The Translational Genomics Research Institute and Affiliates For the Period January 1 through November 16, 2016 With Report of Independent Auditors

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1 C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S, R E P O R T S, S U P P L E M E N T A R Y I N F O R M A T I O N AND S C H E D U L E R E Q U I R E D B Y T H E U N I F O R M G U I D A N C E The Translational Genomics Research Institute and Affiliates For the Period January 1 through November 16, 2016 With Report of Independent Auditors Ernst & Young LLP

2 Consolidated Financial Statements, Reports, Supplementary Information and Schedule Required by the Uniform Guidance For the Period January 1 through November 16, 2016 Contents Report of Independent Auditors...1 Consolidated Financial Statements Consolidated Statement of Financial Position...3 Consolidated Statement of Activities...4 Consolidated Statement of Cash Flows...5 Notes to Consolidated Financial Statements...6 Reports Required by the Uniform Guidance 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...32 Report of Independent Auditors on Compliance for Each Major Federal Program and Report on Internal Control Over Compliance Required by the Uniform Guidance...34 Supplementary Information Schedule of Expenditures of Federal Awards...37 Notes to Schedule of Expenditures of Federal Awards...40 Schedule Required by the Uniform Guidance Schedule of Findings and Questioned Costs

3 Ernst & Young LLP Ernst & Young Tower One Renaissance Square Suite North Central Avenue Phoenix, AZ Tel: Fax: ey.com Report of Independent Auditors The Board of Directors The Translational Genomics Research Institute and Affiliates Report on the Financial Statements We have audited the accompanying consolidated financial statements of The Translational Genomics Research Institute and Affiliates (the Institute), which comprise the consolidated statement of financial position as of November 16, 2016, the related consolidated statements of activities and cash flows for the period January 1 through November 16, 2016, 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 conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free of 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 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 of 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 A member firm of Ernst & Young Global Limited

4 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 Translational Genomics Research Institute and Affiliates at November 16, 2016, and the changes in their net assets and their cash flows for the period January 1 through November 16, 2016 in conformity with U.S. generally accepted accounting principles. Supplementary Information Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The Schedule of Expenditures of Federal Awards as required by Title 2 U.S. Code of Federal Regulations 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 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. 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 also have issued our report dated August 16, 2017, on our consideration of the Institute 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 solely 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 the effectiveness of the Institute s 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 Institute s internal control over financial reporting and compliance. August 16, A member firm of Ernst & Young Global Limited

5 Consolidated Statement of Financial Position November 16, 2016 Assets Current assets: Cash and cash equivalents $ 10,598,488 Assets whose use is limited, current: Donor or time restricted, primarily cash and investments 10,299,994 Contributions receivable 3,557,108 Total assets whose use is limited, current 13,857,102 Accounts receivable 4,501,557 Related-party receivables 535,695 Prepaid expenses and other assets 4,311,814 Total current assets 33,804,656 Assets whose use is limited, less current portion: Donor or time restricted, primarily cash and investments 5,814,667 Contributions receivable, net 5,800,072 Total assets whose use is limited, less current portion 11,614,739 Equity method investments 1,627,883 Property and equipment, net 6,822,135 Other assets 1,073,024 Total assets $ 54,942,437 Liabilities and net assets Current liabilities: Accounts payable $ 2,876,396 Accrued salaries and benefits 1,144,512 Deferred compensation 340,000 Other accrued expenses 362,684 Related-party payables 445,065 Notes payable, current portion 649,076 Capital lease obligation, current portion 29,054 Deferred revenue, current portion 6,739,768 Total current liabilities 12,586,555 Notes payable, less current portion 1,131,006 Capital lease obligation, less current portion 60,976 Deferred compensation, less current portion 200,926 Deferred rent 3,214,252 Deferred revenue, less current portion 879,657 Other 1,069,402 Total liabilities 19,142,774 Net assets: Unrestricted 10,327,822 Temporarily restricted 25,409,748 Permanently restricted 62,093 Total net assets 35,799,663 Total liabilities and net assets $ 54,942,437 See accompanying notes

6 Consolidated Statement of Activities For the Period January 1 through November 16, 2016 Changes in unrestricted net assets Revenues and support: Federal, state, and other grants $ 15,565,008 Research contracts 9,418,333 Unrestricted contributions 4,266,518 Other revenue 485,767 Total unrestricted revenues 29,735,626 Net assets released from restriction 8,537,194 Total unrestricted revenues and support 38,272,820 Expenses: Salaries and benefits 18,835,786 Materials and supplies 5,700,129 Professional fees 4,672,987 Consortium contractual 4,351,652 Office and laboratory facilities 1,061,047 Rent 2,649,448 Depreciation 2,155,830 Other 164,892 Total expenses 39,591,771 Losses on equity method investments (125,563) Decrease in unrestricted net assets (1,444,514) Changes in temporarily restricted net assets Contributions 3,994,706 Net assets released from restriction (8,160,361) Release of donated equipment (376,833) Interest income, realized losses, and unrealized gains on investments 367,175 Decrease in temporarily restricted net assets (4,175,313) Decrease in net assets (5,619,827) Net assets, beginning of year 41,419,490 Net assets, end of year $ 35,799,663 See accompanying notes

7 Consolidated Statement of Cash Flows For the Period January 1 through November 16, 2016 Operating activities Decrease in net assets $ (5,619,827) Adjustments to reconcile decrease in net assets to net cash used in operating activities: Depreciation 2,155,830 Unrealized loss on investments (294,140) Loss on disposal of property and equipment 1,057 Unrealized losses on equity method investments 125,563 Changes in operating assets and liabilities: Other assets whose use is limited 3,211,814 Contributions receivable (478,615) Accounts receivable (830,866) Related-party receivables 806,331 Prepaid expenses and other assets (2,434,024) Accounts payable 1,053,206 Accrued salaries and benefits 307,656 Related-party payables (59,897) Other accrued expenses 29,743 Deferred revenue (3,480,986) Deferred compensation (132,232) Deferred rent 538,485 Other long-term liabilities 44,105 Net cash used in operating activities (5,056,797) Investing activities Purchases of property and equipment (793,850) Net cash used in investing activities (793,850) Financing activities Repayments of notes payable (303,657) Proceeds from notes payable 1,306,044 Income received on endowment funds 359,421 Payments on capital lease (5,044) Net cash provided by financing activities 1,356,764 Net decrease in cash and cash equivalents (4,493,883) Cash and cash equivalents, beginning of period 15,092,371 Cash and cash equivalents, end of period $ 10,598,488 Supplemental non-cash activity Contributed equipment $ 46,833 Property and equipment acquisitions included in accounts payable $ 1,710,863 Equipment purchased under capital lease $ 90,030 Supplemental cash flow information Cash paid for interest $ 32,676 See accompanying notes

8 Notes to Consolidated Financial Statements November 16, Description of Business The Translational Genomics Research Institute (TGen) was incorporated on June 10, 2002, as a not-for-profit, tax-exempt corporation under Section 501(c)(3) of the Internal Revenue Code. TGen s primary mission is to make and translate genomic discoveries into advances in human health. Translational genomics research employs innovative advances arising from the Human Genome Project and applies them to the development of diagnostics, prognostics, and therapies for cancer, neurological disorders, diabetes, and other complex diseases. TGen receives its support from contributions from private individuals, corporations, foundations, state governmental agencies, and other not-for-profit organizations, as well as grants from the federal government and research service contracts that it enters into with various pharmaceutical, health care, and educational organizations. TGen has the following wholly owned affiliates (collectively, the Institute) that were created to support TGen through various functions: The Translational Genomics Research Institute Foundation (Foundation) is a not-for-profit, tax-exempt corporation under Section 501(c)(3) of the Internal Revenue Code. TGen is the sole member of this entity. The Foundation was formed exclusively to carry out the fundraising and development functions for the benefit of TGen. TGen Accelerators Management, LLC (TGen Accelerators), an Arizona limited liability company, was formed for the purpose of advancing the charitable, educational, and scientific endeavors of TGen through technology transfer initiatives. TGen is the sole member of this entity. Translational Drug Development, LLC (TD2), a Delaware limited liability company, was a wholly owned subsidiary of TGen Accelerators. TD2 is a contract research organization that focuses on the early-stage development and consultation of clinical trials and drug development. On November 21, 2013, TGen sold a majority interest of TD2. The Center for Translational Drug Development, LLC (TDD), an Arizona limited liability company, was then formed as a wholly owned subsidiary of TGen Accelerators. TDD retained a minority interest in TD2, which is recorded as an equity method investment on the Institute s accompanying consolidated statement of financial position. See Note 3. Translational Systems, LLC (Translational Systems), an Arizona limited liability company, was formed for the purpose of furthering the mission of translational medicine and science through the development and deployment of information systems, and to help advance research that can be translated into cures for disease and other benefits to humankind. TGen is the sole member of this entity

9 Notes to Consolidated Financial Statements (continued) 1. Description of Business (continued) Pet Cancer Diagnostics, LLC (Pet Cancer Diagnostics), an Arizona limited liability company, was formed for the purpose of animal diagnostics. TGen is the sole member of this entity. TGen Health Ventures, LLC (TGen Health Ventures), an Arizona limited liability company, was formed for the purpose of health care commercialization opportunities. TGen is the sole member of this entity. PMed Management, LLC (PMed), a Delaware limited liability company, was created in December 2013 to assist in the deployment of personalized medicine for the benefit of patients locally, nationally, and internationally by commercializing personalized medicine. TGen Health Ventures was the sole member of PMed through February In 2014, the entity was renamed Ashion PMed Management, LLC. Ashion Analytics (Ashion), an Arizona limited liability company, was formed for the purpose of delivering clinical genomic laboratory services. PMed is the sole member of Ashion. In February 2014, TGen sold 50% of its membership interest in PMed to an unrelated third party in a joint venture transaction for the purpose of commercializing personalized medicine. TGen s interest in the joint venture is recorded as an equity method investment on the accompanying consolidated statement of financial position. See Note 3. Profero, LLC (Profero), a Delaware limited liability company, was formed for the purpose of supporting the technology transfer initiatives of the Institute. TGen is the sole member of this entity. In March 2016, Dropwise, LLC (Dropwise), an Arizona limited liability company, was formed for the purpose of biomarker discovery in various diseases. TGen Accelerators is the sole member of this entity. In May 2016, ID Origins, LLC (ID Origins), an Arizona limited liability company, was formed for the purpose of supporting the technology transfer initiatives of TGen. TGen Accelerators is the sole member of this entity. In September 2016, Metricbio, LLC (Metricbio), a Delaware limited liability company, was formed for the purpose of conducting research projects through participant funded protocols. TGen is the sole member of this entity

10 Notes to Consolidated Financial Statements (continued) 1. Description of Business (continued) On November 16, 2016, the Institute entered into an Affiliation Agreement (the Agreement) with the City of Hope (COH), a California nonprofit public benefit tax-exempt corporation under 501(c)(3) of the Internal Revenue Code. Pursuant to terms of the Agreement, COH became the sole member of TGen. TGen will remain an Arizona-based nonprofit with headquarters in Phoenix, Arizona. COH and TGen share the goal to collaborate on research advances in precision medicine, scientific and clinical research and the field of translational genomics to improve health and wellbeing while supporting each organization s mission. Pursuant to the Agreement, COH will provide $50.0 million in unrestricted support over a five-year period. Subsequent to the Agreement, in November 2016, the Institute amended its articles of incorporation to change its fiscal year-end from December 31 to September 30, beginning with the fiscal period ending September 30, Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of TGen and its wholly owned and related affiliates. All significant intercompany accounts and transactions have been eliminated in consolidation. Investments in companies that are 50% or less owned and where the Institute exercises significant influence over operations are accounted for under the equity method. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Fair Value of Financial Instruments The carrying values of financial instruments classified as current assets and current liabilities approximate fair value due to their liquidity and short-term nature. The fair values of other financial instruments are discussed in the respective notes herein

11 Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Concentration of Credit Risk Financial instruments that potentially subject the Institute to concentrations of credit risk consist principally of cash held in depository accounts, contributions, and accounts receivable. During the period January 1 through November 16, 2016, the Institute received approximately 71% of its unrestricted revenues from eight funding sources. A significant portion of the Institute s support is derived from federal research grants, which are subject to government regulations, budgetary constraints, and compliance requirements. Violations of these regulations and compliance requirements could result in expulsion from participating in government grant programs and the potential repayment of grant funds previously expended. Grant funding is also subject to government budgetary decisions. Management believes that the Institute is in compliance with applicable compliance requirements and regulations. Cash and Cash Equivalents Cash and cash equivalents include highly liquid investments with an original maturity of three months or less from the date of purchase, excluding amounts whose use is limited under contractual and donor agreements. Cash is held in depository accounts at various financial institutions. The combined account balance at any given institution may exceed the Federal Deposit Insurance Corporation (FDIC) insurance coverage of $250,000, and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. Management believes, based on the quality of the financial institutions, that the risk is not significant. Accounts Receivable Accounts receivable represent valid claims for services rendered and have been reported net of any allowance for doubtful accounts. The Institute reserves for potentially uncollectible accounts based on a specific account identification method. No allowance has been recorded at November 16,

12 Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Assets Whose Use Is Limited Assets whose use is limited include cash and cash equivalents, investments in equity securities, mutual funds, contributed laboratory equipment, and contributions receivable whose use is restricted to a specific time or purpose. As of November 16, 2016, approximately $13.9 million of assets whose use is limited is expected to be expended within the next 12-month period for the restrictive purpose stipulated by the donor or contractual agreement. Accordingly, these assets have been presented as current assets whose use is limited on the accompanying consolidated statement of financial position. Contributions Receivable Contributions receivable, included in assets whose use is limited, consist of unconditional promises to give cash and other assets to the Institute and are reported at fair value at the date the promise is received. The contributions are reported as temporarily restricted support if they are received with donor stipulations that limit the use of the donated assets or if payment of the contribution extends beyond a one-year period. Investments The Institute accounts for all of its investments in equity securities and mutual funds, included in assets whose use is limited and other assets, as trading. Investments in equity securities and mutual funds are presented at fair value, based on quoted market prices in active markets. Investment income or loss, including realized and unrealized gains and losses on investments, interest, and dividends, is included in unrestricted net assets unless their use is temporarily or permanently restricted by donor stipulations or by law. TGen Accelerators has exchanged various licenses or entered into other agreements for equity interests with various third parties. The stock and membership units held by TGen Accelerators related to these agreements were initially recorded at cost but are subsequently adjusted to recognize TGen Accelerators share of the earnings, losses, and/or changes in the equity of the investee. As several of the equity investments were recently formed development-stage companies with little or no operational history, TGen Accelerators has fully reserved for these investments as of November 16,

13 Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Property and Equipment Property and equipment are stated at cost or at fair value as of the date of donation for donated property or equipment. Depreciation is calculated using the straight-line method over the estimated useful lives as follows: Computer equipment and software Vehicles Office and laboratory equipment Furniture and fixtures Leasehold improvements 3 years 4 years 5 years 5 7 years The shorter of remaining life of lease or estimated useful life of the improvement Expenditures that materially extend useful lives or increase values or capabilities are capitalized, whereas routine maintenance, repair, and replacement costs are charged against current operations. Upon sale or retirement of property and equipment, the cost and related accumulated depreciation are removed from the respective accounts and any gain or loss is included in unrestricted net assets. Gifts of long-lived assets, such as land, buildings, or equipment, are reported as unrestricted support at fair value on the date of donation unless explicit donor stipulations specify how the donated asset must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash and other assets that must be used to acquire long-lived assets are reported as restricted support. Absent explicit donor stipulations about how long-lived assets must be maintained, expirations of donor restrictions are reported when donated or over the estimated useful life of acquired long-lived assets. Long-Lived Asset Impairment The Institute reviews long-lived assets for impairment when events or changes in business conditions indicate that their carrying values may not be recoverable. The Institute considers assets to be impaired and adjusts those impaired to fair value if the expected associated discounted cash flows of the long-lived assets are less than their carrying amounts. Fair value is determined to be the present value of the associated asset s cash flows. The Institute determined that the equity investment in PMed was impaired as of December 31, 2015, and fully reserved the balance of $18.4 million; the investment remains fully reserved as of November 16,

14 Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Deferred Revenue Cash payments received in advance for providing services are treated as deferred revenue until services are rendered or expenditures are made under terms of the award or contract, at which time revenues are recognized. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those whose use by the Institute has been limited by contract terms or by donors to a specific time period or purpose. Permanently restricted donations have been restricted by donors to be maintained by the Institute in perpetuity. Donor-Restricted Gifts Unconditional promises to give that are expected to be collected within one year are recorded at net realizable value. Unconditional promises to give that are expected to be collected in future years are recorded at the present value of their estimated future cash flows. The discounts on those amounts are computed using risk-free interest rates applicable to the years in which the promises are received. Amortization of the discounts is included in contributions or unrestricted contributions. Conditional promises to give are not included as revenues until the conditions are substantially met. Promises to give are recorded as either temporarily or permanently restricted if they are received with donor stipulations that limit the use of the donated assets. When a donor stipulation expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported as net assets released from restriction. In the absence of donor specifications that restrict investment income and gains/losses on temporarily restricted donations, such investment income and gains/losses are reported as other revenue in unrestricted net assets. Federal, State, and Other Grants The Institute receives grant awards from various governmental, educational, and private institutions, including federal grants from the National Institutes of Health. Revenue is earned when expenditures relating to the programs or projects under these grant awards are incurred

15 Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Research Contracts The Institute provides research and other consulting services under certain contracts with life sciences companies, educational and private institutions, and health care facilities. Research, consulting, and laboratory service revenue is recognized based on a proportional performance revenue recognition model as services are performed or on a straight-line basis over the term of the agreement. When a research contract arrangement involves multiple elements, the deliverable items included in the contractual arrangement are evaluated to determine whether they represent separate units of accounting. The Institute performs this evaluation at the inception of the contract and as each item in the arrangement is delivered. Generally, the Institute accounts for a deliverable (or a group of deliverables) separately if the delivered item has stand-alone value to the customer, the customer is given a general right of return relative to the delivered item, and delivery or performance of the undelivered item or service is probable and substantially in the Institute s control. All consideration to be received under the contract terms is allocated to all deliverables, at the inception of the arrangement, based on evidence of fair value or their relative selling prices. In-Kind Contributions The Institute received equipment totaling approximately $50,000 during the period January 1 through November 16, The Institute also receives in-kind services for the equipment related to the Dell, Inc. (Dell) agreement, which is recognized as restricted revenue based on costs incurred. See Note 16. Consortium Contractual Consortium contractual expenses represent payments made by the Institute to governmental, educational, health care, and private institutions acting as subrecipients under various federal and state grants. Tax Status TGen and the Foundation are not-for-profit corporations and are exempt from income taxes under Section 501(c)(3) of the Internal Revenue Code. Accordingly, no provision for income taxes is included in the accompanying consolidated financial statements. TGen Accelerators, Translational Systems, TGen Health Ventures, Pet Cancer Diagnostics, Profero, Dropwise, ID Origins, and

16 Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Metricbio are single-member, limited liability companies that are 100% owned by TGen and are considered disregarded entities for tax purposes. Management is of the opinion that substantially all of TGen s and the Foundation s activities are related to their exempt purposes, and no material uncertain tax positions have been identified or recorded in the accompanying consolidated financial statements at November 16, TGen and the Foundation file Forms 990 in the U.S. federal jurisdiction and comparable forms in the state of Arizona. Tax filings for 2013 through 2016 are subject to examination; however, the Institute has not been notified of any such examinations. Subsequent Events The Institute evaluates events occurring subsequent to the end of the fiscal period and recognizes such events that are material in the consolidated financial statements as required by professional standards. In the preparation of the accompanying consolidated financial statements, the Institute has evaluated subsequent events through August 16, 2017, the date the consolidated financial statements were available to be issued. On December 20, 2016, the Institute secured an operating line of credit with a bank that allows the Institute to draw up to $6.0 million. This operating line of credit bears interest at a rate 0.25% below the bank s prime rate, which was 3.75% at December 20, The loan matures on November 20, Draws on this operating line of credit are collateralized by all of the Institute s inventory and equipment. The line of credit requires the Institute to maintain credit compliance with specified financial reporting requirements and other covenants, including the maintenance of liabilities to tangible net worth ratio and current ratio. There were no amounts outstanding on this line of credit as of August 16, On March 1, 2017, TGen Health Ventures entered into an agreement to purchase the remaining 50% membership interests in PMed, increasing its ownership to 100%. The purchase price was $1.5 million in the form of a promissory note as well as contingent consideration up to the greater of $1.5 million or 5% of the sales price if PMed is sold to an unrelated third party within the next five years. No contingent consideration has been recognized or is expected to be recognized at this time based on current business plans to collaborate with COH. On April 4, 2017, the Institute secured a $1.0 million note payable with a bank for laboratory equipment. The note is collateralized by the equipment and requires 36 monthly principal payments, plus interest at a fixed rate of 4.22%

17 Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) On April 5, 2017, the Institute entered into a modification and assignment agreement in regard to its equity investment in TD2. The equity provisions of the purchase agreement dated November 21, 2013, were amended to reduce provisional decreases in equity ownership of TD2. See Note 3. Pursuant to the amended agreement, the Institute assigned various patents to TD2 in consideration for future royalties and an increased ownership in TD2 from 9.4% to 13.4% minority interest. New Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (FASB) issued a new revenue accounting standard, Accounting Standards Update No. (ASU) , Revenue from Contracts with Customers, together along with subsequent amendments, updates, and an extension of the effective date (collectively, the New Revenue Standard), which supersedes most existing revenue recognition guidance. The New Revenue Standard provides for a single comprehensive principlesbased standard for the recognition of revenue across all industries through the application of the following five-step process: Step 1: Identify the contract(s) with a customer. Step 2: Identify the performance obligations in the contract. Step 3: Determine the transaction price. Step 4: Allocate the transaction price to the performance obligations in the contract. Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation. This five-step process will require significant management judgment in addition to changing the way many companies recognize revenue in their financial statements. Additionally, and among other provisions, the New Revenue Standard requires expanded quantitative and qualitative disclosures, including disclosure of the nature, amount, timing, and uncertainty of revenue. The provisions of the New Revenue Standard are effective for annual periods beginning after December 15, 2018, including interim periods within those years by applying either the full retrospective method or the cumulative catch-up transition method. The full retrospective method requires application of the provisions of the New Revenue Standard for all periods presented while the cumulative catch-up transition method requires the application of the provisions of the New Revenue Standard as of the date of adoption with the cumulative effect of the retrospective

18 Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) application of the provisions as an adjustment through unrestricted net assets. The Institute is currently evaluating the adoption method to be used relating to the New Revenue Standard. As the Institute progresses with its implementation efforts to adopt the New Revenue Standard, management is currently in the process of determining the impact and continues to evaluate estimates of the anticipated impacts it will have on its revenue recognition policies, procedures, financial position, results of operations, cash flows, financial disclosures, and control framework. Management is evaluating its population of revenue sources to determine an appropriate level of stratification, as well as assess all of the potential effects the New Revenue Standard will have on reporting of revenue from contracts with customers and certain related costs. In January 2016, the FASB issued ASU , Financial Instruments: Recognition and Measurement of Financial Assets and Financial Liabilities. This amendment requires certain equity investments to be measured at fair value with changes in the fair value recognized through net income. The adoption of ASU is effective for the Institute for annual periods beginning after December 15, The Institute is currently evaluating the impact of adopting this accounting standard. In February 2016, the FASB issued ASU , Leases. This accounting standard requires companies that lease assets to recognize a right-of-use asset and a lease liability on the balance sheet. Lessor accounting remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. This accounting standard will also require additional disclosures about the amount, timing, and uncertainty of cash flows arising from leases. Upon adoption, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. The adoption of ASU is effective for the Institute for annual periods beginning after December 15, The Institute is currently evaluating the impact of adopting this accounting standard. In August 2016, the FASB issued ASU , Not-for-Profit Entities: Presentation of Financial Statements for Not-for-Profit Entities, which will require not-for-profit entities to revise the presentation of net assets to include two categories, net assets with donor restrictions and net assets without donor restrictions, and provide quantitative and qualitative information as to available resources and management of liquidity and liquidity risk. This accounting standard will also allow companies to elect to use either the direct or indirect cash flow method, and requires additional liquidity disclosures and presentation of expenses by both natural and functional classification

19 Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) The adoption of ASU is effective for the Institute for annual periods beginning after December 15, The Institute is evaluating the impact of adopting this accounting standard. In November 2016, the FASB issued ASU , Statement of Cash Flows: Restricted Cash, which requires restricted cash and cash equivalents to be included with cash and cash equivalents on the statement of cash flows. The adoption of ASU is effective for the Institute for annual periods beginning after December 15, The Institute is currently evaluating the impact of adopting this accounting standard. In January 2017, the FASB issued ASU , Business Combinations: Clarifying the Definition of a Business, which seeks to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting, including acquisitions, disposals, goodwill, and consolidation. The adoption of ASU is effective for the Institute for annual periods beginning after December 15, The Institute is currently evaluating the impact of adopting this accounting standard. 3. Investments TGen owns a minority interest in TD2, which is recorded as a minority interest investment on the accompanying statement of financial position. TGen s ownership percentage is subject to adjustment based on TD2 s operating results as defined by the purchase agreement dated November 21, TGen recorded approximately $126,000 as a decrease in the value of its investment for its equity share of TD2 s operating results for the period January 1 through November 16, In February 2014, TGen sold 50% of its membership interest in PMed for $25.0 million to an unrelated third party in a joint venture transaction for the purpose of commercializing personalized medicine. This investment is accounted for under the equity method. In connection with this joint venture transaction, TGen agreed to contribute a certified and compliant laboratory to the joint venture, which had a net book value of approximately $1.0 million when completed and transferred in May Upon completion of the laboratory, TGen recognized revenue of $25.0 million for cash received and approximately $24.0 million as a gain on sale of the laboratory. Due to a significant decrease in PMed s financial position and continued operating losses, TGen fully reserved the investment of $18.4 million in the prior year. The investment remains fully reserved as of November 16,

20 Notes to Consolidated Financial Statements (continued) 3. Investments (continued) Investment return, excluding equity method investments for the period ended November 16, 2016, is summarized as follows: Interest and dividends $ 105,608 Realized losses on sales of investments, net (12,761) Unrealized gains on investments, net 294,140 Investment-related expenses (39,942) Total investment return $ 347,045 Reported in other expense $ (20,130) Reported in temporarily restricted net assets 367,175 Total investment return $ 347, Donor or Time Restricted Assets Whose Use Is Limited Donor or time restricted assets whose use is limited, consisting of cash and cash equivalents and investments, are stated at fair value based on quoted market prices in active markets for marketable equity securities and fixed income securities and discounted cash flows for preferred stock. Laboratory equipment is stated at historical cost less accumulated depreciation. The composition of donor or time restricted assets whose use is limited at November 16, 2016, is summarized as follows: Cash and cash equivalents $ 9,916,582 Fixed income mutual funds 2,616,496 Equity mutual funds 2,830,081 Laboratory equipment 689,409 Preferred stock 62,093 $ 16,114,

21 Notes to Consolidated Financial Statements (continued) 5. Contributions Receivable Contributions receivable includes multiyear unconditional promises. Contributions receivable, excluding balances classified as related party, at November 16, 2016, are due as follows: Less than one year $ 3,557,108 One year to five years 6,105,000 9,662,108 Less discount to present value (304,928) $ 9,357,180 Discount rates ranged between 0.71% to 3.46% on outstanding contributions receivable as of November 16, See Note 12 related to contributions that are classified as related-party receivables, recorded net of discount. 6. Fair Value Measurements Fair value is defined as an exit price, which represents the amount that would be received to sell an asset in an orderly transaction between market participants. As such, fair value is a marketbased measurement that should be determined based on assumptions that market participants would use in pricing an asset. As a basis for considering such assumptions, the Institute utilizes a three-tier fair value hierarchy, which prioritizes the inputs used to measure fair value as follows: Level 1: Pricing is based on observable inputs for identical instruments, such as quoted prices in active markets. Level 2: Pricing inputs are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and modelbased valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3: Pricing inputs are generally unobservable and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require management s judgment or estimation of assumptions that market participants would use in pricing the assets or liabilities. The fair values are, therefore, determined using factors that involve considerable judgment and interpretations, including, but not limited to, private and public company comparables, third-party appraisals, discounted cash flow models, and fund manager estimates

22 Notes to Consolidated Financial Statements (continued) 6. Fair Value Measurements (continued) Assets measured at fair value are based on one or more of three valuation techniques. The three valuation techniques are identified in the table below. Where more than one technique is noted, individual assets were valued using one or more of the noted techniques. The valuation techniques are as follows: (a) Market approach. Prices and other relevant information generated by market transactions involving identical or comparable assets. (b) Cost approach. Amount that would be required to replace the service capacity of an asset (replacement cost). (c) Income approach. Techniques to convert future amounts to a single present amount based on market expectations (including, but not limited to, present value techniques, option pricing, and excess earnings models). The following table summarizes fair value measurements, by level, at period-end for investments that are measured on a recurring basis. Contributions received during the period January 1 through November 16, 2016, amounted to approximately $2.2 million, which were subject to fair value measurement on a nonrecurring basis. Not included within assets whose use is limited or other assets in the tables below is a deposit balance of approximately $9.3 million that is classified as cash and cash equivalents at November 16, Balance November 16, 2016 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Valuation Technique (a, b, c) Assets whose use is limited: Money market $ 616,085 $ 616,085 $ $ a Fixed income mutual funds 2,616,496 2,616,496 a Equity mutual funds 2,830,081 2,830,081 a Preferred stock 62,093 62,093 a, c Other assets: Money market 445, ,033 a Equity and fixed income mutual funds 624, ,369 a Total $ 7,194,157 $ 7,132,064 $ $ 62,093 During the period January 1 through November 16, 2016, there were no material changes in the fair value of investments that are measured using significant unobservable inputs (Level 3). Transfers to/from Levels 1, 2, and 3 are recognized at the end of the reporting period. There were no transfers between levels for the period January 1 through November 16,

23 Notes to Consolidated Financial Statements (continued) 7. Property and Equipment Property and equipment at November 16, 2016, consist of the following: Office and laboratory equipment $ 17,171,405 Computer equipment and software 8,295,407 Leasehold improvements 5,373,848 Furniture and fixtures 784,237 Vehicles 59,895 31,684,792 Less accumulated depreciation (24,862,657) Property and equipment, net $ 6,822, Temporarily Restricted Net Assets Temporarily restricted net assets are available for the following research and development purposes at November 16, 2016: Pancreatic cancer $ 12,284,306 Education 5,415,593 Rare childhood disorders 2,708,566 General and other neurological disorders 1,859,733 General and other cancers 995,425 Use restrictions 689,409 Basic research 687,266 Personalized medicine 301,504 Other 467,946 $ 25,409, Conditional Promises to Give The Institute has received the following conditional promises to give that have not been recognized as revenue on the accompanying consolidated statement of financial position as of November 16, 2016: Conditional promise to give upon availability of state-appropriated funds from Arizona Department of Health Services (ADHS) $ 1,246,333 Conditional promise to give upon availability of state-appropriated funds from Northern Arizona University 2,250,000 $ 3,496,

24 Notes to Consolidated Financial Statements (continued) 9. Conditional Promises to Give (continued) The Institute was awarded annual fixed funding from Arizona Biomedical Research Commission, an organization of the state of Arizona and ADHS, for the annual periods ended June 30, 2016 and 2017, in the amount of $2.0 million per year to be paid in quarterly installments. These awards are considered conditional by the Institute as funding relies upon the availability of the funding through the state legislature. The Institute is entitled to receive compensation for work in progress or completed before the effective date of any termination of the contract. The Institute recognized revenue of approximately $1.8 million under these contracts for the period January 1 through November 16, 2016, and recognized $1.0 million under these contracts in the previous fiscal year, related to costs incurred. The remaining quarterly installments to be received from ADHS total $2.0 million as of November 16, The Institute received contributions of approximately $1.0 million subsequent to November 16, Effective July 1, 2014, the Institute entered into a five-year agreement and was awarded state funding of $3.0 million per year through a contribution from Northern Arizona University. This amount was considered conditional by the Institute as funding relies upon the availability of the funding through the state legislature. The Institute received contributions for this commitment and recognized revenue of $2.25 million during the period January 1 through November 16, As of November 16, 2016, the total contribution to be received over the remaining term of the agreement is $8.25 million. The Institute received contributions of $0.75 million subsequent to November 16, Note Payable and Lines of Credit In December 2015, the Institute secured a note payable with a bank for laboratory equipment. The note is collateralized by the equipment and requires 36 monthly principal payments of approximately $21,600, plus interest at a fixed rate of 3.50%. The note matures in December As of November 16, 2016, the note has an outstanding balance of approximately $570,000. In May 2016, Dropwise entered into convertible promissory notes with two individuals, including a TGen board member, for $50,000 each, due at end of a three year period. The notes are cancelable upon maturity in accordance with certain terms of the agreements. In August 2016, the Institute secured a note payable with a bank for laboratory equipment. The note is collateralized by the equipment and requires 36 monthly principal payments of approximately $33,400, plus interest at a fixed rate of 3.50%. The note matures in August As of November 16, 2016, the note has an outstanding balance of approximately $1,110,

25 Notes to Consolidated Financial Statements (continued) 10. Note Payable and Lines of Credit (continued) The Institute had an operating line of credit that matured in September No amounts were drawn during the period or outstanding as of November 16, The Institute s notes payable were carried at fixed rates that were indicative of current market rates at November 16, 2016; therefore, the carrying value of the notes approximated the estimated fair value. Interest incurred was approximately $34,000 for the period January 1 through November 16, Future maturities of notes payable as of November 16, 2016, are as follows: 2017 $ 649, , , and thereafter Total $ 1,780, Commitments and Contingencies Leases The Institute accounts for all rent holidays and escalation clauses by recognizing the total rent expense on a straight-line basis over the term of the lease. In November 2004, TGen entered into a 30-year operating lease with the city of Phoenix, Arizona, a related party, (the City) for laboratory and office space in downtown Phoenix. In March 2009 and February 2011, the lease was amended to modify the square footage and to amend the annual rent payments. The lease was amended again on September 1, 2012, to increase the square footage of the lease to 104,078 square feet and to increase the annual rent payments. The agreement includes a lien on TGen s equipment, furnishings, and furniture. In December 2013, the lease was amended to allow for subordination on the prior lien position for up to 33% of TGen s assets, extend the term of the lease an additional five years, and update the rent payment schedule. In December 2015, the lease was amended again, reducing the square footage of the lease to 90,878 square feet and reducing the annual rent payments. Escalating annual rent payments ranging from approximately $1.8 million to $2.8 million are payable by TGen through December 31,

26 Notes to Consolidated Financial Statements (continued) 11. Commitments and Contingencies (continued) TGen pays a portion of the common area maintenance expenses for the laboratory and office space being leased. Annual rent and operating expenses under this lease were approximately $3.5 million for the period ended November 16, TGen has entered into sublease agreements for various square footage and terms throughout the year. Accordingly, other revenue of approximately $0.1 million was recognized during the period January 1 through November 16, In connection with the building lease, during 2016, management determined that certain amounts billed by the City in previous years exceeded specified limits defined in the lease agreement. TGen reached an arrangement with the City for repayment of the excess billings totaling $2.2 million, which was recorded as a reduction of office and laboratories expense on the accompanying statement of activities. As of November 16, 2016, the refund had not been received and is recorded within other assets. In June 2005, TD2 entered into a 35-year operating lease, with two 10-year extension options, for approximately 28,800 square feet of laboratory and office space. TGen is not a guarantor on this lease. Subsequently, in July 2006, TGen entered into a 35-year operating lease, with two 10 year extension options, for approximately 10,446 square feet of laboratory and office space. Both leases are with the same landlord that is leasing the real property underlying the laboratory and office space from a separate third party. Under the terms of these two leases, TD2 and TGen are required to pay rent to the landlord through year 15 with significantly abated rent equal to TD2 s and TGen s share of the landlord s respective annual operating costs for years 16 through 35. The reduced rent payments for years 16 through 35 are considered contingent, based on the terms outlined in the lease agreement, and have not been included in the Institute s calculation of deferred rent. Subsequent to the sale of TD2, TGen now remits payments of its pro rata portion of rent and common area maintenance expenses to TD2, which then remits the total rent payment to the landlord. Annual rent and operating expenses under this lease were approximately $0.5 million for the period January 1 through November 16, In March 2007, TGen entered into a 62-month lease for approximately 4,500 square feet of laboratory and office space with a related party. This lease was amended in January 2008 to add approximately 3,600 square feet and to extend the lease term to May 31, 2013, with two 5-year renewal options. The lease was amended again in June 2011 to add approximately 2,700 square feet and to extend the lease term to August 31, 2018, with one 5-year renewal option. Annual rent and operating expenses under this lease were approximately $0.2 million for the period January 1 through November 16,

27 Notes to Consolidated Financial Statements (continued) 11. Commitments and Contingencies (continued) In April 2013, TGen entered into a 36-month lease for 1,876 square feet of medical office space. This lease was amended in July 2016 to add 269 square feet and to extend the lease term to November 2019, with one 5-year renewal option. Annual rent and operating expenses under this lease were approximately $43,000 for the period January 1 through November 16, The future minimum operating lease payments required under all leases as of November 16, 2016, are as follows: Operating Leases Operating Expense Total 2017 $ 2,829,507 $ 1,732,454 $ 4,561, ,150,486 1,807,142 4,957, ,002,020 1,850,597 4,852, ,953,780 1,942,905 4,896, ,946,082 2,040,039 4,986, and beyond 57,480,261 40,758,945 98,239,206 Total lease payments $ 72,362,136 $ 50,132,082 $122,494,218 The future minimum rentals to be received under all non-cancelable subleases as of November 16, 2016, are as follows: Operating Subleases Operating Expense Total 2017 $ 248,575 $ 61,621 $ 310, ,233 30, , ,233 30, , ,420 21, , Total sublease receipts $ 568,461 $ 143,423 $ 711,884 Rent expense for all operating leases was approximately $2.7 million for the period January 1 through November 16, In 2016, the Institute entered into a 36-month capital lease agreement for computer hardware. At November 16, 2016, assets recorded under this capital lease had a cost of approximately $92,000 with accumulated depreciation of approximately $1,

28 Notes to Consolidated Financial Statements (continued) 11. Commitments and Contingencies (continued) Legal Matters The Institute is party to certain legal matters arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Institute s consolidated financial position. As of November 16, 2016, the Institute is not aware of any other matters that would have a material impact on its consolidated financial position or consolidated statement of activities. 12. Related-Party Transactions Certain parties affiliated with the Institute s management and Board of Directors carry out research-related and other business transactions with the Institute. The Institute recorded revenue from these organizations of approximately $6.9 million for the period January 1 through November 16, Expenses incurred or services provided to these organizations approximated $4.3 million for the period January 1 through November 16, Accounts receivable from these organizations amounted to approximately $0.5 million as of November 16, Accounts payable to these combined parties were approximately $0.4 million as of November 16, Due to its nature as a 501(c)(3) nonprofit organization, the Institute receives monetary and in-kind support from a variety of nonprofit, for-profit, governmental, and educational entities, some of which have direct or indirect relationships to TGen s or the Foundation s Board of Directors. Contribution revenue and integrated grants from these entities totaled approximately $1.1 million for the period January 1 through November 16, There were no contributions classified as related-party contributions as of November 16, All related-party transactions have been reviewed and approved by the Institute s Board of Directors, and management believes that all transactions have been fairly and accurately reported. 13. License and Other Agreements In 2007, TGen Accelerators entered into a license agreement and administrative services partnership opportunities agreement with MedTrust, LLC (MedTrust). As consideration for entering into this agreement, TGen Accelerators received 1,600,000 units of 8% convertible preferred class A membership units in MedTrust, which were initially valued at $836,842 and fully reserved. In September 2011, Annai Systems Inc. (Annai) acquired substantially all of the assets and business of MedTrust in exchange for 500,000 shares of Annai s common stock with additional

29 Notes to Consolidated Financial Statements (continued) 13. License and Other Agreements (continued) contingent payments based on future Annai revenue and other certain milestones. As a result of the acquisition, TGen Accelerators received 160,989 shares of Annai common stock, which were valued at $32,198. Annai is in the development stage and continues to incur significant operating losses, so the value of the Annai common stock is fully reserved as of November 16, In 2014, TGen Health Ventures entered into a license agreement with PMed for certain intellectual property and technology. Under the agreement, TGen Health Ventures granted PMed the licensing rights for the utilization and commercialization of certain licensed intellectual property and technology. As consideration for entering into this agreement, PMed will pay TGen Health Ventures 5% royalties of the net sales on all sales by, on behalf of, or for the licensee group. Additionally, in partial consideration of rights granted under this agreement, PMed will pay TGen Health Ventures a quarterly fee for the deployment, training, and technical support for genomicsenabled medicine updates, improvements, and upgrades. The PMed investment is fully reserved as of November 16, 2016, and no royalties have been received or recorded. See Note 2. In 2016, TGen entered into a license and support agreement with an outside party for certain nonexclusive and non-transferable licensed rights of the TGen trademark as well as support services as it relates to the development of a phase one clinical research program. The agreement is for an initial term of ten years with annual license fees of $2.5 million and support fees based on costs incurred. The Institute recorded approximately $1.3 million of license fee revenue for the period January 1 through November 16, A related receivable as of November 16, 2016, was recorded for approximately $0.7 million. 14. Employee Benefits 401(k) Plan The Institute has a defined contribution 401(k) Profit Sharing Plan (the Plan) covering all employees who are 21 years of age and who have completed one month of service. Under the terms of the Plan, employees may make voluntary contributions, subject to Internal Revenue Service limitations. The Institute matches employee contributions up to 4% of the employee s annual compensation subject to certain eligibility criteria as stated in the plan document. During the period January 1 through November 16, 2016, the Institute recorded expenses of approximately $0.5 million for matching contributions

30 Notes to Consolidated Financial Statements (continued) 14. Employee Benefits (continued) Health Insurance The Institute is self-funded for employees health insurance claims and has a specific and aggregate stop-loss to limit its exposure under these claims. A liability for claims that have been incurred but not reported is estimated based on a historical lag analysis. A receivable is recorded for claims incurred in excess of the Institute s stop-loss limits. A liability for incurred but not reported claims amounted to approximately $83,000 as of November 16, No receivable was due for amounts in excess of the Institute s stop-loss limits at November 16, Functional Expenses Research and development expenses are directly related to the Institute s translational research function. General and administrative expenses include all other expenses associated with management, general administration, and marketing functions. Fundraising expenses are directly related to the Institute s fundraising activities. Certain expenses incurred are in support of multiple functions and have been allocated to the functions accordingly. Functional expenses for the period January 1 through November 16, 2016, were as follows: Research and development $ 30,870,625 General and administrative 6,360,337 Fundraising 2,360,809 $ 39,591, Dell In November 2011, the Institute and Dell entered into an agreement to support pediatric cancer research programs globally, including the world s first personalized medicine trial for pediatric cancer conducted by the Neuroblastoma and Medulloblastoma Translational Research Consortium (NMTRC). The NMTRC enrolls patients over a one-year period from certain participating medical centers. Under the agreement, Dell and the Institute develop a cloud-based precision medicine platform that will include tools, resources, applications, and portals that enable a network of clinical sites, health care providers, and research centers to access a common cloud computing infrastructure. The agreement with Dell has been extended annually since its inception and currently extends through June 30,

31 Notes to Consolidated Financial Statements (continued) 16. Dell (continued) The Institute received approximately $2.5 million in cash and recognized revenue based on costs incurred in the amount of approximately $3.2 million during the period January 1 through November 16, The Institute received approximately $50,000 of computer hardware and related services in the period January 1 through November 16, 2016, and recognized approximately $0.4 million of restricted revenue and related depreciation expense during the period January 1 through November 16, In summary, in accordance with the Dell grant agreement and subsequent amendments, the Institute is to receive total cash funding of approximately $18.9 million and approximately $7.6 million of products and services. As of November 16, 2016, the Institute has received a total of approximately $18.9 million of cash funding and approximately $5.3 million of products and services since inception of the agreement. The Institute has deferred revenue of approximately $1.3 million as of November 16, Multiple Myeloma Research Foundation In July 2011, the Multiple Myeloma Research Foundation (MMRF) and TGen entered into a molecular profiling and biobanking agreement to study multiple myeloma. This multiyear agreement involves several partners, including Spectrum Health Hospitals and Van Andel Research Institute. Under the agreement, TGen provides patient tissue sample processing and analysis services. TGen also provides the use of its tissue tracking software services. MMRF agreed to pay the Institute $22.3 million, including $7.2 million of pass through funds, over eight years for all services under this agreement. The Institute s agreement with MMRF involves multiple elements. The items included in the agreement (deliverables) have been determined to be the tissue sample collection, processing and analysis services, tissue banking services, bioinformatics services, and use of its tissue tracking software. There are no cancellations, terminations, or lack of performance provisions in the agreement with MMRF. The Institute has allocated consideration to each deliverable in the agreement based on the relative selling price method utilizing the Institute s best estimate of the selling price for the respective deliverable. For the period January 1 through November 16, 2016, the Institute received approximately $0.9 million of cash funding. The Institute recognized revenue of approximately $1.7 million related to this agreement for the period January 1 through November 16, As of November 16, 2016, total cash received by the Institute is approximately $11.1 million

32 Notes to Consolidated Financial Statements (continued) 18. Endowments The Institute s endowments primarily consist of three donor-restricted funds, two of which were established for supporting summer internships for high school students at the Institute and one to support the general operations of the Institute. Net assets associated with endowment funds, including investment income earned on the endowment assets, are classified and reported based on donor-imposed restrictions. The Institute s Board of Directors has interpreted the Uniform Prudent Management of Institutional Funds Act as requiring the preservation of the fair value of the original gift, as of the gift date of the donor-restricted endowment fund, absent explicit donor stipulations to the contrary. As a result of this interpretation, the Institute classifies as permanently restricted net assets (1) the original value of the gift donated to the permanent endowment, (2) the original value of subsequent gifts to the permanent endowment, and (3) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument. The remaining portion of the donorrestricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the Institute. The Institute has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowments while seeking to maintain the purchasing power of the endowment assets. Endowment assets include those assets of donor-restricted funds that the Institute must hold in perpetuity or for a donor-specified period. Under these policies, endowment assets are invested in a manner that is intended to achieve a longterm rate of return on investments which ensure that the growth of the Institute s assets will be sufficient to offset or exceed inflation, required spending, investment management fees, and expenses over a period sufficient to meet the endowment s purposes. Actual results in any given year may vary from this amount. The Institute expects its endowment funds, over time, to provide a nominal total rate of return of 5% annually for the total portfolio. Actual returns in any given year may vary from this amount. The Institute s policy for appropriating the distribution for one of its summer internship program endowments has been designed to support a specific number of summer interns each year for the next 18 years. In establishing this policy, the Institute considered the long-term expected return on its endowment. The Institute has not yet adopted a formal policy of appropriating endowment fund distributions for the general operations support endowment or general intern endowment, as investment earnings have not yet been significant for these endowments

33 Notes to Consolidated Financial Statements (continued) 18. Endowments (continued) Changes in endowment net assets consist of the following: Temporarily Restricted Permanently Restricted Total Endowment net assets, January 1, 2016 $ 5,322,890 $ 62,093 $ 5,384,983 Investment return: Investment income 57,174 8,292 65,466 Net appreciation (realized and unrealized) 274, ,294 Other 19,661 19,661 Total investment return 351,129 8, ,421 Appropriation of endowment assets for expenditure (489,431) (8,292) (497,723) Other 19,997 19,997 Endowment net assets, November 16, 2016 $ 5,204,585 $ 62,093 $ 5,266,

34 Reports Required by the Uniform Guidance

35 Ernst & Young LLP Ernst & Young Tower One Renaissance Square Suite North Central Avenue Phoenix, AZ Tel: Fax: ey.com 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 The Board of Directors The Translational Genomics Research Institute and Affiliates We have audited, in accordance with auditing standards generally accepted in the United States and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of The Translational Genomics Research Institute and Affiliates (the Institute) which comprise the consolidated statement of financial position as of November 16, 2016, and the related consolidated statements of activities, and cash flows for the period January 1 through November 16, 2016, and the related notes to the financial statements, and have issued our report thereon dated August 16, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the Institute s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Institute s internal control. Accordingly, we do not express an opinion on the effectiveness of the Institute 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 combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity s 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. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified A member firm of Ernst & Young Global Limited

36 Compliance and Other Matters As part of obtaining reasonable assurance about whether the Institute s 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. 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 result 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 the entity s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. August 16, A member firm of Ernst & Young Global Limited

37 Ernst & Young LLP Ernst & Young Tower One Renaissance Square Suite North Central Avenue Phoenix, AZ Tel: Fax: ey.com Report of Independent Auditors on Compliance for Each Major Federal Program and Report on Internal Control Over Compliance Required by Uniform Guidance The Board of Directors The Translational Genomics Research Institute and Affiliates Report on Compliance for Each Major Federal Program We have audited The Translational Genomics Research Institute and Affiliates (the Institute) compliance with the types of compliance requirements described in the US Office of Management and Budget (OMB) Compliance Supplement that could have a direct and material effect on the Institute s major federal program for the period January 1 through November 16, The Institute s major federal program is 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 the requirements of federal statutes, regulations 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 the Institute s major federal program 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; 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 the Institute 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 the major federal program. However, our audit does not provide a legal determination of the Institute s compliance A member firm of Ernst & Young Global Limited

38 Opinion on the Major Federal Program In our opinion, the Institute complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on its major federal program for the period January 1 through November 16, Report on Internal Control Over Compliance Management of the Institute 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 the Institute s internal control over compliance with the types of requirements that could have a direct and material effect on the major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for the 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 the Institute 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 and therefore, material weaknesses or significant deficiencies may exist that were not identified. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, we identified a certain deficiency in internal control over compliance, as described in the accompanying schedule of findings and questioned costs as item (Research and Development Cluster, CFDA , I. Procurement, Suspension and Debarment) that we consider to be a significant deficiency. The Institute s response to the internal control over compliance finding identified in our audit is described in the accompanying schedule of findings and questioned costs. The Institute s response A member firm of Ernst & Young Global Limited

39 was not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the response. 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. August 16, A member firm of Ernst & Young Global Limited

40 Supplementary Information

41 Schedule of Expenditures of Federal Awards For the Period January 1 through November 16, 2016 CFDA Number/ Pass-Through Federal Expenditures to Cluster Title/Federal Grantor/Program Title/Pass-Through Grantor Contract Number Number Expenditures Subrecipients Research and Development Cluster U.S. Department of Agriculture Agriculture and Food Research Initiative (AFRI) - Pass-Through Kent State University $ 27,208 $ Total U.S. Department of Agriculture 27,208 U.S. Department of Defense Military Medical Research and Development Pass-Through Programs: Pass-Through Northern Arizona University ,582 Pass-Through The J. David Gladstone Institutes ,219 Pass-Through University of Maryland, Baltimore ,743 Pass-Through University of North Carolina at Chapel Hill ,000 Pass-Through Van Andel Research Institute ,165 Total Military Medical Research and Development 391,709 Total U.S. Department of Defense 391,709 National Science Foundation Engineering Grants - Pass-Through Virginia Polytechnic Institute and State University ,264 Biological Sciences ,099 10,904 Biological Sciences - Pass-Through Northern Arizona University (3,150) Total Biological Sciences 101,949 10,904 Education and Human Resources - Pass-Through Northern Arizona University ,297 Total National Science Foundation 135,510 10,904 U.S. Department of Health and Human Services Mental Health Research Grants Pass-Through Programs: Pass-Through University of California San Diego Pass-Through Trustees of the University of Pennsylvania Total Mental Health Research Grants 882 Trans-NIH Research Support ,165, ,

42 Schedule of Expenditures of Federal Awards (continued) For the Period January 1 through November 16, 2016 CFDA Number/ Pass-Through Federal Expenditures to Cluster Title/Federal Grantor/Program Title/Pass-Through Grantor Contract Number Number Expenditures Subrecipients Research and Development Cluster (continued) U.S. Department of Health and Human Services (continued) Cancer Cause and Prevention Research Pass-Through Programs: Pass-Through Mayo Clinic Arizona $ 12,018 $ Pass-Through Phoenix Children's Hospital, Inc ,847 Pass-Through University of North Carolina at Chapel Hill ,410 Total Cancer Cause and Prevention Research 477,275 Cancer Detection and Diagnosis Research , ,161 Cancer Detection and Diagnosis Research - Pass-Through University of Georgia Research Foundation, Inc ,927 Total Cancer Detection and Diagnosis Research 738, ,161 Cancer Treatment Research ,360 88,301 Cancer Treatment Research Pass-Through Programs: Pass-Through Mayo Clinic Arizona ,023 Pass-Through University of North Carolina at Chapel Hill ,651 Total Pass-Through of Cancer Treatment Research 92,674 Total Cancer Treatment Research 764,034 88,301 Cancer Biology Research - Pass-Through University of North Carolina at Chapel Hill ,726 Cancer Centers Support Grants - Pass-Through Ohio State University ,095 Cardiovascular Diseases Research ,067 Diabetes, Digestive, and Kidney Diseases Extramural Research , ,424 Extramural Research Programs in the Neurosciences and Neurological Disorders ,679 9,557 Extramural Research Programs in the Neurosciences and Neurological Disorders Pass-Through Programs: Pass-Through Mayo Clinic Arizona ,905 Pass-Through St. Joseph s Hospital and Medical Center ,699 Pass-Through University of Arizona ,335 Total Pass-Through of Extramural Research Programs in the Neurosciences and Neurological Disorders 183,939 Total Extramural Research Programs in the Neurosciences and Neurological Disorders 550,618 9,

43 Schedule of Expenditures of Federal Awards (continued) For the Period January 1 through November 16, 2016 CFDA Number/ Pass-Through Federal Expenditures to Cluster Title/Federal Grantor/Program Title/Pass-Through Grantor Contract Number Number Expenditures Subrecipients Research and Development Cluster (continued) U.S. Department of Health and Human Services (continued) Allergy and Infectious Diseases Research $ 338,309 $ 185,716 Allergy and Infectious Diseases Research Pass-Through Programs: Pass-Through Brigham and Women's Hospital, Inc ,068 Pass-Through Trustees of Columbia University in the City of New York ,975 Pass-Through Northern Arizona University ,764 Pass-Through The Regents of the University of California ,544 Total Pass-Through of Allergy and Infectious Diseases Research 287,351 Total Allergy and Infectious Diseases Research 625, ,716 Aging Research , ,744 Aging Research Pass-Through Programs: Pass-Through Banner Sun Health Research Institute ,593 Pass-Through University of Arizona ,616 Pass-Through University of Chicago ,870 Pass-Through University of Miami ,609 Total Pass-Through of Aging Research 769,688 Total Aging Research 1,087, ,744 Total U.S. Department of Health and Human Services 5,816,833 1,164,539 U.S. Department of Homeland Security Chemical and Biological Research 97.RD HSHQDC-16-C-B ,604 Total U.S. Department of Homeland Security 87,604 Total Research and Development Cluster 6,458,864 1,175,443 Total Federal Expenditures $ 6,458,864 $ 1,175,443 See Notes to Schedule of Expenditures of Federal Awards

44 Notes to Schedule of Expenditures of Federal Awards For the Period January 1 through November 16, 2016 Organization The Translational Genomics Research Institute (TGen or the Institute) is a recipient of federal grants to assist in carrying out the organization s mission to make and translate genomic discoveries into advances in human health. On November 16, 2016, the Institute entered into an Affiliation Agreement (the Agreement) with the City of Hope (COH), a California nonprofit public benefit tax-exempt corporation under 501(c)(3) of the Internal Revenue Code. Pursuant to terms of the Agreement, COH became the sole member of TGen. TGen will remain an Arizona-based nonprofit with headquarters in Phoenix, Arizona. COH and TGen share the goal to collaborate on research advances in precision medicine, scientific and clinical research and the field of translational genomics to improve health and wellbeing while supporting each organization s mission. Subsequent to the Agreement, in November 2016, the Institute amended its articles of incorporation to change its fiscal year-end from December 31 to September 30, beginning with the fiscal period ending September 30, Basis of Presentation The accompanying schedule of expenditures of federal awards (SEFA) includes the federal grant activity of the Institute and is presented on the accrual basis of accounting. All of the Institute s grants are reimbursement-type grants, in which funds received offset reimbursable expenses already incurred. The information on 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 (the Uniform Guidance). Therefore, some amounts presented in this schedule may differ from amounts presented in, or used in the preparation of, the consolidated financial statements of the Institute. For purposes of the SEFA, federal awards include any assistance provided by a federal agency directly or indirectly in the form of grants, contracts, cooperative agreements, or other non-cash assistance. Direct and indirect costs are charged to awards in accordance with cost principles contained in the Uniform Guidance. Under these cost principles, certain types of expenditures are not allowable or are limited as to reimbursement. The Uniform Guidance provides for a 10% de minimis indirect cost rate election; however, the Institute did not make this election and uses a negotiated indirect cost rate. The SEFA includes federal awards subject to the requirements of the Uniform Guidance, as well as federal awards that were funded prior to the Uniform Guidance effective date of December 26,

45 Schedule Required by the Uniform Guidance

46 Schedule of Findings and Questioned Costs For the Period January 1 through November 16, 2016 Section I Summary of Auditor s Results Financial Statements Type of report the auditor issued on whether the financial statements audited were prepared in accordance with GAAP (unmodified, qualified, adverse or disclaimer): Unmodified Internal control over financial reporting: Material weakness(es) identified? Yes X No Significant deficiency(ies) identified? Yes X None reported Noncompliance material to financial statements noted? Yes X No Federal Awards Internal control over major federal program: Material weakness(es) identified? Yes X No Significant deficiency(ies) identified? X Yes None reported Type of auditor s report issued on compliance for major federal program (unmodified, qualified, adverse or disclaimer): Unmodified Any audit findings disclosed that are required to be reported in accordance with 2 CFR (a)? X Yes No

47 Schedule of Findings and Questioned Costs (continued) For the Period January 1 through November 16, 2016 Section I Summary of Auditor s Results (continued) Identification of major program: CFDA Number(s) All grants as noted in the SEFA Name of Federal Program or Cluster Research and Development Cluster Dollar threshold used to distinguish between Type A and Type B programs: $750,000 Auditee qualified as low-risk auditee? X Yes No Section II Financial Statement Findings This section identifies significant deficiencies, material weaknesses, fraud, noncompliance with provisions of laws, regulations, contracts and grant agreements, and abuse related to the financial statements for which Government Auditing Standards requires reporting. No such items. Section III Federal Award Findings and Questioned Costs This section identifies the audit findings required to be reported by the 2 CFR (a) (for example, significant deficiencies, material weaknesses, material instances of noncompliance, including questioned costs, and material abuse). Finding Research and Development Cluster, CFDA No Diabetes, Digestive, and Kidney Diseases Extramural Research; U.S. Department of Health and Human Services; R01DK091601; Grant period July 25, 2011 through May 31, 2017 Internal control weakness over the document retention process related to the verification that vendors were not suspended or debarred

48 Schedule of Findings and Questioned Costs (continued) For the Period January 1 through November 16, 2016 Finding (continued) Criteria: 2 CFR Part 200 Section states, Non-federal entities are subject to the non-procurement debarment and suspension regulations implementing Executive Orders and 12689, 2 CFR part 180. These regulations restrict awards, subawards, and contracts with certain parties that are debarred, suspended, or otherwise excluded from or ineligible for participation in Federal assistance programs or activities. Condition: The Institute is responsible for ensuring that it does not expend federal assistance to parties who are suspended or debarred. Based on our testing over procurement, suspension and debarment, the vendor who was paid with federal funds was not suspended or debarred. However, the Institute did not maintain documentation to support that one vendor was not suspended or debarred. Questioned Costs: None. Context: We selected the only four vendors that had contracts in excess of $25,000 for testing to verify that the suspended and debarred certifications were obtained in accordance with the provisions of 2 CFR Part 200 Section Per inquiries of the Institute s management, although a process is in place at the Institute to ensure that vendors are not suspended or debarred, there was no documentation maintained to support that suspended and debarred certifications were obtained for one of the four vendors. Effect: Federal assistance was expended by the Institute to a vendor without proper documentation to support that suspension and debarment reviews had occurred. Cause: The Institute did not maintain support that suspension and debarment certification was obtained for a vendor receiving federal awards

49 Schedule of Findings and Questioned Costs (continued) For the Period January 1 through November 16, 2016 Finding (continued) Recommendation: We recommend that the Institute ensures that appropriate suspended and debarred certifications are maintained for vendors paid with federal awards. Auditee Response and Corrective Action Plan: Management acknowledges this finding and will address remediation in the accompanying corrective action plan

50 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com Ernst & Young LLP. All Rights Reserved. ey.com

51 Corrective Action Plan: Prior to the execution of the vendor contract in September 2015, the Institute did an online review of the vendor through the federal System for Award Management for any suspension or debarment of the entity, but did not retain written documentation of the review. This review is also completed prior to any new vendor being added to the accounting system, and is repeated again on all vendors on an annual basis. The date of the online review is retained within the Institute s accounting system, but is over written within the system to only reflect the most current review date. As a result, any prior search history is overwritten within the accounting system. The Institute has since implemented a process where the search results are saved in a file to document the date of each review and to provide evidence of the suspension and debarment review separate from the accounting system. TGen 445 North Fifth Street, Suite 600 Phoenix, Arizona Main Toll Free Fax tgen.org