University of Kansas Medical Center Research Institute, Inc.

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

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, 2017... 20 Consolidating Statement of Activities for the Year Ended June 30, 2017... 21 Functional Expenses for the Year Ended June 30, 2017... 22 Schedule of Expenditures of Federal Awards... 23 Notes to Schedule of Expenditures of Federal Awards... 36 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... 37 Report on Compliance for Each Major Federal Program and Report on Internal Control Over Compliance Independent Auditor s Report... 39 Schedule of Findings and Questioned Costs... 41 Summary Schedule of Prior Audit Findings... 46

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.

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

Consolidated Statements of Financial Position June 30, 2017 and 2016 Assets 2017 2016 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 336,300 366,755 Kansas Life Sciences Development Company, Inc. investment 419,323 250,000 Interest receivable 164,531 149,160 Prepaid expenses 145,154 182,914 Property and equipment, net 266,305 266,646 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

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 223,503-223,503 Support for KU Center for Technology Commercialization, Inc. 740,000-740,000 Royalties and technology income 1,846,970-1,846,970 Investment return 73,632-73,632 Other income 533,329-533,329 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 595,962-595,962 University support 4,593,862-4,593,862 Royalties and technology 1,461,354-1,461,354 Research Properties, Inc. 429,453-429,453 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 100,960,304-100,960,304 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

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 215,610-215,610 Support for KU Center for Technology Commercialization, Inc. 740,000-740,000 Royalties and technology income 1,570,735-1,570,735 Investment return 995,293-995,293 Other income 841,109-841,109 Net assets released from restrictions 10,059,339 (10,059,339) - Total revenues, gains and other support 114,244,370 1,300,206 115,544,576 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 817,451-817,451 Research Properties, Inc. 577,114-577,114 KU Center for Technology Commercialization, Inc. 1,877,778-1,877,778 Management and general 4,801,319-4,801,319 Total expenses 107,414,657-107,414,657 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

Consolidated Statements of Cash Flows Years Ended June 30, 2017 and 2016 2017 2016 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 210,000 330,000 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 1,296,964 197,528 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 1,619,762 120,872 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

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

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

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: 2017 2016 Precede Fund, L.C. $ 336,300 $ 366,755 KLSD 419,323 250,000 $ 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

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

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

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: 2017 2016 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: 2017 2016 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

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 9,585 - - $ 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 29,085 - - $ 50,269,197 $ 29,085 $ 50,240,112 $ - 13

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: 2017 2016 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 $ 2,550,000 2019 910,000 2020 940,000 2021 980,000 2022 1,020,000 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

Notes to Consolidated Financial Statements June 30, 2017 and 2016 RI has received annual installments from 2009-2017. Assuming all conditions and milestones are achieved, the final installments of $2,640,000 is expected to be disbursed in 2018. 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 $ 12,693,055 2019 2,711,483 2020 429,059 2021 182,897 $ 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. 2017 2016 Debt service payments $ 2,640,000 $ 2,640,000 Research projects 6,297,442 7,419,339 $ 8,937,442 $ 10,059,339 15

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: 2017 2016 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

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

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

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

Supplementary Information

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 15,035 - - 15,219,431 Investments 55,875,492-9,585-55,885,077 Precede Fund, L.C. investments 336,300 - - - 336,300 Kansas Life Sciences Development Company, Inc. investment 1,000 - - 418,323 419,323 Interest receivable 164,531 - - - 164,531 Prepaid expenses 145,154 - - - 145,154 Property and equipment, net - 266,305 - - 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 8,815 - - 2,213,502 Bonds payable 16,992,633 - - - 16,992,633 Total liabilities 28,599,692 78,963 143,661-28,822,316 Net Assets Unrestricted 46,695,414 266,305 677,983 424,596 48,064,298 Temporarily restricted 2,980,766 - - - 2,980,766 Total net assets 49,676,180 266,305 677,983 424,596 51,045,064 20 Total liabilities and net assets $ 78,275,872 $ 345,268 $ 821,644 $ 424,596 $ 79,867,380

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 12,335,815 - - - - - 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 - - 176,500 (176,500) 12,008,107 Research Properties, Inc., rental income - - 429,418 - - (205,915) 223,503 Support for KU Center for Technology Commercialization, Inc. - - - 1,187,375 - (447,375) 740,000 Royalties and technology income 1,838,345 - - 496,070 - (487,445) 1,846,970 Investment return 93,132 - - (19,500) - - 73,632 Other income 530,958-35 2,336 - - 533,329 Net assets released from restrictions 8,937,442 (8,937,442) - - - - - Total revenues, gains and other support 109,361,609 (376,932) 429,453 1,666,281 176,500 (1,317,235) 109,939,676 Expenses Direct research 87,548,675 - - - - - 87,548,675 Facilities 595,962 - - - - - 595,962 University support 4,593,862 - - - - - 4,593,862 Royalties and technology 1,948,799 - - - - (487,445) 1,461,354 Research Properties, Inc. 205,915-429,453 - - (205,915) 429,453 KU Center for Technology Commercialization, Inc. 447,375 - - 1,420,262 - (447,375) 1,420,262 Kansas Life Sciences Development Company, Inc. 176,500 - - - 1,904 (176,500) 1,904 Management and general 4,908,832 - - - - - 4,908,832 Total expenses 100,425,920-429,453 1,420,262 1,904 (1,317,235) 100,960,304 Changes in Net Assets 8,935,689 (376,932) - 246,019 174,596-8,979,372 Net Assets, Beginning of Year 37,759,725 3,357,698 266,305 431,964 250,000-42,065,692 Net Assets, End of Year $ 46,695,414 $ 2,980,766 $ 266,305 $ 677,983 $ 424,596 $ - $ 51,045,064 21

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 9,138,174 - - - - 197,306-833,608 10,169,088 Contract services 119,982 - - - - - - 23,784 143,766 Travel, food and meetings 1,887,636 - - - - 22,648-59,628 1,969,912 Professional fees 2,111,392 - - 327,802 245,341 410,761 1,600 229,484 3,326,380 Subaward payments 9,207,162 - - - - - - 150,302 9,357,464 Supplies 6,577,627 - - - 10 255-33,066 6,610,958 Depreciation - - - - 341 - - - 341 Payments to students and subjects 1,825,993 - - - - - - - 1,825,993 Fees, dues and charges 13,827,156 - - - 24 37,902 304 87,918 13,953,304 Capital asset donation to KUMC 970,126 9,459 - - - - - - 979,585 Equipment and other non-capital items 481,342 - - - - - - 24,268 505,610 Services 1,565,510 - - - 183,737 15,825-49,981 1,815,053 F&A transfer for University operations - - 4,593,862 - - - - - 4,593,862 Royalty distributions - - - 1,133,552-6,526 - - 1,140,078 Interest expense - 586,503 - - - - - - 586,503 Bad debt expense 425,028 - - - - - - - 425,028 Insurance 5,000 - - - - - - 65,982 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

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) 10.331 4102-78591 $ - $ 29,975 Passed through Mid-America Regional Council Food Insecurity Nutrition Incentive (FINI) 10.331 N/A - 91,699 Total CFDA #10.331-121,674 Department of Defense s Military Medical Research and Development 12.420 W81XWH-10-1-0386-152,235 Military Medical Research and Development 12.420 W81XWH-14-1-0116-84,228 Military Medical Research and Development 12.420 W81XWH-12-1-0304-29,355 Military Medical Research and Development 12.420 W81XWH-17-1-0078-10,389 Military Medical Research and Development 12.420 W81XWH-16-1-0320-183,254 Military Medical Research and Development 12.420 W81XWH-16-1-0077-165,569 Military Medical Research and Development 12.420 W81XWH1610730-136,251 Passed through Case Western Reserve University Military Medical Research and Development 12.420 W81XWH160503-109,186 Passed through University of Kansas Center for Research Military Medical Research and Development 12.420 W81XWH-16-1-0519-29,282 Military Medical Research and Development 12.420 W81XWH 15 1 0524-57,424 Passed through Weill Cornell Medical College Military Medical Research and Development 12.420 J591-15 Total CFDA #12.420-957,188 National Aeronautics and Space Administration Space Operations 43.007 NNX13AM62G - 95,906 Space Operations 43.007 NNX15AB48G - 61,241 Total CFDA #43.007-157,147 National Science Foundation Education and Human Resources 47.076 DGE-1518767-3,201 Passed through University of Florida Education and Human Resources 47.076 1504792-3,119 Total CFDA #47.076-6,320 Department of Health and Human Services Passed through University of Kansas Center for Research Advancing System Improvements for Key Issues in Women's Health 93.088 NIH0076727-16,613 Food and Drug Administration Research 93.103 R01FD003739-300 Food and Drug Administration Research 93.103 4R01FD003739-03 146,274 328,886 Food and Drug Administration Research 93.103 7R01FD003937-02 - 8 Food and Drug Administration Research 93.103 1R01FD004809-01A2-43,362 Total CFDA #93.103 146,274 372,556 Maternal and Child Health Federal Consolidated Programs 93.110 T73MC06623-10 - 52,783 Maternal and Child Health Federal Consolidated Programs 93.110 T73MC06623-11 - 536,982 Maternal and Child Health Federal Consolidated Programs 93.110 T73MC06623-12 - 597 Passed through University of Massachusetts Maternal and Child Health Federal Consolidated Programs 93.110 WA00222227RFS2015044-4,861 Passed through Arkansas Children's Hospital Research Institute Maternal and Child Health Federal Consolidated Programs 93.110 034492-4,590 Total CFDA #93.110-599,813 23

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 93.113 5T32ES007079-35 $ - $ 97,558 Environmental Health 93.113 5R01ES009649-12 - 48,160 Environmental Health 93.113 R56ES022665-14,716 Environmental Health 93.113 4R00ES024431-02 - 242,317 Environmental Health 93.113 1R21ES026752-01 - 179,159 Passed through Columbia University NYC Environmental Health 93.113 R01 ES 016348 5-37761 - 129 Passed through Michigan State University Environmental Health 93.113 5R01ES024966-02 - 12,642 Passed through Johns Hopkins University Environmental Health 93.113 48640-6,618 Passed through Emory University Environmental Health 93.113 7R01ES025145-02 - 25,926 Total CFDA #93.113-627,225 Oral Diseases and Disorders Research 93.121 5R01DE021664-05 - 160,919 Oral Diseases and Disorders Research 93.121 5R01DE022660-04 - 100 Oral Diseases and Disorders Research 93.121 4R01DE022660-05 - 327,991 Oral Diseases and Disorders Research 93.121 5 R01 DE018713-05 - 164,372 Oral Diseases and Disorders Research 93.121 1R56DE025786-01 - 77,857 Oral Diseases and Disorders Research 93.121 1R03DE025906-01A1-4,950 Oral Diseases and Disorders Research 93.121 R01DE026172-302,733 Passed through University of Delaware Oral Diseases and Disorders Research 93.121 NIH DE024776-121,551 Passed through University of Kansas Center for Research Oral Diseases and Disorders Research 93.121 FY2013-068 - 37,823 Total CFDA #93.121-1,198,296 Human Genome Research 93.172 R21DK104086-212,798 Research Related to Deafness and Communication Disorders 93.173 R21DC015038-182,763 Passed through Orbis Biosciences Inc Research Related to Deafness and Communication Disorders 93.173 NA - 132,080 Total CFDA #93.173-314,843 Passed through University of Kansas Center for Research Disabilities Prevention 93.184 NIH76698-34,162 Telehealth Programs 93.211 D3FRH29257-01 - 14,243 Telehealth Programs 93.211 D3FRH29257-02 - 246,688 Telehealth Programs 93.211 D3FRH29257-03 - 456 Telehealth Programs 93.211 H2ARH30306-105,723 Telehealth Programs 93.211 G22RH30363 57,322 69,654 Total CFDA #93.211 57,322 436,764 Passed through Virginia Commonwealth University Research on Healthcare Costs, Quality and Outcomes 93.226 NIH-R01HS023147-1,053 Passed through University of Pennsylvania Research on Healthcare Costs, Quality and Outcomes 93.226 1R01HS024918-01 - 7,770 Total CFDA #93.226-8,823 24

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 93.242 R34MH107337 $ 125,172 $ 213,957 Passed through Association of Schools & Programs of Public Occupational Safety and Health Program 93.262 ASPPH - (203) Occupational Safety and Health Program 93.262 CDC - (1,103) Total CFDA #93.262 - (1,306) Alcohol Research Programs 93.273 5R01AA020518-02 - 161,396 Alcohol Research Programs 93.273 2R01AA020518-06 - 12,084 Alcohol Research Programs 93.273 5 R01 AA012863-14 - (31,653) Alcohol Research Programs 93.273 4R01AA012863-16 - 323,711 Alcohol Research Programs 93.273 1U01AA024733-01A1-23,462 Alcohol Research Programs 93.273 1F32AA02466901A1-56,025 Total CFDA #93.273-545,025 Drug Abuse Research Programs 93.279 R01DA035796 10,088 848,498 Drug Abuse Research Programs 93.279 5R01DA034542-02 - (13,558) Drug Abuse Research Programs 93.279 4R01DA034542-05 - 313,248 Drug Abuse Research Programs 93.279 R01DA031815 83,428 136,479 Drug Abuse Research Programs 93.279 4R01DA031815 132,126 424,080 Drug Abuse Research Programs 93.279 4R01DA031815 - Supp - 67,271 Drug Abuse Research Programs 93.279 1K01DA040745-01A1-4,008 Drug Abuse Research Programs 93.279 1 R01 DA042715-01 - 247,391 Total CFDA #93.279 225,642 2,027,417 Discovery and Applied Research for Technological Innovations to Improve Human Health 93.286 1 R01 EB015911-01 - 113,481 Passed through Spectradyne LLC Discovery and Applied Research for Technological Innovations to Improve Human Health 93.286 2R44EB01927-228,542 Total CFDA#93.286-342,023 Minority Health and Health Disparities Research 93.307 R01MD007800-331,977 Passed through University of Texas at Austin Minority Health and Health Disparities Research 93.307 1R01MD009675-01 - 36,858 Passed through Agile Health Minority Health and Health Disparities Research 93.307 R41MD010318-14,858 Total CFDA #93.307-383,693 Trans-NIH Research Support 93.310 R21GM114647-184,470 National Center for Advancing Translational Sciences 93.350 5TL1TR000120-05 - (3,198) National Center for Advancing Translational Sciences 93.350 KL2TR000119-04 - 122 National Center for Advancing Translational Sciences 93.350 KL2TR000119-05 48,183 174,029 National Center for Advancing Translational Sciences 93.350 UL1TR000001-05 15,381 655,310 Passed through Harvard Medical School National Center for Advancing Translational Sciences 93.350 3UL1TR001102-04S1-13,991 Passed through Indiana University National Center for Advancing Translational Sciences 93.350 IN468090UK - 14,827 Total CFDA #93.350 63,564 855,081 Research Infrastructure Programs 93.351 1 R21 OD010478-01A1-2,435 Research Infrastructure Programs 93.351 R25OD020214 68,857 289,569 Total CFDA #93.351 68,857 292,004 25

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 93.361 R01NR16255 01A1 $ - $ 77,321 Nursing Research 93.361 7R01NR014518-03 - 267,790 Nursing Research 93.361 1R01NR015743-01A1-275,303 Nursing Research 93.361 7R01NR014737-03 - 41,570 Passed through University of Iowa Nursing Research 93.361 1 12627 00 01-82,760 Total CFDA #93.361-744,744 Cancer Cause and Prevention Research 93.393 1R01CA190291-01 - 622,260 Cancer Cause and Prevention Research 93.393 1 R21 CA185460-02 - (242) Cancer Cause and Prevention Research 93.393 R01CA174481-161 Cancer Cause and Prevention Research 93.393 4R01CA174481 93,310 509,865 Cancer Cause and Prevention Research 93.393 R21CA191158-125,193 Cancer Cause and Prevention Research 93.393 4 R01 CA166213-05 17,561 205,138 Cancer Cause and Prevention Research 93.393 4R00CA166643-03 - 164,323 Cancer Cause and Prevention Research 93.393 5R01CA166557-04 - 332 Cancer Cause and Prevention Research 93.393 5 R01 CA106258-11 - 12,878 Cancer Cause and Prevention Research 93.393 R01CA181047 56,441 377,909 Cancer Cause and Prevention Research 93.393 R01CA181047-04S1-3,691 Cancer Cause and Prevention Research 93.393 5R01CA125262-05 - (4,203) Cancer Cause and Prevention Research 93.393 1R01CA185322-01A1 33,402 434,184 Cancer Cause and Prevention Research 93.393 5 R01 CA134981-04 - (4,387) Cancer Cause and Prevention Research 93.393 R01CA212189 01-79,909 Cancer Cause and Prevention Research 93.393 R21CA20356801A1-216,004 Cancer Cause and Prevention Research 93.393 5R01CA188898 02-387,059 Cancer Cause and Prevention Research 93.393 1R01CA201309-01A1-351,184 Cancer Cause and Prevention Research 93.393 R21CA204767 9,343 138,688 Passed through Baylor College of Medicine Cancer Cause and Prevention Research 93.393 R01CA172880-3,363 Passed through University of Missouri Kansas City Cancer Cause and Prevention Research 93.393 R21 CA184834 - (956) Passed through Tufts University Cancer Cause and Prevention Research 93.393 100627-29,508 Cancer Cause and Prevention Research 93.393 1006270001-7,348 Passed through Health Communication Impact LLC Cancer Cause and Prevention Research 93.393 NA - 64,884 Passed through Johns Hopkins University Cancer Cause and Prevention Research 93.393 J14146-1,654 Total CFDA #93.393 210,057 3,725,747 Passed through Fox Chase Cancer Center Cancer Detection and Diagnosis Research 93.394 FCCC 16199-42,630 Passed through University of Texas Health Science Center Cancer Detection and Diagnosis Research 93.394 U01 CA086402 - (5,926) Passed through University of Arkansas for Medical Sciences Cancer Detection and Diagnosis Research 93.394 50070-23,000 Passed through University of Kansas Center for Research Cancer Detection and Diagnosis Research 93.394 FY2015-013 - 14,141 Cancer Detection and Diagnosis Research 93.394 FY2017-064 - 22,935 Total CFDA #93.394-96,780 Cancer Treatment Research 93.395 R01CA182872 15,100 575,927 Cancer Treatment Research 93.395 R01CA155014 5,416 245,255 Cancer Treatment Research 93.395 R21CA198265 9,456 202,067 Cancer Treatment Research 93.395 1R01CA214545-01 - 5,253 Passed through Oregon Health and Sciences University Cancer Treatment Research 93.395 1005019_U10CA032102-32,014 Passed through University of Kansas Center for Research Cancer Treatment Research 93.395 R01CA167079-90,019 26

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 93.839 1R01HL111264-03 $ - $ 14,803 Blood Diseases and Resources Research 93.839 4R01HL111264-04 - 414,383 Passed through University of Nebraska Medical Center Blood Diseases and Resources Research 93.839 BMT CTN 1102-7,750 Blood Diseases and Resources Research 93.839 BMT CTN 1101-58,146-495,082 Arthritis, Musculoskeletal and Skin Diseases Research 93.846 5 R01 AR059088-05 - 207,432 Passed through Brigham and Women's Hospital, Harvard Med School Arthritis, Musculoskeletal and Skin Diseases Research 93.846 115219-9,585 Passed through University of Pennsylvania Arthritis, Musculoskeletal and Skin Diseases Research 93.846 U54AR057319-2,066 Total CFDA #93.846-219,083 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 4R01DK098414-04 - 305,174 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 5R01DK081431-05 - 4,532 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 R01DK099611-290,472 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 R01DK103872-269,539 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 5R01DK085317-06 - (1,305) Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 R01DK083539-03 - (22,474) Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 NIH R01DK102142-185,835 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 NIH R01DK102142-206,840 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 5R01DK091277-03 - (44,320) Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 5R01DK091277-05 - 212,849 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 5U01DK056943-15 - 81,448 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 U01DK056943 15S1-60,028 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 5T32DK071496-09 - (104) Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 T32DK071496-62,156 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 R01DK084097-11,683 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 R01DK084097-07A1-179,392 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 NIH,R01DK102487-411,246 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 1 R01 DK100595-01 - 204,754 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 R01DK100779 26,596 156,445 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 5 R01 DK083525-05 - 112,594 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 3R01DK083525-5 - 13,879 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 5R01 DK085605-05 (1,937) (1,938) Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 1 R01 DK094833-01A1 16,236 60,438 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 1R03DK102433-02 - 25,646 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 F32DK103493-72,552 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 R01DK103033-355,328 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 7R01DK088940-05 - 56,550 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 R01DK081579-395,987 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 1R01DK108088-01A1-350,579 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 DP3DK108211 19,023 88,759 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 1R01DK108433-01 - 192,650 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 5K01DK096032-06 - 215,792 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 5F30DK096842-03 - 43,652 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 1R01DK113111-01 - 3,659 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 K01DK10772901A1-75,589 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 1P30DK106912-01 57,158 1,159,307 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 P30DK10691201S1-40,822 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 R21DK10809301A1-157,402 Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 1F30DK109605-34,560 Passed through University of Texas Southwestern Med Ctr at Dallas Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 GMO-161120-175,534 Passed through University of Alabama at Birmingham Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 000508172-SP006-0101 - 1,403 Passed through Tufts University Diabetes, Digestive, and Kidney Diseases Extramural Research 93.847 5008759-SERV U01DK098245-253,747 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 Extramural Research Programs in the Neurosciences and Neurological Disorders 93.853 NN104 Rhapsody $ - $ 28,309 Passed through Mayo Clinic Jacksonville Extramural Research Programs in the Neurosciences and Neurological Disorders 93.853 CREST 2-185 Passed through Yale University Extramural Research Programs in the Neurosciences and Neurological Disorders 93.853 M14A11718(09997)_U01NS084495-9,565 Total CFDA #93.853 8,195 2,416,147 Allergy, Immunology and Transplantation Research 93.855 5R01 AI070723-08 - 1,061 Allergy, Immunology and Transplantation Research 93.855 4R01AI070723-09 - 303,924 Allergy, Immunology and Transplantation Research 93.855 1R21AI105543-01A1 14,911 27,976 Allergy, Immunology and Transplantation Research 93.855 1 R21 AI108391-01 - 62,028 Allergy, Immunology and Transplantation Research 93.855 1R21AI113547-02 - 122,464 Allergy, Immunology and Transplantation Research 93.855 1R01AI121073-01A1 50,870 369,707 Allergy, Immunology and Transplantation Research 93.855 1R21AI112803-01A1 76,702 217,002 Allergy, Immunology and Transplantation Research 93.855 1R21AI122962-01 - 198,691 Passed through The Rockefeller University Allergy, Immunology and Transplantation Research 93.855 Rockefeller U. R01AI099284-95,788 Passed through University of Kansas Center for Research Allergy, Immunology and Transplantation Research 93.855 R21AI115187-4,209 Allergy, Immunology and Transplantation Research 93.855 R21AI127622-159 Allergy, Immunology and Transplantation Research 93.855 FY2012-029 - 7,950 Total CFDA #93.855 142,483 1,410,959 Biomedical Research and Research Training 93.859 P20GM104936-09 - 175,243 Biomedical Research and Research Training 93.859 P20GM104936-10 - 1,719,403 Biomedical Research and Research Training 93.859 P20GM103549-10 9,307 453,734 Biomedical Research and Research Training 93.859 4R01GM029764-33 - 510,974 Biomedical Research and Research Training 93.859 5R01GM069783-08 25,716 36,747 Biomedical Research and Research Training 93.859 5P30GM103326-04 12,966 276,754 Biomedical Research and Research Training 93.859 4P30GM103326-05 74,215 682,888 Biomedical Research and Research Training 93.859 P20GM103418 2,191,203 3,694,915 Biomedical Research and Research Training 93.859 1 P30 GM118247-01 - 839,222 Biomedical Research and Research Training 93.859 R01GM115340 40,327 357,410 Biomedical Research and Research Training 93.859 R01GM102801 13,961 337,652 Biomedical Research and Research Training 93.859 2R01GM077336-09A1-271,424 Biomedical Research and Research Training 93.859 1K23GM123320-01 - 6,693 Biomedical Research and Research Training 93.859 1R01GM118589-01A1 16,393 111,258 Biomedical Research and Research Training 93.859 1P30GM122731-01 - 1,010 Biomedical Research and Research Training 93.859 U13GM103387-152,502 Passed through University of Kansas Center for Research Biomedical Research and Research Training 93.859 5P30GM110761-8,028 Biomedical Research and Research Training 93.859 1P20GM113117-01 - 80,689 Biomedical Research and Research Training 93.859 FY2016-027 - (1,279) Biomedical Research and Research Training 93.859 FY2016-028 - 10,533 Biomedical Research and Research Training 93.859 FY2017-021-M1-213,132 Passed through Fox Chase Cancer Center Biomedical Research and Research Training 93.859 FCCC15101-01 - 34,942 Passed through Rice University Biomedical Research and Research Training 93.859 R22892-99,998 Passed through City College of New York Biomedical Research and Research Training 93.859 41946-A - 64,232 Total CFDA #93.859 2,384,088 10,138,104 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 Child Health and Human Development Extramural Research 93.865 5K01HD067318-02 $ - $ 7,949 Child Health and Human Development Extramural Research 93.865 U01HD080423-02 - - Child Health and Human Development Extramural Research 93.865 U01HD080423-03 65,892 187,294 Child Health and Human Development Extramural Research 93.865 U01HD080423-04 2,993 20,717 Child Health and Human Development Extramural Research 93.865 R01HD047315 14,733 340,924 Child Health and Human Development Extramural Research 93.865 1R01HD076450-04 15,860 346,742 Child Health and Human Development Extramural Research 93.865 1R21HD082484-01 33,495 102,503 Child Health and Human Development Extramural Research 93.865 5R01HD079642-02 20,729 469,011 Child Health and Human Development Extramural Research 93.865 R01HD076673 445,895 670,663 Child Health and Human Development Extramural Research 93.865 R01HD07667304-S1 23,712 90,462 Child Health and Human Development Extramural Research 93.865 R03HD081730-01A1-26,582 Child Health and Human Development Extramural Research 93.865 HD068454-135,475 Child Health and Human Development Extramural Research 93.865 T32HD057850-204,978 Child Health and Human Development Extramural Research 93.865 5 R01HD069043-05 36,179 242,017 Child Health and Human Development Extramural Research 93.865 1 R21 HD075233-01 - (465) Child Health and Human Development Extramural Research 93.865 HD076116 26,614 116,553 Child Health and Human Development Extramural Research 93.865 R21HD081502 85,956 178,346 Child Health and Human Development Extramural Research 93.865 2 R01 HD020676-26 - (8,075) Child Health and Human Development Extramural Research 93.865 4R01HD020676-28 - 294,758 Child Health and Human Development Extramural Research 93.865 2R01HD020676-29 - 12,989 Child Health and Human Development Extramural Research 93.865 5 R01 HD049615-09 - 23,274 Child Health and Human Development Extramural Research 93.865 4R01HD049615-10 861 307,351 Child Health and Human Development Extramural Research 93.865 1P01HD079363-02 - 37,726 Child Health and Human Development Extramural Research 93.865 1P01HD079363-03 - 1,139,025 Child Health and Human Development Extramural Research 93.865 P01HD079363-03S1-52,301 Child Health and Human Development Extramural Research 93.865 R21HD082535-132,293 Child Health and Human Development Extramural Research 93.865 K12 HD052027-1,730 Child Health and Human Development Extramural Research 93.865 5U01HD076428-04 - 12,471 Child Health and Human Development Extramural Research 93.865 5U01HD076428-05 48,600 243,562 Child Health and Human Development Extramural Research 93.865 5U01HD080431-02 - (2,321) Child Health and Human Development Extramural Research 93.865 5U01HD080431-03 211,829 323,817 Child Health and Human Development Extramural Research 93.865 5U01HD080431-04 44,321 63,356 Child Health and Human Development Extramural Research 93.865 R01HD083292 366,744 739,206 Child Health and Human Development Extramural Research 93.865 1R01HD086001-586,907 Child Health and Human Development Extramural Research 93.865 1R13HD092010-01 - 6,000 Child Health and Human Development Extramural Research 93.865 R01HD062860-323,890 Child Health and Human Development Extramural Research 93.865 1R13HD083029-01A1-5,982 Child Health and Human Development Extramural Research 93.865 R00HD075886-212,237 Child Health and Human Development Extramural Research 93.865 8UGOD024943 52,335 200,018 Passed through University of Kansas Center for Research Child Health and Human Development Extramural Research 93.865 KUCR,NIH69181-266,928 Passed through Northwestern University Child Health and Human Development Extramural Research 93.865 P50 HD076188-294 Passed through Children's Mercy Hospital & Clinics Child Health and Human Development Extramural Research 93.865 9920170041-5,702 Total CFDA #93.865 1,496,748 8,121,172 Aging Research 93.866 1R01AG043962-01A1 - (447) Aging Research 93.866 4R01AG043962-03 23,469 471,578 Aging Research 93.866 5 R01 AG031575-05 - (254) Aging Research 93.866 5 P30 AG035982-04 - 216 Aging Research 93.866 5 P30 AG035982-05 56,633 260,317 Aging Research 93.866 2P30AG035982-06 150,779 1,429,893 Aging Research 93.866 R56AG047590 35,081 154,063 Aging Research 93.866 1 K99 AG050490-01A - 153,361 Aging Research 93.866 R01AG051470 55,462 410,301 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 Department of Health & Human Services CCDF Cluster Passed through Kansas Social Rehabilitation Services Child Care and Development Block Grant 93.575 EHS 14 15 YC0038 - Total Federal Expenditure $ $ 53,128 Child Care Mandatory and Matching Funds of the Child Care and Development Fund 93.596 EES2017KEHSCCP09G - 290,840 Total CCDF Cluster - 343,968 TANF Cluster Passed through Kansas Social Rehabilitation Services Temporary Assistance for Needy Families 93.558 EES2017KEHSHV09 G - 272,704 Total TANF Cluster - 272,704 Student Financial Aid Cluster s Nurse Faculty Loan Program (NFLP) 93.264 2E01HP28798-02-00 79,471 79,471 Health Professions Student Loans, including Primary Care Loans/Loans for Disadvantaged Students 93.342 6 E26HP179890202 195,335 195,335 Nursing Student Loans 93.364 4 E4DHP261100200 2,150 2,150 Total Student Financial Aid Cluster 276,956 276,956 Passed through University of California Task Order 93.U01 GOG subaward #2004-1435-1-363 Passed through American Academy of Pediatrics Maternal and Child Health Federal Consolidated Programs 93.110 U23MC26252-1,417 Nurse Anesthetist Traineeship 93.124 1A22HP29959-01-00-35,214 Passed through University of Illinois at Chicago HIV-Related Training and Technical Assistance 93.145 068475-00001 - 227 HIV-Related Training and Technical Assistance 93.145 UICC - 145,422 Total CFDA #93.145-145,649 Passed through Medical Society of Sedgwick County Disabilities Prevention 93.184 MSSC - 16,570 Telehealth Programs 93.211 G22RH20214 112,586 169,729 Telehealth Programs 93.211 G22RH30363-115,152 Total CFDA #93.211 112,586 284,881 Passed through Kansas Department of Health and Environment State Rural Hospital Flexibility Program 93.241 NA - 19,688 Geriatric Academic Career Awards 93.250 K01HP20492-255 Poison Center Support and Enhancement Grant Program 93.253 H4BHS15505-93,907 Passed through Kansas Department of Health and Environment Centers for Disease Control and Prevention Investigations and Technical Assistance 93.283 FY16-179,733 Centers for Disease Control and Prevention Investigations and Technical Assistance 93.283 FY17-817,370 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 Centers for Disease Control and Prevention Investigations and Technical Assistance 93.283 NA - Total Federal Expenditure $ $ 2,024 Total CFDA #93.283-999,127 s Advanced Education Nursing Traineeships 93.358 5A10HP27193-02 - 50,977 Passed through Washington University Sickel cell treatment demonstration program 93.365 WU 17 105-42,055 Sickel cell treatment demonstration program 93.365 WU 17 291-41,907 Total CFDA #93.364-83,962 Head Start 93.600 07CH70750200 36,679 202,876 Head Start 93.600 07CH70750300 196,773 3,052,166 Passed through The Family Conservancy Head Start 93.600 TFC - 290,428 Total CFDA #93.600 233,452 3,545,470 Passed through University of Kansas Center for Research University Centers for Excellence in Developmental Disabilities, Education, Research and Service 93.632 KUCR sub,nih70111-17,454 University Centers for Excellence in Developmental Disabilities, Education, Research and Service 93.632 NIH70117-110,747 Total CFDA #93.632-128,201 Alzheimer s Disease Initiative: Specialized Supportive Services Project (ADI-SSS) thru Prevention and Public Health Funds (PPHF) 93.763 90ALGG0009-01-01 14,449 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 93.808 KSQI - 14,007 Passed through Manpower Demonstration Research Corporation Maternal, Infant and Early Childhood Home Visiting Grant Program 93.870 MIHOPE - 1,512 Grants for Primary Care Training and Enhancement 93.884 D58HP20802-05-00 - (172) Grants for Primary Care Training and Enhancement 93.884 5D56HP21074-05-00 - (3,011) Grants for Primary Care Training and Enhancement 93.884 D55HP23208-65,811 Grants for Primary Care Training and Enhancement 93.884 D56HP23276 - (4) Grants for Primary Care Training and Enhancement 93.884 DP56HP23276-137,080 Total CFDA #93.884-199,704 Passed through Kansas Department of Health and Environment Maternal and Child Health Services Block Grant 93.994 6B04MC281000104-15,961 Maternal and Child Health Services Block Grant 93.994 B04MC281000-1,579 Maternal and Child Health Services Block Grant 93.994 PEDS FY2015-1,961 Total CFDA #93.994-19,501 Total Federal Awards $ 6,433,173 $ 63,812,786 35

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, 2017. 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

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, 2017. 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 2017-001 that we consider to be a significant deficiency in internal control. 37

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, 2017. 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, 2017 38

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, 2017. 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

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, 2017. 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, 2017 40

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 200.516(a)? Yes No 41

Schedule of Findings and Questioned Costs (Continued) Year Ended June 30, 2017 7. RI s major programs were: Cluster/Program Research and Development Cluster CFDA Number Various Head Start 93.600 8. The threshold used to distinguish between Type A and Type B programs was $1,914,384. 9. RI qualified as a low-risk auditee? Yes No 42

Schedule of Findings and Questioned Costs (Continued) Year Ended June 30, 2017 Findings Required to be Reported by Government Auditing Standards Reference Number Finding 2017-001 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 958-605-25 - 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 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. 43

Reference Number Corrective Action Plan 2017-001 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 1039 3901 Rainbow Boulevard Kansas City, KS 66160 (913) 588 1261 Fax (913) 588 3225 www2.kumc.edu/researchinstitute/ Physical Address 4330 Shawnee Mission Parkway Fairway KS 66205 44

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

Summary Schedule of Prior Audit Findings Year Ended June 30, 2017 Reference Number Summary of Finding Status 2016-001 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 2017-001 Mailing Address Mail Stop 1039 3901 Rainbow Boulevard Kansas City, KS 66160 (913) 588 1261 Fax (913) 588 3225 www2.kumc.edu/researchinstitute/ Physical Address 4330 Shawnee Mission Parkway Fairway KS 66205 46

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 2016-001 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 1039 3901 Rainbow Boulevard Kansas City, KS 66160 (913) 588 1261 Fax (913) 588 3225 www2.kumc.edu/researchinstitute/ Physical Address 4330 Shawnee Mission Parkway Fairway KS 66205 47

Reference Number Summary of Finding Status 2016-002 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 1039 3901 Rainbow Boulevard Kansas City, KS 66160 (913) 588 1261 Fax (913) 588 3225 www2.kumc.edu/researchinstitute/ Physical Address 4330 Shawnee Mission Parkway Fairway KS 66205 48