Quarterly report pursuant to Section 13 or 15(d)

Net Loss Per Share

Net Loss Per Share

9 Months Ended

Sep. 30, 2021

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 Operations		Discontinued Operations
Numerator:
Allocation of undistributed net loss	$	(17,471)	$	76
Denominator:
Weighted average shares	100,490,389		100,490,389
Basic and diluted net loss per share	$	(0.17)	$	0.00


	Nine Months Ended
	September 30, 2021
	Common stock				Preferred stock
	Continuing Operations		Discontinued Operations		Continuing Operations		Discontinued Operations
Numerator:
Allocation of undistributed net loss	$	(63,602)	$	37	$	(1,616)	$	1
Denominator:
Weighted average shares	95,125,817		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 stock				Preferred stock
	Continuing Operations		Discontinued Operations		Continuing Operations		Discontinued Operations
Numerator:
Allocation of undistributed net loss	$	(12,234)	$	(183)	$	(1,027)	$	(15)
Denominator:
Weighted average shares	74,900,047		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 stock				Preferred stock
	Continuing Operations		Discontinued Operations		Continuing Operations		Discontinued Operations
Numerator:
Allocation of undistributed net loss	$	(43,511)	$	347	$	(4,731)	$	38
Denominator:
Weighted average shares	63,920,795		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,
	2021	2020
Stock options	13,473,412	9,548,262
Warrants on common stock1	4,406,224	4,024,708
Restricted Stock Units	77,916	155,833

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.