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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

or

 

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-32587

 

 

ALTIMMUNE, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   20-2726770

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

19 Firstfield Road, Gaithersburg, Maryland   20878
(Address of principal executive offices)   (Zip Code)

(240) 654-1450

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes     No 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes     No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer      Accelerated Filer  
Non-Accelerated Filer    (Do not check if a smaller reporting company)    Smaller Reporting Company  
Emerging Growth Company       

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes     No 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: The number of shares of the registrant’s Common Stock, par value $0.0001 per share, outstanding as of November 9, 2017 was 15,652,640

 

 

 


Table of Contents

ALTIMMUNE, INC.

TABLE OF CONTENTS

 

     Page  

PART I — FINANCIAL INFORMATION

     1  

Item 1. Unaudited Condensed Consolidated Financial Statements

     1  

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     16  

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     23  

Item 4. Controls and Procedures

     24  

PART II — OTHER INFORMATION

     24  

Item 1. Legal Proceedings

     24  

Item 1A. Risk Factors

     24  

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     25  

Item 3. Defaults Upon Senior Securities

     25  

Item 4. Mine Safety Disclosures

     25  

Item 5. Other Information

     25  

Item 6. Exhibits

     26  

 

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Table of Contents

Part I—FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements.

ALTIMMUNE, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

     September 30,
2017
    December 31,
2016
 
ASSETS  

Current assets:

 

Cash and cash equivalents

   $ 17,116,845     $ 2,876,113  

Restricted cash

     34,174       —    

Accounts receivable

     2,902,503       383,046  

Prepaid expenses and other current assets

     1,007,032       420,424  

Tax refund receivable

     5,061,920       807,507  
  

 

 

   

 

 

 

Total current assets

     26,122,474       4,487,090  

Property and equipment, net

     280,093       177,859  

Intangible assets, net

     38,586,399       14,954,717  

Other assets

     22,248       22,248  

Goodwill

     9,334,904       18,758,421  
  

 

 

   

 

 

 

Total assets

   $ 74,346,118     $ 38,400,335  
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY  

Current liabilities:

    

Notes payable

   $ 49,702     $ 458,629  

Accounts payable

     495,064       2,005,208  

Accrued expenses and other current liabilities

     3,597,313       2,972,745  

Current portion of deferred revenue

     19,753       19,753  

Current portion of deferred rent

     18,626       14,388  
  

 

 

   

 

 

 

Total current liabilities

     4,180,458       5,470,723  

Unvested restricted stock liability

     343       1,001  

Long-term debt

     590,185       525,950  

Deferred revenue, long-term portion

     164,609       179,424  

Deferred rent, long-term portion

     1,591       15,914  

Deferred tax liability

     8,312,426       —    

Other long-term liabilities

     4,027,962       —    
  

 

 

   

 

 

 

Total liabilities

     17,277,574       6,193,012  
  

 

 

   

 

 

 

Contingencies (Note 12)

    

Series B redeemable convertible preferred stock; $0.0001 par value; 16,000 shares designated; 15,656 and zero shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively; aggregate liquidation and redemption value of $8,238,300 at September 30, 2017

     8,238,300       —    
  

 

 

   

 

 

 

Stockholders’ equity:

    

Series B convertible preferred stock; $0.01 par value; zero and 599,285 shares authorized, issued and outstanding at September 30, 2017 and December 31, 2016, respectively

     —         5,993  

Common stock, $0.0001 par value; 100,000,000 shares authorized; 15,652,640 and 6,991,749 shares issued; 15,627,081 and 6,917,204 shares outstanding at September 30, 2017 and December 31, 2016, respectively

     1,563       692  

Additional paid-in capital

     122,392,504       71,034,899  

Accumulated deficit

     (68,853,850     (31,259,449

Accumulated other comprehensive loss – foreign currency translation adjustments

     (4,709,973     (7,574,812
  

 

 

   

 

 

 

Total stockholders’ equity

     48,830,244       32,207,323  
  

 

 

   

 

 

 

Total liabilities, redeemable convertible preferred stock, and stockholders’ equity

   $ 74,346,118     $ 38,400,335  
  

 

 

   

 

 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

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Table of Contents

ALTIMMUNE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2017     2016     2017     2016  

License revenue

   $ 26,689     $ 4,938     $ 36,565     $ 168,341  

Research grants and contracts

     4,565,251       896,101       7,892,919       1,983,574  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue and grants and contracts

     4,591,940       901,039       7,929,484       2,151,915  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

        

Research and development

     5,905,552       2,400,914       13,946,403       4,845,045  

General and administrative

     3,038,756       3,289,647       6,863,782       5,301,444  

Goodwill impairment charges

     26,600,000       —         26,600,000       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     35,544,308       5,690,561       47,410,185       10,146,489  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (30,952,368     (4,789,522     (39,480,701     (7,994,574
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

        

Change in fair value of warrant liabilities

     (508,316     —         (508,316     —    

Change in fair value of embedded derivative

     (1,157     —         (1,157     —    

Interest expense

     (2,344     (9,408     (160,103     (28,858

Interest income

     15,372       —         19,538       1,047  

Other income (expense)

     10,786       3,871       9,839       (2,600
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     (485,659     (5,537     (640,199     (30,411
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before income tax benefit

     (31,438,027     (4,795,059     (40,120,900     (8,024,985

Income tax benefit

     1,532,790       —         2,526,499       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (29,905,237     (4,795,059     (37,594,401     (8,024,985

Other comprehensive loss – foreign currency translation adjustments

     (1,028,033     (1,316,787     (2,864,839     (5,121,081
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive loss

   $ (30,933,270   $ (6,111,846   $ (40,459,240   $ (13,146,066
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (29,905,237   $ (4,795,059   $ (37,594,401   $ (8,024,985

Preferred stock accretion and dividends

     (1,962,072     (104,548     (2,125,141     (247,562
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributed to common stockholders

   $ (31,867,309   $ (4,899,607   $ (39,719,542   $ (8,272,547
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding,
basic and diluted

     15,527,867       6,911,715       11,595,698       6,911,366  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributed to common stockholders, basic and diluted

   $ (2.05   $ (0.71   $ (3.43   $ (1.20
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

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Table of Contents

ALTIMMUNE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

 

    Series B Redeemable
Convertible
Preferred Stock
         

Series B
Convertible

Preferred Stock

    Common Stock     Additional
Paid-In Capital
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Loss
    Total
Stockholders’
Equity
 
    Shares     Amount           Shares     Amount     Shares     Amount                          

Balance, January 1, 2017

    —       $ —             599,285     $ 5,993       6,917,204     $ 692     $ 71,034,899     $ (31,259,449   $ (7,574,812   $ 32,207,323  

Stock based compensation

                    905,230           905,230  

Vesting and accelerated vesting of restricted stock

                48,988       5       231,895           231,900  

Exercises of stock options

                200,657       20       16,435           16,455  

Warrant issuance, net of issuance costs

                    548,956           548,956  

Conversion of Series B convertible preferred stock into common stock

            (599,285     (5,993     599,285       60       5,933           —    

Conversion of convertible notes and accrued interest into common stock

                316,734       32       3,645,392           3,645,424  

Warrant exercises

                660,715       66       (66         —    

Issuance of common stock for the acquisition of subsidiaries

                6,883,498       688       44,742,049           44,742,737  

Issuance of Series B redeemable convertible preferred stock and warrants, net of issuance costs and discounts

    15,656       6,276,228                   3,223,853           3,223,853  

Accretion of Series B redeemable convertible preferred stock

      1,962,072                   (1,962,072         (1,962,072

Foreign currency translation adjustments

                        2,864,839       2,864,839  

Net loss

                      (37,594,401       (37,594,401
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2017

    15,656     $ 8,238,300           —       $ —         15,627,081     $ 1,563     $ 122,392,504     $ (68,853,850   $ (4,709,973   $ 48,830,244  
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

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ALTIMMUNE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Nine Months Ended September 30,  
     2017     2016  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net loss

   $ (37,594,401   $ (8,024,985

Adjustments to reconcile net loss to net cash used in operating activities:

    

Goodwill impairment charges

     26,600,000       —    

Stock-based compensation

     1,137,125       584,784  

Depreciation

     61,191       47,276  

Amortization

     40,409       60,552  

Debt discount and deferred financing cost accretion

     98,060       1,950,159  

Loss on disposal of property and equipment

     3,745       —    

Change in fair value of warrant liabilities

     508,316       —    

Change in fair value of embedded derivatives

     1,157       —    

Changes in operating assets and liabilities:

    

Accounts receivable

     (1,393,988     (103,308

Prepaid expenses and other current assets

     (150,524     67,465  

Accounts payable

     (2,273,397     925,664  

Accrued expenses and other current liabilities

     (34,680     80,668  

Deferred revenue

     (14,815     (70,705

Deferred rent

     (10,085     (5,971

Tax refund receivable

     (2,142,987     (371,715

Deferred tax liability

     (243,056     —    
  

 

 

   

 

 

 

Net cash used in operating activities

     (15,407,930     (4,860,116
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchase of property and equipment

     (89,849     (113,040

Proceeds from sale of property and equipment

     7,531       —    

Additions to intangible assets

     (47,634     (66,307

Refund of cash held in escrow

     200,000       —    

Cash assumed from acquiring subsidiaries

     13,684,535       —    
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     13,754,583       (179,347
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Repayments of notes payable

     (212,431     (99

Proceeds from issuance of convertible notes, net of issuance costs

     3,018,780       531  

Proceeds from issuance of preferred stock and warrants, net of issuance costs

     13,018,570       5,673,680  

Proceeds from exercise of stock options

     16,455       300  
  

 

 

   

 

 

 

Net cash provided by financing activities

     15,841,374       5,674,412  
  

 

 

   

 

 

 

EFFECT OF EXCHANGE RATES ON CASH

     86,879       (170,048
  

 

 

   

 

 

 

Net increase in cash and cash equivalents and restricted cash

     14,274,906       464,901  

Cash and cash equivalents and restricted cash, beginning of period

     2,876,113       4,638,711  
  

 

 

   

 

 

 

Cash and cash equivalents and restricted cash, end of period

   $ 17,151,019     $ 5,103,612  
  

 

 

   

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

    

Cash paid for interest

   $ 5,882     $ 2,424  
  

 

 

   

 

 

 

SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES:

    

Accrued expenses and notes payable modified and replaced with convertible notes

   $ 1,077,540     $ —    
  

 

 

   

 

 

 

Conversion of convertible notes into common stock

   $ 3,645,424     $ —    
  

 

 

   

 

 

 

Common stock warrants issued in connection with convertible notes, net of issuance costs

   $ 548,956     $ —    
  

 

 

   

 

 

 

Preferred stock subscription reclassified as additional paid-in capital upon preferred stock issuance

   $ —       $ 325,280  
  

 

 

   

 

 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

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Table of Contents

ALTIMMUNE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Business and Basis of Presentation

Altimmune, Inc., headquartered in Gaithersburg, Maryland, United States, together with its subsidiaries (collectively, “Altimmune”) is a clinical stage biopharmaceutical company incorporated in 1997 under the laws of the State of Delaware. Altimmune is focused on discovering and developing immunotherapies and vaccines to address significant unmet medical needs. Since its inception, Altimmune has devoted substantially all of its efforts to business planning, research and development, recruiting management and technical staff, and raising capital, and has financed its operations through the issuance of common and convertible preferred stock, long-term debt, and proceeds from research grants and government contracts. Altimmune has not generated any revenues from the sale of any products to date, and there is no assurance of any future revenues from product sales.

Pursuant to an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) dated January 18, 2017, PharmAthene, Inc. (“PharmAthene”), its wholly owned acquisition subsidiaries Mustang Merger Sub Corp I Inc. (“Merger Sub Corp”) and Mustang Merger Sub II LLC (“Merger Sub LLC”) agreed to acquire 100% of the outstanding capital stock of Altimmune in a reverse triangular merger and reorganization pursuant to section 368(a) of the Internal Revenue Code (the “Mergers”) (Note 3).

As a condition for the Mergers, in January 2017, prior to the Mergers, Altimmune entered into a Convertible Promissory Note Purchase Agreement (the “Note Agreement”) for the private placement of $8.6 million of 6% convertible notes (the “Notes”) (See Note 7) to be issued in two separate closings. The initial closing dated March 9, 2017 resulted in $3,150,630 of gross proceeds. The initial closing also included $196,496 of certain existing outstanding notes payable and $881,044 of certain accrued expenses that were modified and became a component of the Notes on March 9, 2017. In connection with the Notes, Altimmune issued warrants to purchase 49,776 shares of Altimmune’s common stock to certain noteholders, with an exercise price of $0.01 per share. These warrants are classified as permanent equity (see Note 10). The second closing was included in the sale of Series B redeemable convertible preferred stock (“redeemable preferred stock”) that closed on August 16, 2017 (see Note 9).

On May 4, 2017, Altimmune and PharmAthene closed the Mergers in accordance with the terms of the Merger Agreement. Upon the closing of the Mergers, (i) Merger Sub Corp merged with and into Altimmune, with Altimmune remaining as the surviving corporation; (ii) Altimmune then merged with and into Merger Sub LLC, with Merger Sub LLC (renamed as “Altimmune LLC”) remaining as the surviving entity; and (iii) PharmAthene was renamed as “Altimmune, Inc.” Upon closing of the Mergers, all equity instruments of Altimmune were exchanged for corresponding equity instruments of PharmAthene (see Note 3). Altimmune and PharmAthene and its subsidiaries are hereinafter collectively referred to as the “Company” or “we”.

The accompanying unaudited condensed consolidated financial statements are prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States for complete consolidated financial statements and should be read in conjunction with Altimmune’s audited consolidated financial statements for the year ended December 31, 2016 included in the Registration Statement on Form S-4/A which was filed with the SEC on March 31, 2017. In the opinion of management, we have prepared the accompanying unaudited condensed consolidated financial statements on the same basis as our audited consolidated financial statements, and these condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year 2017 or any future years or periods.

The unaudited condensed consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities in the ordinary course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and liabilities that might be necessary should we be unable to continue as a going concern.

2. Going Concern

The accompanying condensed consolidated financial statements have been prepared assuming we will continue as a going concern. We have experienced recurring losses in past years and incurred a net loss of $37,594,401 and used $15,407,930 in cash to fund operations during the nine months ended September 30, 2017, and had an accumulated deficit of $68,853,850 as of September 30, 2017. We expect to incur additional losses in the future in connection with our research and development activities. Since inception, we have financed our activities principally from the issuance of equity and debt securities and the receipt of proceeds from research grants and government contracts.

 

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Table of Contents

Our ability to continue as a going concern is dependent upon our ability to raise additional debt and equity capital. There can be no assurance that such capital will be available in sufficient amounts or on terms acceptable to us. These factors raise substantial doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability of the recorded assets or the classification of liabilities that may be necessary should we be unable to continue as a going concern.

As capital resources are consumed to fund our research and development activities, we may not have sufficient capital to fund our plan of operations. In order to address our capital needs, including our planned clinical trials, we must continue to actively pursue additional equity or debt financing. Adequate financing opportunities might not be available to us, when and if needed, on acceptable terms, or at all. If we are unable to obtain additional financing in sufficient amounts or on acceptable terms under such circumstances, our operating results and prospects will be adversely affected.

As more fully described in Note 3, in January 2017, in connection with the Mergers, Altimmune entered into the Note Agreement for the private placement of the Notes. In addition, as more fully described in Note 9, in August 2017, we issued shares of redeemable preferred stock and the related common stock warrants for an aggregate net proceeds of $13.0 million. We expect that the combination of the net proceeds from the Notes, cash assumed from the Mergers, the anticipated receipt of tax refunds (Note 3), redeemable preferred financing, and revenue from our government sponsored contracts will be insufficient to fund our operations and research and development efforts for at least twelve months from the expected issuance date of our September 2017 financial statements.

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.

 

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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:

 

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     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  

4. Summary of Significant Accounting Policies

Segment information

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, our Chief Executive Officer, in making decisions regarding resource allocation and assessing performance. We view our operations and manage our business in one operating segment, the research and development of immunotherapies and vaccines.

Business combination

We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. Our estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, we 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. Our management collects information and reevaluates these estimates and assumptions quarterly and records any adjustments to our 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 our consolidated statements of operations and comprehensive loss.

Amounts paid for acquisitions are allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. We allocate the purchase price in excess of net tangible assets acquired to identifiable intangible assets, including purchased IPR&D assets. The fair value of identifiable intangible assets is based on detailed valuations that use information and assumptions provided by management. We allocate any excess purchase price over the fair value of the net tangible and intangible assets acquired to goodwill.

Our IPR&D assets represent 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, management 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.

Impairment of long-lived assets and goodwill

We evaluate 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.

From the date of the Mergers through September 30, 2017, we experienced a decline in the trading price of our common stock. As of September 30, 2017, our one reporting unit had an estimated average market capitalization through September 30, 2017, before adjusting for an estimated control premium, of approximately $36,200,000 as compared to the unadjusted carrying value of the reporting unit of $75,430,244, which is an impairment indicator. As a result, we conducted an interim impairment review and test.

 

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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 annually by comparing the fair value of such assets to their carrying value. On an interim basis, we consider qualitative factors which could be indicative of impairment; these factors include the current project status, forecasted changes in the timing or amounts required to complete the project, forecasted changes in the future cash flows to be generated by the completed products, and changes to other market based assumptions, such as discount rates. Upon completion or abandonment, the value of the IPR&D assets will be amortized to expense or the anticipated useful life of the developed products, if completed, or charged to expense when abandoned if no alternative future use exists. As of September 30, 2017, the 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 performed an interim qualitative assessment of our long-lived assets, including IPR&D, as of September 30, 2017, and have determined that our long-lived assets, including IPR&D, are not impaired at September 30, 2017.

We test goodwill for impairment during the fourth quarter of each year, or more frequently if impairment indicators arise. During the nine months ended September 30, 2017, we 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. We early adopted ASU 2017-04 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 relied on fair value estimated based on our market capitalization (a Level 1 input) as of or near the testing date, adjusted for an estimated control premium. As noted, due to the decline in the market value of our common stock which indicated potential impairment, we performed an interim impairment test on our goodwill as of September 30, 2017, using a volume weighted average price (“VWAP”) of $2.31 per share at September 30, 2017 and a control premium of 35%.

Based on the result of our impairment test, the carrying value of our reporting unit exceeded its estimated fair value at September 30, 2017. As a result, we have concluded that our goodwill was impaired at September 30, 2017 and an impairment charge of $26,600,000 was recorded during the three and nine months ended September 30, 2017, and was classified as a component of operating expenses. We will continue to evaluate our goodwill for impairment based on factors including the overall movements of our market capitalization. Any sustained declines in our stock price from the September 30, 2017 level could result in a future impairment and the overall amount of impairment loss could be material.

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. 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.

Pursuant to federal and state tax regulations with respect to carryback periods of certain net operating losses (“NOLs”), in 2017, as a result of the Mergers, we anticipate that we will be able to carryback 2017 NOLs to 2016, which we expect will allow us to recover previously paid federal and state income taxes by PharmAthene and other tax credits of approximately $5.1 million. These anticipated refunds generated through September 30, 2017, are included as a component of tax refund receivable on the condensed consolidated balance sheet at September 30, 2017 and an income tax benefit during the three and nine months ended September 30, 2017.

Preferred Stock

Convertible preferred stock outstanding prior to the Mergers were classified as permanent equity, with the net issuance price in excess of par value recorded as additional paid-in capital. Redeemable preferred stock issued in August 2017 are classified as temporary equity and were initially recorded at their original issuance price, net of issuance costs and discounts. 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 10), an embedded derivative related to certain redemption features which was classified as a liability and recorded at fair value (Note 9), and the intrinsic value of a beneficial conversion feature present in the instrument at issuance (Note 9). The carrying value of redeemable preferred stock will be accreted over the term of the redeemable preferred stock up to their redemption value, using the interest method with the amount of the accretion recorded as a reduction of additional paid-in capital.

 

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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 us 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 do not provide any guarantee of value or return. These warrants were valued using the Black Scholes option pricing model (“Black-Scholes”).

Common stock warrants issued in connection with the redeemable preferred stock are classified as a liability because the warrants may be net share settled at the holders option. Such 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 Compensation

We 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 our financial statements. We 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.

Recently issued accounting pronouncements

In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), as amended, which amends the guidance for revenue recognition to replace numerous industry specific requirements. ASU 2014-09, as amended, implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. ASU 2014-09, as amended, also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. ASU 2014-09, as amended, is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted, but not before December 15, 2016. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently in the process of evaluating the effect the adoption of ASU 2014-09, as amended, may have on our financial statements. As the majority of our revenues relate to research grants and government contracts, we do not expect the adoption of ASU 2014-09, as amended, will have a material impact on our financial statements.

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 do not expect the adoption of ASU 2016-02 will have a material impact on our financial statements.

5. Net Loss Per Share

Because we have reported a net loss attributable to common stockholders for all periods presented, basic and diluted net loss per share attributable to common stockholders are the same for all periods presented. For periods presented, all preferred stock, unvested restricted stock, common stock warrants, and stock options have been excluded from the computation of diluted weighted-average shares outstanding because such securities would have an antidilutive impact.

The following table sets forth the computation of basic and diluted net loss per share:

 

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     Three Months Ended September 30,      Nine Months Ended September 30,  
     2017      2016      2017      2016  

Numerator:

           

Net loss

   $ (29,905,237    $ (4,795,059    $ (37,594,401    $ (8,024,985

Less: preferred stock accretion and dividends

     (1,962,072      (104,548      (2,125,141      (247,562
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss attributed to common stockholders

   $ (31,867,309    $ (4,899,607    $ (39,719,542    $ (8,272,547
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Weighted-average common shares outstanding, basic and diluted

     15,527,867        6,911,715        11,595,698        6,911,366  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss per share attributed to common stockholders, basic and diluted

   $ (2.05    $ (0.71    $ (3.43    $ (1.20
  

 

 

    

 

 

    

 

 

    

 

 

 

Potential common shares issuable upon conversion, vesting or exercise of convertible preferred stock, redeemable preferred stock, unvested restricted stock, common stock warrants, and stock options that are excluded from the computation of diluted weighted-average shares outstanding are as follows:

 

    

Three Months Ended

September 30,

    

Nine Months Ended

September 30,

 
     2017      2016      2017      2016  

Convertible preferred stock

     —          517,860        —          411,736  

Redeemable preferred stock

     5,863,564        —          5,863,564        —    

Common stock warrants

     2,350,085        538,003        2,350,085        442,910  

Common stock options

     1,720,004        831,248        1,720,004        838,595  

Restricted stock

     25,559        —          25,559        —    

6. Goodwill and Intangible Assets

Changes in the carrying amounts of IPR&D assets and goodwill for the nine months ended September 30, 2017 were:

 

     IPR&D      Goodwill  

Balance, beginning of period

   $ 14,477,019      $ 18,758,421  

Additions from the Mergers

     22,389,000        15,573,822  

Foreign currency translation adjustments

     1,235,457        1,602,661  

Impairment charges

     —          (26,600,000
  

 

 

    

 

 

 

Balance, end of period

   $ 38,101,476      $ 9,334,904  
  

 

 

    

 

 

 

Our intangible assets consisted of the following:

 

     December 31, 2016  
    

Estimated
Useful

Lives

    

Gross

Carrying

Value

     Accumulated
Amortization
     Net Book
Value
 

Internally developed patents

     6-10 years      $ 624,454      $ (211,956    $ 412,498  

Acquired licenses

     16-20 years        285,000        (219,800      65,200  
     

 

 

    

 

 

    

 

 

 

Total intangible assets subject to amortization

        909,454        (431,756      477,698  

IPR&D assets

     Indefinite        14,477,019        —          14,477,019  
     

 

 

    

 

 

    

 

 

 

Total

      $ 15,386,473      $ (431,756    $ 14,954,717  
     

 

 

    

 

 

    

 

 

 
     September 30, 2017  
    

Estimated
Useful

Lives

    

Gross
Carrying

Value

     Accumulated
Amortization
     Net Book
Value
 

Internally developed patents

     6-10 years      $ 672,088      $ (239,211    $ 432,877  

Acquired licenses

     16-20 years        285,000        (232,954      52,046  
     

 

 

    

 

 

    

 

 

 

Total intangible assets subject to amortization

        957,088        (472,165      484,923  

IPR&D assets

     Indefinite        38,101,476        —          38,101,476  
     

 

 

    

 

 

    

 

 

 

Total

      $ 39,058,564      $ (472,165    $ 38,586,399  
     

 

 

    

 

 

    

 

 

 

 

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Amortization expense of intangible assets subject to amortization totaled $14,257 and $11,764 for the three months ended September 30, 2017 and 2016, respectively, and $40,409 and $60,552 for the nine months ended September 30, 2017 and 2016, respectively. Amortization expense was classified as research and development expenses in the accompanying condensed consolidated statements of operations and comprehensive loss.

As of September 30, 2017, future estimated amortization expense is as follows:

 

Years ending December 31,       

The remainder of 2017

   $ 14,257  

2018

     53,027  

2019

     48,227  

2020

     34,781  

2021

     14,222  

2022 and thereafter

     320,409  
  

 

 

 

Total

   $ 484,923  
  

 

 

 

7. Notes Payable

As a condition for the Mergers as described in Note 3, Altimmune entered into the Note Agreement on January 18, 2017. The Notes bore interest at a rate of 6% per annum, compounded annually. On February 28, 2017, as part of the initial closing, $196,496 of the Notes were issued upon the conversion of outstanding principal of certain prior notes payable, and $881,044 of the Notes were issued upon the conversion of certain outstanding accrued expenses. The conversion of the prior notes payable into the Notes was accounted for as a modification with no resulting gains or losses being recognized. On March 9, 2017, the remainder of the initial closing of the Notes was issued for an aggregate of $3,150,630 in gross proceeds. In connection with the issuance of the Notes, we granted warrants for the purchase of up to 49,776 shares of our common stock to certain noteholders. The allocated fair value of the warrants on the issuance date of $566,793 was accounted for as a debt issuance discount and was accreted over the term of the Notes using the interest method.

All outstanding principal and accrued interest on the Notes were converted into our common stock upon the close of the Mergers. On May 4, 2017, upon the close of the Mergers, outstanding principal and accrued interest, net of unamortized discount and deferred financing costs totaling $3,645,424 were converted into 316,734 shares of our common stock. Interest expense incurred on the Notes prior to conversion totaled $83,207 and $136,629 for the three and nine months ended September 30, 2017, respectively.

8. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:

 

     September 30,      December 31,  
     2017      2016  

Accrued professional services

   $ 885,549      $ 689,135  

Accrued board of director compensation

     81,414        606,199  

Accrued payroll and employee benefits

     1,070,006        957,719  

Accrued interest

     536        169,790  

Accrued research and development costs

     1,559,808        549,902  
  

 

 

    

 

 

 

Total

   $ 3,597,313      $ 2,972,745  
  

 

 

    

 

 

 

9. Redeemable Convertible Preferred Stock

On August 16, 2017, we issued 15,656 shares of $0.0001 par value, redeemable preferred stock and warrants to purchase up to 2,345,427 shares of our common stock (see Note 10) for total gross proceeds of $14,716,370, and incurred issuance costs totaling

 

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$1,697,800. The redeemable preferred stock matures on August 16, 2018. The maturity date may be extended at the option of the holders to ten trading days after the curing of a triggering event (as defined), or ten business days after the consummation of a change of control. In addition, the redeemable preferred stock agreements require that we reserve a sufficient number of common shares to cover at least 150% of the common shares expected to be issued upon the conversion of the redeemable preferred stock at the then current conversion price, and the exercises of common stock warrants issued in connection with the redeemable preferred stock.

The rights, preferences, and privileges of redeemable preferred stock are summarized below:

Voting – Holders of redeemable preferred stock have no voting rights, except as required by law.

Dividends – Holders of redeemable preferred stock are entitled to participate in dividends, when and if declared by our board of directors, on an as converted basis at the initial conversion price of $2.67 per share, not to exceed the maximum ownership percentages (as defined).

Optional conversion – Holders of redeemable preferred stock have the option to convert redeemable preferred stock into shares of common stock, rounded up to the nearest whole shares, at any time, not to exceed the maximum ownership percentages (as defined), at the conversion rate calculated as (1) whole shares of redeemable preferred shares to be converted at $1,000 per share, plus any accrued but unpaid dividends, and any accrued but unpaid late charges, divided by (2) the conversion price which is $2.67 per share initially, or as adjusted for any dilutive events and down rounds.

Mandatory conversion – If for any ten consecutive trading days after the redeemable preferred stock issuance date, the weighted average price of our common stock equals or exceeds 200% of the then current conversion price (initially $2.67 per share, subject to adjustment for stock dividends, stock splits, or a stock combination), we have the option to require all holders of redeemable preferred stock to convert all or a pro rata portion of their outstanding unconverted redeemable preferred stock (plus accrued and unpaid dividends and accrued and unpaid late charges) into common stock at the then current conversion rate (initially $2.67 per share), up to the maximum ownership percentage (as defined).

Triggering event conversion – Upon a triggering event, holders of redeemable preferred stock may elect to convert all, or a portion of, the outstanding conversion amount at the triggering event conversion price determined based on the lowest of (1) the conversion price then in effect (initially $2.67 per share), (2) 75% of the lowest VWAP during the 20-day period prior to the triggering event conversion date, and (3) 75% of the VWAP on the triggering event conversion date, adjusted for any share dividend, share split, or share combination.

Installment – On each of the nine specified installment dates beginning in December 2017 through maturity, we are required to convert, redeem, or a combination, one-ninth of the originally issued number of redeemable preferred shares at their stated value of $1,000 per share, for an aggregate value of $1,739,524 at each installment. If we elect to convert the installment shares, the conversion price is determined based on the lowest of (i) the then applicable conversion price (initially $2.67 per share), (ii) 85% of the average of the three lowest weighted-average prices of the common stock during the ten trading days up to the installment date, and (iii) 85% of the weighted average price of common stock on the trading day immediately before the installment date. If we elect cash redemption, the redemption amount is $1,000 per share, plus any accrued but unpaid dividends and any accrued but unpaid late charges.

Liquidation preference – In the event of a voluntary or involuntary liquidation, dissolution, or winding up of business involving substantially all of our assets, holders of redeemable preferred stock are entitled to receive cash payments in priority to holders of common stock in the amount that equals the sum of any outstanding shares at $1,000 per share, plus any accrued and unpaid dividends, and any accrued and unpaid late charges. If assets available for distribution are insufficient to satisfy the liquidation payment in full, funds available for distribution shall be allocated pari passu among holders of redeemable preferred stock, and other equity classes equal in preference, based on their relative shareholdings. When the holders of redeemable preferred stock are satisfied in full, any excess assets available for distribution will be allocated ratably among holders of common stock and holders of redeemable preferred stock based on the number of common shares held by each holders of redeemable preferred stock on an as-converted basis.

Mandatory redemption – Upon maturity, we are required redeem any remaining outstanding redeemable preferred stock in cash at $1,000 per share, plus any accrued and unpaid dividends, and any accrued and unpaid late charges.

 

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Change of control redemption or triggering event redemption – In the event of a change of control or upon a triggering event, holders of redeemable preferred stock may redeem for cash all or a portion of their outstanding redeemable preferred stock at the greater of (i) 125% of the amount to be redeemed, or (ii) the amount to be redeemed multiplied by the quotient of the highest closing sale price during the period from the earlier of consummation or public announcement of the change of control to the date of the redemption notice, divided by the lowest conversion price in effect during such period. If we are unable to redeem all redeemable preferred stock submitted for redemption, we may be required to pay a penalty until the redemption amount is paid in full.

Stock purchasing rights – Holders of redeemable preferred stock are entitled to the same stock purchasing rights granted to holders of common stock.

Late charges – We may be required to pay a late charge for any amounts due to the holders of redeemable preferred stock that are not paid timely, at 12% per annum on the unpaid amount, until it is paid in full.

Because the securities contain contingencies which could require the Company to redeem the shares for cash, and such contingencies are outside the control of the Company, the redeemable convertible preferred stock must be classified outside of permanent equity. Because a substantive conversion feature is present at issuance, the redeemable convertible preferred stock is only contingently redeemable and therefore is classified as temporary equity and carried on the balance sheet in between liabilities and equity at its accreted redemption value.

In addition, certain features present in the redeemable convertible preferred stock require separate recognition. For purposes of this evaluation, we have determined that the redeemable preferred instrument is more akin to a debt host because the installment conversion feature, as the primary settlement mechanism, settles in variable shares. Because the potential contingent redemption price contains a significant premium over the issuance price, the redemption feature is not clearly and closely related to the debt-like host instrument. All redemption features (including the change of control redemption, triggering event redemption, mandatory redemption, and installment redemption) have been determined to be a single, compound embedded derivative financial instrument to be bifurcated and separately accounted for as a liability. The embedded derivative financial instrument was initially recorded at its fair value on the redeemable preferred stock issuance date, and is being remeasured on each subsequent balance date with changes in fair value classified as a component of other income (expenses), net. The embedded derivative is classified as a component of other long-term liabilities.

The redeemable convertible preferred stock also contains a beneficial conversion element at issuance. The conversion feature was “in-the-money” as of the commitment date as the fair value of the underlying common share was greater than the effective conversion price. The beneficial conversion feature, measured as the intrinsic value of the feature, totaled $3,223,853 and is classified as a component of additional paid-in capital. This amount was allocated from the net proceeds of the financing. The beneficial conversion feature will not be remeasured in subsequent periods.

The net proceeds from the financing were allocated as follows:

 

Common stock warrant liability

   $ 3,498,632  

Embedded derivative, redemption features

     19,857  

Beneficial conversion feature

     3,223,853  

Initial carrying value of redeemable preferred stock

     6,276,228  
  

 

 

 

Net proceeds from redeemable preferred stock issuance

   $ 13,018,570  
  

 

 

 

The periodic changes in the fair value of the embedded redemption derivative financial instrument measured using Level 3 inputs, is as follows:

 

Balance, beginning of period

   $ —    

Issuance

     19,857  

Change in fair value

     1,157  
  

 

 

 

Balance, end of period

   $ 21,014  
  

 

 

 

The fair value used to determine the initial carrying value of the embedded redemption derivative financial instrument was measured using Level 3 inputs and was estimated using the Monte Carlo simulation valuation model. The assumptions used to estimate the fair value of the embedded redemption derivative financial instrument as September 30, 2017 and as of the redeemable preferred stock issuance date were as follows:

 

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     September 30,
2017
    August 16,
2017
 

Expected volatility

     52.00     56.00

Incremental borrowing rate

     12.00     12.00

Risk-free interest rate

     1.28     1.24

10. Warrants

As of December 31, 2016, there were 616,770 warrants outstanding. In March 2017, we issued warrants to purchase up to 49,776 shares of common stock in connection with the Notes (see Note 1). The warrants were classified as permanent equity, and were recorded at the issuance date using a relative fair value allocation method, and were not subsequently remeasured. In connection with the Mergers, 660,715 shares of common stock were issued as a result of cashless exercises of such warrants.

In August 2017, in connection with the redeemable preferred stock issuance (Note 9), we granted warrants to holders of redeemable preferred stock to purchase up to 2,345,427 shares of our common stock. Warrants issued with the redeemable preferred stock are classified as a liability and are initially recorded at their grant date fair value, to be remeasured on each subsequent balance sheet date. The warrant liability is classified as component of other long-term liabilities.

A summary of warrant activity during the three and nine months ended September 30, 2017 and 2016 is as follows:

 

    

Three Months Ended

September 30,

    

Nine Months Ended

September 30,

 
     2017      2016      2017      2016  

Warrants outstanding, beginning of period

     4,658        477,613        616,770        208.614  

Issuances

     2,345,427        134,499        2,395,203        403,498  

Exercises and conversions

     —          —          (661,888      —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Warrants outstanding, end of period

     2,350,085        612,112        2,350,085        612,112  
  

 

 

    

 

 

    

 

 

    

 

 

 

Warrants outstanding at September 30, 2017 have an aggregate grant date fair value of $3,498,720 with a weighted average exercise price of $2.70.

The periodic changes in the fair value of the warrant liability, measured using Level 3 inputs, is as follows:

 

Balance, beginning of period

   $ —    

Issuance

     3,498,632  

Change in fair value

     508,316  
  

 

 

 

Balance, end of period

   $ 4,006,948  
  

 

 

 

The fair value used to determine the initial carrying value of warrants classified as permanent equity was measured using Level 3 inputs and was estimated using the Black-Scholes option pricing model. The fair value of common warrants classified as a liability was estimated using the Monte Carlo simulation valuation model with Level 3 inputs. The following assumptions were used to estimate the fair value of warrants during the three and nine months ended September 30, 2017 and 2016:

 

     Three Months Ended
September 30,
   

Nine Months Ended

September 30,

 
     2017     2016     2017     2016  

Expected volatility

     87.00     71.00     87.00     75.00

Expected term (years)

     5.00       4.22       5.00       4.54  

Risk-free interest rate

     1.76     1.08     1.76     1.29

Expected dividend yield

     0.00     0.00     0.00     0.00

 

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11. Stock-Based Compensation

Stock Options

Our stock option awards generally vest over four years and typically have a contractual life of ten years. At September 30, 2017, there was $2,227,080 of unrecognized compensation cost related to stock options, which is expected to be recognized over a weighted-average period of 2.45 years. During the three and nine months ended September 30, 2017, we issued 200,060 and 200,657 shares, respectively, of common stock as a result of option exercises.

Information related to stock options outstanding at September 30, 2017 is as follows:

 

    

Number

of Stock
Options

     Weighted-
average
Exercise
Price
    

Weighted-
average
Remaining
Contractual
Term

(Years)

     Aggregate
Intrinsic
Value
 

Outstanding

     1,720,004      $ 4.73        4.93      $ 883,740  
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable

     971,221      $ 4.44        4.41      $ 857,749  
  

 

 

    

 

 

    

 

 

    

 

 

 

Expected to vest

     748,783      $ 5.11        5.61      $ 25,991  
  

 

 

    

 

 

    

 

 

    

 

 

 

Restricted Stock

At September 30, 2017, we had unvested restricted stock of 25,559 shares with total unrecognized compensation expense of $33,618, which we expect to recognize over a weighted average period of approximately 1.86 years. During the three and nine months ended September 30, 2017, we released 2,130 and 48,987 shares of common stock, respectively, from restriction as a result of the vesting and accelerated vesting of restricted stock.

Stock-based compensation expense

Stock-based compensation expense is classified in the accompanying condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2017 and 2016 as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2017      2016      2017      2016  

Research and development

   $ 93,821      $ 62,871      $ 250,061      $ 215,596  

General and administrative

     359,216        132,185        887,064        369,189  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 453,037      $ 195,056      $ 1,137,125      $ 584,784  
  

 

 

    

 

 

    

 

 

    

 

 

 

12. Contingencies

We are a party in various other contractual disputes, litigation, and potential claims arising in the ordinary course of business. We do not believe that the resolution of these matters will have a material adverse effect on our financial position or results of operations.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our consolidated financial statements and related notes for the year ended December 31, 2016 included in the Registration Statement on Form S-4/A, which was filed with the Securities and Exchange Commission on March 31, 2017 (“Form S-4/A”). Unless the context indicates otherwise, references to “we,” “us,” “our,” “Altimmune” or the “Company” refer, for periods prior to the completion of the Mergers (as defined below), to Altimmune, Inc. and its subsidiaries.

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. There are a number of important risks and uncertainties that could cause our actual results to differ materially from those

 

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indicated by forward-looking statements. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the section entitled “Risk Factors” in Part II, Item 1A that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we may make.

We have based the forward-looking statements included in this Quarterly Report on Form 10-Q on information available to us on the date of this Quarterly Report, and we assume no obligation to update any such forward-looking statements, other than as required by law. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we, in the future, may file with the SEC, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

Overview

We are a clinical stage immunotherapeutics company focused on the development of products to stimulate robust and durable immune responses for the prevention and treatment of diseases. We have two proprietary platform technologies, RespirVec and Densigen, each of which has been shown, in preclinical studies and early clinical trials, to activate the immune system in distinctly different ways than traditional vaccine methods. Using these technologies, we have generated clinical product candidates which potentially represent an entirely new approach to harnessing the immune system. Our most advanced product candidate, NasoVAX, an intranasally administered recombinant influenza vaccine, uses an adenovector to achieve expression of the influenza antigen in the target cell, thereby potentially stimulating a broader and more rapid immune response than traditional influenza vaccines. Our planned Phase 2 program for NasoVAX started in September 2017, with initial data anticipated approximately six months following the start of enrollment. Our second most advanced product candidate, HepTcell, is being tested as an immunotherapy for patients chronically infected with the hepatitis B virus (‘‘HBV’’), and has the potential to provide a functional cure, something that is not achievable with current treatments. HepTcell is currently in a Phase 1 trial in the United Kingdom and South Korea in patients with chronic HBV. Preliminary results from this trial are expected by the end of 2017. With the support of the U.S. Biomedical Advanced Research and Development Authority (‘‘BARDA’’), we are developing a third product candidate, NasoShield, an anthrax vaccine designed to provide rapid, stable protection after one intranasal administration. Subject to continued financial and other support from BARDA, we anticipate launching a Phase 1 trial for NasoShield in the first quarter of 2018. With the support of the National Institute of Allergy and Infectious Disease (“NIAID”), we are developing a fourth product candidate, SparVax-L, a recombinant protein based anthrax vaccine designed to require fewer doses and have a longer shelf-life than the only currently licensed anthrax vaccine.

Pursuant to the Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) dated January 18, 2017, PharmAthene, Inc. (“PharmAthene”), its wholly owned acquisition subsidiaries Mustang Merger Sub Corp I Inc. (“Merger Sub Corp”) and Mustang Merger Sub II LLC (“Merger Sub LLC”) agreed to acquire 100% of Altimmune’s outstanding capital stock in a reverse triangular merger and reorganization pursuant to section 368(a) of the Internal Revenue Code (the “Mergers”). Upon the closing of the Mergers, (i) Merger Sub Corp merged with and into Altimmune, with Altimmune remaining as the surviving corporation; (ii) Altimmune then merged with and into Merger Sub LLC, with Merger Sub LLC (renamed as “Altimmune LLC”) remaining as the surviving entity; and (iii) PharmAthene was renamed as “Altimmune, Inc.”

As a condition for the Mergers, in January 2017, Altimmune entered into a Convertible Promissory Note Purchase Agreement (the “Note Agreement”) for the private placement of $8.6 million of 6% convertible notes (the “Notes”) to be issued in two separate closings. The initial closing dated March 9, 2017 resulted in $3,150,630 of gross proceeds. The initial closing also included $196,496 of certain existing outstanding notes payable and $881,044 of certain accrued expenses that were modified and became a component of the Notes on February 28, 2017. The second closing contemplated by the Note Agreement occurred in connection with the offering of Series B redeemable convertible preferred stock (“redeemable preferred stock”). In connection with the Notes, Altimmune issued warrants to purchase 49,776 shares of Altimmune’s common stock to certain noteholders, with an exercise price of $0.01 per share.

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 common stock outstanding as of the closing date. All historical share and per share information has been retroactively adjusted to reflect the impact of the share exchange ratio. In addition, Altimmune stock options and warrants were also replaced with options and warrants to purchase PharmAthene’s common stock at the same exchange ratio of 0.749106 share. Immediately prior to closing, 599,285 shares of our Series B convertible preferred (“convertible preferred”) stock were converted into Altimmune common stock on a 1-for-1 basis. In addition, outstanding principal and accrued interest on the Notes were 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, all outstanding shares of Altimmune common stock were exchanged for 6,883,498 shares of PharmAthene common stock.

 

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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, and the assets and liabilities of PharmAthene will be recorded at their estimated fair value. The unadjusted purchase price to be 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 shares of PharmAthene outstanding stock options 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.

We have incurred accumulated losses since inception. Our ability to continue as a going concern is dependent upon our ability to raise additional debt and equity capital. There can be no assurance that such capital will be available in sufficient amounts or on terms acceptable to us. These factors raise substantial doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability of the recorded assets or the classification of liabilities that may be necessary should we be unable to continue as a going concern.

As capital resources are consumed to fund our research and development activities, we may not have sufficient capital to fund our plan of operations. In order to address its capital needs, including our planned clinical trials, in addition to the Note Agreement and the private placement, we must continue to actively pursue additional equity or debt financing.

Adequate financing opportunities might not be available to us, when and if needed, on acceptable terms, or at all. If we are unable to obtain additional financing in sufficient amounts or on acceptable terms under such circumstances, our operating results and prospects will be adversely affected. As of September 30, 2017, the combination of the net proceeds from the Notes, cash assumed from the Mergers, the anticipated receipt of tax refunds, the August 2017 redeemable preferred stock financing, and revenue from our government sponsored contracts will be insufficient to fund our operations and research and development efforts for at least twelve months from the expected issuance date of our September 2017 financial statements.

Critical Accounting Policies and Significant Judgment and Estimates

Other than described below, there were no material changes in the first nine months of 2017 to the information provided under the heading “Critical Accounting Policies and Significant Judgment and Estimates” or in the significant accounting policies in our consolidated financial statements for the year ended December 31, 2016 included in Form S-4/A.

Business combination

We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. Our estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, we 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. Our management collects information and reevaluates these estimates and assumptions quarterly and records any adjustments to our 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 our consolidated statements of operations and comprehensive loss.

Amounts paid for acquisitions are allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. We allocate the purchase price in excess of net tangible assets acquired to identifiable intangible assets, including purchased IPR&D assets. The fair value of identifiable intangible assets is based on detailed valuations that use information and assumptions provided by management. We allocate any excess purchase price over the fair value of the net tangible and intangible assets acquired to goodwill.

Our IPR&D assets represent 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, management considers, among other factors, the stage of completion of the projects, the technological feasibility of the projects,

 

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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.

Impairment of long-lived assets and goodwill

We evaluate 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 is assessed by comparing the undiscounted cash flows expected to be generated by the asset to its carrying value. From the date of the Mergers through September 30, 2017, we experienced a decline in the trading price of our common stock. As of September 30, 2017, our one reporting unit had an estimated average market capitalization through September 30, 2017, defined as the number of common shares outstanding multiplied by the traded market price of our common stock on September 30, 2017, before adjusting for an estimated control premium, of approximately $36.2 million as compared to the unadjusted, pre-tax carrying value of the reporting unit of $75.4 million, which is an impairment indicator.

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 annually by comparing the fair value of such assets to their carrying value. On an interim basis, we consider qualitative factors which could be indicative of impairment; these factors include the current project status, forecasted changes in the timing or amounts required to complete the project, forecasted changes in the future cash flows to be generated by the completed products, and changes to other market based assumptions, such as discount rates. Upon completion or abandonment, the value of the IPR&D asset will be amortized to expense or the anticipated useful life of the developed product, if completed, or charged to expense when abandoned if no alternative future use exists. As of September 30, 2017, the projects continue to progress as originally anticipated, and no significant changes to the timing or amount of cash flows or any other market assumptions appears to have occurred. We performed an interim qualitative assessment of our long-lived assets, including IPR&D, as of September 30, 2017, and have determined that our long-lived assets, including IPR&D, are not impaired at September 30, 2017.

We test goodwill for impairment during the fourth quarter of each year, or more frequently if impairment indicators arise. 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 including fair value estimated based on our market capitalization as of or near the testing date, adjusted for an estimated control premium. We performed an interim impairment test on our goodwill as of September 30, 2017. Based on the result of the goodwill impairment test, the carrying value of our reporting unit exceeded its estimated fair value at September 30, 2017. We have concluded that our goodwill was impaired at September 30, 2017 and an impairment adjustment charge of $26.6 million was recorded during the three and nine months ended September 30, 2017, and was classified as a component of operating expenses. We will continue to evaluate our goodwill for impairment based on factors including the overall movements of our market capitalization. Any sustained declines in our stock price from the September 30, 2017 level could result in a future impairment and the overall amount of impairment loss could be material.

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. 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.

Pursuant to federal and state tax regulations with respect to carryback periods of net operating losses (“NOLs”), in 2017, as a result of the Mergers, we anticipate that we will be able to carryback 2017 NOLs to 2016, which we expect will allow us to recover previously paid federal and state income taxes. These anticipated refunds generated through September 30, 2017, are included as a component of tax refund receivable on the unaudited condensed consolidated balance sheet at September 30, 2017 and an income tax benefit during the three and nine months ended September 30, 2017.

Recently issued accounting pronouncements

In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), as amended, which amends the guidance for revenue recognition to replace numerous industry specific requirements. ASU 2014-09, as amended, implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. ASU 2014-09, as amended, also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. ASU 2014-09, as amended, is effective for reporting periods beginning after December 15, 2017.

 

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Early adoption is permitted, but not before December 15, 2016. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently in the process of evaluating the effect the adoption of ASU 2014-09, as amended, may have on our financial statements. We do not expect the adoption of ASU 2014-09, as amended, will have a material impact on our financial statements.

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 do not expect the adoption of ASU 2016-02 will have a material impact on our financial statements.

Results of Operations

Comparison of the three months ended September 30, 2017 and 2016:

 

     Three Months Ended September 30,  
     2017      2016      Increase (Decrease)  

License revenue

   $ 26,689      $ 4,938      $ 21,751        440

Research grants and contracts

     4,565,251        896,101        3,669,150        409  
  

 

 

    

 

 

       

Total revenue and grants and contracts

     4,591,940        901,039        3,690,901        410  
  

 

 

    

 

 

       

Operating expenses

           

Research and development

     5,905,552        2,400,914        3,504,638        146  

General and administrative

     3,038,756        3,289,647        (250,891      (8

Goodwill impairment charges

     26,600,000        —          26,600,000        —    
  

 

 

    

 

 

       

Total operating expenses

     35,544,308        5,690,561        29,853,747        525  
  

 

 

    

 

 

       

Loss from operations

     (30,952,368      (4,789,522      26,162,846        546  
  

 

 

    

 

 

       

Other income (expenses):

           

Change in fair value of warrant liabilities

     (508,316      —          508,316        —    

Change in fair value of embedded derivative

     (1,157      —          1,157        —    

Interest expense

     (2,344      (9,408      (7,064      (75

Interest income

     15,372        —          15,372        —    

Other income

     10,786        3,871        6,915        179  
  

 

 

    

 

 

       

Total other expenses, net

     (485,659      (5,537      480,122        8,671  
  

 

 

    

 

 

       

Net loss before income tax benefit

     (31,438,027      (4,795,059      26,642,968        556  

Income tax benefit

     1,532,790        —          1,532,790        —    
  

 

 

    

 

 

       

Net loss

   $ (29,905,237    $ (4,795,059    $ 25,110,178        524
  

 

 

    

 

 

       

Comparison of the nine months ended September 30, 2017 and 2016:

 

     Nine Months Ended September 30,  
     2017      2016      Increase (Decrease)  

License revenue

   $ 36,565      $ 168,341      $ (131,776      (78 )%   

Research grants and contracts

     7,892,919        1,983,574        5,909,345        298    
  

 

 

    

 

 

         

Total revenue and grants and contracts

     7,929,484        2,151,915        5,777,569        268    
  

 

 

    

 

 

         

Operating expenses

             

Research and development

     13,946,403        4,845,045        9,101,358        188    

General and administrative

     6,863,782        5,301,444        1,562,338        29    

Goodwill impairment charges

     26,600,000        —          26,600,000        —      
  

 

 

    

 

 

         

Total operating expenses

     47,410,185        10,146,489        37,263,696        367    
  

 

 

    

 

 

         

Loss from operations

     (39,480,701      (7,994,574      31,486,127        394    
  

 

 

    

 

 

         

Other income (expenses):

             

Change in fair value of warrant liabilities

     (508,316      —          508,316        —      

Change in fair value of embedded derivative

     (1,157      —          (1,157      —      

Interest expense

     (160,103      (28,858      131,245        455    

Interest income

     19,538        1,047        18,491        1,766    
     Nine Months Ended September 30,        
     2017      2016      Increase (Decrease)        

Other expenses

     9,839        (2,600      12,439        478    
  

 

 

    

 

 

         

Total other expenses, net

     (640,199      (30,411      609,788        2,005    
  

 

 

    

 

 

         

Net loss before income tax benefit

     (40,120,900      (8,024,985      32,095,915        400    

Income tax benefit

     2,526,499        —          2,526,499        —      
  

 

 

    

 

 

         

Net loss

   $ (37,594,401    $ (8,024,985    $ 29,569,416        368  
  

 

 

    

 

 

         

 

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The results of our operations during the three and nine months ended September 30, 2017 include the consolidated financial results of Altimmune and PharmAthene and its subsidiaries from the closing of the Mergers in May 2017. The operating results for the three and nine months ended September 30, 2016 included only Altimmune.

Revenue and grants and contracts

Revenue and grants and contracts for the three and nine months ended September 30, 2016 consisted primarily of research grants from BARDA and NIAID in the United States for our anthrax vaccine product candidates. During July 2016, we signed a new contract with BARDA resulting in an increase in research grants and contracts by $3.0 million and $4.9 million during the three and nine months ended September 30, 2017, respectively, as compared to the same period in 2016. Research grants and contracts for the three and nine months ended September 30, 2017 also included $624,000 and $1.0 million, respectively, of research grant revenue from a contract with NIAID that was acquired in the Mergers with PharmAthene.

Research and development expenses

Research and development operating expenses increased by $3.5 million, or 146%, and $9.1 million, or 188%, for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016. The increase in research and development expenses was the combination of (i) the addition of $449,000 and $779,000 research and development costs for the SparVax-L asset acquired in the Mergers with PharmAthene, for the three and nine months ended September 30, 2017, respectively; (ii) an increase of $2.5 million and $4.0 million in spending on the development of the NasoShield product on behalf of BARDA during the three and nine months ended September 30, 2017, respectively; (iii) an increase of $10,000 and $1.3 million in HepTCell development and Phase 1 trial costs incurred during the three and nine months ended September 30, 2017, respectively; and (iv) an increase of $843,000 and $3.6 million in manufacturing and other costs in preparation for NasoVAX Phase 2 trial during the three and nine months ended September 30, 2017, respectively, offset by decreases in spending on other R&D efforts of $337,000 and $507,000 during the three and nine months ended September 30, 2017, respectively.

General and administrative expenses

General and administrative expenses decreased by $251,000, or 8%, during the three months ended September 30, 2017, and increased by $1.6 million, or 29%, during the nine months ended September 30, 2017, as compared to the same periods in 2016. The changes were the combined result of (i) the addition of $208,000 and $232,000 in general and administrative expenses from the Mergers with PharmAthene during the three and nine months ended September 30, 2017, respectively, and (ii) an increase in legal and professional costs, primarily as a result of the Mergers by $1.3 million and $2.9 million during the three and nine months ended September 30, 2017, respectively, (iii) an increase in stock compensation expense of $238,000 and $528,000 during the three and nine months ended September 30, 2017, respectively, and (iv) an increase of $388,000 and $218,000 during the three and nine months ended September 30, 2017, respectively, offset by (v) a decrease due to a write down of deferred offering costs in September 2016 of $2.3 million.

Goodwill impairment charges

As more fully described in Note 4 to the unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2017, we had determined that our goodwill was impaired at September 30, 2017 and an impairment charge of $26.6 million was recorded during the three and nine months ended September 30, 2017, and was classified as a component of operating expenses.

Other income (expenses), net

The increase in other expenses, net, by $480,000 and $610,000 during the three and nine months ended September 30, 2017, respectively, was primarily the result of (i) an increase in interest expense of $131,000 during the nine months ended September 30, 2017 from the issuance of the Notes during the periods presented, and (ii) a change in the fair value of warrant liabilities for $508,000 during the three and nine months ended September 30, 2017.

 

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Income tax benefit

We recorded an income tax benefit of $1.5 million and $2.5 million during the three and nine months ended September 30, 2017, respectively, which reflected estimated tax refunds we expect to receive from carrying back the 2017 NOLs to offset the 2016 federal and state income taxes paid by PharmAthene.

Liquidity and Capital Resources

Overview

Our primary sources of cash during the three and nine months ended September 30, 2017 were $3.0 million in net proceeds received from the issuance of the Notes, $13.7 million in cash assumed from the Mergers, and $13.0 million in net proceeds from the issuance of the redeemable preferred stock and warrants. Our primary source of cash during the comparable period in 2016 was $5.7 million net proceeds received from the issuance of our convertible preferred stock. Our cash and cash equivalents were $17.1 million at September 30, 2017. We believe, based on the operating cash requirements and capital expenditures expected for 2017, our cash on hand at September 30, 2017, expected tax refunds, and revenue from our government sponsored contracts, are adequate to fund operations through September 2018. Our ability to continue as a going concern is dependent upon our ability to raise additional debt and equity capital. There can be no assurance that such capital will be available in sufficient amounts or on terms acceptable to us. These factors raise substantial doubt about our ability to continue as a going concern. Our condensed consolidated financial statements do not include any adjustments relating to the recoverability of the recorded assets or the classification of liabilities that may be necessary should we be unable to continue as a going concern.

We have not generated any revenues from the sale of any products to date, and there is no assurance of any future revenues from product sales. Our sources of revenue consist of revenues under our contract with BARDA and NIAID for the development of NasalShield and SparVax-L, respectively, and to a lesser degree from other licensing arrangements. We have incurred significant losses since we commenced operations. As of September 30, 2017, we had accumulated losses of $68.9 million since our inception. In addition, we have not generated positive cash flows from operations. We have had to rely on a variety of financing sources, including the issuance of debt and equity securities. As capital resources are consumed to fund our research and development activities, we may not have sufficient capital to fund our plan of operations. In order to address our capital needs, including our planned clinical trials, we must continue to actively pursue additional equity or debt financing.

In July 2016, we signed a five-year contract with BARDA which was amended in March 2017. The contract has a total value of up to $127.5 million and is used to fund clinical development of NasoShield. Under the contract, BARDA pays us a fixed fee and reimburses certain costs for the research and development of an Ad5-vectored, protective antigen-based intranasal anthrax vaccine through GMP manufacture and conduct of a Phase 2 clinical trial dose ranging assessment of safety and immunogenicity. The contract consists of an initial base performance period providing approximately $21.6 million in funding for the period July 2016 through July 2018. BARDA has seven options to extend the contract to fund certain continued development and manufacturing activities for the anthrax vaccine, including Phase 2 clinical studies. Each option, if exercised by BARDA, would provide additional funding ranging from approximately $1.1 million to $34.4 million for the period July 2018 through July 2021. Through September 30, 2017, we have received an aggregate of approximately $5.5 million under the current BARDA contract.

As part of the Mergers, we assumed a PharmAthene contract with NIAID. The NIAID contract is incrementally funded. Over the base period of the contract, PharmAthene was awarded initial funding of approximately $5.2 million, which includes a cost reimbursement component and a fixed fee component payable upon achievement of certain milestones. NIAID exercised four options under this agreement to provide additional funding of approximately $8.8 million and an extension of the period of performance through December 31, 2017. In April 2017, PharmAthene was notified by NIAID that it will exercise only one of the additional remaining options under the contract to provide funding for a rabbit challenge study. Work under all exercised options will bring total committed and final funding under the NIAID contract to $15.1 million.

Cash Flows

The following table provides information regarding our cash flows for the nine months ended September 30, 2017 and 2016:

 

     Nine Months Ended September 30,  
     2017      2016  

Net cash (used in) provided by:

     

Operating activities

   $ (15,407,930    $ (4,860,116

Investing activities

   $ 13,754,583      $ (179,347

Financing activities

   $ 15,841,374      $ 5,674,412  

 

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Operating Activities

Net cash used in operating activities was $15.4 million for the nine months ended September 30, 2017 compared to $4.9 million during the nine months ended September 30, 2016.

Net cash used in operating activities during the nine months ended September 30, 2017 included our net loss of $37.6 million, adjusted for $26.6 million in goodwill impairment charges, $1.1 million in stock-based compensation expense, $98,000 from the accretion of debt discount and deferred financing costs, a $508,000 change in the fair value of warrant liabilities, a $1.4 million increase in accounts receivable, a $2.3 million decrease in accounts payable, a $151,000 increase in prepaid expenses and other current assets, a $2.1 million increase in tax refund receivable, a $243,000 decrease in deferred tax liability and $88,000 from net changes in other balances.

In comparison, net cash used in operating activities of $4.9 million during the nine months ended September 30, 2016 included our net loss of $8.0 million, adjusted for $585,000 of stock-based compensation expense; $2.0 million from the accretion of debt discount and deferred financing costs; a $103,000 increase in accounts receivable; a $926,000 increase in accounts payable; an $81,000 increase in accrued expenses and other current liabilities; a $372,000 increase in tax refund receivable, and $17,000 from net changes in other balances.

Investing Activities

During the nine months ended September 30, 2017, net cash provided by investing activities of $13.8 million was primarily the result of $13.7 million cash assumed from the Mergers with PharmAthene that closed in May 2017.

Financing Activities

Net cash provided by financing activities during the nine months ended September 30, 2017 was primarily the result of $3.0 million net proceeds received from the Notes that closed in May 2017 and $13.0 million net proceeds from the redeemable preferred financing, offset by the repayment of notes payable for $212,000.

Net cash provided by financing activities during the nine months ended September 30, 2016 was primarily the result of $5.7 million net proceeds received from the issuance of convertible preferred stock in April 2016.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

The market risk inherent in our financial instruments and in our financial position represents the potential loss arising from adverse changes in interest rates. As of September 30, 2017, we had cash and cash equivalents of $17.1 million. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. Because most of our cash is held in bank deposit accounts without restriction, an immediate 100 basis point change in interest rates would not have a material effect on our financial position or the results of our operations. We are subject to interest rate risk from our outstanding notes and borrowings under our credit facility. Borrowings under our credit facility bear interest at an annual rate equal to the bank’s prime rate (4.75% at September 30, 2017) plus 2%.

In addition, we are subject to currency risk for cash held in British pounds and Euros in our UK and French subsidiaries. Fluctuations in the exchange rates for the British pound since January 2016 have been about 22% comparing the high and low during the period. Transactions of our UK subsidiary are predominantly settled in British pounds and transactions of our French subsidiary are predominantly settled in Euros; therefore, we believe that we have minimal exposure to foreign currency exchange risks on a net basis. We do not hedge against foreign currency risks.

We do not believe that inflation and changing prices had a significant impact on our results of operations for any periods presented herein.

 

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Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by this Quarterly Report on Form 10-Q.

Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of September 30, 2017, our disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

Our management, including our principal executive and principal financial officer, has evaluated any changes in our internal control over financial reporting that occurred during the three and nine months ended September 30, 2017, and has concluded that there was no change that occurred during the three and nine months ended September 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, except as follows:

On May 4, 2017, we completed the Mergers with PharmAthene as described in Items 1 and 2 above.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

We encourage you to carefully consider the risk factors identified in the “Risk Factors” section of our Form S-4/A filed with the Security and Exchange Commission on March 31, 2017, our Form 10-K for the year ended December 31, 2016, and our Form 8-K filed August 17, 2017. These risk factors could materially affect our business, financial condition, and future results and could cause our actual business and financial results to differ materially from those contained in forward-looking statements made in this Quarterly Report on Form 10-Q or elsewhere by management from time to time. Except for the information presented below, which updates, and should be read in conjunction with, the risk factors and information disclosed in our Form S-4/A, Form 10-K, and Form 8-K, there have been no material changes during the nine months ended September 30, 2017 to the risk factors disclosed in our Form S/A filed with the Security and Exchange Commission on March 31, 2017, and our Annual Report on Form 10-K for the year ended December 31, 2016, and our Form 8-K filed on August 17, 2017.

Future conditions might require us to make substantial write-downs in our assets, which would adversely affect our balance sheet and results of operations.

We review our long-lived tangible and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. We also test our goodwill and indefinite-lived intangible assets for impairment at least annually in the fourth quarter, or when events or changes in the business environment indicate that the carrying value of the reporting unit may exceed its fair value. As of September 30, 2017, as a result of our declining share price, we tested our goodwill and indefinite-lived intangible assets for impairment. Based on the result of the test, we have determined that our indefinite-lived intangible assets were not impaired at September 30, 2017; however, we recorded $26.6 million in goodwill impairment charges as of September 30, 2017. If our stock price continues to remain low or decline, we may determine that certain of our assets, including goodwill, may be further impaired, and we may be required to write-down the carrying value for such assets or record additional write-down for goodwill. Any such significant write-downs could adversely affect our financial position and results of operations.

Conversion of the Series B redeemable convertible preferred stock or exercise of the related warrants may have an adverse effect on the market price of our common stock.

In August 2017, we issued and sold 15,656 shares of our Series B redeemable convertible preferred stock, initially convertible into 5,863,564 shares of our common stock (without regard to any limitations on conversion governing the Series B

 

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redeemable convertible preferred stock). In connection with the issuance of the Series B redeemable convertible preferred stock, we also issued warrants initially exercisable to purchase 2,345,427 shares of our common stock (without regard to any limitations on exercise set forth in the warrants). We cannot predict if and when the holders of Series B redeemable convertible preferred stock and warrants may sell such shares of converted or exercised common stock. The conversion of shares of Series B redeemable convertible preferred stock into shares of common stock or the exercise of warrants for shares of our common stock will result in substantial dilution to holders of our common stock. Further, the sale of a significant amount of these shares of common stock in the open market or the perception that these sales may occur could adversely affect prevailing market prices of our common stock, including causing the market price of our common stock to decline or become highly volatile.

Holders of our Series B redeemable convertible preferred stock will have rights that may restrict the ability of the Company to operate our business or be adverse to holders of our common stock.

The Certificate of Designations governing the Series B redeemable convertible preferred stock, as filed with the Secretary of State of the State of Delaware on August 21, 2017, contains a covenant that until the Series B redeemable convertible preferred stock is no longer outstanding, the Company shall maintain an unrestricted cash balance equal to the lower of $3,500,000 or the amount of preferred outstanding at any given time. Further, additional provisions contained in the Certificate of Designations may limit the Company’s ability to: (i) issue stock senior to or on parity with the Series B redeemable convertible preferred stock, (ii) incur indebtedness that would cause us to exceed a specified leverage ratio, (iii) amend, modify, alter or supplement our articles of incorporation or the Certificate of Designations in a manner that would adversely affect the rights, preferences or privileges of the Series B redeemable convertible preferred stock, and (iv) pay distributions on, purchase or redeem our common stock or other capital stock.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Default upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

We have refiled the incentive stock option award agreements with Mr. Enright and Ms. Czerepak dated September 22, 2017 and initially filed with our Current Report on Form 8-K on September 28, 2017 as Exhibit 10.3 and Exhibit 10.4 to this Quarterly Report on Form 10-Q. We are filing these agreements solely to include certain information that was inadvertently omitted from the copies of the agreements filed as exhibits to our Current Report on Form 8-K filed on September 28, 2017.

 

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Item 6. Exhibits

 

    No.    

  

Description

    2.1*    Securities Purchase Agreement between Altimmune, Inc. and the purchasers named therein dated August  16, 2017 (incorporated by reference to the Exhibit 2.1 to our Form 8-K filed on August 17, 2017)
    3.1*    Amended and Restated Certificate of Incorporation, dated October 17, 2017 (incorporated by reference to Exhibit 3.1 to our Form 8-K filed on October 18, 2017)
    3.2*    Certificate of Designations of the Series B Convertible Preferred Stock, dated August  21, 2017 (incorporated by reference to Exhibit 3.1 to our Form 8-K filed on August 21, 2017)
    3.3*    Amended and Restated Bylaws of Altimmune, Inc. (incorporated by reference to Exhibit 3.2 to our Form 8-K filed on October 18, 2017)
    4.1*    Form of Warrant (incorporated by reference to Exhibit 4.1 to our Form 8-K filed on August  17, 2017)
  10.1*    Form of Lock Up Agreement (incorporated by reference to Exhibit D of Exhibit 2.1 to our Form 8-K filed on August 17, 2017)
  10.2*    Form of Voting Agreement (incorporated by reference to Exhibit E to Exhibit 2.1 to our Form 8-K filed on August 17, 2017)
  10.3†    Incentive Stock Option Agreement under the Altimmune, Inc. 2017 Omnibus Incentive Plan, dated as of September 22, 2017, by and between Altimmune, Inc. and William Enright
  10.4†   

Incentive Stock Option Agreement under the Altimmune, Inc. 2017 Omnibus Incentive Plan, dated as of September 22, 2017, by and between Altimmune, Inc. and Elizabeth Czerepak

  31.1    Certification of Principal Executive Officer Pursuant to SEC Rule 13a-14(a)/15d-14(a)
  31.2    Certification of Principal Financial Officer Pursuant to SEC Rule 13a-14(a)/15d-14(a)
  32.1    Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350
  32.2    Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350
(101)    The following unaudited condensed consolidated financial statements from the Altimmune, Inc. Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2017, formatted in Extensive Business Reporting Language (“XBRL”): (i) Unaudited Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016, (ii) Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2017 and 2016, (iii) Unaudited Condensed Consolidated Statements of Redeemable Preferred Stock and Stockholders’ Equity for the nine months ended September 30, 2017, (iv) Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.
101.INS    Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

* Incorporated by reference.
Indicates a management contract or compensatory plan.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused the report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  ALTIMMUNE, INC.
Dated: November 9, 2017   By:  

/s/ William Enright

    Name: William Enright
    Title: President and Chief Executive Officer (principal executive officer)
Dated: November 9, 2017   By:  

/s/ Elizabeth A. Czerepak

    Name: Elizabeth A. Czerepak
    Title: Chief Financial Officer and Executive Vice President of Corporate Development (principal financial and accounting officer)