avtx-20220630

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 June 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 class	Trading Symbol	Name 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 August 2, 2022, the registrant had 9,414,105 shares of common stock outstanding.

AVALO THERAPEUTICS, INC.

FORM 10-Q

For the Quarter Ended June 30, 2022

TABLE OF CONTENTS

Page

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets (Unaudited) as of June 30, 2022 and December 31, 2021

Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) for the Three and Six Months Ended June 3 0 , 2022 and 2021

Condensed Consolidated Statements of Changes in Stockholders’ (De ficit ) Equit y (Unaudited) for the Three and Six Months Ended June 3 0 , 2022 and 2021

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30 , 2022 and 2021

Notes to Unaudited Condensed Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

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)


	June 30, 2022		December 31, 2021

Assets
Current assets:
Cash and cash equivalents	$	11,249	$	54,585
Accounts receivable, net	544		1,060
Other receivables	1,306		3,739
Inventory, net	23		38
Prepaid expenses and other current assets	1,885		2,372
Restricted cash, current portion	14		51
Total current assets	15,021		61,845
Property and equipment, net	2,567		2,695
Other long-term asset	—		1,000
Intangible assets, net	—		38
Goodwill	14,409		14,409
Restricted cash, net of current portion	227		227
Total assets	$	32,224	$	80,214
Liabilities and stockholders’ (deficit) equity
Current liabilities:
Accounts payable	$	2,164	$	3,369
Accrued expenses and other current liabilities	13,231		16,519

Total current liabilities	15,395		19,888
Notes payable, non-current	18,713		32,833
Royalty obligation	2,000		2,000
Deferred tax liability, net	128		113
Other long-term liabilities	1,939		2,298
Total liabilities	38,175		57,132
Stockholders’ (deficit) equity:
Common stock—$0.001 par value; 200,000,000 shares authorized at June 30, 2022 and December 31, 2021; 9,405,724 and 9,399,517 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively1	9		9

Additional paid-in capital1	291,244		285,239
Accumulated deficit	(297,204)		(262,166)
Total stockholders’ (deficit) equity	(5,951)		23,082
Total liabilities and stockholders’ (deficit) equity	$	32,224	$	80,214

1 Results 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.

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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 Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
Revenues:
Product revenue, net	$	1,033	$	2,730	$	2,206	$	3,204
License revenue	—		625		—		625
Total revenues, net	1,033		3,355		2,206		3,829

Operating expenses:
Cost of product sales	1,567		83		2,286		159
Research and development	8,510		12,569		18,094		37,774
Selling, general and administrative	2,784		7,404		14,468		12,751
Amortization expense	—		428		38		853
Total operating expenses	12,861		20,484		34,886		51,537
	(11,828)		(17,129)		(32,680)		(47,708)
Other expense:
Other expense, net	—		(5)		(20)		(5)
Interest expense, net	(1,154)		(239)		(2,323)		(222)
Total other expense, net from continuing operations	(1,154)		(244)		(2,343)		(227)
Loss from continuing operations before taxes	(12,982)		(17,373)		(35,023)		(47,935)
Income tax expense (benefit)	5		(199)		15		(188)
Loss from continuing operations	$	(12,987)	$	(17,174)	$	(35,038)	$	(47,747)
Income (loss) from discontinued operations	—		69		—		(38)
Net loss	$	(12,987)	$	(17,105)	$	(35,038)	$	(47,785)

Net loss per share of common stock, basic and diluted1:
Continuing operations	$	(1.38)	$	(2.12)	$	(3.73)	$	(5.97)
Discontinued operations	0.00		0.01		0.00		0.00
Net loss per share of common stock, basic and diluted	$	(1.38)	$	(2.11)	$	(3.73)	$	(5.97)

Net loss per share of preferred stock, basic and diluted1:
Continuing operations			$	(0.88)			$	(2.49)
Discontinued operations			0.00				0.00
Net loss per share of preferred stock, basic and diluted			$	(0.88)			$	(2.49)

1 Results 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.

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AVALO THERAPEUTICS, INC. and SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ (Deficit) Equity (Unaudited)

(In thousands, except share amounts)


	Common stock			Additional paid-in	Accumulated		Total stockholders’
	Shares1	Amount1			capital1		deficit		deficit
Three Months Ended June 30, 2022
Balance, March 31, 2022	9,399,517	$	9		$	290,550	$	(284,217)	$	6,342
Restricted stock units vested during period	938	—			—		—		$	—
Shares purchased through employee stock purchase plan	5,269	—			25		—		$	25
Stock-based compensation	—	—			669		—		669
Net loss	—	—			—		(12,987)		(12,987)
Balance, June 30, 2022	9,405,724	$	9		$	291,244	$	(297,204)	$	(5,951)


	Common stock			Additional paid-in	Accumulated		Total stockholders’
	Shares1	Amount1			capital1		deficit		deficit
Six Months Ended June 30, 2022
Balance, December 31, 2021	9,399,517	$	9		$	285,239	$	(262,166)	$	23,082
Restricted stock units vested during period	938	—			—		—		$	—
Shares purchased through employee stock purchase plan	5,269	—			25		—		$	25
Stock-based compensation	—	—			5,980		—		5,980
Net loss	—	—			—		(35,038)		(35,038)
Balance, June 30, 2022	9,405,724	$	9		$	291,244	$	(297,204)	$	(5,951)

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	Common stock			Preferred Stock			Additional paid-in		Accumulated		Total stockholders’
	Shares1	Amount1		Shares	Amount		capital1		deficit		equity
Three Months Ended June 30, 2021
Balance, March 31, 2021	7,425,401	$	7	1,257,143	$	1	$	241,617	$	(208,470)	$	33,155
Conversion of preferred stock to common stock	523,810	1		(1,257,143)	(1)		—		—		—
Restricted stock units vested during period	6,493	—		—	—		—		—		—
Shares purchased through employee stock purchase plan	7,391	—		—	—		207		—		207
Issuance of equity classified warrants related to venture loan and security agreement	—	—		—	—		861		—		861
Exercise of stock options	37,651	—		—	—		1,396		—		1,396
Stock-based compensation	—	—		—	—		3,074		—		3,074
Net loss	—	—		—	—		—		(17,105)		(17,105)
Balance, June 30, 2021	8,000,746	$	8	—	$	—	$	247,155	$	(225,575)	$	21,588


	Common stock			Preferred Stock			Additional paid-in		Accumulated		Total stockholders’
	Shares1	Amount1		Shares	Amount		capital1		deficit		equity
Six Months Ended June 30, 2021
Balance, December 31, 2020	6,250,344	$	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, net	1,164,323	1		—	—		37,652		—		37,653
Conversion of preferred stock to common stock	523,810	1		(1,257,143)	(1)		—		—		—
Restricted stock units vested during period	6,493	—		—	—		—		—		—
Shares purchased through employee stock purchase plan	7,391	—		—	—		207		—		207
Issuance of equity classified warrants related to venture loan and security agreement	—	—		—	—		861		—		861
Exercise of stock options and warrants	48,385	—		—	—		1,568		—		1,568
Stock-based compensation	—	—		—	—		4,522		—		4,522
Net loss	—	—		—	—		—		(47,785)		(47,785)
Balance, June 30, 2021	8,000,746	$	8	—	$	—	$	247,155	$	(225,575)	$	21,588

1 Results 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.

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AVALO THERAPEUTICS, INC. and SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Amounts in thousands)


	Six Months Ended June 30,
	2022		2021
Operating activities
Net loss	$	(35,038)	$	(47,785)
Adjustments to reconcile net loss used in operating activities:
Depreciation and amortization	97		907
Stock-based compensation	5,980		4,522
Accretion of debt discount	686		104
Allowance for other long-term asset	1,000		—
Deferred taxes	15		31
Changes in assets and liabilities:
Accounts receivable, net	516		(1,943)
Other receivables	2,433		1,210
Inventory, net	15		(17)
Prepaid expenses and other assets	487		910

Accounts payable	(1,205)		(324)

Accrued expenses and other liabilities	(3,537)		4,916
Lease liability, net	14		(34)
Net cash used in operating activities	(28,537)		(37,503)
Investing activities
Purchase of property and equipment	(56)		(21)
Net cash used in investing activities	(56)		(21)
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	—		19,615
Prepayment on Notes	(14,806)		—




Proceeds from exercise of stock options	—		1,568
Proceeds from issuance of common stock under employee stock purchase plan	25		207
Net cash (used in) provided by financing activities	(14,781)		59,043
(Decrease) increase in cash, cash equivalents and restricted cash	(43,374)		21,519
Cash, cash equivalents, and restricted cash at beginning of period	54,864		19,106
Cash, cash equivalents, and restricted cash at end of period	$	11,490	$	40,625
Supplemental disclosures of cash flow information
Cash paid for interest	$	1,657	$	—
Unpaid debt issuance costs	$	—	$	1,715

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):


	June 30,
	2022		2021

Cash and cash equivalents	$	11,249	$	40,435
Restricted cash, current	14		41
Restricted cash, non-current	227		149
Total cash, cash equivalents and restricted cash	$	11,490	40,625

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” or “we”) is a leading clinical-stage precision medicine company that discovers, develops, and commercializes targeted therapeutics for patients with significant unmet clinical need in immunology 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.

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 has retroactively applied the reverse stock split made effective on July 7, 2022 to share and per share amounts in the unaudited condensed consolidated financial statements for the three and six months ended June 30, 2022 and 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 the three and six months ended June 30, 2022 and 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 June 30, 2022, Avalo had $11.2 million in cash and cash equivalents. Subsequent to June 30, 2022, in August 2022, Avalo received the approximate $15 million of upfront payment from its transfer of AVTX-007 on July 29, 2022. Refer to Note 14 for further information. For the six months ended June 30, 2022, Avalo generated a net loss of $35.0 million and negative cash flows from operations of $28.5 million. As of June 30, 2022, Avalo had an accumulated deficit of $297.2 million.

In June 2022, as collectively agreed upon with the Lenders, the Company made a partial prepayment of $15.0 million ($14.8 million of which was applied to principal) 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 June 30, 2022, the carrying value of the Notes (as defined in Note 9) was $18.7 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. 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) other 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 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 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

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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 $0.8 million and $1.2 million from sales and marketing expense to selling, general and administrative expense for the three and six months ended June 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 six months ended June 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

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 June 30, 2022, the Company’s two largest customers accounted for approximately 86% and 14%, respectively, of the Company’s total net product revenues. For the six months ended June 30, 2022, the Company’s two largest customers accounted for approximately 79% and 21%, respectively, of the Company’s total net product revenues. Net revenue from sales of prescription drugs was $1.0 million and $2.7 million for the three months ended June 30, 2022 and 2021, respectively, and $2.2 million and $3.2 million for the six months ended June 30, 2022 and 2021, 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 six months ended June 30, 2022, the Company recognized $0.4 million and $1.0 million, respectively, in cost of product

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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 June 30, 2022, the total receivable balance was approximately $1.9 million. As most recently public disclosed in their Quarterly Report on Form 10-Q for the quarter ended March 31, 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 May 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 three and six months ended June 30, 2022. The remaining $0.9 million is included within other receivables and is contractually owed in the fourth quarter of 2022.

4. 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 only common stock outstanding during the three and six months ended June 30, 2022. The Company had two classes of stock outstanding during the three and six months ended June 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, serve on the Board of the Company, converted the then outstanding 1,257,143 shares of convertible preferred stock into 523,810 shares of Avalo’s common stock (refer to Note 10 for more information). 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 six months ended June 30, 2022, and both common stock and preferred stock for the three and six months ended June 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 June 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).

Diluted net loss 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 per share of common stock for the three and six months ended June 30, 2022, and common stock and preferred stock for the three and six months ended June 30, 2021 (in thousands, except share and per share amounts):

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Three Months Ended

June 30, 2022

Common stock

Numerator:

Allocation of undistributed net loss

(12,987)

Denominator:

Weighted average shares

9,400,902

Basic and diluted net loss per share

(1.38)

Six Months Ended

June 30, 2022

Common stock

Numerator:

Allocation of undistributed net loss

(35,038)

Denominator:

Weighted average shares

9,400,214

Basic and diluted net loss per share

(3.73)


	Three Months Ended
	June 30, 2021
	Common stock				Preferred stock
	Continuing Operations		Discontinued Operations		Continuing Operations		Discontinued Operations
Numerator:
Allocation of undistributed net loss	$	(16,991)	$	68	$	(183)	$	1
Denominator:
Weighted average shares	8,014,966		8,014,966		207,221		207,221
Basic and diluted net loss per share	$	(2.12)	$	0.01	$	(0.88)	$	0.00


	Six Months Ended
	June 30, 2021
	Common stock				Preferred stock
	Continuing Operations		Discontinued Operations		Continuing Operations		Discontinued Operations
Numerator:
Allocation of undistributed net loss	$	(45,934)	$	(37)	$	(1,813)	$	(1)
Denominator:
Weighted average shares	7,699,923		7,699,923		729,282		729,282
Basic and diluted net loss per share	$	(5.97)	$	0.00	$	(2.49)	$	0.00

The following outstanding securities have been excluded from the computation of diluted weighted shares outstanding for the three and six months ended June 30, 2022 and 2021, as they could have been anti-dilutive:

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	Three and Six Months Ended
	June 30,
	2022	2021
Stock options	1,379,570	1,053,785
Warrants on common stock1	366,990	367,186
Restricted Stock Units	—	6,493

1 The weighted average number of common shares outstanding as of June 30, 2021 includes 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 June 30, 2022, the weighted average number of common shares outstanding includes 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):

June 30, 2022

Fair Value Measurements Using

Quoted prices in

Significant other

Significant

active markets for

observable

unobservable

identical assets

inputs

(Level 1)

(Level 2)

(Level 3)

Assets

Investments in money market funds*

10,508

—

December 31, 2021

Fair Value Measurements Using

Quoted prices in

Significant other

Significant

active markets for

observable

unobservable

identical assets

inputs

(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.

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As of June 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 June 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 six months ended June 30, 2022 and 2021. No transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy occurred during the six months ended June 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 June 30, 2022 was 6.0 years.

Supplemental balance sheet information related to the leased properties include (in thousands):


	As of
	June 30, 2022		December 31, 2021
Property and equipment, net	$	1,877	$	2,001

Accrued expenses and other current liabilities	$	524	$	485
Other long-term liabilities	1,869		2,018
Total operating lease liabilities	$	2,393	$	2,503

The operating lease 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.

The components of lease expense for the three and six months ended June 30, 2022 and 2021 were as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Operating lease cost*	$	122	$	95	$	239	$	190

*Includes short-term leases, which are immaterial.

The following table shows a maturity analysis of the operating lease liabilities as of June 30, 2022 (in thousands):

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	Undiscounted Cash Flows
July 1, 2022 through December 31, 2022	$	261
2023	528
2024	537
2025	547
2026	557
2027	258
Thereafter	426
Total lease payments	$	3,114
Less implied interest	(721)
Total	$	2,393

7. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities as of June 30, 2022 and December 31, 2021 consisted of the following (in thousands):


	As of
	June 30, 2022		December 31, 2021
Research and development	$	6,183	$	8,221
Compensation and benefits	3,327		4,310
Selling, general and administrative	1,142		1,386
Commercial operations	1,770		1,733
Royalty payment	282		375
Lease liability, current	524		485
Other	3		9
Total accrued expenses and other current liabilities	$	13,231	$	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 is winding down internal development efforts of AVTX-006 and paused 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, $0.8 million was paid in the six months ended June 30, 2022. The remaining severance liability will be paid over the next one to nine months as dictated in each separation 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 six months ended June 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.

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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 June 30, 2022, the outstanding notes payable balance was $18.7 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 17.7% as of June 30, 2022.

Balance sheet information related to the note payable for the Notes is as follows (in thousands):

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	As of
	June 30, 2022	December 31, 2021	Maturity
Initial Note	12,139	20,600	January 2025
Second Note	6,070	10,300	February 2025
Third Note	3,035	5,150	April 2025
Notes payable, gross1	21,244	36,050
Less: Unamortized debt discount and issuance costs	2,531	3,217
Carrying value of notes payable, non-current	18,713