4.	Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. Intercompany accounts and transactions have been eliminated in consolidation.

Reclassification

Certain 2016 amounts and disclosures have been reclassified to conform to the 2017 presentation. The 2016 amounts and disclosures reclassified include the combining of all noncurrent liabilities, other than deferred income taxes, into other long-term liabilities on the consolidated balance sheets; the combining of other income and other expenses into other income, net in the consolidated statements of operations and comprehensive loss; and the disclosure of additional property and equipment components in Note 6.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and the disclosure of contingent assets and liabilities as of and during the reporting period. The Company bases estimates and assumptions on historical experience when available and on various factors that it believes to be reasonable under the circumstances. Significant estimates relied upon in preparing the accompanying consolidated financial statements related to revenue recognition, the fair value of common stock and other equity instruments, accounting for stock-based compensation, income taxes, collectability of accounts receivable, useful lives of long lived assets, fair value of assets acquired and liabilities assumed, impairment of goodwill and other long-lived assets, and accounting for project development and certain accruals. The Company assesses the above estimates on an ongoing basis; however, actual results could differ materially from those estimates.

Comprehensive Loss

For the years presented, the total comprehensive loss includes net loss and other comprehensive loss which represents foreign currency translation adjustments.

Foreign Currency Translation

Assets and liabilities of Altimmune UK Limited, PharmAthene UK Limited, and Altimmune France SAS, whose functional currencies are the British pound and Euro, respectively, are translated at year end exchange rates, while revenues and expenses are translated at average exchange rates for the year. Translation adjustments are reflected as accumulated other comprehensive loss within stockholders’ equity. Translation adjustments from intercompany advances that the Company does not anticipate settling in the foreseeable future are recorded in accumulated other comprehensive loss within stockholders’ equity. Gains and losses on foreign currency transactions are included in the consolidated statements of operations and comprehensive loss as a component of operating expenses.

Segment

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, the Company’s Chief Executive Officer, in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business in one operating segment, the research and development of immunotherapies and vaccines.

Business Combination

The Company uses its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. The Company’s estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. In addition, uncertain tax positions and tax-related valuation allowances are initially established in connection with a business combination as of the acquisition date. The Company collects information and reevaluates these estimates and assumptions quarterly and records any adjustments to the Company’s preliminary estimates to goodwill during the measurement period. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statements of operations and comprehensive loss. Amounts paid for acquisitions are allocated to the tangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The Company allocates the purchase price in excess of net tangible assets acquired to identifiable intangible assets, including purchased research and development. The fair value of identifiable intangible assets is based on detailed valuations that use information and assumptions provided by management. The Company allocates any excess purchase price over the fair value of the net tangible and intangible assets acquired to goodwill.

The Company’s purchased research and development represents the estimated fair value as of the acquisition date of substantive in-process projects that have not reached technological feasibility. The primary basis for determining technological feasibility of these projects is obtaining regulatory approval. The valuation of IPR&D assets is determined using the discounted cash flow method. In determining the value of IPR&D assets, the Company considers, among other factors, the stage of completion of the projects, the technological feasibility of the projects, whether the projects have an alternative future use and the estimated residual cash flows that could be generated from the various projects and technologies over their respective projected economic lives. The discount rate used is determined at the time of acquisition and includes a rate of return which accounts for the time value of money, as well as risk factors that reflect the economic risk that the cash flows projected may not be realized.

Intangible Assets

Intangible assets acquired in a business combination consist primarily of IPR&D assets. The value attributable to IPR&D projects at the time of acquisition is capitalized as an indefinite-lived intangible asset and tested for impairment until the project is completed or abandoned. Upon completion of the project, the indefinite-lived intangible asset will be accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life. If the project is abandoned, the indefinite-lived intangible asset will be charged to expense. Intangible assets acquired in other transactions are recorded at cost. Intangible assets with finite useful lives consist of legal costs incurred in the course of obtaining patents and license issuance fees for the use of proprietary technologies. Costs incurred for obtaining patents are amortized on a straight-line basis over the estimated useful lives of the assets from the time of approval of the patent. Prior to approval, these costs are carried on the balance sheets and not amortized. In the event approval is denied, the cost of the denied application is expensed. License issuance fees are amortized on a straight-line basis over the estimated useful lives of the underlying licensed technology. Intangible assets with finite useful lives are being amortized over 6 to 20 years and are evaluated separately from indefinite-lived intangible assets for impairment at least annually or whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable.

Acquisition-related Costs

Acquisition-related costs incurred in connection with the Mergers are expensed as incurred and include direct and incremental costs associated with the acquisition. The $1,512,423 and $671,248 of acquisition-related costs incurred in 2017 and 2016, respectively, were primarily professional fees and are classified as general and administrative expenses.

Impairment of Long-lived Assets and Goodwill

The Company evaluates our long-lived tangible and intangible assets, including IPR&D assets and goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Impairment of long-lived assets other than goodwill and indefinite lived intangibles is assessed by comparing the undiscounted cash flows expected to be generated by the asset to its carrying value. Goodwill is tested for impairment by comparing the estimated fair value of our single reporting unit to its carrying value.

Our IPR&D assets are currently non-amortizing. Until such time as the projects are either completed or abandoned, we test those assets for impairment at least annually at year end, or more frequently at interim periods, by evaluating qualitative factors which could be indicative of impairment. Qualitative factors being considered include, but are not limited to, the current project status, forecasted changes in the timing or amounts required to complete the project, forecasted in timing or changes in the future cash flows to be generated by the completed products, and changes to other market-based assumptions, such as discount rates. If impairment indicators are present as a result of our qualitative assessment, we test those assets for impairment by comparing the fair value of the assets to their carrying value. Upon completion or abandonment, the value of the IPR&D assets will be amortized to expense over the anticipated useful life of the developed products, if completed, or charged to expense when abandoned if no alternative future use exists. As of December 31, 2017, our projects continue to progress as originally anticipated, and no significant changes to the estimated timing or amount of cash flows or any other market assumptions have occurred. We believe our assumptions to be reasonable, however development of IPR&D assets are unpredictable and inherently uncertain. Actual future progress may differ from our initial expectations. We performed qualitative assessments of our long-lived assets, including IPR&D, and have determined that our long-lived assets, including IPR&D, are not impaired as of and during the year ended December 31, 2017.

Goodwill represents the excess of the purchase price of an acquired entity over the amounts assigned to assets and liabilities assumed in a business combination. We test goodwill for impairment during the fourth quarter of each year, or more frequently if impairment indicators arise. During the year ended December 31, 2017, we early adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which provides for a one-step quantitative test to simplify our goodwill impairment analysis. If the carrying value of a reporting unit exceeds its fair value, the amount of goodwill impairment is the excess of the reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. We consider multiple methods including both market and income approaches to determine fair value of our one reporting unit, and primarily rely on fair value estimated based on our market capitalization (a Level 2 input and non-recurring fair value measurement) as of or near the testing date, adjusted for an estimated control premium.

From the date of the Mergers through December 31, 2017, the Company experienced a significant decline in the trading price of our common stock which indicated potential impairment. We performed interim impairment tests on our goodwill as of September 30, 2017 and December 21, 2017, by estimating our average market capitalization using a volume weighted average price (“VWAP”) (a Level 2 input and non-recurring fair value measurement) as of the testing dates and applying a control premium of 35% (a Level 2 input). Based on the results of our impairment tests, the carrying value of our reporting unit exceeded its estimated fair value by more than the goodwill carrying value. As a result, we have concluded that our goodwill was impaired and the full amount of its carrying value of $35,919,695 was written off as an impairment charge which was classified as a component of operating expenses.

Fair Value Measurements

The Company follows the guidance in FASB Accounting Standard Codification (“ASC”) 820, Fair Value Measurements and Disclosures, which defines fair value and establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company can access at the measurement date.

Level 2 — Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term.

Level 3 — Unobservable inputs developed using estimates of assumptions developed by the Company, which reflect those that a market participant would use.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may change for many instruments. This condition could cause an instrument to be reclassified within levels in the fair value hierarchy. There were no transfers within the fair value hierarchy during the years ended December 31, 2017 and 2016.

Financial Instruments

The Company’s financial instruments consist of cash, cash equivalents, restricted cash, accounts receivable, notes payable, accounts payable, accrued expenses, BPI France notes, common stock warrants classified as a liability, common stock warrant classified as equity, convertible preferred stock, redeemable convertible preferred stock, and an embedded derivative. The carrying amounts of cash, cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued expenses approximate their fair value due to the short-term nature of those financial instruments. The carrying amounts of notes payable approximate their fair value because their stated interest rates approximate the market rates and due to the short-term nature of the notes. BPI France notes are recorded at their repayment value which approximates fair value. Redeemable convertible preferred stock is classified as temporary equity and its carrying amount is accreted over the term of the instrument up to its liquidation and redemption value. Common stock warrant classified as equity and convertible preferred stock classified as permanent equity are initially recorded at their grant date fair value but are not subsequently remeasured. Common stock warrants classified as a liability and the embedded derivative are recorded at fair value and are remeasured every reporting period with the changes in fair value recorded as a component of other income (expenses), net.

License Revenue

License revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the fee is fixed or determinable, and (iv) collectability is reasonably assured. When one or more of the revenue recognition criteria are not met, the Company defers the recognition of revenue until such time that all criteria are met. The Company has granted a license to one of its investors providing for an exclusive right to use, market, sell, and import the Company’s potential vaccine products in the territory provided by the license. The terms of the agreement included nonrefundable upfront fees, annual license maintenance fees, and potential royalties from the licensee’s sale of the licensed products. The non-refundable upfront fees are deferred and recognized over the license term, which represents the service period, is considered to extend to the expiration of all licensed patents included in the license. Annual license maintenance fees are recognized when due and payable if collection is reasonably assured. Royalty revenue, if any, will be recognized based upon actual and estimated net sales by the licensee in the period sales occur.

Research Grants and Contracts

Research grants and contracts are derived from government and foundation grants and contracts that support the Company’s efforts on specific research projects. We have determined that the government agencies and foundations providing grants and contracts to the Company are not our customers. These grants and contracts generally provide for reimbursement of approved costs as those costs are incurred by the Company. Research grants and contracts and the related accounts receivable are recognized as earned when reimbursable expenses are incurred and the earnings process is complete. Payments received in advance of services being provided are recorded as deferred revenue.

Research and Development

Research and development costs are expensed as incurred. Research and development costs include payroll and personnel expense; consulting costs; external contract research and development expenses; raw materials; drug product manufacturing costs; and allocated overhead, including depreciation and amortization, rent and utilities. Research and development costs that are paid in advance of performance are capitalized as a prepaid expense and amortized over the service period as the services are provided.

Clinical Trial Costs

Clinical trial costs are a component of research and development expenses. The Company accrues and expenses clinical trial activities performed by third parties based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activation, and other information provided to the Company by our vendors.

Cash Equivalents

The Company considers all highly liquid investments purchased with remaining maturities of 90 days or less on the purchase date to be cash equivalents, and include amounts held in money market funds which are actively traded (a Level 1 input).

Restricted Cash

The Company had restricted cash of $34,174 at December 31, 2017 held in a money market savings account as collateral for the Company’s facility lease obligation. In addition, until all the redeemable preferred stock shares have been converted, redeemed, or otherwise satisfied in accordance with their terms, the Company is required to maintain cash on deposit in an unrestricted account with an aggregate amount not less than the lower of $3,500,000 or the redeemable preferred stock outstanding conversion amount. The Company has elected to record this amount within restricted cash. Restricted cash is classified as a component of cash, cash equivalents, and restricted cash in the accompanying consolidated balance sheets and consolidated statements of cash flows.

Accounts Receivable

Accounts receivable includes both billed and unbilled amounts. The Company makes judgments as to its ability to collect outstanding receivables and provides an allowance for receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices and the overall quality and age of those invoices not specifically reviewed. The Company’s receivables represent amounts reimbursed under its government grants and contracts. The Company believes that credit risks associated with these government grants and contracts is not significant. To date, the Company has not experienced any losses associated with accounts receivable and do not maintain an allowance for doubtful accounts.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash, cash equivalents, restricted cash, and accounts receivable. Periodically, the Company maintains deposits in financial institutions in excess of government insured limits. Management believes that the Company is not exposed to significant credit risk as the Company’s deposits are held at financial institutions that management believes to be of high credit quality. The Company has not experienced any losses in these deposits. The Company recognizes research grants and contracts earned in connection with the services provided on research and development projects. The Company provides credit in the normal course of providing such services based on evaluations of the grantors’ financial condition and generally does not require collateral. To manage accounts receivable credit risk, the Company monitors the creditworthiness of its grantors. Grantors that represented 10% or more of research grants and contracts for the years ended December 31, 2017 and 2016 and grantors that accounted for 10% or more of accounts receivable at December 31, 2017 and 2016, are presented below:


	Year Ended December 31,
	2017			2016
Research Grants and Contracts
BARDA		83	%		81	%
NIAID		17			—
Texas A&M University System		—			19


	December 31,
	2017			2016
Accounts Receivable
BARDA		73	%		100	%
NIAID		27			—

Property and Equipment, Net

Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to operations as incurred, whereas major improvements are capitalized as additions to property and equipment. Costs of assets under construction are capitalized but are not depreciated until the construction is substantially complete and the assets being constructed are ready for their intended use. Depreciation and amortization are recorded using the straight-line method over the estimated useful lives of the assets, as follows:


Asset Category		Estimated Useful Life
Computer and telecommunications		3 – 5 years
Software		3 years
Furniture, fixtures and equipment		5 years
Laboratory equipment		7 years
Leasehold improvements		Lesser of lease term or estimated useful lives

Patent and licensing costs

Patent and licensing costs that are incurred on behalf of, or reimbursable under, research grant arrangements are capitalized as intangible assets and amortized over the estimated useful lives of the assets. All other patents and licensing costs are expensed as incurred because their realization is uncertain. These costs are classified as research and development expenses in the accompanying statements of operations and comprehensive loss.

Preferred Stock

The Company issued convertible preferred stock under a stock purchase agreement entered into in connection with a 2015 acquisition. Upon a deemed liquidation event, the convertible preferred stock terms permitted holders to vote as a single class to either liquidate or redeem their shares. Upon such an election, all of the Company’s stockholders, including the common stock holders, would always be entitled to receive the same form of consideration. As a result, the Company’s convertible preferred stock met the limited exception allowed for shares containing such liquidation rights to be classified as permanent equity with net issuance price in excess of par value recorded as additional paid-in capital. In connection with the Mergers, all outstanding shares of convertible preferred stock converted into Private Altimmune common stock on a 1-for-1 basis (see Note 3).

Shares of redeemable preferred stock issued in August 2017 represented the second closing under the Note Agreement (see Notes 1 and 12). Redeemable preferred stock was classified as temporary equity and was initially recorded at its original issuance price, net of issuance costs and discounts. Such discounts included common stock warrants issued as part of the financing which were required to be classified as a liability and recorded at fair value (Note 16), an embedded derivative related to certain redemption features which was classified as a liability and recorded at fair value (Note 14), and the intrinsic value of a beneficial conversion feature present in the instrument at issuance (Note 14). The carrying value of the redeemable preferred stock will be accreted over the term of the redeemable preferred stock up to its redemption value, using the straight-line method which approximates the interest method due to the short-term nature of the redeemable preferred stock terms with the amount of the accretion recorded as a reduction of additional paid-in capital.

Warrants

Common stock warrants issued in connection with the convertible preferred stock and the Notes were classified as a component of permanent equity because they were freestanding financial instruments that were legally detachable and separately exercisable from other debt and equity instruments, were contingently exercisable, did not embody an obligation for the Company to repurchase our own shares, and permitted the holders to receive a fixed number of common shares upon exercise. In addition, such warrants required physical settlement and did not provide any guarantee of value or return. These warrants were initially recorded at their issuance date allocated fair value and were not subsequently remeasured. These warrants were valued using the Black Scholes option pricing model (“Black-Scholes”) and were converted into Private Altimmune common stock according to their original terms upon the Mergers.

Common stock warrants issued in connection with redeemable preferred stock are classified as a liability because these warrants contain terms which could, in certain circumstances, require the Company to settle the instruments for cash and such circumstances are outside the Company’s control. Common stock warrants classified as a liability are initially recorded at their issuance date fair value and are remeasured on each subsequent balance sheet date with changes in fair value recorded as a component of other income (expenses), net. These common stock warrants were valued using the Monte Carlo simulation valuation model.

Stock-based Compensation

The Company accounts for all stock-based compensation granted to employees and non-employees using a fair value method. Stock-based compensation awarded to employees is measured at the grant date fair value of stock option grants and is recognized over the requisite service period of the awards, usually the vesting period, on a straight-line basis, net of estimated forfeitures. Stock-based compensation awarded to non-employees are subject to revaluation over their vesting terms. For performance-based awards where the vesting of the options may be accelerated upon the achievement of certain milestones, vesting and the related stock-based compensation is recognized as an expense when it is probable the milestone will be met. For awards containing a market condition, the effect of the market condition is reflected in measuring the grant date fair value of the award and is recognized over the requisite service period, which is usually the vesting period, on a straight-line basis, net of estimated forfeitures.

When awards are modified, the Company compares the fair value of the affected award measured immediately prior to modification to its value after modification. To the extent that the fair value of the modified award exceeds the original award, the incremental fair value of the modified award is recognized as compensation on the date of modification for vested awards, and over the remaining vesting period for unvested awards.

The Company adopted FASB’s ASU No. 2016-09, Compensation – Stock Compensation (“ASU 2016-09”) on January 1, 2017. The adoption of ASU 2016-09 did not have a material impact on the Company’s financial statements. The Company elected to adopt the cash flow presentation of the excess tax benefits prospectively, commencing with our statement of cash flows for the three months ended March 31, 2017. We have elected to continue to estimate the number of stock-based awards expected to vest, rather than electing to account for forfeitures as they occur to determine the amount of compensation cost to be recognized in each period. There was no impact to our computation of dilutive EPS as all securities were considered anti-dilutive.

Income Taxes

We account for income taxes using the asset and liability approach, which requires the recognition of future tax benefits or liabilities on the temporary differences between the financial reporting and tax bases of our assets and liabilities. Deferred tax assets and liabilities represent future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities and for loss carryforwards using enacted tax rates expected to be in effect in the years in which the differences reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized. We also recognize a tax benefit from uncertain tax positions only if it is “more likely than not” that the position is sustainable based on its technical merits. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for income taxes. To date, the Company has not incurred interest and penalties related to uncertain tax positions. Should such costs be incurred, they would be classified as a component of provision for income taxes.

Net Loss per Share

Basic net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period without consideration for potentially dilutive securities. Net loss attributable to common stockholders and participating preferred stock is allocated to each share on an as-converted basis as if all of the net loss for the period had been distributed. During periods in which the Company incurred a net loss, the Company does not allocate net loss to participating securities because they do not have a contractual obligation to share in the net loss of the Company.

The Company computes diluted net loss per common share after giving consideration to all potentially dilutive common equivalents, including convertible preferred stock, redeemable preferred stock, common stock options, restricted stock awards, and common stock warrants outstanding during the period except where the effect of such non-participating securities would be antidilutive.

Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares and dilutive common stock equivalents outstanding for the period determined using the treasury-stock and if-converted methods.

Lease Incentive Obligations

Lease incentives and allowance provided by our landlord for the construction of leasehold improvements are recorded as lease incentive obligations as the related construction costs are incurred, up to the maximum allowance. Lease incentive obligations are classified as a component of deferred rent and are amortized on a straight-line basis over the lease term as a reduction of rent expense.

Deferred Rent

Rent expense from operating leases is recognized on a straight-line basis over the lease term. The difference between rent expense recognized and rental payments is recorded as deferred rent in the consolidated balance sheets.

Recently Issued Accounting Pronouncements

In February 2016, FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 requires a lessee to separate the lease components from the non-lease components in a contract and recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. It also aligns lease accounting for lessors with the revenue recognition guidance in ASU 2014-09. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and is to be applied at the beginning of the earliest period presented using a modified retrospective approach. We expect the adoption of ASU 2016-02 will not have a material impact on our financial statements.