Quarterly report pursuant to Section 13 or 15(d)

Net (Loss) Income Per Share

Net (Loss) Income Per Share

9 Months Ended

Sep. 30, 2022

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

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

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

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

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


	Three Months Ended
	September 30, 2022
	Common stock

Basic income per share:
Net income	$	3,192
Weighted average shares	9,413,466
Basic net income per share	$	0.34

Diluted income per share:
Net income	$	3,192
Weighted average shares - basic	9,413,466
Effect of dilutive securities:

Potentially dilutive shares	166
Weighted average shares - diluted	9,413,632
Diluted net income per share	$	0.34


	Nine Months Ended
	September 30, 2022
	Common stock


Net loss	$	(31,846)

Weighted average shares	9,404,679
Basic and diluted net loss per share	$	(3.39)


	Three Months Ended
	September 30, 2021
	Common stock
	Continuing Operations		Discontinued Operations

Allocation of undistributed net (loss) income	$	(17,471)	$	76

Weighted average shares	8,374,200		8,374,200
Basic and diluted net (loss) income per share	$	(2.09)	$	0.01


	Nine Months Ended
	September 30, 2021
	Common stock				Preferred stock
	Continuing Operations		Discontinued Operations		Continuing Operations		Discontinued Operations

Allocation of undistributed net (loss) income	$	(63,602)	$	37	$	(1,616)	$	1

Weighted average shares	7,927,152		7,927,152		483,517		483,517
Basic and diluted net (loss) income per share	$	(8.02)	$	0.00	$	(3.34)	$	0.00

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


	Three and Nine Months Ended
	September 30,
	2022	2021
Stock options	1,260,906	1,122,785
Warrants on common stock1	366,990	367,186
Restricted Stock Units	—	6,493

1 The weighted average number of common shares outstanding as of September 30, 2021 included the weighted average effect of the 139,747 pre-funded warrants issued in connection with the underwritten public offering that closed in January 2021 because the exercise of such warrants requires only nominal consideration ($0.012 per share exercise price for each pre-funded warrant). During 2021, the holder exercised 25,740 of the pre-funded warrants. As of September 30, 2022, the weighted average number of common shares outstanding included the weighted average effect of the remaining 114,007 pre-funded warrants outstanding. These pre-funded warrants are not included in the table above.