NOTE 3. Business Combination

On February 13, 2018, the Company acquired Aviragen in a reverse merger (see Note 1). Aviragen presently has in-process research and development as it is currently conducting a Phase 2 trial, it has previously developed drugs that were licensed to others who brought them to market and it has a workforce that is considered to have the necessary skills, knowledge, and experience to perform a process, that when applied to the in-process research and development is critical to the ability to convert it into outputs. Based on this evaluation, the Company determined that the Merger should be accounted for as a business combination.

Since the date of the Merger, the results of Aviragen’s operations have been included in the condensed consolidated financial statements. As a result of the acquisition, the Company eliminated the majority of its debt and acquired a significant cash balance in exchange for equity securities.

The total purchase price for Aviragen is summarized as follows (in thousands):

Common stock	$	31,789

Total	$	31,789

In connection with the Aviragen acquisition, the Company allocated the total purchase consideration to the net assets and liabilities acquired, including identifiable intangible assets, based on their respective fair values at the acquisition date.

The following table summarizes the preliminary allocation of the purchase price to the fair value of the respective assets and liabilities acquired (in thousands):

Cash and cash equivalents	$	25,525
Accounts receivable		14,666
Prepaid expenses		446
Property and equipment		170
Intangible assets:
Developed technology ⁽¹⁾		22,400
In-process research and development ⁽²⁾		1,600
Total assets		64,807

Accounts payable		(3,379)
Other current liabilities		(6,351)
Liability related to sale of future royalties		(16,300)
Net assets acquired		38,777

Purchase price		(31,789)

Bargain purchase gain ⁽³⁾	$	6,988

__________

(1) Developed technology comprises Inavir® and Relenza®, both influenza vaccines on which the Company is presently receiving royalty revenue, which, based on preliminary valuations, are being amortized on a straight-line basis over the estimated periods of future royalties of 11.75 and 1.3 years, respectively.

(2) In-process research and development relates to teslexivir, or BTA074, a direct-acting antiviral that is being developed as a treatment for genital warts and is presently undergoing Phase 2 clinical trials. The preliminary valuation was prepared by an independent third party based on estimated discounted cash flows based on probability-weighted future development expenditures and revenue streams provided by the Company’s management.

(3) The bargain purchase gain represents the excess of a preliminary valuation of the fair value of tangible and identified intangible assets, less liabilities, acquired over the purchase price.

In addition, the Company incurred and expensed costs directly related to the Merger totaling approximately $1.4 million, of which approximately $0.5 million was incurred in the three months ended March 31, 2018, and is included in general and administrative expenses in the condensed consolidated statement of operations and comprehensive income (loss). The Company is in the process of gathering the information necessary to evaluate the tax impact of the acquisition, including the treatment of the bargain purchase gain, and to finalize the discount rate and underlying assumptions utilized in the valuation of the intangible assets acquired. The Company expects to complete its evaluation of the impact, if any, during fiscal 2018.

Selected amounts related to Aviragen’s business included in the Company’s condensed consolidated statement of operations for the three months ended March 31, 2018, are as follows:

Revenue	$	893,000

Net loss	$	(362,000)

The unaudited pro forma information in the table below summarizes the combined results of operations of Vaxart Biosciences, Inc. with those of Aviragen as though these entities were combined as of January 1, 2017. The results of Aviragen’s business for the three months ended March 31, 2017, are based on the actual unaudited financial statements prepared for the three months ended March 31, 2017, and for the three months ended March 31, 2018, are based on the Company’s results of operations, increased by Aviragen’s activities in the forty-three days prior to the closing of the Merger. The pro forma financial information for all periods presented also includes the removal of direct acquisition-related costs, the reduction in interest expense on borrowing converted into equity in the reverse merger, and the actual depreciation and amortization that would have been charged assuming the fair value adjustments to property and equipment and intangible assets had been applied as of January 1, 2017. This unaudited pro forma information is summarized as follows:

	Three Months Ended March 31,
	2018		2017
		(in thousands)
Total revenue	$	13,039	$	7,176

Net income (loss)	$	5,899	$	(7,915)

The pro forma financial information as presented above is for informational purposes only and is not indicative of the consolidated results of operations of future periods or the results of operations that would have been achieved had the acquisition had taken place on January 1, 2017.