Annual report pursuant to Section 13 and 15(d)

Property and Equipment

Property and Equipment

12 Months Ended

Dec. 31, 2022

Property, Plant and Equipment [Abstract]

Property and equipment as of December 31, 2022 and 2021 consisted of the following (in thousands):


	December 31,
	2022		2021
Furniture and equipment	$	280	$	185
Computers and software	56		56
Right-of-use assets	1,750		2,001
Leasehold improvements	739		739
Total property and equipment	2,825		2,981
Less accumulated depreciation	(414)		(286)
Property and equipment, net	$	2,411	$	2,695

Depreciation expense was $0.1 million for the years ended December 31, 2022 and December 31, 2021.

Leases

Avalo currently occupies two leased properties, both of which serve as administrative office space. The Company determined that both 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 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 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 December 31, 2022 was 5.5 years.

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


	As of
	December 31, 2022		December 31, 2021
Property and equipment, net	$	1,750	$	2,001

Accrued expenses and other current liabilities	$	532	$	485
Other long-term liabilities	1,711		2,018
Total operating lease liabilities	$	2,243	$	2,503

The operating lease right-of-use (ROU) assets are included in property and equipment and the lease liabilities are included in accrued expenses and other current liabilities and other long-term liabilities in the Company’s 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 years ended December 31, 2022 and 2021 were as follows (in thousands):


	Year Ended December 31,
	2022		2021
Operating lease cost*	$	493	$	393
*Includes short-term leases, which are immaterial.

The following table shows a maturity analysis of the operating lease liability as of December 31, 2022 (in thousands):



	Undiscounted Cash Flows
2023	532
2024	537
2025	547
2026	557
2027	258
Thereafter	426
Total lease payments	$	2,857
Less implied interest	(614)
Total	$	2,243