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SAVARA INC. (NASDAQ:SVRA) Files An 8-K Other Events

SAVARA INC. (NASDAQ:SVRA) Files An 8-K Other Events

Item8.01

Other Events.

ARAVAS INC. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL

CONDITION AND

RESULTS OF OPERATIONS

The following discussion contains forward-looking statements
that involve risks and uncertainties, such as Aravass or Savaras
plans, objectives, expectations, intentions and beliefs. Aravass
or Savaras actual results could differ materially from those
discussed in these forward-looking statements. Factors that could
cause or contribute to such differences include, but are not
limited to, those identified below and those discussed in the
section entitled Risk Factors in the Quarterly Report on Form
10-Q of Savara, the parent company of Aravas, which Form 10-Q was
filed with the Securities and Exchange Commission on May9,
2017.

Overview

Aravas is a clinical stage specialty pharmaceutical company
focused on the development and commercialization of product
candidates for patients with rare respiratory diseases, including
cystic fibrosis (CF), and pulmonary alveolar proteinosis (PAP).
Aravass first lead clinical stage product candidate, Molgradex,
is an inhaled formulation of recombinant human
granulocyte-macrophage colony-stimulating factor (GM-CSF),
intended for the treatment of PAP. Aravass second lead clinical
stage product candidate, AeroVanc, is an inhaled formulation of
vancomycin, intended for the treatment of persistent
methicillin-resistant Staphylococcuaureus (MRSA) lung
infection in CF patients. Aravas was formed as a corporation in
Delaware in 2007. Aravas operates in one segment and has its
principal offices in Austin, Texas. Since inception, Aravas has
devoted substantially all of its efforts and resources to
identifying and developing its product candidates, recruiting
personnel, and raising capital. Aravas has incurred operating
losses and negative cash flow from operations and has no material
product revenue from inception to date. Aravas has not yet
commenced commercial operations. From inception to March31, 2017,
Aravas has raised net cash proceeds of approximately
$42.9million, primarily from private placements of convertible
preferred stock and note financings.

Aravas has never been profitable and has incurred operating
losses in each year since inception. Aravass net losses were
$5.0million for the three months ended March31, 2017 and
$10.9million for the year ended December31, 2016. As of March31,
2017, Aravas had an accumulated deficit of $43.4million.
Substantially all of Aravass operating losses resulted from
expenses incurred in connection with its research and development
programs and from general and administrative costs associated
with its operations.

Aravas has chosen to operate by outsourcing its manufacturing and
most of its clinical operations. Aravas expects to incur
significant additional expenses and increasing operating losses
for at least the next several years as it initiates and continues
the clinical development of, and seeks regulatory approval for,
its product candidates and adds personnel necessary for its
parent Savara to operate as a public company with an advanced
clinical candidate pipeline of products. In addition, Savara
operating as a publicly traded company will involve the hiring of
additional financial and other personnel, upgrading financial
information systems and incurring costs associated with operating
as a public company. Aravas expects that its operating losses
will fluctuate significantly from quarter to quarter and year to
year due to timing of clinical development programs and efforts
to achieve regulatory approval.

As of March31, 2017, Aravas had cash of $10.5million. Aravas will
continue to require substantial additional capital to continue
its clinical development and potential commercialization
activities. Accordingly, Aravas or Savara will need to raise
substantial additional capital to continue to fund its
operations. The amount and timing of its future funding
requirements will depend on many factors, including the pace and
results of its clinical development efforts. Failure to raise
capital as and when needed, on favorable terms or at all, would
have a negative impact on its financial condition and its ability
to develop its product candidates.

Recent Events

On April27, 2017, the Merger closed. Upon completion of the
Merger, each outstanding share of Aravas common stock was
automatically converted into 0.5860 of a share of Savara common
stock as adjusted for the reverse split which was affected
immediately prior to the closing of the Merger. Upon the closing
of the Merger, a wholly-owned subsidiary of Savara merged with
and into Aravas, with Aravas, becoming a wholly-owned subsidiary
of Savara and Savara being the surviving corporation of the
Merger. As a result of the Merger, the Savara (formerly Mast)
equity holders own approximately 23% of the combined company, and
Aravass (formerly Savara) pre-existing equity holders own
approximately 77%. At the time the financial statements in this
Form 8-K were available to be issued, the initial accounting for
the business combination was incomplete. As a result, additional
disclosures related to the Merger are unavailable at this time.

Prior to the closing of the Merger, the Company completeda 2017
Convertible Promissory Note (the 2017 Notes) financing. The 2017
Notes carry an annual simple interest rate of 8.0% and are
convertible into shares of the Companys equity dependent upon the
earlier of the maturity date ofJune30, 2018, a subsequent
qualified financing, change of control event, Regulation A
offering, a public offering, including an initial public offering
or a public listing conversion such as a reverse merger, or at
the consent of a majority of the noteholders.Upon the occurrence
of the Merger on April27, 2017, the 2017 Notes, principal only,
automatically converted at a conversion price of eighty percent
of the amount equal to the average trading price of Mast common
stock for the twenty-day period ending two days prior to the
closing of the Merger, as adjusted by an exchange ratio described
in the Merger Agreement. Subsequent to March31, 2017, the Company
raised approximately $3.5million under the 2017 Notes.

On April28, 2017, Savara entered into a Common Stock Sales
Agreement (the Sales Agreement) with H.C. Wainwright Co., LLC, as
sales agent (Wainwright), to which Savara may offer and sell,
from time to time, through Wainwright, shares of its common stock
(the Shares), having an aggregate offering price of not more than
$18.0million. The shares will be offered and sold to Savaras
shelf registration statement on Form S-3. Subject to the terms
and conditions of the Sales Agreement, Wainwright will use its
commercially reasonable efforts to sell the Shares from time to
time, based upon Savaras instructions. Savara has provided
Wainwright with customary indemnification rights, and Wainwright
will be entitled to a commission at a fixed commission rate equal
to 3.0% of the gross proceeds per Share sold. Sales of the
Shares, if any, under the Sales Agreement may be made in
transactions that are deemed to be at the market offerings (ATM)
as defined in Rule 415 under the Securities Act of 1933, as
amended. Savara has no obligation to sell any of the Shares, and
may at any time suspend sales under the Sales Agreement or
terminate the Sales Agreement.

On April27, 2017, Savara concurrently delivered written notice to
Cowen and Company, LLC that it was terminating its prior Sales
Agreement, dated August21, 2015.

On April28, 2017, Savara and the Company entered into a Loan and
Security Agreement with Silicon Valley Bank (SVB). The agreement
provides for a $15million debt facility, $7.5million of which was
immediately available to Savara upon completion of the Merger
with a minimum market cap of $100million. The primary use of the
capital is for the repayment of pre-merger debt of $3.7million
owed to Hercules Technology Growth Capital. In addition, the
capital will be utilized to fund ongoing development programs of
Savara and Aravas and for general corporate purposes. Under the
terms of the agreement, Savara may, but is not obligated to, draw
an additional amount of $7.5million through June30, 2017, subject
to the achievement of certain corporate milestones specifically a
minimum new capital raise with combined proceeds of at least
$40million through a secondary offering, private investment in
public entity (PIPE), ATM, partnerships or grants to be received
within twelve months of signing the agreement.

Interest only payments are due through September 2018 followed by
monthly payments of principal plus interest over the following
thirty (30)months. If the second tranche is fully extended, the
interest only period will be extended for an additional six
(6)months, through March 2019 followed by monthly payments of
principal plus interest over the following twenty-four
(24)months. Interest of prime plus 4.25% will be charged per the
agreement and the maturity date is March1, 2021. Upon funding the
first tranche, Savara issued warrants to purchase shares of
Savaras common stock equal to 3.0% of the funded amount divided
by the exercise price to be set based on the average price per
share over the preceding 10 trading days prior to closing or the
price per share prior to the day of closing. Upon funding, the
second tranche, Savara is obligated to issue warrants to purchase
shares of Savara common stock equal to 3.0% of the funded amount
divided by an exercise price to be set based on the average price
per share over the preceding 10 trading days prior to funding or
the price per share prior to the day of funding. There are no
financial covenants associated with this loan agreement.

Financial Operations Overview

Research and Development Expenses

Research and development expenses represent costs incurred to
conduct research and development, such as the development of
Aravass product candidates. Aravas recognizes all research and
development costs as they are incurred. Research and development
expenses consist primarily of the following:

expenses incurred under agreements with consultants and
clinical trial sites that conduct research and development
activities on Aravass behalf;
laboratory and vendor expenses related to the execution of
clinical trials;
contract manufacturing expenses, primarily for the production
of clinical supplies; and
internal costs that are associated with activities performed
by Aravass research and development organization and
generally benefit multiple programs.

Where appropriate, these costs are allocated by product
candidate. Unallocated internal research and development costs
consist primarily of:

personnel costs, which include salaries, benefits and
stock-based compensation expense;
allocated facilities and other expenses, which include
expenses for rent and maintenance of facilities and
depreciation expense; and
regulatory expenses and technology license fees related to
development activities.

The largest component of Aravass operating expenses has
historically been its investment in research and development
activities. The following table shows Aravass research and
development expenses for the three months ended March31, 2017 and
2016:

ThreeMonthsEnded March31,
(in thousands)

Product candidates:

AeroVanc

$ $ 1,262

Molgradex

2,006

Total research and development expenses

$ 2,948 $ 1,262

Aravas expects research and development expenses will increase in
the future as Aravas advances its product candidates into and
through clinical trials and pursues regulatory approvals, which
will require a significant increased investment in regulatory
support and contract manufacturing and inventory build-up related
costs. In addition, Aravas continues to evaluate opportunities to
acquire or in-license other product candidates and technologies,
which may result in higher research and development expenses due
to license fee and/or milestone payments.

The process of conducting clinical trials necessary to obtain
regulatory approval is costly and time consuming. Aravas may
never succeed in timely developing and achieving regulatory
approval for its product candidates. The probability of success
of Aravass product candidates may be affected by numerous
factors, including clinical data, competition, intellectual
property rights, manufacturing capability and commercial
viability. As a result, Aravas is unable to accurately determine
the duration and completion costs of Aravass development projects
or when and to what extent Aravas will generate revenue from the
commercialization and sale of any of its product candidates.

General and Administrative Expenses

General and administrative expenses consist of personnel costs,
facility expenses and expenses for outside professional services,
including legal, audit and accounting services. Personnel costs
consist of salaries, benefits and stock-based compensation.
Facility expenses consist of rent and other related costs.
General and administrative costs also include depreciation
expense and other supplies. Aravas expects to incur additional
expenses as a result of its parent Savara becoming a public
company following completion of the Merger, including expenses
related to compliance with the rules and regulations of the SEC
and NASDAQ, additional insurance, investor relations, and other
administrative expenses and professional services.

Critical Accounting Policies and Estimates

Aravass managements discussion and analysis of financial
condition and results of operations is based on its condensed
consolidated financial statements, which have been prepared in
accordance with GAAP. The preparation of these financial
statements requires Aravas to make estimates and judgments that
affect the reported amounts of assets, liabilities and expenses.
On an ongoing basis, Savara evaluates these estimates and
judgments. Aravas bases its estimates on historical experience
and on various assumptions that Aravas believes to be reasonable
under the circumstances. These estimates and assumptions form the
basis for making judgments about the carrying values of assets
and liabilities and the recording of expenses that are not
readily apparent from other sources. Actual results may differ
materially from these estimates. Aravas believes that the
accounting policies discussed below are critical to understanding
its historical and future performance, as these policies relate
to the more significant areas involving managements judgments and
estimates.

Accrued Research and Development
Expenses

Aravas records accrued expenses for estimated costs of its
research and development activities conducted by external service
providers, which include the conduct of clinical trial and
contract formulation and manufacturing activities. Aravas records
the estimated costs of development activities

based upon the estimated amount of services provided but not yet
invoiced, and includes these costs in accrued liabilities in the
consolidated balance sheet and within development expense in the
consolidated statement of operations and comprehensive loss.
These costs are a significant component of Aravass research and
development expenses. Aravas records accrued expenses for these
costs based on the estimated amount of work completed and in
accordance with agreements established with these external
service providers.

Aravas estimates the amount of work completed through discussions
with internal personnel and external service providers as to the
progress or stage of completion of the services and the
agreed-upon fee to be paid for such services. Aravas makes
significant judgments and estimates in determining the accrued
balance in each reporting period. As actual costs become known,
Aravas adjusts their accrued estimates.

Stock-based Compensation

Aravas recognizes stock-based awards to employees and directors,
including stock options, based on the fair value on the grant
date using the Black-Scholes option pricing model. The related
stock-based compensation is recognized as expense on a straight
line-basis over the employees or directors requisite service
period (generally the vesting period). Noncash stock compensation
expense is based on awards ultimately expected to vest and is
reduced by forfeitures, if necessary.

Aravas accounts for stock-based compensation arrangements with
non-employees
using a fair value approach. The fair value of options granted to
non-employees is measured using the Black-Scholes option pricing
model reflecting similar assumptions for employees except that
the expected term is based on the options remaining contractual
term instead of the simplified method in each of the reported
periods. The compensation costs of these arrangements are subject
to remeasurement over the vesting terms as earned.

In determining the
fair value of the stock-based awards, Aravas uses the
Black-Scholes option-pricing model and assumptions discussed
below. Each of these inputs is subjective and generally requires
significant judgment to determine.

Fair Value of
Common Stock
. The fair value of the shares of common stock
underlying stock options has historically been determined by
Aravass board of directors. In order to determine the fair value
of the common stock at the time of grant of the option, the
Aravas Board considered, among other things, valuations performed
by an independent third-party. Because there has been no public
market for Aravass common stock, the Aravas Board exercised
reasonable judgment and considered a number of objective and
subjective factors to determine the best estimate of the fair
value of Aravass common stock, including important developments
in Aravass operations, sales of convertible preferred stock,
actual operating results and financial performance, the
conditions in the life sciences industry and the economy in
general, the stock price performance and volatility of comparable
public companies, and the lack of liquidity of its common stock,
among other factors.

Expected
Term
. Aravass expected term represents the period that their
stock-based awards are expected to be outstanding and is
determined using the simplified method (based on the mid-point
between the vesting date and the end of the contractual term) for
employee options and the contractual term for non-employee
options.

Expected
Volatility.
Since Aravas is privately held and does not have
any trading history for its common stock, the expected volatility
was estimated based on the average volatility for comparable
publicly traded biotechnology companies over a period equal to
the expected term of the stock option grants. The comparable
companies were chosen based on their similar size, or stage in
the life cycle.

Risk-Free
Interest Rate.
The risk-free interest rate is based on the
U.S. Treasury zero coupon issues in effect at the time of grant
for periods corresponding with the expected term of
option.

Expected
Dividend.
Aravas has never paid dividends on its common
stock and has no plans to pay dividends on its common stock.
Therefore, Aravas used an expected dividend yield of zero. For
the three months ended March31, 2017 and 2016, stock-based
compensation expense was $81,000 and $51,000,
respectively.

Results of
Operations Comparison of Three Months Ended March31, 2017 and
2016

ThreeMonthsEnded
March31, Dollar
Change
(inthousands)

Grant revenue

$ $ $

Operating expenses:

Research and development

$ 2,948 $ 1,262 $ 1,686

General and administrative

1,736 1,391

Depreciation

Total operating expenses

4,774 1,691 3,083

Loss from operations

(4,774 ) (1,691 ) (3,083 )

Other expense/(income)

(15 )

Net loss before income taxes

(5,211 ) (1,676 ) (3,535 )

Income tax benefit

Net loss

$ (4,974 ) $ (1,676 ) $ (3,298 )

Research and
development

Research and
development expenses increased by $1.7million, or 134%, to
$2.9million for the three months ended March31, 2017 from
$1.3million for the three months ended March31, 2016. The
increase was primarily due to $2.0million in increased
development costs associated with the acquisition of Serendex and
the costs associated with Aravass development of Molgradex,
partially offset by a reduction in costs related to AeroVanc due
to timing of certain development activities.

General and
administrative

General and
administrative expenses increased by $1.4million, or 403%, to
$1.7million for the three months ended March31, 2017 from
$0.3million for the three months ended March31, 2016. The
increase was due to an increase of $1.0million in connection with
various business development activities, including merger related
costs, and legal and accounting expenditures. Aravas personnel
costs increased $0.3million due to increased administrative
personnel. Additionally, administrative costs of Savara ApS
(Denmark) totaled $0.2million which was not a part of Aravas in
2016.

Other
expense

Other expense
increased by $0.5million for the three months ended March31,
2017. The increase was due to interest expense associated with
our bridge notes and the loss on fair value of the put option
feature of our promissory notes.

Income
tax benefit

Income tax benefit
in 2017 represents a tax benefit provided by the Danish
government in the form of a refundable research credit associated
with research and development expenditures of Aravass subsidiary,
Savara ApS. There was no tax benefit in the first quarter of
2016, as the subsidiary was not acquired until July 2016.

Liquidity
and Capital Resources

Sources of
Liquidity

Since inception
through March31, 2017, Aravass operations have been financed
primarily by net cash proceeds of $23.3million from the sale of
its convertible preferred stock and the offering of convertible
notes in the amount of $19.6million. As of March31, 2017, Aravas
had $10.5million in cash and an accumulated deficit of
$43.4million. Aravas expects that its research and development
and general and administrative expenses will increase, and, as a
result, Aravas anticipates that it will continue to incur
increasing losses in the foreseeable future. Therefore, Savara
(the parent of Aravas) will need to raise additional capital to
fund its operations, which may be through the issuance of
additional equity, and potentially through borrowings.

Note
and Warrant Purchase Agreement

During 2014,
Aravas borrowed $10million from several investors under
convertible subordinate promissory notes (the 2014 Notes). On
December3, 2015, the 2014 Notes were converted into Series C
Preferred Stock (which converted into shares of Savara common
stock upon the closing of the Merger) in accordance with the
automatic conversion provision of the 2014 Notes. The 2014 Notes
had an 8.0% simple interest rate per annum computed on the basis
of the actual number of days elapsed and a year of 365 days. All
unpaid principal, together with any then accrued but unpaid
interest was due and payable on the earliest of (i)December31,
2015 (the Maturity Date), (ii) the closing of a change of
control, or (iii)the occurrence of an event of default. The 2014
Notes were pre-payable only with the written consent of the
holders of a majority of the principal amount of the
then-outstanding 2014 Notes.

On December3,
2015, the date of the automatic conversion, the 2014 Notes and
separated put option liability were surrendered in exchange for
Series C Preferred Stock. The debt contract and separated
derivative liability were both subject to extinguishment
accounting, and a loss in the amount of $226,000 was recorded in
the Aravas statement of operations and comprehensive loss. The
loss was calculated as the difference between the net book value
of the 2014 Notes plus the fair value of the put option
immediately prior to the automatic conversion, and the fair value
of the Series C Preferred Stock into which the 2014 Notes were
converted.

Aravas conducted a
2016 Convertible Promissory Note (the 2016 Notes) financing. The
2016 Notes carry an annual simple interest rate of 8.0% and are
convertible into certain shares of Aravass equity dependent upon
the earlier of the maturity date of June30, 2018, a subsequent
qualified financing, change of control event, Regulation A
offering, an initial public offering (IPO). The 2016 Notes were
amended such that they automatically convert at a stipulated
discount upon the consummation of the

Merger, which was
completed on April27, 2017. In consideration for the purchase of
the 2016 Notes on or prior to August15, 2016, Aravas will issue
to each investor who purchased a 2016 Note, a warrant to purchase
shares of Aravass Series C Preferred Stock. Each warrant will be
exercisable for that number of whole shares equal to the quotient
obtained by dividing (a)by (b), where (a)is an amount equal to
15% of the principal amount of 2016 Note issued to the investor
and (b)is the Series C Preferred Stock price. The exercise price
per share shall be the Series C Preferred Stock price. The
warrants will expire five (5)years from the date of issuance, or
earlier upon an acquisition or IPO. The warrants will be
exercisable upon the earlier to occur of an acquisition or an
IPO. These warrants have also been amended such that the Merger
would enable the warrant holder to have the right to exercise the
warrant any time during the five-year expiration period. As of
March31, 2017, the carrying value of the 2016 Notes was
approximately $3.6million.

Cash
Flows

The following
table summarizes Aravass cash flows for the periods
indicated:

ThreeMonthsEndedMarch31,
(in thousands)

Cash used in operating activities

$ (2,844 ) $ (1,835 )

Cash used in investing activities

(59 ) (3 )

Cash provided by financing activities

Effect of exchange rate changes

(6 )

Net decrease in cash

$ (2,909 ) $ (1,029 )

Cash
flows from operating activities

Cash used in
operating activities for the three months ended March31, 2017 was
$2.8million, consisting of a net loss of $5.0million, which was
partially offset by noncash charges of $0.6million, mainly
comprised of depreciation, noncash interest, fair value changes,
accretion of discount to convertible promissory notes, and
stock-based compensation, and by a net increase in assets and
liabilities of $1.5million. The change in Aravass net operating
assets and liabilities was primarily due to an increase accrued
liabilities mostly related to research and development costs for
both AeroVanc and Molgradex.

Cash used in
operating activities for the three months ended March31, 2016 was
$1.8million, consisting mainly of a net loss of
$1.7million.

Cash
flows from investing activities

Cash used in
investing activities for all periods presented was related to
purchases of property and equipment, primarily related to office
and computer equipment.

Cash
flows from financing activities

Cash provided by
financing activities for the three months ended March31, 2016 was
related to proceeds from the issuance of redeemable convertible
preferred stock, net of issuance costs.

Future
Funding Requirements

Aravas has not
generated any revenue from product sales. Aravas does not know
when, or if, it will generate any revenue from product sales.
Aravas does not expect to generate any revenue from product sales
unless and until it obtains regulatory approval for and
commercializes any of its product candidates. At the same time,
Aravas expects its expenses to increase in connection with its
ongoing development and manufacturing activities, particularly as
Aravas continues the research, development, manufacture and
clinical trials of, and seeks regulatory approval for, its
product candidates. Upon the closing of the Merger, Aravas
expects to incur additional costs associated with its parent
Savara operating as a public company. In addition, subject to
obtaining regulatory approval of any of its product candidates,
Aravas anticipates that it will need substantial additional
funding in connection with its continuing operations. Such
funding is expected to be provided by Savara which is the parent
of Aravas.

As of March31,
2017, Aravas had cash of $10.5million. Aravas will continue to
require substantial additional capital to continue its clinical
development and potential commercialization activities.
Accordingly, Aravas (or its parent Savara) will need to raise
substantial additional capital to continue to fund its
operations. The amount and timing of its future funding
requirements will depend on many factors, including the pace and
results of its clinical development efforts. Failure to raise
capital as and when needed, on favorable terms or at all, would
have a negative impact on its financial condition and Aravass
ability to develop its product candidates.

Until Aravas or
Savara, its parent, can generate a sufficient amount of product
revenue to finance its cash requirements, Aravas and Savara
expect to finance future cash needs primarily through the
issuance of additional equity and potentially through borrowings,
grants and strategic alliances with partner companies. To the
extent that Aravas or Savara raises additional capital through
the issuance of additional equity or convertible debt securities,
the ownership interest of Aravass or Savaras stockholders will be
diluted, and the terms of these securities may include
liquidation or other preferences that adversely affect the rights
of existing stockholders. Debt financing, if available, may
involve agreements that include covenants limiting or restricting
Aravass or Savaras ability to take specific actions, such as
incurring additional debt, making capital expenditures or
declaring dividends. If Aravas or Savara raises additional funds
through marketing and distribution arrangements or other
collaborations, strategic alliances or licensing arrangements
with third parties, Aravas or Savara may have to relinquish
valuable rights to its technologies, future revenue streams,
research programs or product candidates or grant licenses on
terms that may not be favorable to Aravas or Savara. If Aravas or
its parent Savara is unable to raise additional funds through
equity or debt financings when needed, Aravas or Savara may be
required to delay, limit, reduce or terminate its product
development or commercialization efforts or grant rights to
develop and market product candidates to third parties that
Aravas or Savara would otherwise prefer to develop and market
itself.

Contractual
Obligations and Other Commitments

As of December31,
2016, Aravas leased its office facilities under a non-cancellable
operating lease. The lease term was extended for a period of 48
months, commencing on December1, 2015, and expiring on
November30, 2019. Aravas recognizes rent expense on a
straight-line basis over the operating lease term. The lease is
cancellable three years after execution of the lease if Aravas
notifies the property owner of its intention to cancel the lease
by the end of second year of the lease. The future minimum annual
lease payments under the operating lease are as follows (in
thousands):

Year ending December31,
$

Total minimum lease payments

$

As of December31,
2016, Aravas leases certain research and development equipment as
part of a contract manufacturing arrangement. The leased
equipment is accounted for as a capital lease, and the present
value of the future minimum lease payments are recorded as a
liability on the balance sheet as of December31, 2016. The future
minimum annual lease payments under the capital lease are as
follows (in thousands):

Year ending December31,
$

Total minimum lease payments

1,111

Less: imputed interest

(90 )

Total capital lease obligation

$ 1,021

License and
Royalty Agreements

Aravas is also
subject to certain contingent payments to the Cystic Fibrosis
Foundation Therapeutics (CFFT) in connection with a $1.7million
award from the CFFT that was provided to Aravas in support of
AeroVanc research (CFF Award). A payment is due to the CFFT equal
to three (3)times the amount of the CFF Award upon approval of
AeroVanc for commercial use. The payment is owed in equal
installments of 33% due 60 days after first commercial sale; 33%
due 90 days of the first anniversary of the first commercial
sale; and 34% due within 90 days of 2nd anniversary of first
commercial sale. As Aravass product has not yet been approved for
commercial use, Aravas has not recorded a liability for the
commercial approval payment.

In addition, if
net sales exceed $50.0million for any calendar year occurring
during the first five years after the first commercial sale,
Aravas must remit payment to the CFFT equal to one (1)times the
CFF Award. Furthermore, if net sales exceed $100.0million for any
calendar year occurring during the first five years after first
commercial sale, Aravas must remit an additional payment to the
CFFT equal to one (1)times the CFF Award. Given Aravas has not
recognized any sales from AeroVanc, Aravas has not recorded a
liability for any amounts due as additional royalties.

Aravas is subject
to various manufacturing royalties and payments related to
Molgradex. Upon the successful development, registration and
attainment of approval by the proper health authorities, such as
the FDA, in any territory except Latin America, Central America
and Mexico, Aravas must pay a royalty of three percent (3%) on
annual net sales to the manufacturer of its Active Pharmaceutical
Ingredients (API). Under this agreement with the API
manufacturer, no signing fee or milestones are included in the
royalty payments, and there is no minimum royalty. Additionally,
Aravas has a commitment to acquire a working cell bank and a
master cell bank for $2.0million from this API manufacture in the
third quarter of 2017.

Aravas is also
subject to certain contingent milestone payments up to
approximately seven million euros based upon various development
activities and regulatory approvals payable to Aravass
manufacturer of its nebulizer used to administer Molgradex. In
addition to these milestones, Aravas will owe a royalty to the
manufacturer of its nebulizer based on net sales. The royalty
rate ranges from three and a half percent (3.5%) to five percent
(5%) depending on the device technology used by Aravas to
administer to product.

Acquisition of
Serendex Pharmaceuticals

On July15, 2016,
Aravas closed on a Business Transaction Agreement (BTA) under
which Aravas acquired certain assets, liabilities, employees, and
subsidiaries of Serendex Pharmaceuticals A/S (Seller), a limited
liability company incorporated under the laws of Denmark which
delisted from the Oslo Axxes (Oslo Stock Exchange) on or about
May4, 2016. The Sellers wholly owned subsidiaries include
Pharmaorigin ApS and Drugrecure ApS (the Subsidiaries) which are
limited liability companies incorporated under the laws of
Denmark. The Seller was a biopharmaceutical development company
which, directly and through its Subsidiaries, advanced a pipeline
and portfolio of novel inhalation therapies and related
technologies for the treatment of severe pulmonary conditions.
Its primary focus was on the medicinal product Molgradex (an
inhalation formulation of recombinant human GM-CSF for the
treatment of pulmonary alveolar proteinosis). The purchase price
consists of 3,353,925 shares of Aravass common stock, subject to
a hold back of 670,785 shares of common stock by Aravas in the
name of the Seller as security for the Sellers obligations under
the BTA until the lapse of the deadline for submission of claims,
and $21.5million of contingent cash consideration based upon the
achievement of certain milestones.

Other
Contracts

Aravas enters into
contracts in the normal course of business with various third
parties for research studies, clinical trials, testing and other
services. These contracts generally provide for termination upon
notice, and therefore Aravas believes that its non-cancelable
obligations under these agreements are not material except for
certain obligations under its agreement for its capitalized lease
asset.

Off-Balance Sheet
Arrangements

Aravas has not
entered into any off-balance sheet arrangements and does not have
any holdings in variable interest entities.

Recent
Accounting Pronouncements

In February 2016,
the FASB issued Accounting Standards Update 2016-02, Leases (ASU
2016-02). The update aims at making leasing activities more
transparent and comparable, and requires substantially all leases
be recognized by lessees on their balance sheet as a right-of-use
asset and a corresponding lease liability, including leases
currently accounted for as operating leases. The update also
requires improved disclosures to help users of financial
statements better understand the amount, timing and uncertainty
of cash flows arising from leases. ASU 2016-02 is effective for
fiscal years beginning after December15, 2018 with early adoption
permitted. Aravas is currently evaluating the impact of the
adoption of ASU 2016-02 on its financial
statements.

In March 2016, the FASB issued
Accounting Standards Update 2016-09, Compensation Stock
Compensation: Improvements to Employee Share-Based Payment
Accounting (ASU 2016-09). ASU 2016-09 changes certain
aspects of the accounting for share-based payment awards,
including accounting and cash flow classification for excess tax
benefits and deficiencies; income tax
withholding

obligations; forfeitures; and
cash flow classification. ASU 2016-09 is effective for Aravas for
annual periods beginning after December15, 2016, and interim
periods within those annual periods, with early adoption
permitted. The adoption of this standard did not have material
impact on the Companys financial
statements.

In August 2016, the FASB
issued Accounting Standards Update 2016-15, Statement of Cash
Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments (ASU 2016-15), which intended to add or clarify
guidance on the classification of certain cash receipts and
payments on the statement of cash flows. The new guidance
addresses cash flows related to the following: debt prepayment or
extinguishment costs, settlement of zero-coupon bonds, contingent
consideration payments made after a business combination,
proceeds from the settlement of insurance claims, proceeds from
the settlement of corporate-owned life insurance policies and
bank-owned life insurance policies, distributions received from
equity method investees, beneficial interest in securitization
transactions, and the application of predominance principle to
separately identifiable cash flows. ASU 2016-15 is effective for
the Company for annual periods beginning after December15, 2017
and interim periods within those annual periods, with early
adoption permitted. The Company is currently evaluating the
effect of this new guidance on its financial
statements.

In January 2017, the FASB
issued Accounting Standards Update 2017-01, Business Combinations
(Topic 805): Clarifying the Definition of a Business (ASU
2017-01), which intended to clarify the definition of a business
with the objective of adding guidance to assist entities with
evaluating whether transactions should be accounted for as
acquisitions (or disposals) of assets or businesses. ASU 2017-01
is effective for the Company for annual periods beginning after
December15, 2018 with early adoption permitted. The Company is
currently evaluating the effect of this new guidance on its
financial statements.

QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT ARAVAS MARKET
RISK

As of March31, 2017, Aravas
had cash of $10.5million, which consisted of bank deposits.
Such

interest-earning instruments
carry a degree of interest rate risk; however, historical
fluctuations of interest income have not been significant. Aravas
has not been exposed nor does it anticipate being exposed to
material risks due to changes in interest rates. A hypothetical
1% change in interest rates during any of the periods presented
would not have had a material impact on Aravass condensed
consolidated financial statements.

Aravas has ongoing operations
in Denmark as a result of its acquisition of Serendex and pays
those vendors in local currency (Danish Krone) or Euros. Aravas
does not participate in any foreign currency hedging activities
and it does not have any other derivative financial instruments.
Aravas did not recognize any significant exchange rate losses
during the three-month period ended March31, 2017. A 10% change
in the krone-to-dollar or euro-to-dollar exchange rate on
March31, 2017 would not have had a material effect on Aravass
results of operations or financial
condition.

Item9.01 Financial Statements and Exhibits.

Aravas Inc. and
Subsidiary

Condensed Consolidated
Balance Sheets

(In thousands, except
per share amounts)

March31, 2017 December31, 2016
(Unaudited)

Assets

Current assets:

Cash and cash equivalents

$ 10,464 $ 13,373

Grants and award receivable

Prepaid expenses and other current assets

1,038

Total current assets

11,502 14,613

Property and equipment, net

In-process RD

10,609 10,477

Goodwill

3,089 3,051

Total assets

$ 25,962 $ 28,934

Liabilities, redeemable convertible preferred stock
and stockholders deficit

Current liabilities:

Accounts payable

$ $

Accrued expenses

3,672 2,477

Current portion of capital lease obligation

Total current liabilities

4,810 3,455

Long-term liabilities:

Accrued interest on convertible promissory notes

Convertible promissory notes

3,597 3,448

Put option derivative liability

1,055

Contingent consideration

9,808 9,708

Deferred tax liability

2,334 2,305

Capital lease obligation, net of current portion

Warrant liability

Other long-term liabilities

Total liabilities

22,726 20,948

Redeemable convertible preferred stock:

Series A redeemable convertible preferred stock, $0.001 par
value, 1,799,906 shares authorized, issued, and outstanding
as of March31, 2017 and December31, 2016; $3,254
liquidation value as of March31, 2017

3,234 3,232

Series B redeemable convertible preferred stock, $0.001 par
value, 6,000,000 shares authorized as of March31, 2017 and
December31, 2016; 5,675,387 shares issued and outstanding
as of March31, 2017 and December31, 2016; $17,762
liquidation value as of March31, 2017

17,320 17,301

Series C redeemable convertible preferred stock, $0.001 par
value; 8,000,000 shares authorized as of March31, 2017 and
December31, 2016; 4,452,582 shares issued and outstanding
as of March31, 2017 and December31, 2016; $23,423
liquidation value as of March31, 2017

23,331 23,328

Total redeemable convertible preferred stock

43,885 43,861

Stockholders deficit:

Common stock, $0.001 par value, 27,000,000 shares
authorized as of March31, 2017 and December31, 2016;
5,364,383 and 5,396,883 shares issued and outstanding as of
March31, 2017 and December31, 2016, respectively

Additional paid-in capital

3,174 3,117

Accumulated other comprehensive loss

(448 ) (591 )

Accumulated deficit

(43,380 ) (38,406 )

Total stockholders deficit

(40,649 ) (35,875 )

Total liabilities, redeemable convertible preferred
stock, and stockholders deficit

$ 25,962 $ 28,934
The accompanying notes are an integral part of these
financial statements.

Aravas Inc. and
Subsidiary

Condensed Consolidated
Statements of Operations and Comprehensive
Loss

(In thousands, except
share and per share amounts)

(Unaudited)

Three Months Ended March31,

Grant and award revenue

$ $

Operating expenses:

Research and development

2,948 1,262

General and administrative

1,736

Depreciation

Total operating expenses

4,774 1,691

Loss from operations

(4,774 ) (1,691 )

Other income (expense):

Investment income

Interest expense

(247 ) (15 )

Foreign currency exchange gain/(loss)

(32 )

Change in fair value of financial instruments

(160 )

Total other income (expense)

(437 )

Loss before income taxes

(5,211 ) (1,676 )

Income tax benefit

Net loss

$ (4,974 ) $ (1,676 )

Accretion of redeemable convertible preferred stock

(24 ) (24 )

Net loss attributable to common stockholders

(4,998 ) (1,700 )

Other comprehensive income:

Gain (loss) on foreign currency translation

Total Comprehensive Loss

$ (4,831 ) $ (1,676 )

Net loss per share:

Basic and diluted

$ (0.97 ) $ (0.97 )

Weighted average common shares outstanding

Basic and diluted

5,169,323 1,749,355

The accompanying notes are an
integral part of these financial
statements.

Aravas Inc. and
Subsidiary

Consolidated
Statements of Changes in Redeemable Convertible Preferred Stock
and Stockholders Deficit

Period Ended March31,
2017

(In thousands, except
share amounts)

(Unaudited)

Redeemable Convertible Preferred Stock Stockholders Deficit
Redeemable Convertible Series A Preferred
Stock
Redeemable Convertible Series B Preferred
Stock
Redeemable Convertible Series C Preferred
Stock
Common Stock Accumulated Other Comprehensive
Income
Number of Shares Amount Number of Shares Amount Number of Shares Amount Total Number of Shares Amount Additional Paid-In Capital Accumulated Deficit Total

BalanceonDecember31,2016

1,799,906 $ 3,232 5,675,387 $ 17,301 4,452,582 $ 23,328 $ 43,861 5,396,883 $ $ 3,117 $ (38,406 ) $ (591 ) $ (35,875 )

Accretionofredeemableconvertiblepreferredstock

(24 ) (24 )

Repurchase of forfeited restricted common stock

(32,500 )

Stock-based compensation

Foreign exchange translation adjustment

Net loss incurred

(4,974 ) (4,974 )

Balance on March31, 2017

1,799,906 3,234 5,675,387 17,320 4,452,582 23,331 43,885 5,364,383 3,174 (43,380 ) (448 ) (40,649 )

The accompanying notes are an
integral part of these financial
statements.

Aravas Inc. and
Subsidiary

Condensed Consolidated
Statements of Cash Flows

(In
thousands)

(Unaudited)

Three Months Ended
March31,

Cash flows from operating activities:

Net loss

$ (4,974 ) $ (1,676 )

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

Depreciation

Changes in fair value of financial instruments

(13 )

Noncash interest

Foreign currency gain/(loss)

(12 )

Accretion on discount to convertible promissory notes

Stock-based compensation

Changes in operating assets and liabilities:

Grant and award receivable

Tax refund receivable

(165 )

Prepaid expenses and other current assets

(32 ) (183 )

Deferred rent

(2 )

Accounts payable and accrued expenses

1,319 (118 )

Net cash used in operating activities

(2,844 ) (1,835 )

Cash flows from investing activities:

Purchase of property and equipment

(59 ) (3 )

Net cash used in investing activities

(59 ) (3 )

Cash flows from financing activity:

Proceeds from issuance of Series C preferred stock, net

Net cash provided by financing activities

Effect of exchange rate changes on cash and cash
equivalents

(6 )

Decrease in cash and cash equivalents

(2,909 ) (1,029 )

Cash and cash equivalents beginning of period

13,373 16,683

Cash and cash equivalents end of period

$ 10,464 $ 15,654

The accompanying notes are an
integral part of these financial
statements.

Aravas Inc. and
Subsidiary

Notes to Condensed
Consolidated Financial
Statements

1. Description of
Business and Basis of
Presentation

Description of
Business

Aravas Inc. (Aravas, the
Company, or as used in the context of we or us), formerly known
as Savara Inc., is a clinical stage specialty pharmaceutical
company focusing on the development and commercialization of
product candidates for patients with rare respiratory diseases,
including cystic fibrosis (CF), and pulmonary alveolar
proteinosis (PAP). Our lead clinical stage product candidate,
Molgradex, is an inhaled formulation of recombinant human
granulocyte-macrophage colony-stimulating factor (GM-CSF),
intended for the treatment of PAP. Our other lead clinical stage
product candidate, AeroVanc, is an inhaled formulation of
vancomycin, intended for the treatment of persistent
methicillin-resistant Staphylococcus aureus (MRSA) lung infection
in CF patients. Aravas was formed as a corporation in Delaware in
2007. The Company operates in one segment and has its principal
offices in Austin, Texas.

On July15, 2016, the Company
completed the acquisition of certain assets, liabilities, and
subsidiaries of Serendex A/S (Serendex), through its wholly-owned
subsidiary, Savara ApS, a limited liability company established
under the laws in Denmark. Serendex was a biopharmaceutical
development company that advanced a pipeline and portfolio of
novel inhalation therapies and related technologies for the
treatment of severe pulmonary conditions. With this acquisition,
Aravas strengthened its pipeline of rare respiratory disease
products.

On January6, 2017, Aravas Inc.
entered into an Agreement and Plan of Merger and Reorganization
(the Merger Agreement), with Savara Inc. (formerly known as Mast
Therapeutics, Inc., or Mast) (Savara), a publicly traded company,
to which, among other things, subject to the satisfaction or
waiver of the conditions set forth in the Merger Agreement, a
wholly owned subsidiary of Savara will merge with and into Aravas
(Merger), with Aravas becoming a wholly-owned subsidiary of
Savara and the surviving corporation of the Merger. On April27,
2017, upon the closing of the Merger, each outstanding share of
Aravass common stock was converted into the right to receive
.5860 shares of Savara common stock as well as the payment of
cash in lieu of fractional shares. Immediately following the
effective time of the Merger, Savaras preexisting equity holders
own approximately 23% of the combined company, and Aravass
preexisting equity holders own approximately 77%. The combined
companys pipeline includes:

AeroVanc
Molgradex
AIR001, a sodium nitrite solution for intermittent inhalation
via nebulization, which is being developed for the treatment
of heart failure with preserved ejection fraction (HFpEF).

Since inception, Aravas has
devoted substantially all of its efforts and resources to
identifying and developing its product candidates, recruiting
personnel, and raising capital. Aravas has incurred operating
losses and negative cash flow from operations and has no product
revenue from inception to date. The Company has not yet commenced
commercial operations.

Basis of
Presentation

The condensed consolidated
financial statements have been prepared in conformity with
accounting principles generally accepted in the United States
(U.S. GAAP) as defined by the Financial Accounting Standards
Board (FASB). These condensed consolidated financial statements
should be read in conjunction with the audited financial
statements and notes thereto for the year ended December31, 2016.
The results of operations for the three months ended March31,
2017 are not necessarily indicative of the results to be expected
for the entire fiscal year or any future
period.

Unaudited Interim
Financial Information

The interim condensed
consolidated financial statements included in this document are
unaudited. The unaudited interim financial statements have been
prepared on the same basis as the annual financial statements and
reflect, in the opinion of management, all adjustments of a
normal and recurring nature that are necessary for a fair
statement of the Companys financial position as of March31, 2017,
and its results of operations for the three months ended March31,
2017 and 2016, and cash flows for the three months ended March31,
2017 and 2016. The results of operations for the three months
ended March31, 2017 are not necessarily indicative of the results
to be expected for the year ending December31, 2017 or for any
other future annual or interim period. The December31, 2016
consolidated balance sheet was derived from audited financial
statements, but does not include all disclosures required by U.S.
GAAP. These condensed consolidated financial statements should be
read in conjunction with the audited financial statements and
notes thereto for the year ended December31,
2016.

2. Summary of
Significant Accounting
Policies

Liquidity

As of March31, 2017, the
Company had an accumulated deficit of approximately $43.4million.
The Company also had negative cash flow from operations of
approximately $2.8million during the three months ended March31,
2017. The cost to further develop and obtain regulatory approval
for any drug is substantial and, as noted below, the Company may
have to take certain steps to maintain a positive cash position.
Accordingly, the Company will need additional capital to further
fund the development of, and seek regulatory approvals for, its
product candidates and begin to commercialize any approved
products.

The Company is currently
focused primarily on the development of respiratory drugs and
believes such activities will result in the Companys continued
incurrence of significant research and development and other
expenses related to those programs. If the clinical trials for
any of the Companys product candidates fail or produce
unsuccessful results and those product candidates do not gain
regulatory approval, or if any of the Companys product
candidates, if approved, fails to achieve market acceptance, the
Company may never become profitable. Even if the Company achieves
profitability in the future, it may not be able to sustain
profitability in subsequent periods. The Company intends to cover
its future operating expenses through cash and cash equivalents
on hand and through a combination of equity offerings, debt
financings, government or other third-party funding, and other
collaborations and strategic alliances. The Company cannot be
sure that additional financing will be available when needed or
that, if available, financing will be obtained on terms favorable
to the Company or its stockholders.

While the Company expects its
existing cash and cash equivalents of $10.5million as of March31,
2017 will enable it to fund operations and capital expenditure
requirements a year from the date these condensed consolidated
financial statements were available to be issued, the Company may
have to delay, reduce, limit or terminate some or all of its
development programs or future commercialization efforts or grant
rights to develop and market product candidates that the Company
might otherwise prefer to develop and market itself in order to
maintain a positive cash position. Failure to obtain adequate
financing could adversely affect the Companys ability to operate
as a going concern. If the Company raises additional funds from
the issuance of equity securities, substantial dilution to
existing stockholders may result. If the Company raises
additional funds by incurring debt financing, the terms of the
debt may involve significant cash payment obligations as well as
covenants and specific financial ratios that may restrict the
Companys ability to operate its
business.

The Company intends to raise
additional capital through the issuance of additional equity,
including in connection with the Merger discussed in Note 1, and
potentially through borrowings, and strategic alliances with
partner companies. However, if such financings are not available
timely and at adequate levels, the Company will need to
reevaluate its operating plans. Management is currently pursuing
financing alternatives. The condensed consolidated financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.

Principles of
Consolidation

The condensed consolidated
financial statements of the Company are stated in U.S. dollars
and are prepared using U.S. GAAP. These financial statements
include the accounts of the Company and its wholly owned
subsidiary. The financial statements of the Companys wholly owned
subsidiary are recorded in its functional currency and translated
into the reporting currency. The cumulative effect of changes in
exchange rates between the foreign entitys functional currency
and the reporting currency is reported in Accumulated Other
Comprehensive Income. All intercompany transactions and accounts
have been eliminated in
consolidation.

Use of
Estimates

The preparation of financial
statements in conformity with U.S. GAAP requires the Company to
make certain estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Managements estimates include those related to the accrual of
research and development costs, the valuation of preferred and
common shares, certain financial instruments recorded at fair
value, stock-based compensation, and the valuation allowance for
deferred tax assets. The Company bases its estimates on
historical experience and on various other market-specific and
relevant assumptions that it believes to be reasonable under the
circumstances. Accordingly, actual results could be materially
different from those estimates.

Risks and
Uncertainties

The product candidates being
developed by the Company require approvals from the U.S. Food and
Drug Administration (FDA) or foreign regulatory agencies prior to
commercial sales. There can be no assurance that the Companys
product candidates will receive the necessary approvals. If the
Company is denied regulatory approval of its product candidates,
or if approval is delayed, it may have a material adverse impact
on the Companys business, results of operations and its financial
position.

The Company is subject to a
number of risks similar to other life science companies,
including, but not limited to, risks related to the successful
discovery and development of drug candidates, raising additional
capital, development of competing drugs and therapies, protection
of proprietary technology and market acceptance of the Companys
products. As a result of these and other factors and the related
uncertainties, there can be no assurance of the Companys future
success.

Cash and Cash
Equivalents

Cash and cash equivalents
consist of cash and institutional bank money market accounts with
original maturities of three months or less when acquired and are
stated at cost, which approximates fair
value.

Concentration of
Credit Risk

Financial instruments, which
potentially subject the Company to concentrations of credit risk,
consist principally of cash and cash equivalents. The Company
places its cash and cash equivalents with a limited number of
high quality financial institutions and at times may exceed the
amount of insurance provided on such
deposits.

Accrued Research
and Development Costs

The Company records the costs
associated with research nonclinical studies, clinical trials,
and manufacturing development as incurred. These costs are a
significant component of the Companys research and development
expenses, with a substantial portion of the Companys on-going
research and development activities conducted by third-party
service providers, including contract research and manufacturing
organizations.

The Company accrues for
expenses resulting from obligations under agreements with
contract research organizations (CROs), contract manufacturing
organizations (CMOs), and other outside service providers for
which payment flows do not match the periods over which materials
or services are provided to the Company. Accruals are recorded
based on estimates of services received and efforts expended to
agreements established with CROs, CMOs, and other outside service
providers. These estimates are typically based on contracted
amounts applied to the proportion of work performed and
determined through analysis with internal personnel and external
service providers as to the progress or stage of completion of
the services. The Company makes significant judgments and
estimates in determining the accrual balance in each reporting
period. In the event advance payments are made to a CRO, CMO, or
outside service provider, the payments will be recorded as a
prepaid asset which will be amortized as the contracted services
are performed. As actual costs become known, the Company adjusts
its prepaids and accruals. Inputs, such as the services
performed, the number of patients enrolled, or the study
duration, may vary from the Companys estimates resulting in
adjustments to research and development expense in future
periods. Changes in these estimates that result in material
changes to the Companys accruals could materially affect the
Companys results of operations. The Company has not experienced
any material deviations between accrued and actual research and
development expenses.

Goodwill and
Acquired In-Process Research and Development
(IPRD)

Goodwill and acquired IPRD are
not amortized but they are tested annually for impairment or more
frequently if impairment indicators exist. The Company adopted
accounting guidance related to annual and interim goodwill and
acquired IPRD impairment tests which allows the Company to first
assess qualitative factors before performing a quantitative
assessment of the fair value of a reporting unit. If it is
determined on the basis of qualitative factors that the fair
value of the reporting unit is more likely than not less than the
carrying amount, a quantitative impairment test is required. The
$113,000 and $385,000 decreases in the carrying value of goodwill
and IPRD, respectively, from the acquisition date, July15, 2016,
were due to foreign currency
translation.

Tax Refund
Receivable

The Company has recorded a
Danish tax credit earned by its subsidiary, Savara ApS for the
post-acquisition period in 2016 and the first quarter of 2017.
Under Danish Tax Law, Denmark remits a research and development
tax credit equal to 22% of qualified research and development
expenditures, not to exceed established thresholds. As of
March31, 2017, the credits had not yet been received and a
receivable of $594,000 was recorded on the balance sheet in
prepaid expenses and other current
assets.

Segment
Reporting

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, or decision making group, in
making decisions on how to allocate resources and assess
performance. Our chief operating decision maker is the chief
executive officer. We have one operating segment, specialty
pharmaceuticals within the respiratory
system.

Fair Value of
Financial Instruments

The accounting standard for
fair value measurements provides a framework for measuring fair
value and requires disclosures regarding fair value measurements.
Fair value is defined as the price that would be received to sell
an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date,
based on the Companys principal or, in absence of a principal,
most advantageous market for the specific asset or
liability.

The Company uses a three-tier
fair value hierarchy to classify and disclose all assets and
liabilities measured at fair value on a recurring basis, as well
as assets and liabilities measured at fair value on a
non-recurring basis, in periods subsequent to their initial
measurement. The hierarchy requires the Company to use observable
inputs when available, and to minimize the use of unobservable
inputs, when determining fair value.

The three tiers are defined as
follows:

Level 1Observable inputs that reflect quoted market prices
(unadjusted) for identical assets or liabilities in active
markets;
Level 2Observable inputs other than quoted prices in active
markets that are observable either directly or indirectly in
the marketplace for identical or similar assets and
liabilities; and
Level 3Unobservable inputs that are supported by little or no
market data, which require the Company to develop its own
assumptions.

Financial instruments carried
at fair value include cash and cash equivalents, certain warrants
classified as liabilities, an embedded put option separated from
the convertible promissory notes, and contingent consideration
related to the acquisition of Serendex. These financial
instruments are carried at fair value on a recurring
basis.

Financial instruments not
carried at fair value include accounts payable and accrued
liabilities. The carrying amounts of these financial instruments
approximate fair value due to the highly liquid nature of these
short-term instruments.

Net Loss per
Share

Basic net loss per share is
calculated by dividing the net loss by the weighted average
number of shares of common stock outstanding during the period
without consideration of common stock equivalents. Since the
Company was in a loss position for all periods presented, diluted
net loss per share is the same as basic net loss per share for
all periods as the inclusion of all potential dilutive securities
would have been antidilutive.

Redeemable
Convertible Preferred Stock and Series B and C
Warrants

The Series A, Series B, and
Series C redeemable convertible preferred stock is classified in
temporary equity as it is redeemable at the written request from
the holders of at least two-thirds of the then outstanding shares
of preferred stock, at any time after October31, 2022.
Additionally, certain outstanding warrants to purchase the Series
B and Series C redeemable convertible preferred stock (Series B
Warrants and the Series C Warrants) are classified as liabilities
because the Series B and Series C redeemable convertible
preferred stock are contingently
redeemable.

Stock-Based
Compensation

The Company recognizes the
cost of stock-based awards granted to employees based on the
estimated grant-date fair value of the awards. The value of the
portion of the award that is ultimately expected to vest is
recognized as expense ratably over the requisite service period.
The Company recognizes the compensation costs for awards that
vest over several years on a straight-line basis over the vesting
period (see Note 9). Forfeitures are recognized when they occur,
which may result in the reversal of compensation costs in
subsequent periods as the forfeitures arise. The Company
recognizes the cost of stock-based awards granted to nonemployees
at their then-current fair values as services are performed, and
such awards are remeasured through the counterparty performance
date.

Manufacturing
Commitments and
Contingencies

The Company is subject to
various manufacturing royalties and payments related to its
product candidate, Molgradex. Upon the successful development,
registration and attainment of approval by the proper health
authorities, such as the FDA, in any territory except Latin
America, Central America and Mexico, the Company must pay a
royalty of three percent (3%) on annual net sales to the
manufacturer of its Active Pharmaceutical Ingredients (API).
Under this agreement with the API manufacturer, no signing fee or
milestones are included in the royalty payments, and there is no
minimum royalty. Additionally, Aravas has a commitment to acquire
a working cell bank and a master cell bank for approximately
$2.0million from this API manufacturer in the third quarter of
2017.

The Company is also subject to
certain contingent milestone payments up to approximately
7.0million euros based upon various development activities and
regulatory approvals payable to the Companys manufacturer of its
nebulizer used to administer Molgradex. In addition to these
milestones, the Company will owe a royalty to the manufacturer of
its nebulizer based on net sales. The royalty rate ranges from
three and a half percent (3.5%) to five percent (5%) depending on
the device technology used by the Company to administer the
product.

Income
Taxes

The Company uses the asset and
liability method of accounting for income taxes. Under this
method, deferred tax assets and liabilities are recognized for
the expected future tax consequences of temporary differences
between the carrying amounts and the tax basis of assets and
liabilities. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The effect of a change in tax rates on
deferred tax assets and liabilities will be recognized in the
period that includes the enactment date. A valuation allowance is
established against the deferred tax assets to reduce their
carrying value to an amount that is more likely than not to be
realized.

Recent Accounting
Pronouncements

In February 2016, the FASB
issued Accounting Standards Update 2016-02, Leases (ASU
2016-02). The
update aims at making leasing activities more transparent and
comparable, and requires substantially all leases to be
recognized by lessees on their balance sheet as a right-of-use asset and a
corresponding lease liability, including leases currently
accounted for as operating leases. The update also requires
improved disclosures to help users of financial statements better
understand the amount, timing and uncertainty of cash flows
arising from leases. ASU 2016-02 is effective for fiscal years
beginning after December15, 2018 with early adoption permitted.
The Company is currently evaluating the impact of the adoption of
ASU 2016-02 on its financial
statements.

In March 2016, the FASB issued
Accounting Standards Update 2016-09, Compensation – Stock
Compensation: Improvements to Employee Share-Based Payment
Accounting (ASU 2016-09). ASU 2016-09 changes certain aspects of
the accounting for share-based payment awards, including
accounting and cash flow classification for excess tax benefits
and deficiencies; income tax withholding obligations;
forfeitures; and cash flow classification. ASU 2016-09 is
effective for the Company for annual periods beginning after
December15, 2016, and interim periods within those annual periods
with early adoption permitted. The adoption of this standard did
not have a material impact on the Companys financial
statements.

In August 2016, the FASB
issued Accounting Standards Update 2016-15, Statement of Cash
Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments (ASU 2016-15), which intended to add or clarify
guidance on the classification of certain cash receipts and
payments on the statement of cash flows. The new guidance
addresses cash flows related to the following: debt prepayment or
extinguishment costs, settlement of zero-coupon bonds, contingent
consideration payments made after a business combination,
proceeds from the settlement of insurance claims, proceeds from
the settlement of corporate-owned life insurance policies and
bank-owned life insurance policies, distributions received from
equity method investees, beneficial interest in securitization
transactions, and the application of predominance principle to
separately identifiable cash flows. ASU 2016-15 is effective for
the Company for annual periods beginning after December15, 2017 ,
and interim periods within those fiscal years with early adoption
permitted. The Company is currently evaluating the effect of this
new guidance on its financial
statements.

In January 2017, the FASB
issued Accounting Standards Update 2017-01, Business Combinations
(Topic 805): Clarifying the Definition of a Business (ASU
2017-01), which intended to clarify the definition of a business
with the objective of adding guidance to assist entities with
evaluating whether transactions should be accounted for as
acquisitions (or disposals) of assets or businesses. ASU 2017-01
is effective for the Company for annual periods beginning after
December15, 2017. The Company is currently evaluating the effect
of this new guidance on its financial
statements.

3. Prepaid expenses
and other current
assets

Prepaid expenses, consisted of
(in thousands):

March31, December31,

RD tax credit receivable

$ $

Prepaid clinical trial costs

VAT receivable

Deposits

Other

Total prepaid expenses and other current
assets

$ 1,038 $

4. Accrued expenses
and other
liabilities

Accrued expenses and other
liabilities, consisted of (in
thousands):

March31, December31,

Accrued contracted research and development costs

$ 2,724 $ 1,855

Accrued general and administrative costs

Accrued compensation

Other

Total accrued expenses and other
liabilities

$ 3,672 $ 2,477

5. Convertible
Promissory
Notes

During 2016, the Company
borrowed approximately $4.4million from several investors under
convertible subordinate promissory notes (the 2016 Notes). The
2016 Notes accrues interest at 8.0% per annum computed on the
basis of the actual number of days elapsed and a 365-day year.
All unpaid principal, together with any then accrued but unpaid
interest is due and payable on the earliest of (i)June30, 2018
(the Maturity Date), (ii) the closing of a change of control as
defined, or (iii)the occurrence of an event of default, as
defined (such earliest date is hereinafter referred to as
Maturity). The 2016 Notes are prepayable only with the written
consent of the holders of a majority of the principal amount of
the then-outstanding 2016 Notes. Of the total convertible notes,
$1.5million is due to a related party, Sorana A/S, the majority
owner of Serendex, which holds approximately 15.2% of the
Companys fully diluted common stock to the Business Transfer
Agreement effective on July15, 2016. The following paragraphs
describe the conversion features of the 2016
Notes.

Automatic
Conversion

The principal and any accrued
interest automatically convert into shares of Qualified Private
Placement Financing Securities at the 2016 Note Conversion Price,
upon the closing of a Qualified Private Placement Financing
(Private Placement Automatic Conversion). In the event of a
Private Placement Automatic Conversion, the 2016 Notes are
converted into a number of Qualified Private Placement Financing
Securities determined by dividing (i)the aggregate outstanding
principal amount and accrued but unpaid interest by (ii)the 2016
Note Conversion Price. A Qualified Private Placement Financing is
defined as the next Private Placement transaction (or series of
related transactions) after the date of this 2016 Note and before
Maturity in which the Company issues and sells shares of its
preferred stock in exchange for aggregate gross proceeds of at
least $5,000,000 (excluding amounts received
upon

conversion of indebtedness).
Private Placement means any equity financing transaction (or
series of related transactions) to a private placement exempt
from the registration requirements of the Securities Act, other
than to the exemption provided by Regulation A under the
Securities Act (i.e., not a Regulation A Offering or the Initial
Public Offering).

The Note Conversion Price is
the lesser of (A)(i) the price per share of the Next Round
Securities, Qualified Financing Shares or Regulation A Offering
Shares, as the case may be, times (ii) 0.8 (i.e. a 20% discount),
or (B)the quotient obtained by dividing $125,0000,000 (the
Valuation Cap) by the Companys fully diluted capitalization
immediately prior to the initial closing of the Qualified
Financing, Non-Qualified Financing, Qualified Regulation A
Offering or Non-Qualified Regulation A Offering in which the
Notes are converted. Non-Qualified Private
Placement Financing means any transaction (or series of related
transactions) after the date of this 2016 Note and before
Maturity in which the Company issues and sells shares of its
capital stock in any Private Placement transaction that is not
deemed to be a Qualified Private Placement Financing. Next Round
Securities means the equity shares sold in a Non-Qualified
Private Placement
Financing.

The entire outstanding
principal amount of the 2016 Notes and any accrued but unpaid
interest will be converted automatically into shares of
Regulation A Securities at the Note Conversion Price upon the
closing of a Qualified Regulation A Offering. In the event of an
automatic conversion under a Qualified Regulation A Offering, the
2016 Notes will be converted into that number of Regulation A
Securities determined by dividing (i)the aggregate outstanding
principal amount of the 2016 Note and any accrued but unpaid
interest by (ii)the Note Conversion Price. A Qualified Regulation
A Offering means a Regulation A Offering with gross proceeds to
the Company of at least $5,000,000 in one or more closings during
a twelve-month period, excluding amounts received on conversion
of the 2016
Notes.

Voluntary
Conversion

In the event that the Company
consummates a Non-Qualified Private Placement Financing, at the
option of each holder or holders of a majority of the outstanding
aggregate principal amount, all or part of the outstanding
principal and any accrued interest may be converted into Next
Round Securities. A Non-Qualified Private Placement Financing is
any transaction (or series of related transactions) after the
date of the 2016 Notes and before Maturity in which the Company
issues and sells shares of its capital stock in any Private
Placement transaction that is not deemed to be a Qualified
Private Placement Financing at the applicable 2016 Note
Conversion Price as defined
above.

In the event that the Company
consummates a Non-Qualified Regulation A Offering (i)at the
option of the Holder, but subject to the consent of the Board,
all or part of the outstanding principal amount of the 2016 Notes
and any accrued but unpaid interest may be converted into
Regulation A Securities, and (ii)at the option of the Majority
Holders, all or part of the outstanding principal amount of the
2016 Notes and any accrued but unpaid interest will be converted
into shares of Regulation A Securities. In the event of such
conversion, the 2016 Notes will be converted into that number of
shares of Regulation A Securities determined by dividing (x)the
aggregate outstanding principal amount of the 2016 Notes and any
accrued but unpaid interest by (y)the Note Conversion Price. A
Non-Qualified Regulation A Offering means the closing of a
Regulation A Offering with gross proceeds to the Company of less
than

$5,000,000, excluding amounts
received on conversion of the 2016
Notes.

Change in Control
Conversion

In the event of a Change of
Control after the date of the 2016 Notes but prior to Maturity,
at the option of each holder or holders of a majority of the
outstanding aggregate principal amount, all or part of the
outstanding principal amount and any accrued interest, (i)may be
converted into the number of shares of Series C Redeemable
Convertible Preferred Stock (Series C Preferred Stock) determined
by dividing (x)the aggregate outstanding principal amount and any
accrued interest by (y)the quotient obtained by dividing (1)the
Valuation Cap ($125,000,000) by (2)the Companys capital stock
outstanding immediately prior to such Change of
Control.

A Change of Control means any
liquidation, dissolution or winding up of the Company, either
voluntary or involuntary, and shall be deemed to be occasioned
by, or to include, (i)a merger or consolidation of the Company
into or with another entity after which the stockholders of the
Company immediately prior to such transaction do not own,
immediately following the consummation of the transaction by
virtue of their shares in the Company
or

securities received in
exchange for such shares in connection with the transaction, a
majority of the voting power of the surviving entity in
proportions substantially identical to those that existed
immediately prior to such transaction and with substantially the
same rights, preferences, privileges and restrictions as the
shares they held immediately prior to the transaction, (ii)the
sale, transfer or other disposition (but not including a transfer
or disposition by pledge or mortgage to a bona fide lender) of
all or substantially all of the assets of the Company (other than
to a wholly-owned subsidiary), or (iii)the sale or transfer by
the Company or its stockholders of more than 50% of the voting
power of the Company in a transaction or series of related
transactions other than in a transaction or series of
transactions effected by the Company primarily for financing
purposes.

IPO
Conversion

Upon an Initial Public
Offering of the Companys common stock, the entire outstanding
principal amount plus any accrued interest under the 2016 Notes
automatically converts into shares of Company common stock at the
IPO Conversion Price. The IPO Conversion Price means the lesser
of the (x)quotient obtained by dividing (1)the Valuation Cap
($125,000,000) by (2)the Companys fully diluted capitalization
immediately prior to the consummation of the Initial Public
Offering or (y)quotient obtained by dividing (1)the pre-money
valuation of the Company approved by the Board of Directors in
connection with the Initial Public Offering, by (2)the Companys
fully diluted capitalization immediately prior to the
consummation of the Initial Public
Offering.

Maturity Date
Conversion

The entire outstanding
principal amount and any accrued interest under the 2016 Notes
automatically converts into shares of Series C Preferred Stock at
the Series C Price upon the close of business of the Maturity
Date. In the event of such automatic conversion, the 2016 Notes
convert into that number of Series C Preferred Stock determined
by dividing (i)the aggregate outstanding principal amount of the
2016 Notes plus any accrued interest by (ii)the Series C Price.
The Series C Price is $5.2605 as adjusted for stock dividends,
stock splits, recapitalizations and other similar
events.

Public Listing
Conversion

The 2016 Notes and the Series
C Warrants were amended to include a conversion clause in the
case of the Merger. The amendment provides the warrant holder the
right to voluntarily exercise the Series C Warrants; however, the
2016 Notes are automatically converted in the case of the Merger.
Upon the consummation of the Merger or a similar transaction that
results in the listing of capital stock of the Company or shares
issued in exchange for the capital stock of the Company, the
entire principal amount plus any accrued interest under the 2016
Notes automatically converts into shares of Common Stock at the
reverse merger conversion price of $4.22 for notes issued on or
prior to August15, 2016 and 80% of the amount equal to the
average trading price of Savaras common stock for the twenty day
period ending two days prior to the closing of the acquisition of
Aravas by Savara, as adjusted by the exchange ratio described in
the Merger
Agreement.

Accounting for the
2016
Notes

Management determined that the
automatic conversion upon a Qualified Private Placement
Financing, a Qualified Regulation A Offering, a Non-Qualified
Private Placement Financing, or a Non-Qualified Regulation A
Offering as defined above represents, in substance, a put option
(redemption feature) designed to provide the investor with a
fixed monetary amount, settleable in shares. Management
determined that this put option should be separated and accounted
for as a derivative primarily because the put option meets the
net settlement criterion and the settlement provisions are not
consistent with a fixed-for-fixed equity
instrument.

The put option, with a fair
value of $977,000 at inception, was initially recorded as a
derivative liability on the accompanying balance sheet and a
corresponding discount to the 2016 Notes. The Company is
accreting the discount to interest expense on the statement of
operations and comprehensive loss over the term of the 2016 Notes
using the effective interest rate method. The Company recorded
interest expense of $117,000 during the three months ended
March31, 2017 related to the accretion of the discount. The
derivative liability was recorded at fair value at issuance of
the 2016 Notes with changes in fair value recognized in the
statement of operations and comprehensive loss. The change in
fair value from the date of issuance through March31, 2017 was
$78,000.

6. Fair Value
Measurements

The Company measures and
reports certain financial instruments at fair value on a
recurring basis and evaluates its financial instruments subject
to fair value measurements on a recurring basis to determine the
appropriate level in which to classify them in each reporting
period. The Company determined that the warrant liability for the
Series B and C Warrants, the put option on the 2016 Notes,
described further in Note 5, and the contingent consideration,
described further below, were Level3 financial instruments. The
fair value of these instruments as of March31, 2017 and
December31, 2016 was as follows (in
thousands):

Quoted Prices in
Active Marketsfor
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant Unobservable
Inputs (Level 3)

As of March31, 2017:

Put option

$ $ $ 1,055

Warrant liability

$ $ $

Contingent consideration

$ $ $ 9,808

As of December31, 2016:

Put option

$ $ $

Warrant liability

$ $ $

Contingent consideration

$ $ $ 9,708

The estimated fair value of
the put option on 2016 Note was determined using a multi-scenario
probability weighted average method analysis in which the future
probability of the equity financing event was weighted for its
respective probability. The Company used the following
assumptions to value the put option on the 2016 Notes as of
March31,
2017.

Assumption

March31,2017 December31,2016

Discount rate

0.86 % 0.43 %

Probability of event

90.0 % 85.0 %

Changes in the unobservable
inputs noted above would impact the fair value of the put option
and have a corresponding impact on the Companys net loss. The
probability of the automatic conversion feature was determined by
management based on its consideration of the expected timeline
for the next round of financing and historical experience.
Increases (decreases) in discount rate would decrease (increase)
the value of the put option, and an increase (decrease) in the
probability of the equity financing event occurring would
increase (decrease) the value of the put
option.

The estimated fair value of
the warrant liability (Series B and Series C Warrants) was
determined using a Noreen Wolfson option pricing model. The
assumptions used in valuing these warrants are presented in the
table
below.

Assumption

March31,2017 December31,2016

Expected term

0.174.25 0.424.50

Expected dividend yield

Expected volatility

68.13% 44.65%-60.66%

Risk-free interest rate

0.75%-1.68% 0.58%-1.82%

Changes in the unobservable
inputs noted above would impact the fair value of the liabilities
and have a corresponding impact on the Companys net loss.
Increases (decreases) in the expected term and expected
volatility would increase (decrease) net loss and the value of
the warrant liability and an increase (decrease) in the risk-free
interest rate would decrease (increase) net loss and the value of
the warrant
liability.

to the acquisition of certain
assets, liabilities, and subsidiaries of Serendex (see Note 1),
Aravas agreed to pay the seller, in addition to a stipulated
amount of shares of Aravass common stock, (i) $5,000,000 upon
receipt of marketing approval of the medicinal product Molgradex,
an inhalation formulation of recombinant human GM-CSF for the
treatment of pulmonary alveolar proteinosis (the Product) by the
European Medicines Agency, (ii) $15,000,000 upon receipt of
marketing approval of the Product by the FDA, and (iii)
$1,500,000 upon receipt of marketing approval of the Product by
the Japanese Pharmaceuticals and Medical Devices Agency (the
Contingent Milestone Payments). The Company estimates the
likelihood of approval in each region, separately, based on the
product candidates current phase of development and utilizing
published studies of clinical development success rates for
comparable non-oncology orphan drugs. The present value of the
potential cash outflows from the probability weighted Contingent
Milestone Payments is then estimated by taking into consideration
that the Contingent Milestone Payments are similar to a business
expense of the Company and would be senior to any Company debt
obligations. The resulting weighted average present value factor
is then applied to discount the probability adjusted Contingent
Milestone Payments for each region to derive the fair value of
the Contingent Milestone
Payments.

As of March31, 2017, the
Company deemed that there were no material changes to the product
candidates programs in each of the jurisdictions. The Company
also accounted for the time value of money related to the
Contingent Milestone Payments from July15, 2016 to March31, 2017
in its assessment. Accordingly, the related Contingent Liability
was remeasured with a balance of $9.8million as of March31
2017.

The Company did not transfer
any assets measured at fair value on a recurring basis to or from
Level1 and Level2 during the three months ended March31, 2017 and
2016.

The following tables sets
forth a summary of the changes in the fair value of the Companys
Level3 financial instrument (in thousands) for the three months
ended March31, 2017 and year ended December31,
2016:

Warrant Liability PutOption on2016Note Contingent Consideration

As of December31, 2015

$ $ $

Put option at issuance of 2016 Notes

Contingent consideration

9,524

Issuance of Series C Warrants

Change in fair value

(230 )

Balance at December31, 2016

$ $ $ 9,708

Change in fair value

(16 )

Balance at March31, 2017

$ $ 1,055 $ 9,808

7. Redeemable
Convertible Preferred
Stock

The following table summarizes
the Companys redeemable convertible preferred stock as of
March31, 2017 (in thousands, except share
amounts).

Redeemable Convertible Preferred Stock Par Value Authorized Shares SharesIssuedand Outstanding Carrying Value Liquidation Value
SeriesA $ .001 1,799,906 1,799,906 $ 3,234 $ 3,254
SeriesB $ .001 6,000,000 5,675,387 $ 17,320 $ 17,762
SeriesC $ .001 8,000,000 4,452,582 $ 23,331 $ 23,423

8. Common
Stock

The Companys shares of common
stock reserved for issuance as of March31, 2017, and December31,
2016 were as
follows:

March31, 2017 December31, 2016

SeriesA Preferred Stock

1,799,906 1,799,906

SeriesB Preferred Stock

5,675,387 5,675,387

Series C Preferred Stock

4,452,582 4,452,582

Series B Warrants

289,966 289,966

Series C Warrants

125,885 125,885

Stock options outstanding

2,926,665 3,096,665

Total shares reserved

15,270,391 15,440,391

9. Stock-Based
Compensation

The Company adopted the Aravas
Inc. Stock Option Plan (the Plan), to which the Company has
reserved 5,300,076 shares for issuance to employees, directors,
and consultants. The Plan includes 1) the option grant program
providing for both incentive and non-qualified stock options, as
defined by the Internal Revenue Code, and 2) the stock issuance
program providing for the issuance of awards that are valued
based upon common stock, including restricted stock, dividend
equivalents, stock appreciation rights, phantom stock, and
performance units. The Plan also allows eligible persons to
purchase shares of common stock at an amount determined by the
Plan Administrator. Upon a participants termination, the Company
retains the right to repurchase unvested shares issued in
conjunction with the stock issuance program at the fair market
value per share as of the date of
termination.

To date the Company has issued
incentive and non-qualified options and restricted stock to
employees and non-employees under the Plan. The terms of the
stock options, including the exercise price per share and vesting
provisions, are determined by the board of directors. Stock
options are granted at exercise prices not less than the
estimated fair market value of the Companys common stock at the
date of grant based upon numerous objective and subjective
factors including: third-party valuations, preferred stock
transactions with third parties, current operating and financial
performance, management estimates and future expectations. Stock
option grants typically vest quarterly over three to four years
and expire ten years from the grant date, and restricted stock
grants vest on a quarterly basis over four years and expire ten
years from the grant date. Inception to date, the Company has
issued 992,563 shares of restricted
stock.

Restricted
Stock

The Company values stock-based
compensation related to grants of its restricted stock based on
the fair value of the Companys common stock as of the grant date
and recognizes the expense over the requisite service period,
usually four years, adjusted for estimated forfeitures. To
determine the value of its common stock, the Company utilized the
Option Pricing Method. The valuation methodology includes
estimates and assumptions that require the Companys judgment.
Inputs used to determine the estimated fair value of the Companys
common stock include the equity value of the Company, expected
timing to a liquidity event, a risk-free interest rate and the
expected volatility. Generally, increases or decreases in these
unobservable inputs would result in a directionally similar
impact on the fair value measurement of the Companys common
stock.

During the three months ended
March31, 2017 and 2016, the Company did not issue any shares of
restricted stock to employees for
compensation.

Stock
Options

The Company values stock
options using the Black-Scholes option-pricing model, which
requires the input of subjective assumptions, including the
risk-free interest rate, expected life, expected stock price
volatility and dividend yield. The risk-free interest rate
assumption is based upon observed interest rates for constant
maturity U.S. Treasury securities consistent with the expected
term of the Companys employee stock options. The expected life
represents the period of time the stock options are expected to
be outstanding and is based on the simplified method. The Company
uses the simplified method due to the lack of sufficient
historical exercise data to provide a reasonable basis upon which
to otherwise estimate the expected life of the stock options.
Expected volatility is based on historical volatilities for
publicly traded stock of comparable companies over the estimated
expected life of the stock options. The Company assumes no
dividend yield because dividends are not expected to be paid in
the near future, which is consistent with the Companys history of
not paying dividends. The valuation of stock options is also
impacted by the valuation of common stock. Refer to the section
above for further information on the valuation methodology
utilized by the Company to determine the value of its common
stock.

For the three months ended
March31, 2017 and 2016, the Company did not grant any stock
options to employees and non-employees. As of March31, 2017 and
2016, options to purchase 2,926,655 shares and 1,737,455 shares
were outstanding, respectively. For the three months ended
March31, 2017 and 2016, no options were
exercised.

Stock-based compensation
expense is included in the following line items in the
accompanying statements of operations and comprehensive loss for
the three months ended March31, 2017 and 2016 (in
thousands):

March31, 2017 March31, 2016

Research and development

$ $

Selling, general and administrative

Total stock-based compensation

$ $

10. Net Loss per
Share

Basic net loss per share is
computed by dividing the net loss by the weighted-average number
of common shares outstanding. Diluted net loss per share is
computed similarly to basic net loss per share except that the
denominator is increased to include the number of additional
common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares
were dilutive. Diluted net loss per share is the same as basic
net loss per common share, since the effects of potentially
dilutive securities are
antidilutive.

As of March31, 2017 and 2016,
potentially dilutive securities
include:

March31, 2017 March31, 2016

Awards under equity incentive plan

2,926,665 1,737,455

Unvested restricted shares

124,736 277,667

Series A Contingent Redeemable Preferred Stock

1,799,906 1,799,906

Series B Contingent Redeemable Preferred Stock

5,675,387 5,675,387

Series C Contingent Redeemable Preferred Stock

4,497,467 4,452,582

2016 Series C Convertible Note

1,102,635

Warrants to purchase Series B Contingent Redeemable
Preferred Stock

289,966 289,966

Warrants to purchase Series C Contingent Redeemable
Preferred Stock

127,154

Total

16,543,916 14,232,963

The following table reconciles
basic earnings per share of common stock to diluted earnings per
share of common stock for the three months ended March31, 2017
and 2016.

March 31, 2017 March 31, 2016

Net loss

$ (4,974 ) $ (1,676 )

Accretion of preferred stock classified as mezzanine equity

(24 ) (24 )

Net loss attributable to common stockholders

(4,998 ) (1,700 )

Undistributed earnings and net loss attributable to common
stockholders

(4,998 ) (1,700 )

Weighted average common shares outstanding, basic and
diluted

5,169,323 1,749,355

Basic and diluted EPS

$ (0.97 ) $ (0.97 )

11. Subsequent
Events

Merger Agreement
with
Savara

On April27, 2017, the Merger
closed. Immediately prior to the effective time of the Merger,
Mast amended and restated its certificate of incorporation to
change its name to Savara Inc. (or Savara). The amendment and
restatement of Savaras certificate of incorporation was approved
by Savaras (formerly Mast) stockholders at a special meeting of
stockholders on April27, 2017. Upon completion of the Merger,
each outstanding share of Aravas common stock was converted into
0.5860 of a share of Savara (formerly Mast) common stock as
adjusted for the reverse split being affected immediately prior
to the closing of the Merger. Immediately following the Merger, a
wholly owned subsidiary of Savara (formerly Mast), Victoria
Merger Corp., merged with and into Aravas, with Aravas becoming a
wholly-owned subsidiary of Savara (formerly Mast) and the
surviving corporation of the Merger. Immediately following the
effective time of the Merger, Savara preexisting equity holders
own approximately 23% of the combined company, with Aravass
preexisting equity holders owning approximately 77%. In
connection with the merger with Savara, Aravas became a
wholly-owned subsidiary of Savara and its prior name (Savara) was
changed to Aravas
Inc.

Upon completion of the Merger,
the combined company has a pipeline of novel inhalation therapies
for the treatment of serious or life-threatening rare diseases
featuring three product candidates, each in advanced clinical
development. In addition, the Merger will provide a more
efficient means to access capital through the public markets or
other transactions compared to other alternatives. The Merger
will also provide the Companys current stockholders with greater
liquidity by owning stock in a public company. Masts market
capitalization, for which the purchase price is based on, was
approximately $33.0 million on the date of the Merger (April 27,
2017). At the time the financial statements were available to be
issued, the initial accounting for the business combination was
incomplete. As a result, additional disclosures related to the
Merger are
unavailable.

2017 Convertible
Promissory
Notes

The Companyconducted a
Convertible Promissory Note (the 2017 Note) financing. The 2017
Note carries an annual simple interest rate of 8.0% and is
convertible into certain shares of the Companys equity dependent
upon the earlier of the maturity date ofJune30, 2018, a
subsequent qualified financing, change of control event,
Regulation A offering, a Public Offering, including an Initial
Public Offering or a Public Listing Conversion such as the
Merger, or at the consent of a majority of the noteholders. Upon
the occurrence of the Merger, the 2017 Notes automatically
converted into shares of common stock at $4.26 per share.
Subsequent to March31, 2017, the Company has raised approximately
$3.5million under the 2017 Note
financing.

Common Stock Sales
Agreement/At The Market
(ATM)

On April28, 2017, Savara
entered into a Common Stock Sales Agreement (the Sales Agreement)
with H.C. Wainwright Co., LLC, as sales agent (Wainwright), to
which Savara may offer and sell, from time to time, through
Wainwright, shares of Savaras common stock, par value $0.001 per
share (the Shares), having an aggregate offering price of not
more than $18.0million. The shares will be offered and sold to
Savaras shelf registration statement on Form S-3. Subject to the
terms and conditions of the Sales Agreement, Wainwright will use
its commercially reasonable efforts to sell the Shares from time
to time, based upon Savaras instructions. Savara has provided
Wainwright with customary indemnification rights, and Wainwright
will be entitled to a commission at a fixed commission rate equal
to 3.0% of the gross proceeds per Share sold. Sales of the
Shares, if any, under the Sales Agreement may be made in
transactions that are deemed to be at the market offerings as
defined in Rule 415 under the Securities Act of 1933, as amended.
Savara has no obligation to sell any of the Shares, and may at
any time suspend sales under the Sales Agreement or terminate the
Sales
Agreement.

On April27, 2017, Savara
concurrently delivered written notice to Cowen and Company, LLC
that it was terminating its prior Sales Agreement, dated
August21,
2015.

Loan
Agreement

On April28, 2017, Savara and
the Company entered into a Loan and Security Agreement with
Silicon Valley Bank. The agreement provides for a $15million debt
facility, $7.5million of which was immediately available to
Savara upon completion of the Merger with a minimum market cap of
$100,000,000. The primary use of the capital is for the repayment
of Savara (formerly Mast) pre-merger debt of $3.7million owed to
Hercules Technology Growth Capital. In addition, the capital will
be utilized to fund ongoing development programs of Savara and
Aravas and for general corporate purposes. Under the terms of the
agreement, Savara may, but is not obligated to draw an additional
amount of $7.5million through June30, 2017, subject to the
achievement of certain corporate
milestones

specifically a minimum new
capital raise with combined proceeds of at least $40,000,000
through a secondary offering, private investment in public entity
(PIPE), ATM (see Common Stock Sales Agreement section above),
partnerships or grant to be received within twelve months of
signing the
agreement.

Interest only payments are due
through September 2018 followed by monthly payments of principal
plus interest over the following thirty (30)months. If the second
tranche is fully extended, the interest only period will be
extended for an additional six (6)months, through March 2019
followed by monthly payments of principal plus interest over the
following twenty-four (24)months. Interest of Prime plus 4.25%
will be charged per the agreement and the maturity date is
March1, 2021. Upon funding the first tranche, Savara is obligated
to issue warrants to purchase shares of Savaras common stock
equal to 3.0% of the funded amount divided by the exercise price
to be set based on the average price per share over the preceding
10 trading days prior to closing or the price per share prior to
the day of closing. Upon funding the second tranche, Savara is
obligated to issue warrants to purchase shares of the Savaras
common stock equal to 3.0% of the funded amount divided by an
exercise price to be set based on the average price per share
over the preceding 10 trading days prior to funding or the price
per share prior to the day of funding. There are no financial
covenants associated with this loan
agreement.

Financial Advisor
Fees

The Company executed an
agreement with Canaccord Genuity in February 2016 with a
follow-on agreement executed in March 2017 where the Company is
obligated to pay Canaccord a success fee upon the closing of the
Merger of at least $850,000 plus or minus 1% if the equity value,
as defined, is above or below 100,000,000, respectively. A
portion of the success fee, $500,000, is payable upon the closing
of the Merger and the remaining amount due will be paid upon the
closing of the Companys first financing following the closing of
the
Merger.

About SAVARA INC. (NASDAQ:SVRA)
Savara Inc., formerly Mast Therapeutics, Inc., is a clinical-stage pharmaceutical company. The Company is focused on the development and commercialization of novel therapies for the treatment of patients with rare respiratory diseases. Its pipeline includes AeroVanc, Molgradex and AIR001. AeroVanc is an inhaled formulation of vancomycin, which the Company is developing for the treatment of persistent methicillin-resistant Staphylococcus aureus, lung infection in cystic fibrosis patients. Molgradex is an inhaled formulation of recombinant human granulocyte-macrophage colony-stimulating factor. It is developing Molgradex for the treatment of autoimmune pulmonary alveolar proteinosis, a rare lung disease. AIR001 is a sodium nitrite solution for inhalation via nebulization. AIR001 is in Phase II clinical development for the treatment of heart failure with preserved ejection fraction, also known as diastolic heart failure or heart failure with preserved systolic function. SAVARA INC. (NASDAQ:SVRA) Recent Trading Information
SAVARA INC. (NASDAQ:SVRA) closed its last trading session down -0.03 at 5.93 with 135,660 shares trading hands.

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