MEDSTAR HEALTH RESEARCH INSTITUTE Financial Statements and Supplementary Schedule of Expenditures of Federal Awards and Reports under the Uniform Guidance June 30, 2018 and 2017 (With Independent Auditors’ Reports Thereon) MEDSTAR HEALTH RESEARCH INSTITUTE Table of Contents Page(s) Independent Auditors’ Report 1–2 Financial Statements: Balance Sheets 3 Statements of Activities and Changes in Net Assets 4 Statements of Cash Flows 5 Notes to Financial Statements 6–19 Schedule of Expenditures of Federal Awards 20–22 Notes to Schedule of Expenditures of Federal Awards 23 Independent Auditors’ Report 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 24–25 Independent Auditors’ Report on Compliance for Each Major Federal Program and Report on Internal Control over Compliance Required by the Uniform Guidance 26–27 Schedule of Findings and Questioned Costs 28 KPMG LLP 750 East Pratt Street, 18th Floor Baltimore, MD 21202 Independent Auditors’ Report The Board of Directors MedStar Health Research Institute: Report on the Financial Statements We have audited the accompanying financial statements of MedStar Health Research Institute (the Institute), a wholly owned subsidiary of MedStar Health, Inc. (MedStar), which comprise the balance sheets as of June 30, 2018 and 2017, and the related statements of activities and changes in net assets and cash flows for the years then ended, and the related notes to the financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MedStar Health Research Institute as of June 30, 2018 and 2017, and the changes in its net assets and its cash flows for the years then ended in accordance with U.S. generally accepted accounting principles. KPMG LLP is a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Other Matter Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis, as required by Title 2 U.S. Code of Federal Regulations, Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, and is not a required part of the 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 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 financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the schedule of expenditure of federal awards is fairly stated, in all material respects, in relation to the financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated March 7, 2019 on our consideration of MedStar Health Research 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 MedStar Health Research Institute’s internal control over financial reporting and compliance. March 7, 2019 2 MEDSTAR HEALTH RESEARCH INSTITUTE Balance Sheets June 30, 2018 and 2017 Assets 2018 2017 Current assets: Cash and cash equivalents $ 5,300 5,300 Grants receivable, net of allowance for uncollectible accounts of $777,621 and $1,136,811 in 2018 and 2017, respectively 8,082,600 11,023,975 Prepaids and other current assets 29,461 2,303 Total current assets 8,117,361 11,031,578 Assets whose use is limited or restricted 5,828,923 5,377,600 Property and equipment: Building and building improvements 4,146,962 4,078,571 Equipment and leasehold improvements 15,331,892 13,192,530 19,478,854 17,271,101 Less accumulated depreciation and amortization (12,180,588) (10,552,596) Property and equipment, net 7,298,266 6,718,505 Other assets 66,165 66,165 Total assets $ 21,310,715 23,193,848 Liabilities and Net Assets Current liabilities: Accounts payable and accrued expenses $ 847,157 778,488 Accrued salaries and benefits 2,338,674 2,312,776 Deferred grant revenue and other current liabilities 1,194,673 1,364,423 Total current liabilities 4,380,504 4,455,687 Other long-term liabilities 147,465 201,761 Total liabilities 4,527,969 4,657,448 Net assets: Unrestricted 13,578,498 13,240,308 Temporarily restricted 2,944,233 5,036,277 Permanently restricted 260,015 259,815 Total net assets 16,782,746 18,536,400 Total liabilities and net assets $ 21,310,715 23,193,848 See accompanying notes to financial statements. 3 MEDSTAR HEALTH RESEARCH INSTITUTE Statements of Activities and Changes in Net Assets Years ended June 30, 2018 and 2017 2018 2017 Changes in unrestricted net assets: Revenues and gains: Grant and contract revenue $ 31,400,332 31,426,569 Net gains on investments and investment income 403,027 529,020 Contributions from parent, net 5,669,372 5,592,297 Net assets released from restrictions and other revenue 3,717,691 2,432,937 Total revenues and gains 41,190,422 39,980,823 Program expenses: Personnel 19,916,075 18,540,274 Purchased services 4,166,279 3,992,798 Supplies 335,018 307,999 Facilities 157,369 162,718 Other operating expenses 826,593 390,198 Applied overhead 7,242,337 6,885,758 Total program expenses 32,643,671 30,279,745 General and administrative expenses: Unapplied overhead 8,208,561 6,214,590 Increase in unrestricted net assets 338,190 3,486,488 Change in temporarily restricted net assets: Restricted gifts 965,530 4,097,023 Net assets released from restrictions (3,108,566) (229,998) Net gains on investments and investment income 50,992 69,017 (Decrease) Increase in temporarily restricted net assets (2,092,044) 3,936,042 Change in permanently restricted net assets: Restricted gifts 200 7,600 Increase in permanently restricted net assets 200 7,600 (Decrease) Increase in net assets (1,753,654) 7,430,130 Net assets at beginning of year 18,536,400 11,106,270 Net assets at end of year $ 16,782,746 18,536,400 See accompanying notes to financial statements. 4 MEDSTAR HEALTH RESEARCH INSTITUTE Statements of Cash Flows Years ended June 30, 2018 and 2017 2018 2017 Cash flows from operating activities: Change in net assets $ (1,753,654) 7,430,130 Adjustments to reconcile change in net assets to net cash and cash equivalents used in operating activities: Depreciation expense 1,670,520 1,023,861 Provision for uncollectible