Acquisition activity

Imugen, Inc.

July

2016,

the Company acquired substantially all of the assets of Imugen, a privately owned Massachusetts corporation focused on the development and performance of testing for tick-borne diseases. The assets acquired primarily relate to Imugen’s proprietary testing technology and its Clinical Laboratory Improvements Amendment, or CLIA, approved and College of American Pathologists, or CAP, approved laboratory in Norwood, Massachusetts.

The consideration for the acquisition of Imugen consisted of

$22.2

million in cash.

$1.8

million of the purchase price has been placed in escrow for a period of

twelve

months from the closing date to serve as security for potential indemnification claims. The Company filed the required financial statements (including pro forma financial statements) relating to the acquisition on a Form

-K/A on

September

2016.

The acquisition of Imugen was accounted for under the acquisition method of accounting and the purchase price allocation was provisionally prepared during the

third

quarter of

2016.

These provisional amounts have been finalized during the

fourth

quarter of

2016.

The table below summarizes the purchase price of the Imugen acquisition and the fair value of identified assets acquired at the acquisition date (in thousands):

Assets acquired:
Property and equipment	$	655
In-process research and development		9,200
Technology - clinical		5,100
Customer relationships		2,700
Trademarks / trade names		1,900
Total assets acquired		19,555
Add: Goodwill		2,645
Total consideration transferred	$	22,200

On the date of the acquisition, the fair value of acquired intangible assets was determined to be

$18.9

million using primarily the excess earnings method with significant inputs that are not observable, including estimates of the timing and cost required for product approval, revenue growth, gross margin, operating expenses and a discount rate of approximately

22%.

We consider these intangible assets to be Level

fair value assets due to the significant estimates and assumptions used by management in establishing the estimated fair value.

Goodwill of approximately

$2.6

million represents the excess of the purchase price of the acquired business over the fair value of the underlying net tangible and identifiable intangible assets and represents the expected synergistic benefits of the transaction, which relate to an increase in future revenues for the Company as a result of leveraging Imugen’s systems and expertise of its employees. The goodwill is also related to the knowledge and experience of the workforce in place. Goodwill and IPR&D are indefinite-lived intangible assets and are not amortized. Rather, they are reviewed for impairment at least annually. There was no evidence of any impairments at

December

31,

2016

and there were no impairment charges during the year ended

December

31,

2016.

Goodwill related to the Imugen acquisition is deductible for tax purposes over

years.

During the year ended

December

31,

2016,

the Company incurred transaction costs of

$475,000

associated with the acquisition of Imugen that were recorded within general and administrative expense in the statement of operations.

Actual results of operations acquired from Imugen are included in the consolidated financial statements from the date of the acquisition, including revenues in the amount of

$7.0

million and income from operations of

$730,000,

not including transaction costs.

Immunetics, Inc.

October

12,

2016,

the Company, through its indirect subsidiary, Oxford Immunotec, Inc., acquired Immunetics, a Massachusetts based diagnostics company focused on developing specialized tests for infectious diseases, including tick-borne diseases, such as Lyme disease. The assets acquired primarily relate to IPR&D related to a test for Babesia, fixed assets, customer relationships, the “Immunetics” trade name, Immunetics’ proprietary testing technology for Lyme disease, and various government grants currently in progress.

Total consideration consisted of

$6.0

million in cash and up to an additional

$6.0

million in cash payable on the achievement of certain revenue thresholds and pipeline related milestones over the next

three

years

. Approximately

$400,000

of the purchase price is being held by the Company for a period of

eighteen

months from the closing date to serve as security for potential indemnification claims. The Company has determined that this liability is a Level

fair value measurement within the FASB’s fair value hierarchy and the fair value has been estimated to be

$3.4

million on the date of acquisition based on significant assumptions, including the probabilities of milestone occurrence, the expected timing of milestone payments, and a discount rate of

4.4%.

Such liability is adjusted to fair value at each reporting date, with the adjustment reflected in general and administrative expenses. See Note

“Fair value measurement” for information pertaining to changes in the fair value of this liability.

The acquisition of Immunetics was accounted for under the acquisition method of accounting and the purchase price allocation was provisionally prepared during the

fourth

quarter of

2016.

While the Company is close to finalization of the purchase price accounting, it has recorded provisional amounts for the assets acquired and liabilities assumed

, based upon their estimated fair values at the date of the business acquisition. These provisional amounts

may

be adjusted as necessary during the measurement period (up to

one

year from the acquisition date) while the accounting is finalized.

The Company paid approximately

$655,000

in transaction costs associated with this transaction, which is included in general and administrative expense in the statement of operations.

Total consideration was (in thousands):

Cash consideration	$	6,000
Estimated fair value of contingent consideration		3,444
Total consideration transferred	$	9,444

The table below summarizes the purchase price of the Immunetics acquisition and the fair value of identified assets acquired and liabilities assumed at the acquisition date (in thousands):

Assets acquired:
Cash	$	285
Accounts receivable, net		347
Inventory, net		420
Prepaid expenses and other assets		199
Property and equipment		787
In-process research and development		6,970
Customer relationships		400
Trade name		290
Technology – clinical		860
Grants		50
Total assets acquired		10,608

Liabilities assumed:
Accounts payable		(319	)
Accrued liabilities		(739	)
Other liabilities		(1,283	)
Total liabilities assumed		(2,341	)

Net assets acquired		8,267
Add: Goodwill		1,177
Total consideration transferred	$	9,444

On the date of the acquisition, the fair value of acquired intangible assets was determined to be

$8.6

21.6%

and

60.2%,

depending on the levels of risk inherent in the various intangible assets. We consider these intangible assets to be Level

fair value assets due to the significant estimates and assumptions used by management in establishing the estimated fair value.

Goodwill of approximately

$1.2

million represents the excess of the purchase price of the acquired business over the fair value of the underlying net tangible and identifiable intangible assets and represents the expected benefits of the transaction, which relate to an increase in future revenues for the Company as a result of leveraging Immunetics’ systems and expertise of its employees. The goodwill is also related to the knowledge and experience of the workforce in place. Goodwill and IPR&D are indefinite-lived intangible assets and are not amortized. Rather, they are reviewed for impairment at least annually. There was no evidence of any impairments at

December

31,

2016

and there were no impairment charges during the quarter ended

December

31,

2016.

The goodwill recognized is not deductible for tax purposes.

Actual results of operations acquired from Immunetics are included in the consolidated financial statements from the date of the acquisition, including revenues in the amount of

$392,000

and loss from operations of

$813,000,

not including transaction costs.

Pro Forma Information

(Unaudited)

The unaudited pro forma condensed consolidated statement of operations of the Company, set forth below, gives effect to the Company’s acquisitions of Imugen and Immunetics as if they occurred on

January

2015.

These amounts are not necessarily indicative of the consolidated results of operations for future years or actual results that would have been realized had the acquisitions occurred as of those dates:

	Year Ended December 31,
(in thousands, except share and per share data)	201 6			201 5
Total revenues	$	92,860		$	75,622
Net loss	$	(21,840	)	$	(25,281	)
Net loss per share—basic and diluted	$	(0.98	)	$	(1.16	)
Weighted average shares outstanding—basic and diluted		22,353,713			21,781,933

Pro forma net loss for the year ended

December

31,

2016,

excludes

$2.7

million related to transaction costs and accelerated stock-based compensation costs incurred in connection with the Imugen and Immunetics acquisitions.

Prior Year Acquisition

Boulder Diagnostics, Inc.

July

31,

2014,

the Company acquired substantially all of the assets of Boulder, a privately owned company developing immunology-based assays for autoimmune and inflammatory conditions/diseases. The assets acquired primarily related to assays for Lyme disease and gout and an assay to help select biologics for autoimmune disease based on monitoring and prognosis of drug response that was acquired in conjunction with the Boulder acquisition. As part of the transaction, Boulder transferred to the Company all shares of capital stock in its wholly-owned subsidiary, Boulder Diagnostics Europe GmbH, such that the Company has become the sole owner of Boulder Diagnostics Europe GmbH.

The terms of the purchase agreement provided for an upfront payment of

$1.7

million and contingent purchase price consideration consisting of future potential milestone payments totaling up to

$6.1

million in respect of the Lyme disease and gout assays at any time on or prior to

July

31,

2024.

The milestone payments consisted of up to

$400,000

for the completion of studies related to acquired technologies, up to

$700,000

for the development of diagnostic test kits,

$500,000

for the

first

patient enrolled in an Institutional Review Board approved study, up to

$1.5

million for the issuance of patents, and up to

$3.0

million for approvals or clearances by the U.S. Food and Drug Administration. The Company determined that this liability was a Level

fair value measurement within the FASB’s fair value hierarchy and the fair value was estimated to be

$1.2

million on the date of acquisition based on significant assumptions, including the probabilities of milestone occurrence, the expected timing of milestone payments, and a discount rate of

15%.

Such liability was adjusted to fair value at each reporting date, with the adjustment reflected in general and administrative expenses. See Note

“Fair value measurement” for information pertaining to changes in the fair value of this liability.

The acquisition of Boulder was accounted for under the acquisition method of accounting and was finalized during the

fourth

quarter of

2014.

Total consideration was (in thousands):

Cash consideration	$	1,724
Estimated fair value of contingent consideration		1,247
Total consideration transferred	$	2,971

$183,200

of the cash consideration was placed in an escrow account as security for any undisclosed liabilities and as indemnification for certain items.

The Company paid approximately

$181,000

in transaction costs associated with this transaction, which was included in general and administrative expense in the consolidated statement of operations.

The following table summarizes the purchase price of the Boulder acquisition, the fair value of identified assets acquired and liabilities assumed at the acquisition date (in thousands):

Assets acquired:
Cash	$	8
Accounts receivable		15
Inventory		40
Prepaid expenses and other assets		12
Property and equipment		359
In-process research and development		2,627
Total assets acquired		3,061

Liabilities assumed:
Accounts payable		(97	)
Accrued liabilities		(14	)
Other current liabilities		(34	)
Total liabilities assumed		(145	)

Net assets acquired		2,916
Add: goodwill		55
Total consideration transferred	$	2,971

On the date of the acquisition the fair value of IPR&D acquired was determined to be

$2.6

million

($1.8

million for the Lyme disease assay,

$0.5

million for the assay to help select biologics for autoimmune disease based on monitoring and prognosis of drug response that was acquired in conjunction with the Boulder acquisition, and

$0.3

million for the gout assay) using the excess earnings method with significant inputs, including estimates of the timing and cost required for product approval, revenue growth, gross margin, operating expenses and a

15%

discount rate, that were not observable. The Company considered the fair value of IPR&D to be a Level

fair value asset due to the significant estimates and assumptions used by management in establishing the estimated fair value.

Goodwill and IPR&D

are indefinite-lived intangible assets and are not amortized. Rather, they are reviewed for impairment at least annually. During the

third

quarter of

2015,

the timeline for the development of an assay to inform decisions regarding biologic therapies that was acquired as part of the Boulder acquisition was changed due to delays in the completion of research studies. Based upon the changed timeline and the resulting impact on fair value, the Company recorded an IPR&D impairment charge of

$385,000

as of

December

31,

2015.

During the

fourth

quarter of

2016,

the decision was made to halt research on the GoutiFind blood test. Based on this decision, the Company recorded a non-cash impairment charge of

$270,000

to fully reserve the GoutiFind IPR&D. In addition, during the

fourth

quarter of

2016,

the Company recorded a non-cash IPR&D impairment charge of

$1.4

million related to an assay for Lyme disease that was acquired in conjunction with the Boulder acquisition. The impairment charge has been shown on a separate line in the financial statements. Similar charges recorded in prior years have been reclassified out of research and development expense for comparative purposes.

During the

fourth

quarter of

2016,

the Company also wrote off the GoutiFind related contingent purchase price consideration of

$901,000.

In addition during the

fourth

quarter of

2016,

the Company determined that the milestones related to the SpiroFind product would not be achieved and wrote off the contingent purchase price consideration of

$551,000

related to this product candidate.

Actual results of operations of Boulder for

2014

were included in the financial statements from the date of the acquisition, including revenues in the amount of

$42,000

and losses from operations of

$396,000.

The functional currency for Boulder in Germany is the Euro.