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Table of Contents




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, 2021
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)
(410522-8707
(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

AVTXNasdaq 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 5, 2021, the registrant had 112,317,829 shares of common stock outstanding.


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AVALO THERAPEUTICS, INC.
 
FORM 10-Q
 
For the Quarter Ended September 30, 2021
 
TABLE OF CONTENTS 
      
     Page
    
  
      
   
      
  a) 
     
  b) 
     
d)
    
 c)
  e) 
     
  
     
  
     
  
 
     
  
     
  
  
    
  
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PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements.
AVALO THERAPEUTICS, INC. and SUBSIDIARIES

Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
 
September 30, 2021December 31, 2020
(unaudited)
Assets        
Current assets:  
Cash and cash equivalents$71,506 $18,919 
Accounts receivable, net1,435 2,177 
Other receivables2,477 2,208 
Inventory, net16 3 
Prepaid expenses and other current assets1,408 2,660 
Restricted cash, current portion164 38 
Total current assets77,006 26,005 
Property and equipment, net1,410 1,607 
Other long-term asset2,000  
Intangible assets, net304 1,585 
Goodwill14,409 14,409 
Restricted cash, net of current portion227 149 
Total assets$95,356 $43,755 
Liabilities and stockholders’ equity  
Current liabilities:  
Accounts payable$3,568 $2,574 
Accrued expenses and other current liabilities15,460 11,310 
Current liabilities of discontinued operations10 1,341 
Total current liabilities19,038 15,225 
Notes payable32,483  
Royalty obligation2,000 2,000 
Deferred tax liability, net130 90 
Other long-term liabilities1,396 1,878 
Total liabilities55,047 19,193 
Stockholders’ equity:  
Common stock—$0.001 par value; 200,000,000 shares authorized at September 30, 2021 and December 31, 2020; 112,317,829 and 75,004,127 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively
112 75 
Preferred stock—$0.001 par value; 5,000,000 shares authorized at September 30, 2021 and December 31, 2020; 0 and 1,257,143 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively
 1 
Additional paid-in capital283,167 202,276 
Accumulated deficit(242,970)(177,790)
Total stockholders’ equity40,309 24,562 
Total liabilities and stockholders’ equity$95,356 $43,755 

See accompanying notes to the unaudited condensed consolidated financial statements.
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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,
 2021202020212020
Revenues:
Product revenue, net$1,350 $1,111 $4,554 $5,202 
License revenue  625  
Total revenues, net1,350 1,111 5,179 5,202 
Operating expenses:
Cost of product sales908 77 1,067 221 
Research and development10,551 8,872 48,325 19,556 
Acquired in-process research and development   25,549 
General and administrative5,188 4,573 16,718 13,350 
Sales and marketing738 462 1,959 1,792 
Amortization expense428 404 1,281 1,238 
Total operating expenses17,813 14,388 69,350 61,706 
(16,463)(13,277)(64,171)(56,504)
Other (expense) income:
Change in fair value of Investment in Aytu   5,208 
Other (expense) income, net(15)19 (20)447 
Interest (expense) income, net(985) (1,207) 
Total other (expense) income, net from continuing operations(1,000)19 (1,227)5,655 
Loss from continuing operations before taxes(17,463)(13,258)(65,398)(50,849)
Income tax expense (benefit) 8 3 (180)(2,607)
Loss from continuing operations$(17,471)$(13,261)$(65,218)$(48,242)
Income (loss) from discontinued operations, net of tax76 (198)38 385 
Net loss$(17,395)$(13,459)$(65,180)$(47,857)
Net (loss) income per share of common stock, basic and diluted:
Continuing operations$(0.17)$(0.16)$(0.67)$(0.68)
Discontinued operations0.00 (0.01)0.00 0.00 
Net loss per share of common stock, basic and diluted$(0.17)$(0.17)$(0.67)$(0.68)
Net (loss) income per share of preferred stock, basic and diluted:
Continuing operations$(0.82)$(3.34)$(3.40)
Discontinued operations(0.01)0.00 0.02 
Net loss per share of preferred stock, basic and diluted$(0.83)$(3.34)$(3.38)

See accompanying notes to the unaudited condensed consolidated financial statements.
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AVALO THERAPEUTICS, INC. and SUBSIDIARIES

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

 Common stockPreferred StockAdditional paid-inAccumulatedTotal stockholders’
 SharesAmountSharesAmountcapitaldeficitequity
Three Months Ended September 30, 2021
Balance, June 30, 202196,008,951 $96  $ $247,067 $(225,575)$21,588 
Issuance of common stock in underwritten public offering, net14,308,878 14 — — 29,032 — 29,046 
Issuance of common stock pursuant to ATM Program, net2,000,000 2 — — 5,310 — 5,312 
Stock-based compensation— — — — 1,758 — 1,758 
Net loss— — — — — $(17,395)(17,395)
Balance, September 30, 2021112,317,829 $112  $ $283,167 $(242,970)$40,309 
 Common stockPreferred StockAdditional paid-inAccumulatedTotal stockholders’
 SharesAmountSharesAmountcapitaldeficitequity
Nine Months Ended September 30, 2021
Balance, December 31, 202075,004,127 $75 1,257,143 $1 $202,276 $(177,790)$24,562 
Issuance of shares of common stock and pre-funded warrants in underwritten public offering, net13,971,889 14 — — 37,639 — 37,653 
Issuance of common stock in underwritten public offering, net14,308,878 14 — — 29,032 — 29,046 
Issuance of common stock pursuant to ATM Program, net2,000,000 2 — — 5,310 — 5,312 
Issuance of equity classified warrants related to venture debt financing agreement— — — — 861 — 861 
Exercise of stock options580,617 1 — — 1,567 — 1,568 
Conversion of preferred stock to common stock6,285,715 6 (1,257,143)(1)(5)—  
Shares purchased through employee stock purchase plan88,686 — — — 207 — 207 
Restricted stock units vested during period77,917 — — — — — — 
Stock-based compensation — — — — 6,280 — 6,280 
Net loss— — — — — (65,180)(65,180)
Balance, September 30, 2021112,317,829 $112  $ $283,167 $(242,970)$40,309 



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 Common stockPreferred StockAdditional paid-inAccumulatedTotal stockholders’
 SharesAmountSharesAmountcapitaldeficitequity
Three Months Ended September 30, 2020
Balance, June 30, 202074,900,047 $75 1,257,143 $1 $199,191 $(148,689)$50,578 
Stock-based compensation— — — — 1,448 — 1,448 
Net loss— — — — — (13,459)(13,459)
Balance, September 30, 202074,900,047 $75 1,257,143 $1 $200,639 $(162,148)$38,567 
 Common stockPreferred StockAdditional paid-inAccumulatedTotal stockholders’
 SharesAmountSharesAmountcapitaldeficitequity
Nine Months Ended September 30, 2020
Balance, December 31, 201944,384,222 $44 2,857,143 $3 $135,239 $(114,291)$20,995 
Conversion of preferred stock to common stock8,000,000 8 (1,600,000)(2)(6)—  
Issuance of shares related to Aevi Merger 3,893,361 4 — — 15,492 — 15,496 
Issuance of shares pursuant to registered direct offering, net1,306,282 2 — — 5,135 — 5,137 
Issuance of shares pursuant to common stock private placement, net1,951,219 2 — — 3,886 — 3,888 
Issuance of shares of common stock in underwritten public offering, net15,180,000 15 — — 35,413 — 35,428 
Exercise of stock options and warrants50,239 — — — 92 — 92 
Restricted stock units vested during period111,667 — — — — — — 
Restricted stock units withheld for taxes(35,279)— — — (94)— (94)
Shares purchased through employee stock purchase plan58,336 — — — 133 — 133 
Stock-based compensation — — — — 5,349 — 5,349 
Net loss— — — — — (47,857)(47,857)
Balance, September 30, 202074,900,047 $75 1,257,143 $1 $200,639 $(162,148)$38,567 
See accompanying notes to the unaudited condensed consolidated financial statements.
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AVALO THERAPEUTICS, INC. and SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)
(Amounts in thousands)
 Nine Months Ended September 30,
 20212020
Operating activities        
Net loss$(65,180)$(47,857)
Adjustments to reconcile net loss used in operating activities:
Depreciation and amortization1,362 1,305 
Stock-based compensation6,280 5,349 
Accretion of debt discount445  
Acquired in-process research and development, including transaction costs 25,549 
Deferred taxes40 29 
Change in fair value of Investment in Aytu (5,208)
Change in fair value of warrant liability and unit purchase option liability (14)
Change in value of Guarantee (1,755)
Changes in assets and liabilities:
Accounts receivable, net742 (172)
Other receivables(269)(4,184)
Other long-term asset(2,000) 
Inventory, net(13)12 
Prepaid expenses and other assets1,252 (744)
Accounts payable 994 (548)
Income taxes payable 288 
Accrued expenses and other liabilities2,604 1,776 
Lease liability, net(50)10 
Net cash used in operating activities(53,793)(26,164)
Investing activities  
Proceeds from sale of Investment in Aytu, net 12,837 
Net cash paid in merger with Aevi (1,251)
Purchase of property and equipment(102)(63)
Net cash used in investing activities(102)11,523 
Financing activities  
Proceeds from issuance of common stock and pre-funded warrants in underwritten public offering, net37,653  
Proceeds from Notes and warrants, net of debt issuance costs paid32,900  
Proceeds from issuance of common stock in underwritten public offering, net29,046 35,429 
Proceeds from common stock pursuant to ATM Program, net5,312  
Proceeds from registered direct offering, net 5,136 
Proceeds from sale of shares pursuant to common stock private placement, net 3,888 
Proceeds from exercise of stock options1,568 92 
Proceeds from issuance of common stock under employee stock purchase plan207 133 
Restricted stock units withheld for taxes (94)
Net cash provided by financing activities106,686 44,584 
Increase in cash, cash equivalents and restricted cash52,791 29,943 
Cash, cash equivalents, and restricted cash at beginning of period19,106 3,729 
Cash, cash equivalents, and restricted cash at end of period$71,897 $33,672 
Supplemental disclosures of cash flow information  
Cash paid for interest$796 $ 
Cash paid for taxes$ $316 
Supplemental disclosures of non-cash activities
Issuance of common stock in Aevi Merger$ $15,496 
Leased asset obtained in exchange for new operating lease liability$ $376 
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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,
20212020
Cash and cash equivalents$71,506 $33,391 
Restricted cash, current164 132 
Restricted cash, non-current227 149 
Total cash, cash equivalents and restricted cash$71,897 33,672 
See accompanying notes to the unaudited condensed consolidated financial statements.

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

 
1. Business

Avalo Therapeutics, Inc. (the “Company” or “Avalo”) is a leading clinical-stage precision medicine company that discovers, develops, and commercializes targeted therapeutics for patients with significant unmet clinical need in immunology, immuno-oncology, and rare genetic diseases. The Company has built a diverse portfolio of innovative therapies to deliver meaningful medical impact for patients in urgent need. Avalo’s clinical candidates commonly have a proven mechanistic rationale, biomarkers and/or an established proof-of-concept to expedite and increase the probability of success.

In August 2021, the Company changed its corporate name change from Cerecor Inc. to Avalo Therapeutics, Inc. by filing a Certificate of Amendment to our Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware and merged certain wholly-owned subsidiaries into the Company to consolidate its corporate structure. The name change underscores the Company’s transition to developing innovative targeted therapies in immunology, immuno-oncology, and rare genetic diseases.

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

Liquidity

As of September 30, 2021, Avalo had $71.5 million in cash and cash equivalents. In September 2021, the Company closed an underwritten public offering of 14,308,878 shares of common stock for net proceeds of approximately $29.0 million. Additionally, in August 2021, the Company sold 2.0 million shares of common stock under its “at-the-market” sales agreement (the “ATM Program”) for net proceeds of approximately $5.3 million.

In June 2021, the Company entered into a $35.0 million venture debt financing agreement (the “Loan Agreement”) with Horizon Technology Finance Corporation and Powerscourt Investments XXV, LP (collectively, the “Lenders”). As of September 30, 2021, the Company has received the full $35.0 million, $20.0 million of which was funded on the closing date in the second quarter of 2021 and the remaining $15.0 million was funded during the third quarter of 2021 in two separate tranches. 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 acceleration of all or a substantial portion of the notes. As of the filing date of this Quarterly Report on Form 10-Q, the Company was not aware of any breach of covenants nor received any notice of event of default from the Lenders.

In the first quarter of 2021, the Company closed an underwritten public offering of 13,971,889 shares of its common stock and 1,676,923 pre-funded warrants for net proceeds of approximately $37.7 million.

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. For the nine months ended September 30, 2021, Avalo generated a net loss of $65.2 million and negative cash flows from operations of $53.8 million. As of September 30, 2021, Avalo had an accumulated deficit of $243.0 million.

The accompanying 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 at least one year after the date the condensed consolidated financial statements included herein were issued. 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) federal and/or private grants, (iii) other out-licensing or strategic alliances/collaborations of its current pipeline assets, and (iv) out-licensing or sale of its non-core assets. 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, our venture debt financing agreement prohibits us from incurring certain additional indebtedness, making certain asset dispositions, and entering into certain mergers, acquisitions or other business combination transactions without prior consent of the Lenders. 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
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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 PRVs 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, 2020 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, 2020 audited consolidated financial statements.

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, 2021, 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, 2020, as filed with the SEC on March 8, 2021.

3. Revenue

The Company generates substantially all of its 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, 2021, the Company’s three largest customers accounted for approximately 52%, 24%, and 24% of the Company’s total net product revenues. For the nine months ended September 30, 2021, the Company’s three largest customers accounted for approximately 62%, 20%, and 17% of the Company’s total net product revenues. Revenue from sales of prescription drugs was $1.4 million and $1.1 million for the three months ended September 30, 2021 and 2020, respectively, and $4.6 million and $5.2 million for the nine months ended September 30, 2021 and 2020, respectively.

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 is 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. For the three and nine months ended September 30, 2021, the Company recognized $0.7 million 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.

License revenue was $0.6 million for the nine months ended September 30, 2021, which was related to upfront fees received in the second quarter of 2021 as a result of the out-licenses of the Company’s rights to its non-core neurology pipeline assets: AVTX-301 to Alto Neuroscience, Inc. (“Alto”) and AVTX-406 to ES Therapeutics, LLC (“ES”). ES is a wholly-owned subsidiary of Armistice Capital Master Fund Ltd. (an affiliate of Armistice Capital, LLC and collectively “Armistice”), which is a significant stockholder of
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the Company and whose chief investment officer, Steven Boyd, and managing director, Keith Maher, serve on the Company’s Board of Directors. The transaction with ES was approved in accordance with the Company’s related party transaction policy. Avalo is eligible to receive additional payments upon achievement of specified development, regulatory and sales-based milestones for both AVTX-301 and AVTX-406 and is also eligible to royalty payments based on net sales of AVTX-301; refer to Note 14 for more information.

4. Aytu Divestiture

Overview of Sale of Pediatric Portfolio and Related Commercial Infrastructure to Aytu BioScience

On November 1, 2019, the Company closed on an asset purchase agreement to sell the Company’s rights, title and interest in assets relating to certain commercialized products (the “Pediatric Portfolio”) and the corresponding commercial infrastructure to Aytu BioScience, Inc. (“Aytu”). Aytu paid consideration of $4.5 million in cash and approximately 9.8 million shares of Aytu convertible preferred stock, and assumed certain of the Company’s liabilities, including the Company’s payment obligations to Deerfield CSF, LLC (“Deerfield”) and certain other liabilities primarily related to contingent consideration and sales returns. Steve Boyd, chief investment officer of Armistice Capital, LLC, a significant stockholder of the Company and a member of the Company’s Board of Directors, served on Aytu’s Board from March 2019 until August 30, 2021. The transactions and agreements between the Company and Aytu were approved in accordance with the Company’s related party transaction policy.

Upon the sale of the Pediatric Portfolio to Aytu, the Pediatric Portfolio met all conditions to be classified as discontinued operations. Therefore, the accompanying condensed consolidated financial statements for the three and nine months ended September 30, 2021 and 2020 and as of December 31, 2020 reflect the operations, net of taxes, and related assets and liabilities of the Pediatric Portfolio as discontinued operations. Refer to the “Discontinued Operations” section below for more information, including Avalo’s continuing involvement, which the Company expects to end in the second quarter of 2022.

Avalo retained all rights to Millipred®, which the Company considers a non-core asset. Aytu managed Millipred® commercial operations until June 30, 2021 pursuant to transition service agreements entered into between Aytu and Avalo, which included Aytu collecting cash on behalf of Avalo for sales of Millipred® until the second quarter of 2020. In the third quarter of 2021, Avalo finalized its trade and distribution channel to allow it to control third party distribution and began managing Millipred® commercial operations at that time. The Company agreed to postpone receipt of $2.0 million from Aytu in order to better facilitate the transition of commercial operations from Aytu. $1.0 million of the postponement will become due in December 2022 and the remainder in December 2024. The Company recognized the $2.0 million as an other long-term asset on the Company’s condensed consolidated balance sheet as of September 30, 2021.

Deerfield Guarantee

As of the closing date of the Aytu Divestiture on November 1, 2019, Aytu assumed the Company’s debt obligation to Deerfield which included monthly payments of $0.1 million through January 2021, with a balloon payment of $15.0 million that was to be due in January 2021. Aytu also assumed the contingent consideration liability related to future royalties on Avadel Pharmaceuticals PLC’s (“Avadel”) pediatric products, which included minimum monthly payments of $0.1 million through February 2026. In conjunction with the closing of this transaction, the Company entered into a guarantee in favor of Deerfield, which guarantees the payment of the assumed liabilities to Deerfield, which included the debt obligation and includes the contingent consideration related to future royalties on Avadel’s pediatric products (collectively referred to as the “Guarantee”).

Aytu publicly reported that it had paid the $15.0 million balloon payment to Deerfield before it came due in June 2020 and the fixed monthly payments to Deerfield ended in January 2021, thus satisfying the debt obligation. Aytu publicly reported that it had entered into a Waiver, Release and Consent in June 2021, pursuant to which it paid $2.8 million to Deerfield in early satisfaction of the remaining contingent consideration related to future royalties on Avadel’s pediatric products. Aytu agreed to pay the remaining fixed obligation of $3.0 million in six equal quarterly payments of $0.5 million over the next six quarters commencing September 1, 2021.

Avalo is required to make a payment under the Guarantee upon demand by Deerfield if all or any part of the fixed payments are not paid by Aytu when due or upon breach of a covenant. The remaining minimum commitments payable (as most recently publicly reported by Aytu) was $3.0 million as of June 30, 2021, which represents Avalo’s estimated maximum potential future payments under the Guarantee.

The fair value of the Guarantee, which relates to the Company’s obligation to make future payments if Aytu defaults, was determined at the time of the Aytu Divestiture as the difference between (i) the estimated fair value of the assumed payments using Avalo’s estimated cost of debt and (ii) the estimated fair value of the assumed payments using Aytu’s estimated cost of debt. At each
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subsequent reporting period, the value of the Guarantee is determined based on the expected credit loss of the Guarantee with changes recorded in (loss) income from discontinued operations, net of tax within the consolidated statements of operations and comprehensive loss. The Company concluded that the expected credit loss of the Guarantee was de minimis as of September 30, 2021 based on considerations such as recent financings, cash position, operating cash flows and trends and Aytu’s ability to meet its financial commitments.

Discontinued Operations

The following tables summarizes the liabilities of the discontinued operations as of September 30, 2021 and December 31, 2020 (in thousands):
 September 30, December 31,
 20212020
Liabilities  
Current liabilities:
Accrued expenses and other current liabilities$10 $1,341 
Total current liabilities of discontinued operations$10 $1,341 
    
Aytu assumed sales returns of the Pediatric Portfolio made after the transaction close date related to sales prior to November 1, 2019 only to the extent such post-Closing sales returns exceed $2.0 million and are less than $2.8 million (in other words, Aytu will only assume $0.8 million of such returns). Therefore, Avalo is liable for future sales returns of the Pediatric Portfolio sold prior to the transaction close date in excess of the $0.8 million assumed by Aytu. The Company estimated future returns on sales made prior to the transaction close date as of September 30, 2021, which was recognized within accrued expenses and other current liabilities from discontinued operations (and shown in the table above).

Changes to the Company’s estimate of sales returns related to the Pediatric Portfolio is included within discontinued operations on the statement of operations and comprehensive loss and is shown within product revenue, net in the table summarizing the results of discontinued operations below. In future periods, as additional information becomes available, the Company expects to recognize expense (or a benefit) related to actual sales returns of the Pediatric Portfolio in excess (or less than) the returns reserve recorded, which will be recognized within discontinued operations. The Company expects this involvement to continue until sales returns are no longer accepted on sales of the Pediatric Portfolio made prior to November 1, 2019. Returns of these products may be accepted through the second quarter of 2022 (in line with the products’ return policies).

The following table summarizes the results of discontinued operations for the three and nine months ended September 30, 2021 and 2020 (in thousands):
 Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
Product revenue, net$76 $(198)$139 $(1,370)
Operating expenses:
Sales and marketing  101  
Total operating expenses  101  
Other income:
Change in value of Guarantee   1,755 
Total other income   1,755 
Income (loss) from discontinued operations, net of tax$76 $(198)$38 $385 

There were no non-cash operating items from discontinued operations for the nine months ended September 30, 2021 and no non-cash investing items from the discontinued operations for the nine months ended September 31, 2021 and 2020. The significant non-cash operating item from the discontinued operations for the nine months ended September 30, 2020 is contained below (in thousands).
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 Nine Months Ended September 30,
 20212020
Change in value of Guarantee $(1,755)

5. Net Loss 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 two classes of stock outstanding during the nine months ended September 30, 2021; common stock and preferred stock. The preferred stock outstanding during the period had the same rights and preferences as the Company’s common stock, other than being non-voting, and is convertible into share of common stock on a 1-for-5 ratio. In April 2021, Armistice, which is a significant stockholder of the Company and whose chief investment officer, Steven Boyd, and managing director, Keith Maher, serve on the Board of the Company, converted the remaining 1,257,143 shares of convertible preferred stock into 6,285,715 shares of Avalo’s common stock (refer to Note 11 for more information). Therefore, the Company had only common stock outstanding during the three months ended September 30, 2021. 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 and therefore basic and diluted EPS is provided below for both common stock and preferred stock for the three months ended September 30, 2020 and the nine months ended September 30, 2020 and 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 assumes the convertible preferred stock has been converted to common stock. The weighted average number of common shares outstanding as of September 30, 2021 includes 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 11 for more information).

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 and preferred stock for the three and nine months ended September 30, 2021 and 2020 (in thousands, except share and per share amounts): 

Three Months Ended
 September 30, 2021
Common stock
Continuing OperationsDiscontinued Operations
Numerator:
Allocation of undistributed net loss$(17,471)$76 
Denominator:
Weighted average shares100,490,389 100,490,389 
Basic and diluted net loss per share$(0.17)$0.00 


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Nine Months Ended
 September 30, 2021
Common stockPreferred stock
Continuing OperationsDiscontinued OperationsContinuing OperationsDiscontinued Operations
Numerator:
Allocation of undistributed net loss$(63,602)$37 $(1,616)$1 
Denominator:
Weighted average shares95,125,817 95,125,817 483,517 483,517 
Basic and diluted net loss per share$(0.67)$0.00 $(3.34)$0.00 

Three Months Ended
 September 30, 2020
Common stockPreferred stock
Continuing OperationsDiscontinued OperationsContinuing OperationsDiscontinued Operations
Numerator:
Allocation of undistributed net loss$(12,234)$(183)$(1,027)$(15)
Denominator:
Weighted average shares74,900,047 74,900,047 1,257,143 1,257,143 
Basic and diluted net loss per share$(0.16)$(0.01)$(0.82)$(0.01)


Nine Months Ended
 September 30, 2020
Common stockPreferred stock
Continuing OperationsDiscontinued OperationsContinuing OperationsDiscontinued Operations
Numerator:
Allocation of undistributed net loss$(43,511)$347 $(4,731)$38 
Denominator:
Weighted average shares63,920,795 63,920,795 1,389,990 1,389,990 
Basic and diluted net loss per share$(0.68)$0.00 $(3.40)$0.02 

The following outstanding securities have been excluded from the computation of diluted weighted shares outstanding for the three and nine months ended September 30, 2021 and 2020, as they could have been anti-dilutive: 
 Three and Nine Months Ended
September 30,
 20212020
Stock options13,473,4129,548,262
Warrants on common stock1
4,406,2244,024,708
Restricted Stock Units77,916155,833
1 The above table excludes 1,676,923 pre-funded warrants for the three and nine months ended September 30, 2021. See “Q1 2021 Financing” in Note 11 for more information.

6. Asset Acquisition

Aevi Merger

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In the first quarter of 2020, the Company consummated its merger with Aevi Genomic Medicine Inc. (“Aevi”), in which Avalo acquired the rights to AVTX-002, AVTX-006 and AVTX-007 (the “Merger” or the “Aevi Merger”).

The Merger consideration included (i) stock valued at approximately $15.5 million, resulting in the issuance of approximately 3.9 million shares of Avalo common stock to Aevi stockholders, (ii) forgiveness of $4.1 million the Company had loaned Aevi prior to the Merger closing, (iii) contingent value rights for up to an additional $6.5 million in subsequent payments based on certain development milestones (discussed further in Note 14), and (iv) transaction costs of $1.5 million.

The Company recorded this transaction as an asset purchase as opposed to a business combination because management concluded that substantially all the value received was related to one group of similar identifiable assets, which was the in-process research and development (“IPR&D”) for two early phase therapies. The Company considered these pipeline assets similar due to similarities in the risks of development, stage of development, regulatory pathway, patient populations and economics of commercialization. The fair value of $25.5 million (consisting primarily of $24.0 million IPR&D, $0.3 million of cash and $0.9 million of assembled workforce) was immediately recognized as acquired in-process research and development expense in the Company’s consolidated statement of operations and comprehensive loss because the IPR&D asset has no alternate use due to the stage of development. The assembled workforce asset was recorded to intangible assets and will be amortized over an estimated useful life of two years.

7. 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: