10-Q 1 avtx-20220930.htm 10-Q avtx-20220930
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended September 30, 2022
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 001-37590
AVALO THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation)
45-0705648
(I.R.S. Employer Identification No.)
540 Gaither Road, Suite 400
Rockville, Maryland 20850
(Address of principal executive offices)
(410) 522-8707
(Registrant’s telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, $0.001 par value

AVTX
Nasdaq Capital Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐ 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☑
Smaller reporting company ☑
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐  No ☑
As of November 3, 2022, the registrant had 9,414,104 shares of common stock outstanding.


AVALO THERAPEUTICS, INC.
 
FORM 10-Q
 
For the Quarter Ended September 30, 2022
 
TABLE OF CONTENTS 
      
     Page
    
  
      
   
      
  a) 
     
  b) 
     
d)
    
 c)
  e) 
     
  
     
  
     
  
 
     
  
     
  
  
    
  
2

PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements.
AVALO THERAPEUTICS, INC. and SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share and per share data)
 
September 30, 2022December 31, 2021
Assets        
Current assets:  
Cash and cash equivalents$16,943 $54,585 
Accounts receivable, net— 1,060 
Other receivables1,314 3,739 
Inventory, net22 38 
Prepaid expenses and other current assets1,118 2,372 
Restricted cash, current portion53 51 
Total current assets19,450 61,845 
Property and equipment, net2,507 2,695 
Other long-term asset— 1,000 
Intangible assets, net— 38 
Goodwill14,409 14,409 
Restricted cash, net of current portion181 227 
Total assets$36,547 $80,214 
Liabilities and stockholders’ (deficit) equity  
Current liabilities:  
Accounts payable$1,447 $3,369 
Deferred revenue442 — 
Accrued expenses and other current liabilities13,696 16,519 
Notes payable, current2,564 — 
Total current liabilities18,149 19,888 
Notes payable, non-current16,502 32,833 
Royalty obligation2,000 2,000 
Deferred tax liability, net133 113 
Other long-term liabilities1,791 2,298 
Total liabilities38,575 57,132 
Stockholders’ (deficit) equity:  
Common stock—$0.001 par value; 200,000,000 shares authorized at September 30, 2022 and December 31, 2021; 9,414,104 and 9,399,517 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively1
9 9 
Additional paid-in capital1
291,975 285,239 
Accumulated deficit(294,012)(262,166)
Total stockholders’ (deficit) equity(2,028)23,082 
Total liabilities and stockholders’ (deficit) equity$36,547 $80,214 

1 Amounts for prior periods presented have been retroactively adjusted to reflect the 1-for-12 reverse stock split effected on July 7, 2022. See Note 1 for details.

See accompanying notes to the unaudited condensed consolidated financial statements.
3
AVALO THERAPEUTICS, INC. and SUBSIDIARIES
 
Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)
(In thousands, except per share data)

 
Three Months EndedNine Months Ended
 September 30,September 30,
 2022202120222021
Revenues:
Product revenue, net$432 $1,350 $2,638 $4,554 
License revenue14,517 — 14,517 625 
Total revenues, net14,949 1,350 17,155 5,179 
Operating expenses:
Cost of product sales528 908 2,814 1,067 
Research and development7,042 10,551 25,136 48,325 
Selling, general and administrative3,284 5,926 17,752 18,677 
Amortization expense— 428 38 1,281 
Total operating expenses10,854 17,813 45,740 69,350 
4,095 (16,463)(28,585)(64,171)
Other expense:
Interest expense, net(898)(985)(3,221)(1,207)
Other expense, net— (15)(20)(20)
Total other expense, net from continuing operations(898)(1,000)(3,241)(1,227)
Income (loss) from continuing operations before taxes3,197 (17,463)(31,826)(65,398)
Income tax expense (benefit)5 8 20 (180)
Income (loss) from continuing operations$3,192 $(17,471)$(31,846)$(65,218)
Income from discontinued operations— 76 — 38 
Net income (loss)$3,192 $(17,395)$(31,846)$(65,180)
Net income (loss) per share of common stock, basic and diluted1:
Continuing operations$0.34 $(2.09)$(3.39)$(8.02)
Discontinued operations0.00 0.01 0.00 0.00 
Net income (loss) per share of common stock, basic and diluted$0.34 $(2.08)$(3.39)$(8.02)
Net loss per share of preferred stock, basic and diluted1:
Continuing operations$(3.34)
Discontinued operations0.00 
Net loss per share of preferred stock, basic and diluted$(3.34)

1 Amounts for prior periods presented have been retroactively adjusted to reflect the 1-for-12 reverse stock split effected on July 7, 2022. See Note 1 for details.

See accompanying notes to the unaudited condensed consolidated financial statements.
4

AVALO THERAPEUTICS, INC. and SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ (Deficit) Equity (Unaudited)
(In thousands, except share amounts)

 Common stockAdditional paid-inAccumulatedTotal stockholders’
 
Shares1
Amount1
capital1
deficitdeficit
Three Months Ended September 30, 2022
Balance, June 30, 20229,405,724 $9 $291,244 $(297,204)$(5,951)
Impact of reverse stock split fractional share round-up8,380 — — — — 
Stock-based compensation— — 731 — 731 
Net income— — — 3,192 3,192 
Balance, September 30, 20229,414,104 $9 $291,975 $(294,012)$(2,028)

 Common stockAdditional paid-inAccumulatedTotal stockholders’
 
Shares1
Amount1
capital1
deficitdeficit
Nine Months Ended September 30, 2022
Balance, December 31, 20219,399,517 $9 $285,239 $(262,166)$23,082 
Restricted stock units vested during period938 — — — — 
Shares purchased through employee stock purchase plan5,269 — 25 — 25 
Impact of reverse stock split fractional share round-up8,380 — — — — 
Stock-based compensation— — 6,711 — 6,711 
Net loss— — — (31,846)(31,846)
Balance, September 30, 20229,414,104 $9 $291,975 $(294,012)$(2,028)
5

 Common stockAdditional paid-inAccumulatedTotal stockholders’
 
Shares1
Amount1
capital1
deficitequity
Three Months Ended September 30, 2021
Balance, June 30, 20218,000,746 $8 $247,155 $(225,575)$21,588 
Issuance of common stock in underwritten public offering, net1,192,407 1 29,045 — 29,046 
Issuance of common stock pursuant to ATM Program, net 166,667 — 5,312 — 5,312 
Stock-based compensation— — 1,758 — 1,758 
Net loss— — — (17,395)(17,395)
Balance, September 30, 20219,359,820 $9 $283,270 $(242,970)$40,309 

 Common stockPreferred StockAdditional paid-inAccumulatedTotal stockholders’
 
Shares1
Amount1
SharesAmount
capital1
deficitequity
Nine Months Ended September 30, 2021
Balance, December 31, 20206,250,344 $6 1,257,143 $1 $202,345 $(177,790)$24,562 
Issuance of shares of common stock and pre-funded warrants in underwritten public offering, net1,164,323 1 — — 37,652 — 37,653 
Issuance of common stock in underwritten public offering, net1,192,407 1 — — 29,045 — 29,046 
Issuance of common stock pursuant to ATM Program, net166,667 — — — 5,312 — 5,312 
Issuance of equity classified warrants related to venture loan and security agreement— — — — 861 — 861 
Exercise of stock options48,385 — — — 1,568 — 1,568 
Conversion of preferred stock to common stock523,810 1 (1,257,143)(1)— — — 
Shares purchased through employee stock purchase plan7,391 — — — 207 — 207 
Restricted stock units vested during period6,493 — — — — — — 
Stock-based compensation— — — — 6,280 — 6,280 
Net loss— — — — — (65,180)(65,180)
Balance, September 30, 20219,359,820 $9 — $— $283,270 $(242,970)$40,309 
1 Amounts for prior periods presented have been retroactively adjusted to reflect the 1-for-12 reverse stock split effected on July 7, 2022. See Note 1 for details.

See accompanying notes to the unaudited condensed consolidated financial statements.
6

AVALO THERAPEUTICS, INC. and SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Amounts in thousands)
 Nine Months Ended September 30,
 20222021
Operating activities        
Net loss$(31,846)$(65,180)
Adjustments to reconcile net loss used in operating activities:
Depreciation and amortization131 1,362 
Stock-based compensation6,711 6,280 
Accretion of debt discount1,040 445 
Allowance for other long-term asset1,000 — 
Deferred taxes20 40 
Changes in assets and liabilities:
Accounts receivable, net1,060 742 
Other receivables2,425 (269)
Other long-term asset— (2,000)
Inventory, net16 (13)
Prepaid expenses and other assets1,254 1,252 
Accounts payable (1,922)994 
Deferred revenue442 
Accrued expenses and other liabilities(3,144)2,604 
Lease liability, net2 (50)
Net cash used in operating activities(22,811)(53,793)
Investing activities  
Purchase of property and equipment(95)(102)
Net cash used in investing activities(95)(102)
Financing activities  
Proceeds from issuance of common stock and pre-funded warrants in underwritten public offering, net— 37,653 
Proceeds from Notes and warrants, net of debt issuance costs paid— 32,900 
Prepayment on Notes(14,806)— 
Proceeds from issuance of common stock in underwritten public offering, net— 29,046 
Proceeds from common stock pursuant to ATM Program, net— 5,312 
Proceeds from exercise of stock options— 1,568 
Proceeds from issuance of common stock under employee stock purchase plan25 207 
Net cash (used in) provided by financing activities(14,781)106,686 
(Decrease) increase in cash, cash equivalents and restricted cash(37,687)52,791 
Cash, cash equivalents, and restricted cash at beginning of period54,864 19,106 
Cash, cash equivalents, and restricted cash at end of period$17,177 $71,897 
Supplemental disclosures of cash flow information  
Cash paid for interest$2,256 $796 

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows (in thousands):
September 30,
20222021
Cash and cash equivalents$16,943 $71,506 
Restricted cash, current53 164 
Restricted cash, non-current181 227 
Total cash, cash equivalents and restricted cash$17,177 71,897 
See accompanying notes to the unaudited condensed consolidated financial statements.
7

AVALO THERAPEUTICS, INC. and SUBSIDIARIES
 
Notes to Unaudited Condensed Consolidated Financial Statements 

 
1. Business

Avalo Therapeutics, Inc. (the “Company” or “Avalo” or “we”) is a clinical stage biotechnology company focused on the treatment of immune dysregulation by developing therapies that target the LIGHT network.

LIGHT (Lymphotoxin-like, exhibits Inducible expression, and competes with HSV Glycoprotein D for Herpesvirus Entry Mediator (“HVEM”), a receptor expressed by T lymphocytes; also referred to as TNFSF14) is an immunoregulatory cytokine. LIGHT and its signaling receptors, HVEM (TNFRSF14), and lymphotoxin β receptor (TNFRSF3), form an immune regulatory network with two co-receptors of herpesvirus entry mediator, checkpoint inhibitor B and T Lymphocyte Attenuator (“BTLA”), and CD160 (collectively, the “LIGHT-signaling network” or the “LIGHT network”). Accumulating evidence points to the dysregulation of the LIGHT network as a disease-driving mechanism in autoimmune and inflammatory reactions in barrier organs. Therefore, we believe reducing LIGHT levels can moderate immune dysregulation in many acute and chronic inflammatory disorders.

Avalo was incorporated in Delaware and commenced operation in 2011, and completed its initial public offering in October 2015.

On July 7, 2022, Avalo effected a 1-for-12 reverse stock split. The Company retroactively applied the reverse stock split to share and per share amounts for periods prior to July 7, 2022, including the unaudited condensed consolidated financial statements for the nine months ended September 30, 2022, three and nine months ended September 30, 2021, and the year ended December 31, 2021. Additionally, pursuant to their terms, a proportionate adjustment was made to the per share exercise price and number of shares issuable under all of the Company’s outstanding options and warrants, and the number of shares authorized for issuance pursuant to the Company’s equity incentive plans have been reduced proportionately. Avalo retroactively applied such adjustments in the notes to the unaudited condensed consolidated financial statements for periods presented prior to July 7, 2022, including the nine months ended September 30, 2022, three and nine months ended September 30, 2021, and the year ended December 31, 2021. The reverse stock split did not reduce the number of authorized shares of common and preferred stock and did not alter the par value.

Liquidity

In order to meet its cash flow needs, the Company applies a disciplined decision-making methodology as it evaluates the optimal allocation of the Company’s resources between investing in the Company’s existing pipeline assets and acquisitions or in-licensing of new assets. As of September 30, 2022, Avalo had $16.9 million in cash and cash equivalents. For the nine months ended September 30, 2022, Avalo generated a net loss of $31.8 million and negative cash flows from operations of $22.8 million. As of September 30, 2022, Avalo had an accumulated deficit of $294.0 million.

In the second quarter of 2022, as collectively agreed upon with the Lenders (as defined below), the Company made a partial prepayment of $15.0 million ($14.8 million of which was applied to principal) on the notes (the “Notes) issued under its venture loan and security agreement (the “Loan Agreement”) with Horizon Technology Finance Corporation (“Horizon”) and Powerscourt Investments XXV, LP (“Powerscourt”, and together with Horizon, the “Lenders”). Avalo intends to consider additional prepayments prior to principal loan amounts coming due, if collectively agreed upon with the Lenders. As of September 30, 2022, the carrying value of the Notes (as defined in Note 9) was $19.1 million.

The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern; however, losses are expected to continue as the Company continues to invest in its research and development pipeline assets. The Company will require additional financing to fund its operations and to continue to execute its business strategy within one year after the date the unaudited condensed consolidated financial statements included herein were issued. We anticipate that the cash and cash equivalents as of September 30, 2022 will not be sufficient for us to fund our product candidates through their next anticipated milestones, which include topline data from the AVTX-002 Phase 2 PEAK trial and pivotal data from the AVTX-803 LADDER trial, both expected in the first half of 2023. We will need to raise additional capital to reach these milestones. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

To mitigate these conditions and to meet the Company’s capital requirements, management plans to use its current cash on hand along with some combination of the following: (i) dilutive and/or non-dilutive financings, (ii) out-licensing or strategic alliances/collaborations of its current pipeline assets, (iii) out-licensing or sale of its non-core assets, and (iv) federal and/or private grants. If the Company raises additional funds through collaborations, strategic alliances or licensing arrangements with third parties, the Company might have to relinquish valuable rights to its technologies, future revenue streams, research programs or product candidates. Subject to limited exceptions, the Loan Agreement prohibits the Company from incurring certain additional indebtedness, making certain asset dispositions, and entering into certain mergers, acquisitions or other business combination transactions without the prior consent of the
8
Lenders. Additionally, the Loan Agreement contains certain covenants and certain other specified events that could result in an event of default, which if not cured or waived, could result in the immediate acceleration of all or a substantial portion of the outstanding Notes. As of the filing date of this Quarterly Report on Form 10-Q, the Company was not aware of any breach of covenants or occurrence of material adverse change, nor had it received any notice of event of default from the Lenders (refer to Note 9 of the condensed unaudited consolidated financial statements for more information).

If the Company requires but is unable to obtain additional funding, the Company may be forced to make reductions in spending, delay, suspend, reduce or eliminate some or all of its planned research and development programs, or liquidate assets where possible. Due to the uncertainty regarding future financing and other potential options to raise additional funds, management has concluded that substantial doubt exists with respect to the Company’s ability to continue as a going concern within one year after the date that the financial statements in this Quarterly Report on Form 10-Q were issued.

Over the long term, the Company’s ultimate ability to achieve and maintain profitability will depend on, among other things, the development, regulatory approval, and commercialization of its pipeline assets, and the potential receipt and sale of any priority review vouchers it receives.

2. Basis of Presentation and Significant Accounting Policies
 
Basis of Presentation
 
The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”).

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly the Company’s financial position, results of operations, and cash flows. The condensed consolidated balance sheet at December 31, 2021 has been derived from audited financial statements at that date. The interim results of operations are not necessarily indicative of the results that may occur for the full fiscal year. Certain information and footnote disclosure normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to instructions, rules, and regulations prescribed by the United States Securities and Exchange Commission (“SEC”).

The Company believes that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited condensed consolidated financial statements are read in conjunction with the December 31, 2021 audited consolidated financial statements.

In the second quarter of 2022, the Company concluded that it would include sales and marketing expenses within the selling, general and administrative line in the Company’s condensed consolidated statement of operations. The Company reclassified $0.7 million and $2.0 million from sales and marketing expense to selling, general and administrative expense for the three and nine months ended September 30, 2021, respectively, to conform with the current period presentation.

Unless otherwise indicated, all amounts in the following tables are in thousands except share and per share amounts.

Significant Accounting Policies

During the nine months ended September 30, 2022, there were no significant changes to the Company’s summary of significant accounting policies contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 2, 2022.

3. Revenue

In July 2022, Avalo entered into a license agreement with Apollo AP43 Limited, a wholly owned subsidiary of Apollo Therapeutics Group Limited (collectively, “Apollo”) pursuant to which the Company granted Apollo a worldwide, exclusive license to research, develop, manufacture and commercialize AVTX-007, an anti-IL-18 monoclonal antibody (the “Apollo License Agreement”). Pursuant to the Apollo License Agreement, the Company received an upfront payment of $14.5 million, which was recognized as license revenue for the three and nine months ended September 30, 2022.
9

The Company generates substantially all of its product revenue from sales of Millipred®, an oral prednisolone indicated across a wide variety of inflammatory conditions, which is considered a prescription drug. The Company sells its prescription drug in the United States primarily through wholesale distributors. Wholesale distributors account for substantially all of the Company’s net product revenues and trade receivables. For the three months ended September 30, 2022, the Company’s two largest customers accounted for approximately 65% and 35%, respectively, of the Company’s total net product revenues. For the nine months ended September 30, 2022, the Company’s two largest customers accounted for approximately 72% and 28%, respectively, of the Company’s total net product revenues. Net revenue from sales of prescription drugs was $0.4 million and $1.4 million for the three months ended September 30, 2022 and 2021, respectively, and $2.6 million and $4.6 million for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, deferred revenue was $0.4 million due to the receipt of payment from wholesale distributors related to product that had not yet been sold to the customer.

The Company has a license and supply agreement for the Millipred® product with a wholly owned subsidiary of Teva Pharmaceutical Industries Ltd. (“Teva”), which expires on September 30, 2023. Beginning July 1, 2021, Avalo was required to pay Teva fifty percent of the net profit of the Millipred® product following each calendar quarter, subject to a $0.5 million quarterly minimum payment unless total net profit is below a specified threshold. For the three and nine months ended September 30, 2022, the Company recognized $0.4 million and $1.4 million, respectively, in cost of product sales related to the royalty. Dr. Sol Barer served as the Chairman of the Company’s board of directors until June 2021 and currently serves as the Chairman of Teva’s board of directors.

Aytu BioScience, Inc. (“Aytu”), to which the Company sold its rights, title, and interests in assets relating to certain commercialized products in 2019 (the “Aytu Transaction”), managed Millipred® commercial operations until August 31, 2021 pursuant to transition service agreements, which included managing the third-party logistics provider and providing accounting reporting services. Aytu collected cash on behalf of Avalo for revenue generated by sales of Millipred® from the second quarter of 2020 through the third quarter of 2021 and is obligated to transfer cash generated by such sales to Avalo. In the third quarter of 2021, Avalo finalized its trade and distribution channel to allow it to control the third-party distribution and began managing Millipred® commercial operations at that time. The current transition services agreement allows Aytu to withhold cash of $2.0 million until September 30, 2022 and $1.0 million until December 2024. The Company received $2.2 million from Aytu in first quarter of 2022. As of September 30, 2022, the total receivable balance was approximately $1.8 million. As disclosed in its Annual Report on Form 10-K for the year ended June 30, 2022 (filed September 27, 2022), Aytu concluded that substantial doubt exists with respect to their ability to continue as a going concern within one year after the date that the financial statements were issued, or until September 2023. As such, the Company fully reserved for the $1.0 million due in December 2024 and recognized the related expense in cost of product sales for the nine months ended September 30, 2022. The remaining $0.8 million is included within other receivables and is contractually owed in the fourth quarter of 2022.

4. Net (Loss) Income Per Share

The Company computes earnings per share (“EPS”) using the two-class method. The two-class method of computing EPS is an earnings allocation formula that determines EPS for common stock and any participating securities according to dividends declared and participation rights in undistributed earnings.

The Company had only common stock outstanding during the three and nine months ended September 30, 2022 and three months ended September 30, 2021. The Company had two classes of stock outstanding during the nine months ended September 30, 2021; common stock and preferred stock. The preferred stock outstanding during the prior period converted to shares of common stock on an approximately 1-for-0.42 ratio (ratio adjusted for the reverse stock split) and had the same rights, preferences and privileges as the Company’s common stock other than it held no voting rights. In April 2021, Armistice Capital, LLC (“Armistice”), which is a significant stockholder of the Company and whose chief investment officer, Steven Boyd, and managing director, Keith Maher, served on Avalo’s Board until August 8, 2022, converted the then outstanding 1,257,143 shares of convertible preferred stock into 523,810 shares of Avalo’s common stock. Under the two-class method, the convertible preferred stock was considered a separate class of stock until the time it was converted to common shares for EPS purposes. Therefore, basic and diluted EPS is provided below for common stock for the three and nine months ended September 30, 2022 and three months ended September 30, 2021, and both common stock and preferred stock for the nine months ended September 30, 2021.

EPS for common stock and EPS for preferred stock is computed by dividing the sum of distributed earnings and undistributed earnings for each class of stock by the weighted average number of shares outstanding for each class of stock for the period. In applying the two-class method, undistributed earnings are allocated to common stock and preferred stock based on the weighted average shares outstanding during the period, which assumed the convertible preferred stock had been converted to common stock. The weighted average number of common shares outstanding as of September 30, 2022 and 2021 include the weighted average effect of the pre-funded warrants issued in connection with the underwritten public offering that closed in January 2021, the exercise of which requires nominal consideration for the delivery of the shares of common stock (refer to Note 10 for more information).

10

Diluted net (loss) income per share includes the potential dilutive effect of common stock equivalents as if such securities were converted or exercised during the period, when the effect is dilutive. Common stock equivalents include: (i) outstanding stock options and restricted stock units, which are included under the “treasury stock method” when dilutive; and (ii) common stock to be issued upon the exercise of outstanding warrants, which are included under the “treasury stock method” when dilutive. Because the impact of these items is generally anti-dilutive during periods of net loss, there is no difference between basic and diluted loss per common share for periods with net losses. In periods of net loss, losses are allocated to the participating security only if the security has not only the right to participate in earnings, but also a contractual obligation to share in the Company’s losses.

The following tables set forth the computation of basic and diluted net (loss) income per share of common stock for the three and nine months ended September 30, 2022 and three months ended September 30, 2021, and common stock and preferred stock for the nine months ended September 30, 2021 (in thousands, except share and per share amounts): 

Three Months Ended
 September 30, 2022
Common stock
Basic income per share:
Net income$3,192 
Weighted average shares9,413,466 
Basic net income per share$0.34 
Diluted income per share:
Net income$3,192 
Weighted average shares - basic9,413,466 
Effect of dilutive securities:
Potentially dilutive shares166 
Weighted average shares - diluted9,413,632 
Diluted net income per share$0.34 

Nine Months Ended
 September 30, 2022
Common stock
Net loss$(31,846)
Weighted average shares9,404,679 
Basic and diluted net loss per share$(3.39)

Three Months Ended
 September 30, 2021
Common stock
Continuing OperationsDiscontinued Operations
Allocation of undistributed net (loss) income$(17,471)$76 
Weighted average shares8,374,200 8,374,200 
Basic and diluted net (loss) income per share$(2.09)$0.01 
11

Nine Months Ended
 September 30, 2021
Common stockPreferred stock
Continuing OperationsDiscontinued OperationsContinuing OperationsDiscontinued Operations
Allocation of undistributed net (loss) income$(63,602)$37 $(1,616)$1 
Weighted average shares7,927,152 7,927,152 483,517 483,517 
Basic and diluted net (loss) income per share$(8.02)$0.00 $(3.34)$0.00 

The following outstanding securities have been excluded from the computation of diluted weighted shares outstanding for the three and nine months ended September 30, 2022 and 2021, as they could have been anti-dilutive: 
 Three and Nine Months Ended
September 30,
 20222021
Stock options1,260,9061,122,785
Warrants on common stock1
366,990367,186
Restricted Stock Units—6,493
1 The weighted average number of common shares outstanding as of September 30, 2021 included the weighted average effect of the 139,747 pre-funded warrants issued in connection with the underwritten public offering that closed in January 2021 because the exercise of such warrants requires only nominal consideration ($0.012 per share exercise price for each pre-funded warrant). During 2021, the holder exercised 25,740 of the pre-funded warrants. As of September 30, 2022, the weighted average number of common shares outstanding included the weighted average effect of the remaining 114,007 pre-funded warrants outstanding. These pre-funded warrants are not included in the table above.

5. Fair Value Measurements
 
ASC No. 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value standard also establishes a three‑level hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels are defined as follows:
•Level 1—inputs to the valuation methodology are quoted prices (unadjusted) for an identical asset or liability in an active market.
•Level 2—inputs to the valuation methodology include quoted prices for a similar asset or liability in an active market or model‑derived valuations in which all significant inputs are observable for substantially the full term of the asset or liability. 
•Level 3—inputs to the valuation methodology are unobservable and significant to the fair value measurement of the asset or liability.
 
The following table presents, for each of the fair value hierarchy levels required under ASC 820, the Company’s assets and liabilities that are measured at fair value on a recurring basis (in thousands): 
 September 30, 2022
 Fair Value Measurements Using
 Quoted prices inSignificant otherSignificant
 active markets forobservableunobservable
 identical assetsinputsinputs
 (Level 1)(Level 2)(Level 3)
Assets            
Investments in money market funds*$16,079 $— $— 
12

 December 31, 2021
 Fair Value Measurements Using
 Quoted prices inSignificant otherSignificant
 active markets forobservableunobservable
 identical assetsinputsinputs
 (Level 1)(Level 2)(Level 3)
Assets            
Investments in money market funds*$54,010 $— $— 

*Investments in money market funds are reflected in cash and cash equivalents on the accompanying condensed consolidated balance sheets.

As of September 30, 2022 and December 31, 2021, the Company’s financial instruments included cash and cash equivalents, restricted cash, accounts receivable, other receivables, prepaid and other current assets, accounts payable, accrued expenses and other current liabilities, and long-term debt. The carrying amounts reported in the accompanying condensed consolidated financial statements for cash and cash equivalents, restricted cash, accounts receivable, other receivables, prepaid and other current assets, accounts payable, and accrued expenses and other current liabilities approximate their respective fair values because of the short-term nature of these accounts. The estimated fair value of the Company’s debt approximates its carrying value as of September 30, 2022 and is in Level Two of the fair value hierarchy (refer to Note 9 for more information).

No changes in valuation techniques or inputs occurred during the nine months ended September 30, 2022 and 2021. No transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy occurred during the nine months ended September 30, 2022 and 2021.

6. Leases

The Company currently occupies two leased properties, both of which serve as administrative office space. The Company determined that both of these leases are operating leases based on the lease classification test performed at lease commencement.

The annual base rent for the Company’s office located in Rockville, Maryland is $0.2 million, subject to annual 2.5% increases over the term of the lease. The applicable lease provided for a rent abatement for a period of 12 months following the Company’s date of occupancy. The lease has an initial term of 10 years from the date the Company made its first annual fixed rent payment, which occurred in January 2020. The Company has the option to extend the lease two times, each for a period of five years, and may terminate the lease as of the sixth anniversary of the first annual fixed rent payment, upon the payment of a termination fee.

The initial annual base rent for the Company’s office located in Chesterbrook, Pennsylvania is $0.2 million and the annual operating expenses are approximately $0.1 million. The annual base rent is subject to periodic increases of approximately 2.4% over the term of the lease. The lease provided for a rent abatement period of three months following lease commencement. The lease has an initial term of 5.25 years from the lease commencement on December 1, 2021.

The weighted average remaining term of the operating leases at September 30, 2022 was 5.8 years.

Supplemental balance sheet information related to the leased properties include (in thousands):
 As of
 September 30, 2022December 31, 2021
Property and equipment, net $1,813 $2,001 
Accrued expenses and other current liabilities$526 $485 
Other long-term liabilities1,791 2,018 
Total operating lease liabilities$2,317 $2,503 
    
The operating lease right-of-use (ROU) assets are included in property and equipment, net and the lease liabilities are included in accrued expenses and other current liabilities and other long-term liabilities in our condensed consolidated balance sheets. The Company utilized a weighted average discount rate of 9.2% to determine the present value of the lease payments.
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The components of lease expense for the three and nine months ended September 30, 2022 and 2021 were as follows (in thousands):
 Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Operating lease cost*$134 $97 $373 $287 
*Includes short-term leases, which are immaterial.

The following table shows a maturity analysis of the operating lease liabilities as of September 30, 2022 (in thousands):
 
 Undiscounted Cash Flows
October 1, 2022 through December 31, 2022$130 
2023528 
2024537 
2025547 
2026557 
2027258 
Thereafter426 
Total lease payments$2,983 
Less implied interest (666)
Total$2,317 



7. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities as of September 30, 2022 and December 31, 2021 consisted of the following (in thousands): 
 As of
 September 30, 2022December 31, 2021
Research and development$7,094 $8,221 
Compensation and benefits2,972 4,310 
Selling, general and administrative903 1,386 
Commercial operations1,798 1,733 
Royalty payment399 375 
Lease liability, current526 485 
Other4 9 
Total accrued expenses and other current liabilities$13,696 $16,519 

8. Cost Reduction Plan

In the first quarter of 2022, the Board approved a cost reduction plan to enable the Company to execute its strategy of prioritizing the development of its most promising programs (the “Plan”). As part of the Plan, the Company announced plans to wind down internal development efforts of AVTX-006 and pause development efforts of AVTX-802. Accordingly, a reduction in workforce plan was approved to reduce headcount and related expenses. The reduction in workforce plan, which was considered a one-time termination benefit, was completed in the second quarter of 2022.

The one-time termination benefits mainly relate to severance payments to separated employees. As a result, the Company recognized $1.5 million of expense during the first quarter of 2022, of which $0.7 million was recognized in research and development expense, and $0.8 million was recognized in selling, general and administrative expense.

Of the $1.5 million initial liability recognized in the first quarter of 2022, $1.2 million was paid in the nine months ended September 30, 2022. The remaining severance liability will be paid over the next two to six months as dictated in each separation
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agreement. Additionally, $0.4 million of stock-based compensation expense was recognized in the first quarter of 2022 related to the Plan, which was mainly related to accelerated vesting of certain separated employees’ stock options.

In addition, previously and separately, during the first quarter of 2022, the Company separated certain section 16 executive officers. Each of the former executives are entitled to the benefits provided in their respective separation agreements, which include severance payments to be paid over twelve to eighteen months. As a result, the Company recognized $1.7 million expense for the nine months ended September 30, 2022 within selling, general and administrative expenses. Additionally, the Company accelerated the vesting of certain outstanding stock options and extended the exercisability periods, which resulted in $3.9 million of compensation cost recognized in first quarter of 2022. Refer to Note 11 for information regarding stock compensation expense related to separations entered into in the first quarter of 2022.

9. Notes Payable

On June 4, 2021, the Company entered into the $35.0 million Loan Agreement with the Lenders. In accordance with the Loan Agreement, $20.0 million was funded on the closing date (the “Initial Note”), with the remaining $15.0 million fundable upon the Company achieving certain predetermined milestones, which the Company met in the third quarter of 2021. On July 30, 2021, after achieving a predetermined milestone, the Company borrowed an additional $10.0 million, which was evidenced by a second note payable (the “Second Note”). On September 29, 2021, after achieving a second predetermined milestone, the Company borrowed the remaining $5.0 million, which was evidenced by a third note payable (the “Third Note”, and collectively with the Initial and Second Notes, the “Notes”).

In June 2022, the Company, as collectively agreed upon with the Lenders, prepaid $15.0 million to the Lenders, of which $14.8 million was applied to principal and the remainder applied to accrued interest. As of September 30, 2022, the outstanding notes payable balance was $21.2 million, inclusive of the final payment fee. Avalo intends to consider additional prepayments prior to principal loan amounts coming due, if collectively agreed upon with the Lenders.

Each advance under the Loan Agreement will mature 42 months from the first day of the month following the funding of the advance. Each advance accrues interest at a per annum rate of interest equal to 6.25% plus the prime rate, as reported in the Wall Street Journal (subject to a floor of 3.25%). The Loan Agreement provides for interest-only payments for each advance for the first 18 months, however the interest-only period was extended to 24 months as a result of the Company satisfying the Interest Only Extension Milestone (as defined in the Loan Agreement) in the third quarter of 2021. Thereafter, amortization payments will be payable in monthly installments of principal and interest through each advance’s maturity date. Upon ten business days’ prior written notice, the Company may prepay all of the outstanding advances by paying the entire principal balance and all accrued and unpaid interest, subject to prepayment charges of up to 3% of the then outstanding principal balance. Upon the earlier of (i) payment in full of the principal balance, (ii) an event of default, or (iii) the maturity date, the Company will pay an additional final payment of 3% of the principal loan amount to the Lenders.

Each advance of the loan is secured by a lien on substantially all of the assets of the Company, other than Intellectual Property and Excluded Collateral (in each case as defined in the Loan Agreement), and contains customary covenants and representations, including a financial reporting covenant and limitations on dividends, indebtedness, collateral, investments, distributions, transfers, mergers or acquisitions, taxes, corporate changes, deposit accounts, and subsidiaries.

The events of default under the Loan Agreement include, but are not limited to, failing to make a payment, breach of covenant, or occurrence of a material adverse change. If an event of default occurs, the Lenders are entitled to accelerate the loan amounts due or take other enforcement actions. The accelerated payment obligations would include the outstanding principal balance (inclusive of the 3% final payment fee), a prepayment charge on the outstanding principal balance of up to 3%, and any accrued and unpaid interest. As of the filing date of this Quarterly Report on Form 10-Q, the Company was not aware of any breach of covenants, occurrence of a material adverse change, nor had it received any notice of event of default from the Lenders.

On June 4, 2021, pursuant to the Loan Agreement, the Company issued warrants to the Lenders to purchase 33,656 shares of the Company’s common stock with an exercise price of $31.20 per share (the “Warrants”). The Warrants are exercisable for ten years from the date of issuance. The Lenders may exercise the Warrants either by (a) cash or check or (b) through a net issuance conversion. The Warrants, which met equity classification, were recognized as a component of permanent stockholders’ equity within additional paid-in-capital and were recorded at the issuance date using a relative fair value allocation method. The Company valued the Warrants at issuance, which resulted in a discount on the debt, and allocated the proceeds from the loan proportionately to the Notes and to the Warrants, of which $0.9 million was allocated to the Warrants.

In the second quarter of 2021, the Company incurred $2.1 million in debt issuance costs, including legal fees in connection with the Loan Agreement, fees paid directly to the Lenders, and other direct costs. All fees, warrants, and costs paid to the Lenders and all direct costs incurred by the Company are recognized as a debt discount and are amortized to interest expense using the effective interest method over the term of the loan. The $1.1 million final payment fee is included in the contractual cash flows and is accreted to interest expense using the effective interest method over the term of the loan.

The effective interest rate of the Notes, including the accretion of the final payment, was 18.7% as of September 30, 2022.

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Balance sheet information related to the note payable for the Notes is as follows (in thousands):
As of
 September 30, 2022December 31, 2021Maturity
Initial Note12,139 20,600 January 2025
Second Note6,070 10,300 February 2025
Third Note3,035 5,150 April 2025
Notes payable, gross1
21,244 36,050 
Less: Unamortized debt discount and issuance costs2,178 3,217 
Carrying value of notes payable19,066 32,833 
Less: Current portion2,564 — 
Carrying value of notes payable, non-current16,502 32,833 

1 Balance includes $1.1 million final payment fee for the Notes, which represents 3% of the original principal loan amount.

As of September 30, 2022, the estimated future principal payments due on the Notes were as follows (in thousands):

 As of September 30, 2022
2022$— 
20235,930 
202413,463 
20251,851 
Total principal payments1
$21,244 

1 Balance includes $1.1 million final payment fee, which represents 3% of the original principal loan amount.


10. Capital Structure
 
Pursuant to the Company’s amended and restated certificate of incorporation, the Company is authorized to issue two classes of stock, common stock and preferred stock. At September 30, 2022, the total number of shares of capital stock the Company was authorized to issue was