3. Acquisition of Annapurna

(a)

Purchase Price Allocation

On May 11, 2016, the Company completed the acquisition of all outstanding equity interests of Annapurna. Annapurna is a privately held French limited liability company and has two wholly-owned subsidiaries, Annapurna, Inc. in the U.S. and Annapurna Therapeutics Limited in Ireland. Annapurna is a biopharmaceutical company focused on discovering and developing new gene therapy products for people living with severe diseases. The primary reasons for the acquisition were to diversify the technology platforms within the Company’s research and development portfolio and to apply the Company’s resources and expertise in gene vectors development to advance Annapurna programs through development and clinical trials. Annapurna’s results of operations and fair value of assets acquired and liabilities assumed are included in the Company’s condensed consolidated financial statements from the date of acquisition.

The purchase price consideration was estimated to be $64.8 million, which was based on the Company’s common stock closing price on NASDAQ on the acquisition closing date of $4.14 per share. A total of 14,087,246 shares of the Company’s common stock were issued to shareholders of Annapurna in exchange for all common and preferred stock outstanding at the closing date. Annapurna stockholders did not receive any fractional shares of the Company’s common stock in connection with the acquisition. Instead of receiving any fractional shares, each Annapurna stockholders were paid an amount in cash (without interest) equal to such fraction amount multiplied by the average 10 business days sale price of the Company’s common stock on NASDAQ from the acquisition date. Annapurna Series O preferred shares issued to founders were canceled prior to the acquisition date and were not included in the purchase price consideration. Vesting of certain of Annapurna’s options and unvested common stock shares was accelerated at the closing date. The fair value of awards related to accelerated vesting of options and shares of $0.9 million was excluded from the purchase price consideration and included in the Company’s operating expenses post acquisition. A portion of the purchase price has been attributed to the exchange of Annapurna’s options and other rights to purchase capital stock outstanding at the acquisition closing date for corresponding common stock options of the Company at an exchange ratio of 9.54655.

The Company reserved 3,673,940 shares for the future exercise of the Company’s stock options. The total fair value of assumed Annapurna’s stock options and stock-based awards was estimated at $14.7 million on the acquisition date, using the Black-Scholes pricing model, assuming no dividends, expected volatilities of 80% and 89%, risk-free interest rates of 1.4% and 1.1%, and expected lives of six and ten years for employees and non-employees awards, respectively. Of the total fair value, $7.4 million has been attributed as pre-combination service and included as part of the total purchase price consideration. The post-combination attribution of $7.2 million will be recognized as compensation expense over the remaining requisite service period. The Company has included $1.1 million in stock-based compensation expense related to the vesting of exchanged stock options and day-one post combination compensation expenses related to accelerated vesting of options and shares in its condensed consolidated statement of operations during the second quarter 2016.

Total purchase price consideration was as follows (in thousands):

Fair value of common shares issued	$	58,321
Fair value of the Company's common share options exchanged for Annapurna stock options and other awards attributable to pre-combination services		7,422
Less: value of common stock and options accelerated vesting at the closing date		(898	)
Total purchase price consideration	$	64,845

The transaction has been accounted for using the acquisition method based on ASC 805, Business Combinations, with Adverum identified as the acquirer, based on the existence of a controlling financial interest of the combined entities. Under the acquisition method, assets acquired and liabilities assumed were recorded at their estimated fair values as of the May 11, 2016. Goodwill, as well as intangible assets that do not qualify for separate recognition, is measured as of the acquisition date as the excess of consideration transferred, which is also measured at fair value, and the net of the fair values of the assets acquired and the liabilities assumed as of the acquisition closing date. Acquisition costs were expensed as incurred and recorded as general and administrative expenses. The Company recorded $0.6 million and $2.5 million of acquisition costs for the three-months and six-months ended June 30, 2016, respectively.

Valuing certain components of the acquisition, primarily intangible assets acquired, deferred taxes, uncertain tax positions and accrued liabilities required us to make significant estimates that may be adjusted in the future; consequently, the fair value of identifiable assets acquired and liabilities assumed are considered preliminary. Final determination of these estimates could result in an adjustment to the preliminary purchase price allocation, with an offsetting adjustment to goodwill. Preliminary allocation of total purchase price consideration is as follows (in thousands):

Cash	$	3,449
Prepaid expenses and other assets		865
Property and equipment		185
Acquired intangible assets		16,650
Goodwill		49,120
Accounts payable		(1,118	)
Accrued liabilities		(1,848	)
Other noncurrent liabilities		(377	)
Deferred tax liabilities		(2,081	)
Total purchase price allocation	$	64,845

The identifiable intangible assets acquired consist of in-process research and development (IPR&D) assets related to products in development, as summarized in the table below (in thousands):

IPR&D - Alpha-1 antitrypsin deficiency	$	12,150
IPR&D - Hereditary angioedema		4,500
Total acquired intangible assets	$	16,650

The fair value of each IPR&D asset is estimated using the income approach and calculated using cash flow projections adjusted for inherent risks regarding regulatory approval, promotion, and distribution, discounted at a rate of approximately 11.0%. The Company acquired two additional intangible assets relating to the Friedreich’s Ataxia (FA) and severe allergy programs but the fair value of each of these assets was determined to be nominal and is not included in the total acquired intangible assets. All IPR&D intangible assets acquired are currently classified as indefinite-lived and are not currently being amortized. IPR&D asset becomes definite-lived upon the completion or abandonment of the associated research and development efforts, and will be amortized from that time over an estimated useful life based on respective patent terms. The fair value of each IPR&D asset will continue to be evaluated for impairment on an annual basis or more often if the Company identifies impairment indicators that would require earlier testing. Based on the preliminary fair values above, an amount of $49.1 million has been allocated to goodwill, which represents the excess of the purchase price over the fair values assigned to the net assets acquired. The full amount of the preliminary value of goodwill has been assigned to the entire Company, since management has determined that the Company has only one reporting unit. The goodwill is not deductible for tax purposes.

The amount of net loss of Annapurna included in the consolidated statements of operations from the acquisition date, through the period ended June 30, 2016 was $1.2 million. Annapurna did not generate any revenues prior or post acquisition.

The following table presents the unaudited pro forma results for the three and six months ended June 30, 2016 and 2015. The pro forma financial information combines the results of operations of Adverum and Annapurna as though the businesses had been combined as of the beginning of fiscal 2015. The pro forma financial information is presented for informational purposes only, and is not indicative of the results of operations that would have been achieved in the current or any future periods.

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Pro forma information
Collaboration revenue	$	307		$	203		$	572		$	406
Net loss	$	(62,572	)	$	(10,533	)	$	(80,846	)	$	(21,956	)
Basic and diluted loss per share	$	(1.52	)	$	(0.27	)	$	(1.97	)	$	(0.56	)

Pro-forma adjustments included the following:

Actual acquisition-related transaction costs of $0.6 million and $2.5 million for three and six months ended June 2016 were excluded from the 2016 pro forma results above. As these expenses were incurred prior to the closing of the acquisition, they were not included in the 2015 pro forma results.

Stock-based compensation expense related to accelerated vesting associated with the acquisition of $0.9 million was excluded from the 2016 pro forma results and was recorded in the six months ended June 30, 2015.

Stock-based compensation expense related to options granted to executives upon the acquisition closing of $0.1 million and $0.2 million was included in the 2016 and 2015 pro forma results above.

Interest expense related to convertible notes and changes in fair value of preferred stock warrants of $0.5 million for the three and six month periods ended June 30, 2015, $0.5 million for the three month period ended June 30, 2016, and $1.0 million for the six month period ended June 30, 2016, were excluded form 2015 and 2016 pro-forma results above, as the convertible notes and warrants were settled prior to the acquisition closing.

Bonuses paid in connection with closing of the acquisition in May 2016 of $0.4 million were excluded from the 2016 pro forma results and were recorded in the six months ended June 30, 2015.

The unaudited condensed pro forma information does not include any anticipated synergies that may be achievable subsequent to the date of acquisition.

Impairment evaluation for intangible assets and goodwill

As the Company recorded goodwill and IPR&D intangible assets upon the acquisition of Annapurna, the Company is required to test goodwill and indefinite lived intangible assets for impairment on an annual basis or more frequently if indicators of impairment exist. The Company operates as one reporting unit and goodwill was recorded to this reporting unit.

During the second quarter the Company noted a continuing decrease in its stock price that resulted in the market capitalization being less than the carrying value of the Company’s net assets as of June 30, 2016. As the operating losses are expected to increase significantly in the following years due to continuing pre-clinical and expected clinical trials, the Company concluded that it is more likely than not that the fair value of the Company’s one reporting unit is less than its carrying value and as a result performed a step one goodwill impairment analysis.

In performing the step one analysis, the Company determined the fair value of the reporting unit using a market-based approach. The Company multiplied the stock price of $3.16 on June 30, 2016 by the 41.3 million common shares outstanding and applied a control premium to estimate the common equity value on a controlling basis. As the fair value was less than the carrying value of the Company’s net assets, the Company proceeded to step two of the impairment analysis.

The second step of the analysis includes allocating the calculated fair value (determined in the step one analysis) of the reporting unit to its assets and liabilities to determine an implied fair value of goodwill. The implied fair value of goodwill was determined in the same manner as the amount of goodwill recognized in an acquisition. That is, the estimated fair value of the reporting unit was allocated to all of the assets and liabilities as if the Company had been acquired and the estimated fair value was the purchase price paid. As part of this assessment the Company considered preliminary valuation of Annapurna net assets acquired, excluding goodwill, as their fair value from May 11, 2016, the acquisition closing date, to June 30, 2016 did not change. The Company also noted that the fair value of current assets and liabilities approximates their carrying value due to their short-term nature, the Company’s cash and cash equivalent balance is higher than the fair value estimated in the step one analysis, and the fair value of fixed assets approximates their recorded value as most of the Company’s fixed assets are acquired in the last couple of years. Based on this analysis, the implied fair value of the goodwill was zero. Accordingly, the Company recorded a goodwill impairment charge of $49.1 million in the condensed consolidated statements of operations and comprehensive loss for the period ended June 30, 2016.

As the Annapurna purchase price allocation is preliminary and the amount of goodwill might change during the measurement period, the recorded impairment charge reflects the Company’s best estimate as of June 30, 2016.

We did not impair recorded IPR&D intangible assets, as their carrying value at June 30, 2016 approximated their fair value. We noted no significant changes in IPR&D intangible assets fair values from May 11, 2016, the acquisition closing date, to June 30, 2016.