Report of Independent Auditors and Consolidated Financial Statements with Federal Awards Supplementary Information. The J. David Gladstone Institutes

Transcription

1 Report of Independent Auditors and Consolidated Financial Statements with Federal Awards Supplementary Information The J. David Gladstone Institutes December 31, 2016 and 2015

2 C O N T E N T S Page REPORT OF INDEPENDENT AUDITORS CONSOLIDATED FINANCIAL STATEMENTS Statements of Financial Position... 3 Statements of Activities... 4 Statements of Cash Flows... 5 Notes to Financial Statements SUPPLEMENTARY INFORMATION Schedule of Expenditures of Federal Awards Notes to Schedule of Expenditures of Federal Awards REPORT OF INDEPENDENT AUDITORS ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS REPORT OF INDEPENDENT AUDITORS ON COMPLIANCE FOR THE MAJOR FEDERAL PROGRAM AND REPORT ON INTERNAL CONTROL OVER COMPLIANCE WITH THE UNIFORM GUIDANCE SCHEDULE OF FINDINGS AND QUESTIONED COSTS... 35

3 REPORT OF INDEPENDENT AUDITORS To the Trustees The J. David Gladstone Institutes Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of The J. David Gladstone Institutes, (the Institutes ), which comprise the consolidated statements of financial position as of December 31, 2016 and 2015, 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 the 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the J. David Gladstone Institutes as of December 31, 2016 and 2015, and the changes in their net assets and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. 1

4 Other Matters Supplementary Information Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying Schedule of Expenditures of Federal Awards, as required by Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, 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 May 22, 2017, on our consideration of the Institutes 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 Institutes internal control over financial reporting and compliance. San Francisco, California May 22,

5 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION DECEMBER 31, 2016 AND 2015 ASSETS Cash and Cash Equivalents $ 27,812,339 $ 21,272,610 Investments Securities 101,575, ,364,680 Notes receivable, net of discount 16,905,121 20,962,636 Investments in limited liability companies 6,734,891 10,000 Total investments 125,215, ,337,316 Receivables, net of allowance 35,829,063 45,630,890 Prepaid Expenses 1,253,600 1,328,092 Property and Equipment, net of depreciation Research and administration 98,954, ,824,878 Investments in real estate 55,481,864 45,554,478 Total property and equipment 154,436, ,379,356 Other Assets 3,221,836 2,592,026 Total assets $ 347,768,908 $ 342,540,290 LIABILITIES AND NET ASSETS Liabilities Accounts payable $ 3,626,041 $ 5,073,401 Employee benefits payable 7,956,693 7,338,380 Bond interest payable 1,364,930 1,390,411 Other liabilities 531, ,349 Deferred revenue 8,424,906 10,432,235 Notes payable and lines of credit 47,595,905 27,527,806 Bonds payable, net 105,439, ,400,458 Total liabilities 174,939, ,729,040 Net Assets Unrestricted net assets: Unrestricted 132,093, ,276,416 Noncontrolling interests in real estate investment limited liability companies 2,531,480 1,577,423 Total unrestricted net assets 134,625, ,853,839 Temporarily restricted 33,204,231 39,957,411 Permanently restricted 5,000,000 5,000,000 Total net assets 172,829, ,811,250 Total liabilities and net assets $ 347,768,908 $ 342,540,290 See accompanying notes. 3

6 CONSOLIDATED STATEMENTS OF ACTIVITIES YEARS ENDED DECEMBER 31, 2016 AND 2015 Temporarily Restricted Permanently Restricted Total Unrestricted Temporarily Restricted Permanently Restricted Unrestricted Total REVENUE AND OTHER INCREASES Grants federal $ 35,624,377 $ $ $ 35,624,377 $ 34,869,467 $ $ $ 34,869,467 Contracts and other grants 24,881,309 24,881,309 19,377,441 19,377,441 Gain (Loss) on sale of real estate and investment income 10,146,108 10,146,108 (132,058) (132,058) Real estate investment rent 6,742,446 6,742,446 5,068,829 5,068,829 Contributions 971, ,059 1,875,244 1,036,308 10,077,558 11,113,866 Other 1,712,628 1,712,628 1,687,334 1,687,334 Sub tenant rent and services 1,633,800 1,633,800 1,363,881 1,363,881 Intellectual property licensing revenue 417, , , ,856 Net assets released from restrictions 7,657,239 (7,657,239) 8,363,748 (8,363,748) TOTAL REVENUE AND OTHER INCREASES 89,786,560 (6,753,180) 83,033,380 72,260,806 1,713,810 73,974,616 EXPENSES Laboratory 82,544,436 82,544,436 79,566,260 79,566,260 Real estate and interest 5,914,532 5,914,532 4,898,285 4,898,285 General and administrative 1,244,258 1,244,258 2,169,594 2,169,594 Depreciation of investments in real estate 1,810,666 1,810,666 1,183,162 1,183,162 Fundraising 783, ,774 1,190,229 1,190,229 TOTAL EXPENSES 92,297,666 92,297,666 89,007,530 89,007,530 (Decrease) increase in net assets before noncontrolling interests in real estate investment limited liability companies (2,511,106) (6,753,180) (9,264,286) (16,746,724) 1,713,810 (15,032,914) Change in noncontrolling interests in real estate investment limited liability companies (671,754) (671,754) (340,305) (340,305) CHANGES IN NET ASSETS (3,182,860) (6,753,180) (9,936,040) (17,087,029) 1,713,810 (15,373,219) NET ASSETS Beginning of year 136,853,839 39,957,411 5,000, ,811, ,253,030 38,243,601 5,000, ,496,631 Net change in noncontrolling interests (Note K) 954, ,057 (312,162) (312,162) End of year $ 134,625,036 $ 33,204,231 $ 5,000,000 $ 172,829,267 $ 136,853,839 $ 39,957,411 $ 5,000,000 $ 181,811,250 See accompanying notes. 4

7 CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2016 AND OPERATING ACTIVITIES Change in net assets $ (9,936,040) $ (15,373,219) Adjustments to reconcile change in net assets to net cash used in operating activities: Depreciation and amortization of property and equipment 8,460,388 7,970,106 (Gain) loss on disposal of property and equipment (30,071) 23,020 Net amortization of bond premium and issuance costs 373,507 7,504 Net realized and unrealized (gain) loss on securities (4,854,149) 4,664,441 Net realized (gain) on sale of real estate and notes receivable (2,355,417) (1,062,547) GRE, LLC's net (gain) on minority interest investments (178,604) Changes in assets and liabilities: Decrease (increase) in receivables 2,133,256 (13,218,554) Decrease in prepaid expenses 74, ,203 (Increase) in other assets (301,276) (45,912) (Decrease) increase in accounts payable (1,447,360) 441,230 Increase in employee benefits payable and other liabilities 583, ,632 (Decrease) in bond interest payable (25,481) (22,953) (Decrease) increase in deferred revenue (2,007,329) 3,190,284 Net cash used in operating activities (9,510,593) (12,671,765) INVESTING ACTIVITIES Proceeds from maturities and sales of securities 24,060,962 33,161,528 Purchases of securities (17,417,340) (28,971,672) Purchase of real estate (19,379,359) (905,458) Proceeds from sale of real estate 7,174,763 Notes receivable investments (3,330,000) (12,586,851) Collection of notes receivable 4,137,515 17,134,104 Proceeds from sale of equipment 42,500 11,759 Purchase of property and equipment (4,266,586) (3,712,252) Net cash (used in) provided by investing activities (8,977,545) 4,131,158 FINANCING ACTIVITIES Principal repayments on bonds payable (2,860,000) (2,770,000) Collection of temporarily restricted contributions 7,668,571 7,113,343 Proceeds from noncontrolling interest investment 1,159,000 Payments for noncontrolling interest investment (116,750) (173,481) Dividends paid to noncontrolling interests (88,193) (138,681) Payments for loan issuance costs (802,860) (148,631) Proceeds from issuance of notes payable and draws on lines of credit 32,106, ,835 Principal repayment on notes payable and lines of credit (12,038,488) (644,343) Net cash provided by financing activities 25,027,867 4,140,042 NET CHANGE IN CASH AND CASH EQUIVALENTS 6,539,729 (4,400,565) CASH AND CASH EQUIVALENTS Beginning of year 21,272,610 25,673,175 End of year $ 27,812,339 $ 21,272,610 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash payments for: Interest $ 5,734,117 $ 5,653,434 Taxes $ 3,335 $ 6,622 NON CASH INVESTING AND FINANCING ACTIVITIES Conversion of note receivable into LLC membership interest $ 3,250,000 $ See accompanying notes. 5

8 Note A Organization The J. David Gladstone Institutes operates as a medical research organization. Its scientific operations consist of three institutes: the Gladstone Institute of Cardiovascular Disease, the Gladstone Institute of Virology and Immunology, and the Gladstone Institute of Neurological Disease. The medical research institutes are committed to a scientific understanding of coronary heart disease (arteriosclerosis), both its causes and prevention; to a scientific understanding of Type 1 Human Immunodeficiency Virus ( HIV ) and Acquired Immune Deficiency Syndrome ( AIDS ); and supporting research of neurodegenerative and neurological diseases that affect the brain and nervous system. The J. David Gladstone Institutes also operates the Gladstone Office of Corporate Ventures and Translation. All of these scientific operations are located in San Francisco, California. On October 5, 2010, the J. David Gladstone Institutes formed the Gladstone Foundation (the Foundation ) and applied for tax exempt status as a California nonprofit public benefit corporation operating under Internal Revenue Code Section 509(a)(3). In 2011, this application was amended to apply for tax exempt status under Internal Revenue Code Section 509(a)(1). The amended application was approved on January 11, The Foundation was established to provide financial support exclusively to the J. David Gladstone Institutes. Note B Summary of Significant Accounting Policies Principles of Consolidation: The consolidated financial statements include the accounts of the J. David Gladstone Institutes and the Foundation, the Institutes 99 percent owned subsidiary GRE, LLC ( GRE ); 85 percent owned subsidiary, LSTGI 3, LLC; and its 100 percent owned subsidiary, Cure Network Ventures, Inc. All significant transactions between these entities have been eliminated in the consolidation. The aforementioned entities are collectively referred to as the Institutes within these notes to the consolidated financial statements. Basis of Accounting: The consolidated financial statements of the Institutes have been prepared on the accrual basis of accounting and, accordingly, reflect all significant receivables, payables, and other liabilities. Financial Statement Presentation: The consolidated financial statements are presented utilizing the concept of net assets as described below: Unrestricted net assets represent expendable funds available for operations, which are not otherwise limited by donor restrictions. Temporarily restricted net assets consist of contributed funds subject to specific donor imposed restrictions, which may be fulfilled upon satisfaction of a specific purpose or a specific passage of time before the Institutes may spend the funds. Permanently restricted net assets are subject to irrevocable donor restrictions requiring that the assets be maintained in perpetuity, usually for the purpose of generating investment income to fund current operations or other donor designated purposes. 6

9 Note B Summary of Significant Accounting Policies (Continued) Income Taxes: The Institutes has been granted exemption from income taxes under Section 501(c)(3) of the Internal Revenue Code and Section 23701d of the California Revenue and Taxation Code. The Institutes is subject to unrelated business income tax on certain rental transactions and income from alternative investments. For the years ended December 31, 2016 and 2015, the Institutes had approximately $4,689,000 and $2,317,000 of cumulative taxable losses, respectively. Since management believes it is unlikely there will be future income to offset these losses, a valuation allowance has been reflected against the full balance. The Institutes files an exempt organization return and applicable unrelated business income tax returns in the U.S. federal jurisdiction and with the Franchise Tax Board in the state of California. The Institutes had no unrecognized tax benefits at December 31, 2016 and Use of Estimates: Management uses estimates and assumptions in preparing the consolidated financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Cash and Cash Equivalents: For purposes of the consolidated statements of cash flows, the Institutes considers all highly liquid debt instruments purchased with an original maturity of three months or less at the date of purchase, to be cash equivalents. Investments and Investment Income: Investments in debt and equity securities, and alternative investments, are stated at fair value. The fair values of all debt and equity securities with a readily determinable fair value are based on quotations obtained from national securities exchanges. The alternative investments, which are not readily marketable, are carried at estimated fair values as provided by the investment managers. The Institutes reviews and evaluates the values provided by the investment managers and agrees with the valuation methods and assumptions used in determining the fair value of the alternative investments. For these investments, the Institutes uses the net asset value ( NAV ) provided by the investment fund managers to evaluate the fair value of the investments (see Note E). The NAV may be adjusted based on liquidity factors or other information about the investments that management considers significant to the valuation of the investments. Investments may contain elements of both credit and market risk. Such risks include, but are not limited to, limited liquidity, absence of regulatory oversight, dependence upon key individuals, and speculative investments. Notes receivable are recorded at cost, less any principal payments it has received from the borrower since the note purchase date. On April 23, 2015, the Institutes incorporated Cure Network Ventures, Inc., a for profit Delaware corporation and a wholly owned subsidiary of the Institutes, which was formed with the intent of entering into licensing and scientific research collaboration arrangements with unrelated pharmaceutical and biotechnology companies. On October 28, 2015, the Institutes licensed certain technology and intellectual property to Cure Network Ventures, Inc. who sublicensed the technology and intellectual property to a Delaware limited liability company in return for 50 percent ownership in the entity. The fair market value of the technology and intellectual property was recorded as an investment in a limited liability company. 7

10 Note B Summary of Significant Accounting Policies (Continued) Accounts Receivable: Accounts receivable are included in receivables on the accompanying consolidated statements of financial position, and are stated at unpaid balances less a reserve for doubtful accounts. The Institutes provides for losses on accounts receivable using the reserve method. The reserve is based on experience, delays in payment, and other circumstances which may affect the ability of grantors to meet their obligations. It is the Institutes policy to charge off uncollectible accounts receivable against the reserve when management determines the receivable will not be collected. Pledges Receivable: Pledges receivable are included in receivables on the accompanying consolidated statements of financial position, and consist of unconditional promises to give, whereas conditional promises to give are not recorded as revenue until the conditions are substantially met. Unconditional promises to give that are expected to be collected in future years are recorded at their net realizable value. The discounts on these amounts are computed using rates applicable in the years in which those promises are received. The amortization of the discount is included in unrestricted contributions on the consolidated statements of activities. The reserve for doubtful accounts is estimated based on the Institutes historical losses, the existing economic conditions, and the financial stability of its donors. Pledges receivable are written off against the reserve in the year deemed uncollectible. At December 31, 2016 and 2015, allowances were approximately $145,000 and $159,000, respectively. Property and Equipment: Property and equipment is recorded at cost at the date of acquisition. It is the Institutes policy to capitalize property and equipment with a cost in excess of $5,000 and a useful life greater than one year. Depreciation is provided for by the straight line method over the assets estimated useful lives. Leasehold improvements are stated at cost and are amortized using the straight line method over the length of the lease. The useful lives are as follows: Building and building improvements Tenant improvements Furniture and equipment 30, 40, and 50 years 5 years 3, 5, 10, and 20 years Impairment of Long Lived Assets: The Institutes evaluates long lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset are less than the carrying value, a write down will be recorded to reduce the related asset to its estimated fair value. As of December 31, 2016 and 2015, no such write downs have occurred. Other Assets: Other assets include security deposits, renovation reserves, 457 (b) plan assets and unrealized gains or losses, as well as other capitalized costs related to real estate investments. Functional Allocation of Expenses: The costs of providing the research and development programs and other activities have been summarized on a functional basis in the consolidated statements of activities. Accordingly, certain costs have been allocated among the programs and supporting services benefited. 8

11 Note B Summary of Significant Accounting Policies (Continued) Revenue Recognition Government Grants and Contracts: Revenue is recorded as earned to the extent eligible costs have been incurred towards the performance requirements of the government grants or contracts. Cash payments received in advance from grants and contracts are recorded as deferred revenue. Real Estate Investment Rent and Sub tenant Rent and Services: Revenue is recognized at the date the rent payment is due and when services are provided. Contributions: Contributions are recorded as revenue at their fair value when unconditionally pledged or when received, whichever is earlier. Contributions subject to donor imposed restrictions or time restrictions for use in a future period are reported as temporarily restricted. When the restrictions are met, temporarily restricted net assets are reclassified to unrestricted net assets and reported as net assets released from restriction. Intellectual Property Licensing Revenue: Revenue from upfront license fees and certain guaranteed payments where the Institutes continues involvement through development collaboration is recognized ratably over the development period. Revenue associated with performance milestones is recognized upon the achievement of the milestones, as defined in the respective agreements. Concentration of Risk: The Institutes maintains cash and cash equivalents at several financial institutions. Some of the accounts are insured up to $250,000 by the Federal Deposit Insurance Corporation ( FDIC ) or insured to $500,000 by the Securities Investor Protection Corporation ( SIPC ). The Institutes has not experienced any losses in such accounts. During the years ended December 31, 2016 and 2015, the Institutes received approximately $33,389,000 and $34,100,000 of federal grant revenue, respectively, through the National Institutes of Health ( NIH ). This represents 55 percent and 63 percent of the Institutes total grants and contracts revenue for the years ended December 31, 2016 and 2015, respectively. Included in total grants and contracts receivable (Note F) at December 31, 2016 and 2015, was approximately $3,682,000 and $3,267,000, respectively, which is due from the NIH. This represents 44 percent and 39 percent of the Institutes total grants and contracts receivable, respectively. Risks and Uncertainties: The Institutes invests in various types of securities which are exposed to risks such as interest rate fluctuation, market price volatility, and credit risks. The fair value of certain investments is exposed to substantial and rapid change and, as such, there could be a material effect on the future fair value of these investments. Reclassifications: Certain prior year amounts have been reclassified to conform with the current year presentation. These reclassifications have no effect on net assets or changes in net assets. 9

12 Note B Summary of Significant Accounting Policies (Continued) FASB Accounting Standards Updated (ASU): In August 2014, the Financial Accounting Standards Board ( FASB ) issued Accounting Standards Update ( ASU ) No , Presentation of Financial Statements Going Concern (Subtopic ): Disclosure of Uncertainties about an Entity s Ability to Continue as a Going Concern. ASU is intended to define management s responsibility to evaluate whether there is substantial doubt about an organization s ability to continue as a going concern and to provide related footnote disclosures. The adoption of ASU did not have a material impact on the Institutes consolidated financial statements. In April 2015, the FASB issued ASU No , Interest Imputation of Interest (Subtopic ): Simplifying the Presentation of Debt Issuance Costs. ASU simplifies the presentation of debt issuance costs by requiring such costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Recognizing debt issuance costs as a deferred charge is no longer permitted. This update is effective for financial statements issued for fiscal years beginning after December 15, The new guidance should be applied on a retrospective basis with the balance sheet of each individual period presented adjusted to reflect the period specific effects of applying the new guidance. Upon transition, the Institutes is expected to comply with the applicable disclosures for a change in accounting principle in the year ended December 31, In May of 2015, the FASB issued ASU No , Fair Value Measurement: Disclosures for Investment in Certain Entities That Calculate Net Asset Value (NAV) per Share. The Update removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The Institutes adopted ASU as of December 31, 2016 with retrospective application for the December 31, 2015 consolidated financial statements. In February 2016, the FASB issued ASU No , Leases (Topic 842), which increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the statement of financial position and disclosing key information about leasing arrangements in the financial statements of lessees. This update is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The adoption is effective for the Institutes for the calendar year ending December 31, Management is currently evaluating the impact of the provisions of ASU on the consolidated financial statements. 10

13 Note B Summary of Significant Accounting Policies (Continued) In August 2016, the FASB issued ASU No , Not for Profit Entities (Topic 958): Presentation of Financial Statements of Not for Profit Entities, which improves the current net asset classification requirements and the information presented in financial statements and notes about an entity s liquidity, financial performance, and cash flows. The update removes the requirement to present three classes of net assets with two classes, net assets with donor restrictions and net assets without donor restrictions. The update also removes the requirement to present or disclose the indirect method (reconciliation) if using the direct method for the statement of cash flows as well as added several additional enhanced disclosures to the notes. The amendments in this update are effective for fiscal years beginning after December 15, 2017 and interim periods beginning after December 15, 2018, with application to interim financial statements permitted but not required in the initial year of application. The adoption is effective for the Institutes for the calendar year ending December 31, Management is currently evaluating the impact of the provisions of ASU on the consolidated financial statements. Subsequent Events: Subsequent events are events or transactions that occur after the consolidated statement of financial position date, but before the consolidated financial statements are issued. The Institutes recognizes in the consolidated financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the consolidated statement of financial position, including the estimates inherent in the process of preparing the consolidated financial statements. The Institutes consolidated financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the consolidated statement of financial position, but arose after the consolidated statement of financial position date and before the consolidated financial statements are available to be issued. In January 2017, a subsidiary of GRE sold the retail complex located in Los Angeles, California and the balance of the note payable was repaid. In January 2017, the Institutes executed a related party promissory note with the Foundation for $12,000,000. The promissory note accrues interest at a fixed rate of 1.5 percent per annum, and is eliminated in the consolidation. In January 2017, the Institutes repaid the outstanding balance of $12,750,000 on the line of credit. In April 2017, a $1.5 million loan was made to a subsidiary of GRE to pay off the mortgage note maturing in May 2017 and to provide additional capital for future improvements to the property, located in Boise, Idaho. In April 2017, a subsidiary of GRE sold the retail complex located in Albuquerque, New Mexico and the balance of the note payable was repaid. On April 26, 2017, the Institutes amended the line of credit capacity from $20 million to $15 million. In May 2017, a $2.6 million real estate note receivable secured by a retail office property located in Denver, Colorado was repaid. The Institutes has evaluated subsequent events through May 22, 2017, which is the date the consolidated financial statements were available to be issued. 11

14 Note C Securities Securities consisted of the following at December 31: Fair Fair Cost Value Cost Value Mutual funds $ 3,494,276 $ 3,687,145 $ 7,971,475 $ 7,688,800 Common stock 29,279,766 37,568,847 30,744,722 35,220,563 Alternative investments 41,101,629 60,319,215 41,076,590 60,455,317 $ 73,875,671 $ 101,575,207 $ 79,792,787 $ 103,364,680 Unrestricted investment income (loss) is comprised of the following at December 31: Net realized change in unrealized gain (loss) on securities $ 4,854,149 $ (4,664,441) Interest and dividends 2,936,542 3,469,836 Gain on sale of real estate and notes receivable 2,355,417 1,062,547 $ 10,146,108 $ (132,058) Alternative investments are less liquid than the Institutes other investments. The Institutes investment policy is to maximize return with a minimal amount of risk. The use of alternative investments furthers that objective. The Institutes has its alternative investments in the following types of funds: long/short, distressed debt, opportunistic, private equity, absolute return, and venture capital. Note D Notes Receivable Notes receivable consisted of the following at December 31: Real estate notes, net of discount $ 13,578,123 $ 17,503,630 Notes from employees 3,326,998 3,443,998 Other 15,008 $ 16,905,121 $ 20,962,636 The real estate notes are secured by first deeds of trust on commercial and residential properties located throughout the United States and have various payment terms and amounts maturing at various dates through Interest rates range from 7.0 percent to 10.0 percent per annum. The Institutes has recorded the notes at cost, less any principal payments received from the borrower since the note purchase date. When the Institutes invests in real estate notes, the notes are generally purchased at a discount to the outstanding principal balance of the note. The net sum of the notes outstanding principal balance and the notes discount equals the Institutes cost of the note. 12

15 Note D Notes Receivable (Continued) In 2015, the Institutes provided a participating line of credit, with a $10 million borrowing capacity, to a real estate investment firm. The line of credit bears an interest rate of 8.0 percent and allows the Institutes to share in 20 percent of the profits earned by the real estate investment firm on the specific real estate transactions it enters into using the Institutes line. As of December 31, 2016 and 2015, $5,200,000 and $5,856,851 had been borrowed on the line, respectively. All participation profits will be recognized when the real estate investment firm has closed out its investments. Notes receivable from employees that are unsecured have payment terms with amounts maturing at various dates through There are two employee notes receivable that are secured by a deed of trust on residential property and both have an equity appreciation sharing agreement in lieu of interest payments. The other notes bear interest rates ranging from 1.5 percent to 5.0 percent. Note E Fair Value Measurements The Institutes uses fair value to measure the value of certain investments. Fair value is defined as the price that would be received in a sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Accounting guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The policy describes the 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; and Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. See Note B for the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying consolidated statements of financial position. 13

16 Note E Fair Value Measurements (Continued) The following fair value hierarchy table presents information about each major class of the Institutes financial assets measured at fair value on a recurring basis as of December 31: ASSETS 2015 Total Level 1 Level 2 Level 3 NAV Common Stock: U.S. equities $ 24,589,724 $ 24,589,724 $ $ $ Foreign equities 10,630,839 10,630,839 Private equities Total U.S. and foreign equities 35,220,563 35,220,563 Mutual funds: Fixed income indexed bonds 5,231,143 5,231,143 Foreign equities 2,457,657 2,457,657 Total mutual funds 7,688,800 7,688,800 Investments held at net asset value: Absolute return 2,441,141 2,441,141 Distressed debt 10,387,002 10,387,002 Long/short 24,520,441 24,520,441 Opportunistic 7,641,374 7,641,374 Private Equity 14,724,437 14,724,437 Venture capital 740, ,922 Total investments held at net asset value 60,455,317 60,455,317 Total investments $ 103,364,680 $ 42,909,363 $ $ $ 60,455,317 ASSETS 2016 Total Level 1 Level 2 Level 3 NAV Common Stock: U.S. equities $ 27,216,751 $ 27,216,751 $ $ $ Foreign equities 10,292,596 10,292,596 Private equities 59,500 59,500 Total U.S. and foreign equities 37,568,847 37,509,347 59,500 Mutual funds: Fixed income indexed bonds 2,192,977 2,192,977 Foreign equities 1,494,168 1,494,168 Total mutual funds 3,687,145 3,687,145 Investments held at net asset value: Absolute return 2,316,730 2,316,730 Distressed debt 11,341,958 11,341,958 Long/short 22,832,210 22,832,210 Opportunistic 8,603,678 8,603,678 Private Equity 14,715,194 14,715,194 Venture capital 509, ,445 Total investments held at net asset value 60,319,215 60,319,215 Total investments $ 101,575,207 $ 41,196,492 $ $ 59,500 $ 60,319,215 14

17 Note E Fair Value Measurements (Continued) The investment nature of the alternative investments as of December 31, 2016, for which fair value is based on net asset value is as follows: Investee Redemption Strategies Unfunded Notice and Other Fair Value Commitments Period Restrictions Long/short $ 22,832,210 $ (a) (a) Distressed debt 11,341,958 2,967,056 (b) (b) Opportunistic 8,603,678 1,937,401 (c) (c) Private equity 14,715,194 1,885,145 N/A (d) Absolute return 2,316,730 (e) (e) Venture capital 509,445 38,440 N/A (f) Total $ 60,319,215 $ 6,828,042 The Institutes has entered into agreements to make future investments in such funds. These agreements expire through March (a) (b) (c) (d) (e) Long/Short: This class includes investments in funds that use leverage, derivatives, and short positions in an attempt to maximize total returns. This class invests primarily in stocks across many different industries and countries. Redemption frequencies are from monthly to annual. Distressed Debt: This class includes funds that invest primarily in financially troubled companies and other special situations. It is anticipated that the majority of the fund s assets will be invested in debt related securities and obligations as opposed to equity related issues. For four of the funds, redemption is restricted to the liquidation of the investments by the general partner, while the remaining funds have quarterly redemption periods. Opportunistic: This class includes funds that invest in securities of companies experiencing distress and undergoing extraordinary corporate events, including companies subject to bankruptcy proceedings. The primary focus is in merger and acquisitions, distressed/stressed investing, and capital structure arbitrage. Redemptions are allowed every 24 months for one fund. The remaining fund is allowed annual redemptions subject to a fee. Private Equity: This class includes funds invested in private equity funds and private equity funds of funds which invest in the equity of privately held companies and in real estate properties and real estate rich operating companies. The funds are invested globally. Redemption is restricted to the liquidation of the investments by the general partner. Absolute Return: This class includes funds that use techniques including short selling, futures, options, derivatives, leverage, equity long/short special situations, convertible/capital structure arbitrage, distressed credit, and unconventional assets. Redemptions are allowed quarterly for two funds. The remaining amount is not redeemable. Distributions are made at the general partner s discretion. There is no specific date set for when the funds will be liquidated. 15

18 Note E Fair Value Measurements (Continued) (f) Venture Capital: This class includes funds that invest primarily in private early stage companies. The funds do not provide for redemption. The nature of these investments is that distributions are received through the liquidation of the underlying assets of the fund. The investments are generally made for 10 years and may provide for extensions. The Institutes alternative investments currently consist of those for which no prices are available and which have little or no observable inputs. For these instruments, determination of fair value requires subjective assessment and varying degrees of judgment depending on liquidity, concentration, pricing assumptions, the current economic and competitive environment, and the risks affecting the specific instrument. In such circumstances, valuation is determined based on management s own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk). The Institutes endeavors to ensure that the fair values of the financial instruments reported in the consolidated financial statements are appropriate and determined on a reasonable basis. While the Institutes believes its valuation methods are appropriate and consistent with those used by other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Those estimated values may differ significantly from the values that would have been used had a readily available market for such assets existed, or had such assets been liquidated, and these differences could be material to the consolidated financial statements. 16

19 Note F Receivables Accounts receivable consisted of the following at December 31: Grants and contracts $ 8,451,451 $ 8,455,082 Real estate and investment 60,567 3,918,694 Other 6,860 53,603 8,518,878 12,427,379 Less reserve for doubtful accounts (274,055) (174,056) Total accounts receivable $ 8,244,823 $ 12,253,323 Pledges receivable consisted of the following at December 31: Unrestricted and temporarily restricted: Due in less than one year $ 4,639,941 $ 6,280,686 Due in one to five years 13,179,998 15,799,997 Thereafter 12,152,382 14,256,900 29,972,321 36,337,583 Less discounts to net present value* (2,242,657) (2,800,593) Less reserve for doubtful accounts (145,424) (159,423) Total pledges receivable 27,584,240 33,377,567 Total receivables, net of allowance $ 35,829,063 $ 45,630,890 * A discount rate of two (2) percent was used for 2016 and As of December 31, 2016 and 2015, 93 percent and 85 percent of pledges receivable are due from three donors, respectively. The reserve for doubtful accounts is estimated based on the Institutes historical losses, the existing economic conditions, and the financial stability of its donors. Note G Property and Equipment Property and equipment used in research and administration is summarized as follows at December 31: Land $ 13,546,625 $ 13,546,625 Furniture and equipment 45,494,487 42,776,434 Building and improvements 108,552, ,013, ,593, ,336,188 Less accumulated depreciation (68,638,775) (62,511,310) Total research and administration $ 98,954,987 $ 101,824,878 17

20 Note G Property and Equipment (Continued) In March 2007, the Institutes formed GRE, a limited liability company that was set up with a private REIT election and is 99 percent owned by the Institutes. GRE was formed with the intent to invest directly in commercial and residential properties. Property and equipment held by GRE and its subsidiaries, in addition to other directly held commercial and residential rental property and equipment is summarized as follows at December 31: Land $ 15,896,265 $ 13,159,176 Building and improvements 43,006,230 34,996,371 58,902,495 48,155,547 Less accumulated depreciation (3,420,631) (2,601,069) Total investments in real estate $ 55,481,864 $ 45,554,478 Depreciation and amortization of property and equipment expense for December 31, 2016 and 2015, was $8,460,388 and $7,970,106, respectively. Note H Benefit Plans Pension Plans: The Institutes has a defined contribution money purchase pension plan covering most of its full time employees. The Institutes makes annual contributions to the plan of 10 percent of eligible employees compensation for employees who started working for the Institutes on or after January 1, 2010, and who have worked for the Institutes for less than five years. The Institutes makes annual contributions of 15 percent of eligible employees compensation for employees who have worked for the Institutes for five or more years or were hired prior to January 1, The Institutes has a defined contribution plan for post doctorate researchers with annual contributions of $1,200 per eligible person. In 2016 and 2015, the Institutes expensed contributions for both plans totaling approximately $2,865,000 and $2,760,000, respectively. The Institutes has a 457(b) deferred compensation plan for qualified employees. The Institutes does not contribute to the deferred compensation plan; however, employee contributions and the net gains and losses earned on those contributions totaled $1,520,920 and $1,279,843 at fair value as of December 31, 2016 and 2015, respectively. These amounts are recorded in other assets with a matching liability included in employee benefits payable in the accompanying consolidated statements of financial position. Medical Benefits: The Institutes maintains both a premium paid HMO plan and self insured programs for its employees health and dental care benefits. The Institutes is liable for losses on claims under the selfinsured plans of up to $100,000 per employee per year, and an aggregate liability for the year of up to approximately $2,570,000. The Institutes has third party insurance coverage for any losses in excess of such amounts. Self insurance costs are accrued based on claims reported as of the consolidated statements of financial position dates as well as an estimated liability for claims incurred but not reported. The total accrued liability for self insurance costs is $125,000 as of December 31, 2016 and $160,000 as of December 31, 2015 and is included in employee benefits payable in the accompanying consolidated statements of financial position. 18

21 Note I Notes Payable and Lines of Credit In December 2012, a subsidiary of GRE purchased a retail complex located in Los Angeles, California. The purchase was funded with cash and a $2,412,500 first deed of trust note. In September 2015, the note was amended to increase the balance to $3,250,000. The amended note has a fixed interest rate of 3.75 percent and amortizes until it matures in December 2017, at which point the remaining principal will be due. The note is collateralized by the deed of trust and rent assignment of the retail complex. (See Subsequent Events in Note B.) In May 2013, a subsidiary of GRE purchased a retail complex located in Winnetka, Minnesota. The purchase was funded with cash and a $2,600,000 first deed of trust note. The note is an amortizing note that bears a 3.7 percent interest rate. The retail complex was sold in June 2016 and the balance of the note was repaid in June In December 2012, GRE invested $4,000,000 for a 47.5 percent minority interest in Royal Park Apartment Partners, LLC ( Royal Park ), which owns an apartment complex in Hacienda Heights, California. At that time, GRE also issued a $4,000,000 note receivable that was secured by a first deed of trust on the apartment complex. In January 2014, GRE cancelled the $4,000,000 note receivable in return for the borrower s assignment of their 47.5 percent equity interest in this property. This transfer brought GRE s total equity interest up to 95 percent which resulted in GRE recording Royal Park on a consolidated basis. The original purchase of the apartment complex was funded with cash and the assumption of a $14,000,000 first deed of trust note. The note is an amortizing note that bears a 3.9 percent interest rate. The note matures in June 2022 and is collateralized by the deed of trust and rent assignment of the rental complex. In February 2014, a subsidiary of GRE purchased a retail complex located in Boise, Idaho. The purchase was funded with cash and the assumption of a $1,405,056 first deed of trust note. The note is an amortizing note that bears a 5.89 percent interest rate. The note matures in May 2017 and is collateralized by the deed of trust and rent assignment of the retail complex. (See Subsequent Events in Note B.) In August 2014, a subsidiary of GRE purchased a distribution warehouse located in Boise, Idaho. The purchase was funded with cash and the assumption of a $4,736,605 first deed of trust note. The note is an amortizing note that bears a 5.85 percent interest rate. The note is collateralized by the deed of trust and rent assignment of the distribution warehouse. In March 2016, the note was assumed by the subsidiary of GRE and refinanced with a $4,750,000 promissory note. The promissory note is an amortizing note that bears a 3.35 percent interest rate. The promissory note matures in April 2021 and is collateralized by the deed of trust and rent assignment of the distribution warehouse. In November 2014, a subsidiary of GRE purchased a retail complex located in Albuquerque, New Mexico. The purchase was funded with cash and a $2,240,000 first deed of trust note. The note is an amortizing note that bears a 3.95 percent interest rate. The note matures in December 2024 and is collateralized by the deed of trust and rent assignment of the retail complex. (See Subsequent Events in Note B.) In January 2016, a subsidiary of GRE purchased a retail complex located in Huntington Beach, California. The purchase was funded with cash and a $6,075,000 first deed of trust note. The note is an amortizing note that bears a 8.75 percent interest rate. The note matures in February 2018 and is collateralized by the deed of trust and rent assignment of the retail complex. 19