environmental Health R00ES ,317 Environmental Health R21ES ,159 Passed through Columbia University NYC Environmental Health R01 ES Passed through Michigan State University Environmental Health R01ES ,642 Passed through Johns Hopkins University Environmental Health ,618 Passed through Emory University Environmental Health R01ES ,926 Total CFDA # ,225 Oral Diseases and Disorders Research R01DE ,919 Oral Diseases and Disorders Research R01DE Oral Diseases and Disorders Research R01DE ,991 Oral Diseases and Disorders Research R01 DE ,372 Oral Diseases and Disorders Research R56DE ,857 Oral Diseases and Disorders Research R03DE A1-4,950 Oral Diseases and Disorders Research R01DE ,733 Passed through University of Delaware Oral Diseases and Disorders Research NIH DE ,551 Passed through University of Kansas Center for Research Oral Diseases and Disorders Research FY ,823 Total CFDA # ,198,296 Human Genome Research R21DK ,798 Research Related to Deafness and Communication Disorders R21DC ,763 Passed through Orbis Biosciences Inc Research Related to Deafness and Communication Disorders NA - 132,080 Total CFDA # ,843 Passed through University of Kansas Center for Research Disabilities Prevention NIH ,162 Telehealth Programs D3FRH ,243 Telehealth Programs D3FRH ,688 Telehealth Programs D3FRH Telehealth Programs H2ARH ,723 Telehealth Programs G22RH ,322 69,654 Total CFDA # , ,764 Passed through Virginia Commonwealth University Research on Healthcare Costs, Quality and Outcomes NIH-R01HS ,053 Passed through University of Pennsylvania Research on Healthcare Costs, Quality and Outcomes R01HS ,770 Total CFDA # ,823 24

28 Schedule of Expenditures of Federal Awards (Continued) Year Ended June 30, 2017 Federal Grantor/Pass-Through Grantor/Program or Cluster Title Federal CFDA Number Pass-Through Entity Identifying Number Passed through to Subrecipient Total Federal Expenditure Research and Development Cluster Mental Health Research Grants R34MH $ 125,172 $ 213,957 Passed through Association of Schools & Programs of Public Occupational Safety and Health Program ASPPH - (203) Occupational Safety and Health Program CDC - (1,103) Total CFDA # (1,306) Alcohol Research Programs R01AA ,396 Alcohol Research Programs R01AA ,084 Alcohol Research Programs R01 AA (31,653) Alcohol Research Programs R01AA ,711 Alcohol Research Programs U01AA A1-23,462 Alcohol Research Programs F32AA A1-56,025 Total CFDA # ,025 Drug Abuse Research Programs R01DA , ,498 Drug Abuse Research Programs R01DA (13,558) Drug Abuse Research Programs R01DA ,248 Drug Abuse Research Programs R01DA , ,479 Drug Abuse Research Programs R01DA , ,080 Drug Abuse Research Programs R01DA Supp - 67,271 Drug Abuse Research Programs K01DA A1-4,008 Drug Abuse Research Programs R01 DA ,391 Total CFDA # ,642 2,027,417 Discovery and Applied Research for Technological Innovations to Improve Human Health R01 EB ,481 Passed through Spectradyne LLC Discovery and Applied Research for Technological Innovations to Improve Human Health R44EB ,542 Total CFDA# ,023 Minority Health and Health Disparities Research R01MD ,977 Passed through University of Texas at Austin Minority Health and Health Disparities Research R01MD ,858 Passed through Agile Health Minority Health and Health Disparities Research R41MD ,858 Total CFDA # ,693 Trans-NIH Research Support R21GM ,470 National Center for Advancing Translational Sciences TL1TR (3,198) National Center for Advancing Translational Sciences KL2TR National Center for Advancing Translational Sciences KL2TR , ,029 National Center for Advancing Translational Sciences UL1TR , ,310 Passed through Harvard Medical School National Center for Advancing Translational Sciences UL1TR S1-13,991 Passed through Indiana University National Center for Advancing Translational Sciences IN468090UK - 14,827 Total CFDA # , ,081 Research Infrastructure Programs R21 OD A1-2,435 Research Infrastructure Programs R25OD , ,569 Total CFDA # , ,004 25

29 Schedule of Expenditures of Federal Awards (Continued) Year Ended June 30, 2017 Federal CFDA Number Passed through to Subrecipient Federal Grantor/Pass-Through Grantor/Program or Cluster Title Pass-Through Entity Identifying Number Total Federal Expenditure Research and Development Cluster Nursing Research R01NR A1 $ - $ 77,321 Nursing Research R01NR ,790 Nursing Research R01NR A1-275,303 Nursing Research R01NR ,570 Passed through University of Iowa Nursing Research ,760 Total CFDA # ,744 Cancer Cause and Prevention Research R01CA ,260 Cancer Cause and Prevention Research R21 CA (242) Cancer Cause and Prevention Research R01CA Cancer Cause and Prevention Research R01CA , ,865 Cancer Cause and Prevention Research R21CA ,193 Cancer Cause and Prevention Research R01 CA , ,138 Cancer Cause and Prevention Research R00CA ,323 Cancer Cause and Prevention Research R01CA Cancer Cause and Prevention Research R01 CA ,878 Cancer Cause and Prevention Research R01CA , ,909 Cancer Cause and Prevention Research R01CA S1-3,691 Cancer Cause and Prevention Research R01CA (4,203) Cancer Cause and Prevention Research R01CA A1 33, ,184 Cancer Cause and Prevention Research R01 CA (4,387) Cancer Cause and Prevention Research R01CA ,909 Cancer Cause and Prevention Research R21CA A1-216,004 Cancer Cause and Prevention Research R01CA ,059 Cancer Cause and Prevention Research R01CA A1-351,184 Cancer Cause and Prevention Research R21CA , ,688 Passed through Baylor College of Medicine Cancer Cause and Prevention Research R01CA ,363 Passed through University of Missouri Kansas City Cancer Cause and Prevention Research R21 CA (956) Passed through Tufts University Cancer Cause and Prevention Research ,508 Cancer Cause and Prevention Research ,348 Passed through Health Communication Impact LLC Cancer Cause and Prevention Research NA - 64,884 Passed through Johns Hopkins University Cancer Cause and Prevention Research J ,654 Total CFDA # ,057 3,725,747 Passed through Fox Chase Cancer Center Cancer Detection and Diagnosis Research FCCC ,630 Passed through University of Texas Health Science Center Cancer Detection and Diagnosis Research U01 CA (5,926) Passed through University of Arkansas for Medical Sciences Cancer Detection and Diagnosis Research ,000 Passed through University of Kansas Center for Research Cancer Detection and Diagnosis Research FY ,141 Cancer Detection and Diagnosis Research FY ,935 Total CFDA # ,780 Cancer Treatment Research R01CA , ,927 Cancer Treatment Research R01CA , ,255 Cancer Treatment Research R21CA , ,067 Cancer Treatment Research R01CA ,253 Passed through Oregon Health and Sciences University Cancer Treatment Research _U10CA ,014 Passed through University of Kansas Center for Research Cancer Treatment Research R01CA ,019 26

30 Schedule of Expenditures of Federal Awards (Continued) Year Ended June 30, 2017 Federal CFDA Number Passed through to Subrecipient Federal Grantor/Pass-Through Grantor/Program or Cluster Title Pass-Through Entity Identifying Number Total Federal Expenditure Research and Development Cluster Cancer Treatment Research R01CA A1 $ - $ 10,530 Passed through University of Michigan Cancer Treatment Research SWOG - (724) Passed through American College of Radiology Cancer Treatment Research ACR-RTOG Passed through University of Nebraska Medical Center Cancer Treatment Research BMT CTN ,650 Cancer Treatment Research BMT CTN ,767 Total CFDA # ,972 1,169,577 Cancer Biology Research R21CA ,097 93,818 Cancer Biology Research R01CA ,602 Cancer Biology Research R01 CA ,086 Cancer Biology Research R01CA ,572 Cancer Biology Research R01 CA ,839 Cancer Biology Research R01CA S1-56,413 Cancer Biology Research R01CA ,689 Cancer Biology Research R01CA A1-150,847 Total CFDA # ,097 1,078,866 Cancer Centers Support Grants U54CA (2,077) Cancer Centers Support Grants U54CA S2-121,851 Cancer Centers Support Grants P30 CA ,057 (156,945) Cancer Centers Support Grants P30CA ,868 19,200 Cancer Centers Support Grants P30CA , ,816 Cancer Centers Support Grants P30CA S1 17,835 27,533 Cancer Centers Support Grants P30 CA ,852 2,015,862 Total CFDA # ,790 2,247,240 Cancer Research Manpower K01CA ,925 Cancer Research Manpower K23CA ,693 Cancer Research Manpower K22CA ,873 Cancer Research Manpower F30CA ,854 Cancer Research Manpower F30CA ,491 Cancer Research Manpower F32CA ,823 Total CFDA # ,659 Passed through NRG Oncology Foundation, Inc. Cancer Control GOG Studies - 30,930 Cancer Control R-TOG Studies - 118,865 Cancer Control NSABP Studies - 72,913 Passed through Southwest Oncology Group (SWOG) Cancer Control NA - 45,845 Cancer Control NA - 351,459 Total CFDA # ,012 ACL National Institute on Disability, Independent Living, and Rehabilitation Research DP ,854 Passed through Integrated Behavioral Technologies, Inc ACL National Institute on Disability, Independent Living, and Rehabilitation Research BI ,001 Passed through Intellispeak LLC ACL National Institute on Disability, Independent Living, and Rehabilitation Research INT KUMC 90B DEC15 - (31) 27

31 Schedule of Expenditures of Federal Awards (Continued) Year Ended June 30, 2017 Federal CFDA Number Passed through to Subrecipient Federal Grantor/Pass-Through Grantor/Program or Cluster Title Pass-Through Entity Identifying Number Total Federal Expenditure Research and Development Cluster Passed through University of Kansas Center for Research ACL National Institute on Disability, Independent Living, and Rehabilitation Research UN $ - $ 18,238 ACL National Institute on Disability, Independent Living, and Rehabilitation Research UNI G ,082 Total CFDA # ,144 Passed through University of Kansas Center for Research PPHF: Racial and Ethnic Approaches to Community Health Program financed solely by Public Prevention and Health Funds U58DP (1,971) PPHF: Racial and Ethnic Approaches to Community Health Program financed solely by Public Prevention and Health Funds FY ,905 Total CFDA # ,934 Passed through Kansas Department of Health and Environment Cancer Prevention and Control Programs for State, Territorial and Tribal Organizations Financed in Part by Prevention and Public Health Funds KDHE - 20,596 Passed through Kansas State University Medicaid Infrastructure Grants To Support the Competitive Em 93.RD1 1Z0CMS ,801 Passed through Kansas Department of Health and Environment Increasing the Implementation of Evidence-Based Cancer Survivorship Interventions to Increase Quality and Duration of Life Among Cancer Patients KDHE - 124,055 Cardiovascular Diseases Research R01HL , ,768 Cardiovascular Diseases Research R01HL ,329 Cardiovascular Diseases Research R01HL (10,062) Cardiovascular Diseases Research R01HL ,094 Cardiovascular Diseases Research R01HL ,946 Cardiovascular Diseases Research R56HL ,575 72,012 Cardiovascular Diseases Research R01HL A1-411,672 Passed through University of Florida Cardiovascular Diseases Research UFDSP (R18HL112720) - 9,913 Passed through University of Nebraska Medical Center Cardiovascular Diseases Research ,896 Cardiovascular Diseases Research BMT CTN Cardiovascular Diseases Research BMTCTN ,746 Passed through Ohio State University Cardiovascular Diseases Research R01HL ,958 Passed through University of Texas Health Science at Houston Cardiovascular Diseases Research UM1HL ,597 Passed through PhD Biosciences Cardiovascular Diseases Research KUMC1-14,020 Passed through Aspire Foundation Cardiovascular Diseases Research R01HL ,950 Passed through University of Kansas Center for Research Cardiovascular Diseases Research R01HL ,324 Passed through University of Wisconsin Cardiovascular Diseases Research INVESTED ,913 Passed through University of Pennsylvania Cardiovascular Diseases Research R01HL ,436 Total CFDA # ,689 2,606,157 Passed through University of North Carolina at Charlotte Lung Diseases Research GMinCFLD

32 Schedule of Expenditures of Federal Awards (Continued) Year Ended June 30, 2017 Federal CFDA Number Passed through to Subrecipient Federal Grantor/Pass-Through Grantor/Program or Cluster Title Pass-Through Entity Identifying Number Total Federal Expenditure Research and Development Cluster Blood Diseases and Resources Research R01HL $ - $ 14,803 Blood Diseases and Resources Research R01HL ,383 Passed through University of Nebraska Medical Center Blood Diseases and Resources Research BMT CTN ,750 Blood Diseases and Resources Research BMT CTN , ,082 Arthritis, Musculoskeletal and Skin Diseases Research R01 AR ,432 Passed through Brigham and Women's Hospital, Harvard Med School Arthritis, Musculoskeletal and Skin Diseases Research ,585 Passed through University of Pennsylvania Arthritis, Musculoskeletal and Skin Diseases Research U54AR ,066 Total CFDA # ,083 Diabetes, Digestive, and Kidney Diseases Extramural Research R01DK ,174 Diabetes, Digestive, and Kidney Diseases Extramural Research R01DK ,532 Diabetes, Digestive, and Kidney Diseases Extramural Research R01DK ,472 Diabetes, Digestive, and Kidney Diseases Extramural Research R01DK ,539 Diabetes, Digestive, and Kidney Diseases Extramural Research R01DK (1,305) Diabetes, Digestive, and Kidney Diseases Extramural Research R01DK (22,474) Diabetes, Digestive, and Kidney Diseases Extramural Research NIH R01DK ,835 Diabetes, Digestive, and Kidney Diseases Extramural Research NIH R01DK ,840 Diabetes, Digestive, and Kidney Diseases Extramural Research R01DK (44,320) Diabetes, Digestive, and Kidney Diseases Extramural Research R01DK ,849 Diabetes, Digestive, and Kidney Diseases Extramural Research U01DK ,448 Diabetes, Digestive, and Kidney Diseases Extramural Research U01DK S1-60,028 Diabetes, Digestive, and Kidney Diseases Extramural Research T32DK (104) Diabetes, Digestive, and Kidney Diseases Extramural Research T32DK ,156 Diabetes, Digestive, and Kidney Diseases Extramural Research R01DK ,683 Diabetes, Digestive, and Kidney Diseases Extramural Research R01DK A1-179,392 Diabetes, Digestive, and Kidney Diseases Extramural Research NIH,R01DK ,246 Diabetes, Digestive, and Kidney Diseases Extramural Research R01 DK ,754 Diabetes, Digestive, and Kidney Diseases Extramural Research R01DK , ,445 Diabetes, Digestive, and Kidney Diseases Extramural Research R01 DK ,594 Diabetes, Digestive, and Kidney Diseases Extramural Research R01DK ,879 Diabetes, Digestive, and Kidney Diseases Extramural Research R01 DK (1,937) (1,938) Diabetes, Digestive, and Kidney Diseases Extramural Research R01 DK A1 16,236 60,438 Diabetes, Digestive, and Kidney Diseases Extramural Research R03DK ,646 Diabetes, Digestive, and Kidney Diseases Extramural Research F32DK ,552 Diabetes, Digestive, and Kidney Diseases Extramural Research R01DK ,328 Diabetes, Digestive, and Kidney Diseases Extramural Research R01DK ,550 Diabetes, Digestive, and Kidney Diseases Extramural Research R01DK ,987 Diabetes, Digestive, and Kidney Diseases Extramural Research R01DK A1-350,579 Diabetes, Digestive, and Kidney Diseases Extramural Research DP3DK ,023 88,759 Diabetes, Digestive, and Kidney Diseases Extramural Research R01DK ,650 Diabetes, Digestive, and Kidney Diseases Extramural Research K01DK ,792 Diabetes, Digestive, and Kidney Diseases Extramural Research F30DK ,652 Diabetes, Digestive, and Kidney Diseases Extramural Research R01DK ,659 Diabetes, Digestive, and Kidney Diseases Extramural Research K01DK A1-75,589 Diabetes, Digestive, and Kidney Diseases Extramural Research P30DK ,158 1,159,307 Diabetes, Digestive, and Kidney Diseases Extramural Research P30DK S1-40,822 Diabetes, Digestive, and Kidney Diseases Extramural Research R21DK A1-157,402 Diabetes, Digestive, and Kidney Diseases Extramural Research F30DK ,560 Passed through University of Texas Southwestern Med Ctr at Dallas Diabetes, Digestive, and Kidney Diseases Extramural Research GMO ,534 Passed through University of Alabama at Birmingham Diabetes, Digestive, and Kidney Diseases Extramural Research SP ,403 Passed through Tufts University Diabetes, Digestive, and Kidney Diseases Extramural Research SERV U01DK ,747 29

33 Schedule of Expenditures of Federal Awards (Continued) Year Ended June 30, 2017 Federal CFDA Number Passed through to Subrecipient Federal Grantor/Pass-Through Grantor/Program or Cluster Title Pass-Through Entity Identifying Number Total Federal Expenditure Research and Development Cluster Passed through University of Utah Diabetes, Digestive, and Kidney Diseases Extramural Research $ - $ 197,304 Passed through Purdue University Diabetes, Digestive, and Kidney Diseases Extramural Research ,230 Passed through University of Kansas Center for Research Diabetes, Digestive, and Kidney Diseases Extramural Research NIH76980-M1, FY M1-468,081 Passed through NovaTarg Diabetes, Digestive, and Kidney Diseases Extramural Research R44DK ,275 Total CFDA # ,076 7,237,571 Extramural Research Programs in the Neurosciences and Neurological Disorders U10 NS ,842 Extramural Research Programs in the Neurosciences and Neurological Disorders U10NS , ,739 Extramural Research Programs in the Neurosciences and Neurological Disorders U10NS Extramural Research Programs in the Neurosciences and Neurological Disorders R21NS ,468 Extramural Research Programs in the Neurosciences and Neurological Disorders R01NS ,319 Extramural Research Programs in the Neurosciences and Neurological Disorders R01NS S1-59,049 Extramural Research Programs in the Neurosciences and Neurological Disorders R01NS A1-30,294 Extramural Research Programs in the Neurosciences and Neurological Disorders R01NS ,401 Extramural Research Programs in the Neurosciences and Neurological Disorders R01NS ,853 Extramural Research Programs in the Neurosciences and Neurological Disorders R21NS A1-157,083 Extramural Research Programs in the Neurosciences and Neurological Disorders F32NS ,116 Passed through Georgia Regents Research Institute Extramural Research Programs in the Neurosciences and Neurological Disorders RI01NS Passed through University of Miami Extramural Research Programs in the Neurosciences and Neurological Disorders ,334 Extramural Research Programs in the Neurosciences and Neurological Disorders Training - 4,756 Extramural Research Programs in the Neurosciences and Neurological Disorders U54NS ,293 Passed through University of Minnesota Extramural Research Programs in the Neurosciences and Neurological Disorders POINT - 2 Passed through University of Rochester Extramural Research Programs in the Neurosciences and PO#416131G 5 UO1 NS Neurological Disorders FOR-DMD G - 3,204 Passed through University of Kansas Center for Research Extramural Research Programs in the Neurosciences and Neurological Disorders FY ,027 Passed through Johns Hopkins University Extramural Research Programs in the Neurosciences and Neurological Disorders MISTIE III PO ,350 Passed through Massachusetts General Hospital Extramural Research Programs in the Neurosciences and Neurological Disorders NN103-33,796 30

34 Schedule of Expenditures of Federal Awards (Continued) Year Ended June 30, 2017 Federal CFDA Number Passed through to Subrecipient Federal Grantor/Pass-Through Grantor/Program or Cluster Title Pass-Through Entity Identifying Number Total Federal Expenditure Research and Development Cluster Extramural Research Programs in the Neurosciences and Neurological Disorders NN104 Rhapsody $ - $ 28,309 Passed through Mayo Clinic Jacksonville Extramural Research Programs in the Neurosciences and Neurological Disorders CREST Passed through Yale University Extramural Research Programs in the Neurosciences and Neurological Disorders M14A11718(09997)_U01NS ,565 Total CFDA # ,195 2,416,147 Allergy, Immunology and Transplantation Research R01 AI ,061 Allergy, Immunology and Transplantation Research R01AI ,924 Allergy, Immunology and Transplantation Research R21AI A1 14,911 27,976 Allergy, Immunology and Transplantation Research R21 AI ,028 Allergy, Immunology and Transplantation Research R21AI ,464 Allergy, Immunology and Transplantation Research R01AI A1 50, ,707 Allergy, Immunology and Transplantation Research R21AI A1 76, ,002 Allergy, Immunology and Transplantation Research R21AI ,691 Passed through The Rockefeller University Allergy, Immunology and Transplantation Research Rockefeller U. R01AI ,788 Passed through University of Kansas Center for Research Allergy, Immunology and Transplantation Research R21AI ,209 Allergy, Immunology and Transplantation Research R21AI Allergy, Immunology and Transplantation Research FY ,950 Total CFDA # ,483 1,410,959 Biomedical Research and Research Training P20GM ,243 Biomedical Research and Research Training P20GM ,719,403 Biomedical Research and Research Training P20GM , ,734 Biomedical Research and Research Training R01GM ,974 Biomedical Research and Research Training R01GM ,716 36,747 Biomedical Research and Research Training P30GM , ,754 Biomedical Research and Research Training P30GM , ,888 Biomedical Research and Research Training P20GM ,191,203 3,694,915 Biomedical Research and Research Training P30 GM ,222 Biomedical Research and Research Training R01GM , ,410 Biomedical Research and Research Training R01GM , ,652 Biomedical Research and Research Training R01GM A1-271,424 Biomedical Research and Research Training K23GM ,693 Biomedical Research and Research Training R01GM A1 16, ,258 Biomedical Research and Research Training P30GM ,010 Biomedical Research and Research Training U13GM ,502 Passed through University of Kansas Center for Research Biomedical Research and Research Training P30GM ,028 Biomedical Research and Research Training P20GM ,689 Biomedical Research and Research Training FY (1,279) Biomedical Research and Research Training FY ,533 Biomedical Research and Research Training FY M1-213,132 Passed through Fox Chase Cancer Center Biomedical Research and Research Training FCCC ,942 Passed through Rice University Biomedical Research and Research Training R ,998 Passed through City College of New York Biomedical Research and Research Training A - 64,232 Total CFDA # ,384,088 10,138,104 31

35 Schedule of Expenditures of Federal Awards (Continued) Year Ended June 30, 2017 Federal CFDA Number Passed through to Subrecipient Federal Grantor/Pass-Through Grantor/Program or Cluster Title Pass-Through Entity Identifying Number Total Federal Expenditure Research and Development Cluster Child Health and Human Development Extramural Research K01HD $ - $ 7,949 Child Health and Human Development Extramural Research U01HD Child Health and Human Development Extramural Research U01HD , ,294 Child Health and Human Development Extramural Research U01HD ,993 20,717 Child Health and Human Development Extramural Research R01HD , ,924 Child Health and Human Development Extramural Research R01HD , ,742 Child Health and Human Development Extramural Research R21HD , ,503 Child Health and Human Development Extramural Research R01HD , ,011 Child Health and Human Development Extramural Research R01HD , ,663 Child Health and Human Development Extramural Research R01HD S1 23,712 90,462 Child Health and Human Development Extramural Research R03HD A1-26,582 Child Health and Human Development Extramural Research HD ,475 Child Health and Human Development Extramural Research T32HD ,978 Child Health and Human Development Extramural Research R01HD , ,017 Child Health and Human Development Extramural Research R21 HD (465) Child Health and Human Development Extramural Research HD , ,553 Child Health and Human Development Extramural Research R21HD , ,346 Child Health and Human Development Extramural Research R01 HD (8,075) Child Health and Human Development Extramural Research R01HD ,758 Child Health and Human Development Extramural Research R01HD ,989 Child Health and Human Development Extramural Research R01 HD ,274 Child Health and Human Development Extramural Research R01HD ,351 Child Health and Human Development Extramural Research P01HD ,726 Child Health and Human Development Extramural Research P01HD ,139,025 Child Health and Human Development Extramural Research P01HD S1-52,301 Child Health and Human Development Extramural Research R21HD ,293 Child Health and Human Development Extramural Research K12 HD ,730 Child Health and Human Development Extramural Research U01HD ,471 Child Health and Human Development Extramural Research U01HD , ,562 Child Health and Human Development Extramural Research U01HD (2,321) Child Health and Human Development Extramural Research U01HD , ,817 Child Health and Human Development Extramural Research U01HD ,321 63,356 Child Health and Human Development Extramural Research R01HD , ,206 Child Health and Human Development Extramural Research R01HD ,907 Child Health and Human Development Extramural Research R13HD ,000 Child Health and Human Development Extramural Research R01HD ,890 Child Health and Human Development Extramural Research R13HD A1-5,982 Child Health and Human Development Extramural Research R00HD ,237 Child Health and Human Development Extramural Research UGOD , ,018 Passed through University of Kansas Center for Research Child Health and Human Development Extramural Research KUCR,NIH ,928 Passed through Northwestern University Child Health and Human Development Extramural Research P50 HD Passed through Children's Mercy Hospital & Clinics Child Health and Human Development Extramural Research ,702 Total CFDA # ,496,748 8,121,172 Aging Research R01AG A1 - (447) Aging Research R01AG , ,578 Aging Research R01 AG (254) Aging Research P30 AG Aging Research P30 AG , ,317 Aging Research P30AG ,779 1,429,893 Aging Research R56AG , ,063 Aging Research K99 AG A - 153,361 Aging Research R01AG , ,301 32

36 Schedule of Expenditures of Federal Awards (Continued) Year Ended June 30, 2017 Federal CFDA Number Passed through to Subrecipient Federal Grantor/Pass-Through Grantor/Program or Cluster Title Pass-Through Entity Identifying Number Total Federal Expenditure Research and Development Cluster Aging Research R21AG $ - $ 15,722 Passed through University of California San Diego Aging Research ADNI-2-76,964 Aging Research ADC-037-RES - (1,316) Aging Research SNIFF ADC-046-INI Passed through Eli Lilly & Company Aging Research A4-248,274 Passed through Minneapolis Medical Research Foundation Aging Research ASPREE - 10,483 Passed through William Beaumont Hospital Aging Research R01AG A1-14,646 Passed through University of Washington Aging Research U01 AG Aging Research U01 AG ,524 Aging Research U01 AG ,460 Passed through University of Texas Southwestern Med Ctr at Dallas Aging Research RO1AG ,582 Passed through University of Pittsburgh Aging Research ( ) - 52,654 Passed through University of Iowa Aging Research W ,424 Total CFDA # ,424 3,806,706 Passed through Oakland University Vision Research ,668 Passed through University of Pennsylvania Vision Research Dream (U10EY022879) - 3,950 Total CFDA # ,618 Passed through Northwestern University Assistance Programs for Chronic Disease Prevention and Control KANMED 49,280 96,699 Total Research and Development Cluster 5,780,730 56,733,169 Department of Transportation Passed through Mid-America Regional Council Safety Data Improvement Program Section 5310 FTA MO 16 X046 15, ,268 Institute of Museum and Library Services Passed through University of Utah Grants to States ,802 Department of Energy Office of Science Financial Assistance Program (203) Department of Education Passed through University of Kansas Center for Research National Institute on Disability and Rehabilitation Research KU,FY ,708 National Institute on Disability and Rehabilitation Research KUCR sub. DED ,458 Total CFDA # ,166 Special Education - Personnel Development to Improve Services and Results for Children with Disabilities UNI ,472 33

37 Schedule of Expenditures of Federal Awards (Continued) Year Ended June 30, 2017 Federal CFDA Number Passed through to Subrecipient Federal Grantor/Pass-Through Grantor/Program or Cluster Title Pass-Through Entity Identifying Number Department of Health & Human Services CCDF Cluster Passed through Kansas Social Rehabilitation Services Child Care and Development Block Grant EHS YC Total Federal Expenditure $ $ 53,128 Child Care Mandatory and Matching Funds of the Child Care and Development Fund EES2017KEHSCCP09G - 290,840 Total CCDF Cluster - 343,968 TANF Cluster Passed through Kansas Social Rehabilitation Services Temporary Assistance for Needy Families EES2017KEHSHV09 G - 272,704 Total TANF Cluster - 272,704 Student Financial Aid Cluster s Nurse Faculty Loan Program (NFLP) E01HP ,471 79,471 Health Professions Student Loans, including Primary Care Loans/Loans for Disadvantaged Students E26HP , ,335 Nursing Student Loans E4DHP ,150 2,150 Total Student Financial Aid Cluster 276, ,956 Passed through University of California Task Order 93.U01 GOG subaward # Passed through American Academy of Pediatrics Maternal and Child Health Federal Consolidated Programs U23MC ,417 Nurse Anesthetist Traineeship A22HP ,214 Passed through University of Illinois at Chicago HIV-Related Training and Technical Assistance HIV-Related Training and Technical Assistance UICC - 145,422 Total CFDA # ,649 Passed through Medical Society of Sedgwick County Disabilities Prevention MSSC - 16,570 Telehealth Programs G22RH , ,729 Telehealth Programs G22RH ,152 Total CFDA # , ,881 Passed through Kansas Department of Health and Environment State Rural Hospital Flexibility Program NA - 19,688 Geriatric Academic Career Awards K01HP Poison Center Support and Enhancement Grant Program H4BHS ,907 Passed through Kansas Department of Health and Environment Centers for Disease Control and Prevention Investigations and Technical Assistance FY16-179,733 Centers for Disease Control and Prevention Investigations and Technical Assistance FY17-817,370 34

38 Schedule of Expenditures of Federal Awards (Continued) Year Ended June 30, 2017 Federal CFDA Number Passed through to Subrecipient Federal Grantor/Pass-Through Grantor/Program or Cluster Title Pass-Through Entity Identifying Number Centers for Disease Control and Prevention Investigations and Technical Assistance NA - Total Federal Expenditure $ $ 2,024 Total CFDA # ,127 s Advanced Education Nursing Traineeships A10HP ,977 Passed through Washington University Sickel cell treatment demonstration program WU ,055 Sickel cell treatment demonstration program WU ,907 Total CFDA # ,962 Head Start CH , ,876 Head Start CH ,773 3,052,166 Passed through The Family Conservancy Head Start TFC - 290,428 Total CFDA # ,452 3,545,470 Passed through University of Kansas Center for Research University Centers for Excellence in Developmental Disabilities, Education, Research and Service KUCR sub,nih ,454 University Centers for Excellence in Developmental Disabilities, Education, Research and Service NIH ,747 Total CFDA # ,201 Alzheimer s Disease Initiative: Specialized Supportive Services Project (ADI-SSS) thru Prevention and Public Health Funds (PPHF) ALGG ,449 20,079 Passed through Kansas Department of Health and Environment Increasing the Implementation of Evidence-Based Cancer Survivorship Interventions to Increase Quality and Duration of Life Among Cancer Patients KSQI - 14,007 Passed through Manpower Demonstration Research Corporation Maternal, Infant and Early Childhood Home Visiting Grant Program MIHOPE - 1,512 Grants for Primary Care Training and Enhancement D58HP (172) Grants for Primary Care Training and Enhancement D56HP (3,011) Grants for Primary Care Training and Enhancement D55HP ,811 Grants for Primary Care Training and Enhancement D56HP (4) Grants for Primary Care Training and Enhancement DP56HP ,080 Total CFDA # ,704 Passed through Kansas Department of Health and Environment Maternal and Child Health Services Block Grant B04MC ,961 Maternal and Child Health Services Block Grant B04MC ,579 Maternal and Child Health Services Block Grant PEDS FY2015-1,961 Total CFDA # ,501 Total Federal Awards $ 6,433,173 $ 63,812,786 35

39 Notes to Schedule of Expenditures of Federal Awards Year Ended June 30, 2017 Notes to Schedule 1. The accompanying schedule of expenditures of federal awards (the Schedule ) includes the federal award activity of RI under programs of the federal government for the year ended June 30, The information in this Schedule 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). Because the Schedule presents only a selected portion of the operations of RI, it is not intended to and does not present the financial position, changes in net assets or cash flows of RI. 2. Expenditures reported on the Schedule are reported on the accrual basis of accounting. Such expenditures are recognized following, as applicable, either the cost principles in OMB Circular A-21 or the cost principles contained in Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, wherein certain types of expenditures are not allowable or are limited as to reimbursement. Negative amounts shown on the Schedule represent adjustments or credits made in the normal course of business to amounts reported as expenditures in prior years. RI has elected not to use the 10 percent de minimis indirect cost rate allowed under the Uniform Guidance. 36

40 Independent Auditor s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of the Financial Statements Performed in Accordance with Government Auditing Standards Board of Directors University of Kansas Medical Center Research Institute, Inc. Kansas City, Kansas We have audited, 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, the consolidated financial statements of University of Kansas Medical Center Research Institute, Inc. (RI), which comprise the consolidated statement of financial position as of June 30, 2017, and the related consolidated statements of activities and cash flows for the year then ended, and the related notes to the consolidated financial statements, and have issued our report thereon dated September 28, Internal Control Over Financial Reporting Management of RI is responsible for establishing and maintaining effective internal control over financial reporting (internal control). In planning and performing our audit of the consolidated financial statements, we considered RI s internal control to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the consolidated financial statements, but not for the purpose of expressing an opinion on the effectiveness of RI s internal control. Accordingly, we do not express an opinion on the effectiveness of RI 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 RI s consolidated financial statements will not be prevented or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. We identified a deficiency in internal control described in the accompanying schedule of findings and questioned costs as item that we consider to be a significant deficiency in internal control. 37

41 Board of Directors University of Kansas Medical Center Research Institute, Inc. Page 2 Compliance and Other Matters As part of obtaining reasonable assurance about whether RI s consolidated financial statements are free of 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. University of Kansas Medical Center Research Institute, Inc. s Response to Finding RI's response to the finding identified in our audit is described in the accompanying schedule of findings and questioned costs. RI's response was not subjected to the auditing procedures applied in the audit of the consolidated financial statements and, accordingly, we express no opinion on it. We also noted certain matters that we reported to RI s management in a separate letter dated September 28, 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 RI s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Kansas City, Missouri September 28,

42 Report on Compliance for Each Major Federal Program and Report on Internal Control Over Compliance Independent Auditor s Report Board of Directors University of Kansas Medical Center Research Institute, Inc. Kansas City, Kansas Report on Compliance for Each Major Federal Program We have audited the University of Kansas Medical Center Research Institute, Inc. s (RI) compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on each of RI s major federal programs for the year ended June 30, RI s major federal programs are identified in the summary of auditor s results section of the accompanying schedule of findings and questioned costs. Management s Responsibility Management is responsible for compliance with federal statutes, regulations, contracts and the terms and conditions of its federal awards applicable to its federal programs. Auditor s Responsibility Our responsibility is to express an opinion on compliance for each of RI s major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about RI s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of RI s compliance. 39

43 Board of Directors University of Kansas Medical Center Research Institute, Inc. Page 2 Opinion on Each Major Federal Program In our opinion, RI 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 federal programs for the year ended June 30, Report on Internal Control Over Compliance Management of RI 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 RI s internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing our opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of RI s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose. Kansas City, Missouri September 28,

44 Schedule of Findings and Questioned Costs Year Ended June 30, 2017 Summary of Auditor s Results Financial Statements 1. The type of report the auditor issued on whether the consolidated financial statements audited were prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) was: Unmodified Qualified Adverse Disclaimer 2. The independent auditor s report on internal control over financial reporting disclosed: Significant deficiency(ies)? Yes None reported Material weakness(es)? Yes No 3. Noncompliance considered material to the consolidated financial statements was disclosed by the audit? Yes No Federal Awards 4. The independent auditor s report on internal control over compliance for major federal awards programs disclosed: Significant deficiency(ies)? Yes None reported Material weakness(es)? Yes No 5. The opinions expressed in the independent auditor s report on compliance for major federal awards were: Unmodified Qualified Adverse Disclaimer 6. The audit disclosed findings required to be reported by 2 CFR (a)? Yes No 41

45 Schedule of Findings and Questioned Costs (Continued) Year Ended June 30, RI s major programs were: Cluster/Program Research and Development Cluster CFDA Number Various Head Start The threshold used to distinguish between Type A and Type B programs was $1,914, RI qualified as a low-risk auditee? Yes No 42

46 Schedule of Findings and Questioned Costs (Continued) Year Ended June 30, 2017 Findings Required to be Reported by Government Auditing Standards Reference Number Finding Criteria or Specific Requirement Management is responsible for establishing and maintaining effective internal control over financial reporting. Condition Significant audit adjustments were proposed to properly recognize contribution revenue. Context Contribution revenue was not being recognized in accordance with Accounting Standards Codification Topic Recognition - Contributions Received. As a result, a net adjusting entry was proposed and recorded to decrease contribution revenue and increase deferred revenue by $999,000 for contributions determined to be conditional and only recognized upon meeting certain criteria. Effect Potentially material misstatements in the consolidated financial statements due to error or fraud could occur and not be prevented or detected in a timely manner. Cause Review of contributions and determination of proper revenue recognition was completed only at year end. During the year end review, contribution agreements were not thoroughly reviewed resulting in incorrect assumptions regarding amounts available to be recognized as revenue. Recommendation Management should implement a review of contributions received upon initial notification of the award and make a determination for recognition as opposed to completing this review only at year end. Completing this analysis on the front-end will reduce the risk of improperly recording revenue and ease the year-end financial statement closing process. View of Responsible Official and Planned Corrective Actions Management will implement a review of all initial contribution agreements upon notification of award and determine the proper revenue recognition. The review and determination will be conducted by financial personnel knowledgeable with current ASC Topic Revenue Recognition. In addition to the initial determinations, concurrent revenue monitoring will be conducted that utilizes the previously implemented general ledger revenue recognition translate code to ensure ongoing compliance. 43

47 Reference Number Corrective Action Plan Personnel Responsible for Corrective Action: Timothy M. Siskey Anticipated Completion Date: 12/31/2017 Corrective Action Plan: Management will implement a review of all initial contribution agreements upon notification of award and determine the proper revenue recognition. The review and determination will be conducted by financial personnel knowledgeable with current ASC Topic 605 Revenue Recognition. In addition to the initial determinations, concurrent revenue monitoring will be conducted that utilizes the previously implemented general ledger revenue recognition translate code to ensure ongoing compliance. Mailing Address Mail Stop Rainbow Boulevard Kansas City, KS (913) Fax (913) www2.kumc.edu/researchinstitute/ Physical Address 4330 Shawnee Mission Parkway Fairway KS

48 Schedule of Findings and Questioned Costs (Continued) Year Ended June 30, 2017 Findings Required to be Reported by Uniform Guidance Reference Number No matters are reportable. Finding 45

49 Summary Schedule of Prior Audit Findings Year Ended June 30, 2017 Reference Number Summary of Finding Status Criteria or Specific Requirement Management is responsible for establishing and maintaining effective internal control over financial reporting. Condition Significant audit adjustments were proposed and recorded to the consolidated financial statements, including a restatement of beginning net assets related to revenue recognition of funding received for research and development. Context Research and development revenue was not being recognized in accordance with Accounting Standards Codification Topic 605 Revenue Recognition. For clinical trials, the majority of revenue was inappropriately being deferred until the completion of the project despite the clinical trial agreements having no clauses regarding repayment of funds received under the agreement if certain objectives were not met. Rather, clinical trial agreements stated certain amounts to be billed to the sponsor based on services provided under the clinical trial. Accounting Standards require revenue for basic fee-for-service contracts (i.e., clinical trials) to be recognized as the services are provided. For other research and development agreements, funds received were deferred and recognized only as expenses were incurred and consideration was not given to the terms of the agreement and type of transaction the agreement qualified as. In certain instances, revenue should be recognized using either the multiple-element arrangement method or the milestone method as opposed to expenses incurred, which would be determined based on the terms of the agreement. In other instances, certain funding received for research and development qualified as a contribution rather than an exchange transaction. In accordance with Accounting Standards, revenue from unconditional promises to give should be recognized upon notification of the gift and be classified as either unrestricted, temporarily restricted or permanently restricted based upon the existence of any donor-imposed restrictions. Partially resolved. See finding Mailing Address Mail Stop Rainbow Boulevard Kansas City, KS (913) Fax (913) www2.kumc.edu/researchinstitute/ Physical Address 4330 Shawnee Mission Parkway Fairway KS

50 Reference Number Summary of Finding Status Upon review of funding agreements and determination of proper revenue recognition, adjustments were proposed to properly recognize an approximate additional $3.2 million in revenues for the fiscal year ended June 30, 2016 and restate beginning net assets for approximately $14.5 million to recognize revenue in the proper period. Effect Potential material misstatements in the consolidated financial statements due to error or fraud could occur and not be prevented or detected in a timely manner. Cause A policy had been implemented in which the majority of all funding received for research and development were considered exchange transactions and revenue should only be recognized as expenses were incurred under the project or until completion of the project, regardless of the agreement terms. Recommendation We recommend performing a formal evaluation of all contract and grant agreements to determine the appropriate revenue recognition method. We also suggest implementing procedures to monitor project revenue each month to ensure compliance with the established revenue recognition method. Reason for Audit Finding Recurrence and Planned Corrective Actions - Managements corrective action focus was on the proper revenue recognition and classification of exchange transactions versus contributions as the finding would advocate. Those findings have been resolved. The need to accurately define a contribution as unconditional or conditional remained unresolved. Newer award agreements were reviewed, but due to time constraints, group assumptions were made and individual agreements were not always reviewed. Management will implement a review of all initial contribution agreements upon notification of award and determine the proper revenue recognition. The review and determination will be conducted by financial personnel knowledgeable with ASC Topic 605 Revenue Recognition. Additional concurrent revenue monitoring will also be conducted utilizing the previously implemented general ledger revenue recognition translate code to ensure ongoing compliance. Mailing Address Mail Stop Rainbow Boulevard Kansas City, KS (913) Fax (913) www2.kumc.edu/researchinstitute/ Physical Address 4330 Shawnee Mission Parkway Fairway KS

51 Reference Number Summary of Finding Status Criteria or Specific Requirement Management is responsible for establishing and maintaining effective internal control over financial reporting. Resolved Condition Significant audit adjustments were proposed and made to the consolidated financial statements, including multiple restatements of beginning net assets. Context Our audit procedures identified deficiencies in internal controls surrounding the following areas: Monthly tracking and reconciliation of accounts receivable Recording subrecipient services and payroll expenses in the appropriate period Proper amortization of deferred bond costs Appropriate tracking and recording of temporarily restricted net assets and interfund accounts Effect Potential material misstatements in the consolidated financial statements due to error or fraud could occur and not be prevented or detected in a timely manner. Cause A system is not in place to ensure that the consolidated financial statements are free from material error. Mailing Address Mail Stop Rainbow Boulevard Kansas City, KS (913) Fax (913) www2.kumc.edu/researchinstitute/ Physical Address 4330 Shawnee Mission Parkway Fairway KS