3. Business Combination

On May 4, 2017, we closed the Mergers with PharmAthene. In accordance with the terms of the Merger Agreement, PharmAthene issued 0.749106 (the “share exchange ratio”) of a share of PharmaAthene common stock for each share of Altimmune’s $0.0001 par value common stock (“common stock”) outstanding as of the closing date. All historical share and per share information including common and preferred stock, common stock warrants, and stock options, has been retroactively adjusted to reflect the impact of the share exchange ratio. In addition, Altimmune’s stock options and warrants were also replaced with options and warrants to purchase PharmAthene’s common stock at the same share exchange ratio of 0.749106 share. Immediately prior to closing, 599,285 shares of Series B convertible preferred stock (“convertible preferred stock”) converted into Altimmune common stock on a 1-for-1 basis. Due to the convertible preferred stock having unique terms and conditions, the convertible preferred stock outstanding in periods prior to the Mergers continues to be presented separately on our balance sheet for periods prior to conversion. In addition, outstanding principal and accrued interest on the Notes converted into 316,734 shares of Altimmune common stock. Further, 39,758 shares of Altimmune common stock were issued pursuant to the accelerated vesting of restricted stock, and 660,715 shares of Altimmune common stock were issued as a result of warrant exercises, both in accordance with their original terms. Upon the closing of the Mergers, Altimmune common stock totaling 6,883,498 shares were exchanged for 6,883,498 shares of PharmAthene common stock.

Although PharmAthene was the issuer of the shares and considered the legal acquirer in the Mergers, following the closing, shareholders of Altimmune held 58.2% of the equity interest of the combined entity and assumed control of the combined entity. As a result, the transaction has been accounted for as a reverse merger, with Altimmune considered the accounting acquirer, and the assets and liabilities of PharmAthene have been recorded at their estimated fair value. The unadjusted purchase price allocated to PharmAthene’s assets and liabilities was estimated to be $44,742,737 as of the closing date and consisted of the shares of the combined company retained by PharmAthene shareholders, and the estimated fair value of vested PharmAthene stock options and warrants which remained outstanding as of the closing date. Also at the closing, 7,569 outstanding unvested options of PharmAthene with an estimated fair value of $15,173 remained subject to vesting and service requirements. These unvested options will be recorded as operating expense in future periods as the services are delivered and the options vest.

Headquartered in Annapolis, Maryland, PharmAthene was incorporated in Delaware in April 2005. PharmAthene was a biodefense company engaged in Phase II clinical trials in developing a next generation anthrax vaccine. The next generation vaccine is intended to have more rapid time to protection, fewer doses for protection and less stringent requirements for temperature controlled storage and handling than the currently used vaccine. The Mergers enable the combined company to become a fully integrated, commercially-focused immunotherapeutics company with the ability to create more value than either company could achieve individually. As a publicly listed entity, the Mergers also provide us with additional capital financing alternatives to support the combined entity’s planned research and development activities.

In addition to the operating assets and liabilities of PharmAthene, Altimmune also acquired PharmAthene’s tax attributes, which primarily consisted of a tax refund receivable and approximately $1 million of net operating losses which were limited under Section 382 of the U.S. Internal Revenue Service and were fully reserved, which begin to expire in 2023. We recorded a deferred tax liability related to future tax benefits arising from an in-process research and development asset (“IPR&D”) acquired in the Mergers. Goodwill generated from the Mergers is not expected to be deductible for tax purposes.

For accounting purposes, the historical financial statements of Altimmune have not been adjusted to reflect the Mergers, other than adjustments to the capital structure of Altimmune to reflect the historical capital structure of PharmAthene. Altimmune incurred $1,673,695 of transaction costs, which have been expensed as incurred in the accompanying condensed consolidated financial statements.

The following table lists the various securities of PharmAthene which were outstanding as of May 4, 2017 and whose rights and obligations were assumed by Altimmune following the Mergers:


Outstanding PharmAthene common stock		6,883,498
Outstanding PharmAthene stock options		123,003
Outstanding PharmAthene stock warrants		4,658
Per share fair value of PharmAthene common stock	$	6.50
Weighted average per share fair value of PharmAthene stock options	$	0.26
Per share fair value of PharmAthene stock warrants	$	0.01
Aggregate fair value of consideration	$	44,757,910
Less fair value of unvested common stock options		(15,173	)

Total fair value of consideration	$	44,742,737

Since the acquisition date, we have recorded adjustments to the allocation of the purchase consideration that included a $44,700 adjustment to increase our tax refund receivable and a $4,535 adjustment to reduce our deferred tax liabilities, with a total adjustment of $49,235 resulting in an increase in goodwill. The adjustments were the result of a change in the tax rate being applied from 34% to 35%. These purchase price adjustments were reflected in the accompanying condensed consolidated balance sheet as of September 30, 2017. The adjusted allocation of the purchase consideration to the assets acquired and liabilities assumed of PharmAthene in these financial statements is still preliminary and subject to change as management gathers information regarding these items. The adjusted allocation of the purchase consideration was as follows:


Cash and cash equivalents	$	13,684,535
Accounts receivable		1,124,462
Prepaid expenses and other current assets		597,172
Tax refund receivable		2,047,234
Property and equipment		75,779
IPR&D		22,389,000
Goodwill		15,573,822

Total assets acquired		55,492,004

Accounts payable and accrued expenses		(2,193,785	)
Deferred tax liability		(8,555,482	)

Total liabilities assumed		(10,749,267	)

Net assets acquired	$	44,742,737

We relied on significant Level 3 unobservable inputs to estimate the fair value of acquired IPR&D assets using management’s estimate of future revenue and expected profitability of the products after taking into account an estimate of future expenses necessary to bring the products to completion. These projected cash flows were then discounted to their present values using a discount rate of 23%, which was considered commensurate with the risks and stages of development of the products.

The operating activities of PharmAthene have been included in the accompanying condensed consolidated financial statements from the date of the Mergers. For the period from May 4, 2017 to September 30, 2017, revenues and net loss of PharmAthene included in the accompanying condensed consolidated financial statements aggregated $1,052,007 and $343,509, respectively.

The following unaudited pro forma information for the nine months ended September 30, 2017 and 2016 gives effect to the acquisition of PharmAthene as if the Mergers had occurred at the beginning of the respective full annual reporting period:


	Nine Months Ended September 30,
	2017			2016
Pro forma revenue and grants and contracts	$	9,035,435		$	6,262,748
Pro forma net (loss) income attributable to common stockholders	$	(39,277,568	)	$	111,784,503
Pro forma weighted average common shares outstanding, basic		15,218,542			14,268,717
Pro forma net (loss) income per share, basic	$	(2.58	)	$	7.83
Pro forma weighted average common shares outstanding, diluted		15,218,542			15,107,312
Pro forma net (loss) income per share, diluted	$	(2.58	)	$	7.40