Table of Contents






UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10‑Q
10-Q
☒☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended SeptemberJune 30, 20172022
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 001-3759001-37590
Cerecor Inc.AVALO THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation)
45-0705648
(I.R.S. Employer Identification No.)
400 E. Pratt Street,540 Gaither Road, Suite 606400
Baltimore,Rockville, Maryland 2120220850
(Address of principal executive offices)
(410) 522‑8707522-8707
(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 and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑TS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑acceleratednon-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“emerging growth company"company” in Rule 12b‑2 of the Exchange Act. (Check one):
Large accelerated filer ¨☐
Accelerated filer ¨
☐
Non-accelerated filer ¨
☑		(Do not check if a smaller reporting company)
Smaller reporting company þ
☑
Emerging growth company þ
☐


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 þ☑
As of November 6, 2017,August 2, 2022, the registrant had 26,054,8579,414,105 shares of common stock outstanding.




CERECORAVALO THERAPEUTICS, INC.
 
FORM 10-Q
 
For the Quarter Ended SeptemberJune 30, 20172022
 
TABLE OF CONTENTS
Page
a)
3
b)
4
d)
5
c)
7
Page
PART I. 
e)
Item 1.
Financial Statements
a)
Balance Sheets as of September 30, 2017 (Unaudited) and December 31, 2016
3
b)
Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2017 and 2016
4
c)
Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2017 and 2016
5
d)
Notes to Unaudited Condensed Consolidated Financial Statements
68
2025
3034
3034
3135
3135
3136
Exhibits
3237
SIGNATURES
34


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PART I –- FINANCIAL INFORMATION

Item 1.  Financial StatementsStatements.
CERECORAVALO THERAPEUTICS, INC. and SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share and per share data)
 
Balance Sheets
June 30, 2022December 31, 2021
Assets        
Current assets:  
Cash and cash equivalents$11,249 $54,585 
Accounts receivable, net544 1,060 
Other receivables1,306 3,739 
Inventory, net23 38 
Prepaid expenses and other current assets1,885 2,372 
Restricted cash, current portion14 51 
Total current assets15,021 61,845 
Property and equipment, net2,567 2,695 
Other long-term asset— 1,000 
Intangible assets, net— 38 
Goodwill14,409 14,409 
Restricted cash, net of current portion227 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 liabilities13,231 16,519 
Total current liabilities15,395 19,888 
Notes payable, non-current18,713 32,833 
Royalty obligation2,000 2,000 
Deferred tax liability, net128 113 
Other long-term liabilities1,939 2,298 
Total liabilities38,175 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.
  September 30,
2017		 December 31,
2016
  (unaudited)  
Assets          
Current assets:    
Cash and cash equivalents $23,955,397
 $5,127,958
Escrowed cash receivable 3,750,803
 —
Grants receivable 30,135
 132,472
Prepaid expenses and other current assets 341,025
 391,253
Restricted cash, current portion 29,159
 11,111
Total current assets 28,106,519
 5,662,794
Property and equipment, net 34,183
 43,243
Restricted cash, net of current portion 62,847
 62,828
Total assets $28,203,549
 $5,768,865
Liabilities and stockholders’ (deficit) equity    
Current liabilities:    
Term debt, net of discount $—
 $2,353,667
Accounts payable 312,514
 1,010,209
Accrued expenses and other current liabilities 1,290,683
 947,987
Income taxes payable 3,230,000
 —
Total current liabilities 4,833,197
 4,311,863
License obligations 1,250,000
 1,250,000
Total liabilities 6,083,197
 5,561,863
Stockholders’ equity:    
Preferred stock—$0.001 par value; 5,000,000 shares authorized; zero shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively —
 —
Common stock—$0.001 par value; 200,000,000 shares authorized; 26,054,857 and 9,434,141 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively 26,055
 9,434
Additional paid-in capital 77,167,922
 70,232,651
Accumulated deficit (55,073,625) (70,035,083)
Total stockholders’ equity 22,120,352
 207,002
Total liabilities and stockholders’ equity $28,203,549
 $5,768,865

See accompanying notes to the unaudited condensed consolidated financial statements.


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CERECORAVALO THERAPEUTICS, INC. and SUBSIDIARIES
 
Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)
(In thousands, except per share data)
 
Three Months EndedSix Months Ended
 June 30,June 30,
 2022202120222021
Revenues:
Product revenue, net$1,033 $2,730 $2,206 $3,204 
License revenue— 625 — 625 
Total revenues, net1,033 3,355 2,206 3,829 
Operating expenses:
Cost of product sales1,567 83 2,286 159 
Research and development8,510 12,569 18,094 37,774 
Selling, general and administrative2,784 7,404 14,468 12,751 
Amortization expense— 428 38 853 
Total operating expenses12,861 20,484 34,886 51,537 
(11,828)(17,129)(32,680)(47,708)
Other expense:
Other expense, net— (5)(20)(5)
Interest expense, net(1,154)(239)(2,323)(222)
Total other expense, net from continuing operations(1,154)(244)(2,343)(227)
Loss from continuing operations before taxes(12,982)(17,373)(35,023)(47,935)
Income tax expense (benefit)5 (199)15 (188)
Loss from continuing operations$(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)$(5.97)
Discontinued operations0.00 0.01 0.00 0.00 
Net loss per share of common stock, basic and diluted$(1.38)$(2.11)$(3.73)$(5.97)
Net loss per share of preferred stock, basic and diluted1:
Continuing operations$(0.88)$(2.49)
Discontinued operations0.00 0.00 
Net loss per share of preferred stock, basic and diluted$(0.88)$(2.49)
  Three Months Ended Nine Months Ended
  September 30, September 30,
  2017 2016 2017 2016
License and other revenue $25,000,000
 $—
 $25,000,000
 $—
Grant revenue 37,592
 321,497
 579,597
 971,985
   Total revenue 25,037,592
 321,497
 25,579,597
 971,985
Operating expenses:                 
Research and development 964,574
 4,581,605
 2,411,293
 9,376,633
General and administrative 2,151,859
 1,703,188
 4,921,269
 5,989,053
Income (loss) from operations 21,921,159
 (5,963,296) 18,247,035
 (14,393,701)
Other income (expense):        
Change in fair value of warrant liability and unit purchase option liability 64
 (101,246) (1,586) (57,595)
Interest income (expense), net 29,387
 (104,183) (53,991) (381,603)
Total other income (expense) 29,451
 (205,429) (55,577) (439,198)
Net income (loss) before taxes $21,950,610
 $(6,168,725) $18,191,458
 $(14,832,899)
Income tax expense 3,230,000
 —
 3,230,000
 —
Net income (loss) after taxes $18,720,610
 $(6,168,725) $14,961,458
 $(14,832,899)
         
Net income (loss) per common share, basic and diluted $0.52
 $(0.70) $0.65
 $(1.71)
         
Weighted-average number of common shares - basic 21,382,683
 8,756,393
 14,952,391
 8,685,818
Weighted-average number of common shares - diluted 21,407,702
 8,756,393
 14,960,032
 8,685,818

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

 Common stockAdditional paid-inAccumulatedTotal stockholders’
 
Shares1
Amount1
capital1
deficitdeficit
Three Months Ended June 30, 2022
Balance, March 31, 20229,399,517 $9 $290,550 $(284,217)$6,342 
Restricted stock units vested during period938 — — — $— 
Shares purchased through employee stock purchase plan5,269 — 25 — $25 
Stock-based compensation— — 669 — 669 
Net loss— — — (12,987)(12,987)
Balance, June 30, 20229,405,724 $9 $291,244 $(297,204)$(5,951)

 Common stockAdditional paid-inAccumulatedTotal stockholders’
 
Shares1
Amount1
capital1
deficitdeficit
Six Months Ended June 30, 2022
Balance, December 31, 20219,399,517 $9 $285,239 $(262,166)$23,082 
Restricted stock units vested during period938 — — — $— 
Shares purchased through employee stock purchase plan5,269��— 25 — $25 
Stock-based compensation— — 5,980 — 5,980 
Net loss— — — (35,038)(35,038)
Balance, June 30, 20229,405,724 $9 $291,244 $(297,204)$(5,951)
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 Common stockPreferred StockAdditional paid-inAccumulatedTotal stockholders’
 
Shares1
Amount1
SharesAmount
capital1
deficitequity
Three Months Ended June 30, 2021
Balance, March 31, 20217,425,401 $7 1,257,143 $1 $241,617 $(208,470)$33,155 
Conversion of preferred stock to common stock523,810 1 (1,257,143)(1)— — — 
Restricted stock units vested during period6,493 — — — — — — 
Shares purchased through employee stock purchase plan7,391 — — — 207 — 207 
Issuance of equity classified warrants related to venture loan and security agreement— — — — 861 — 861 
Exercise of stock options37,651 — — — 1,396 — 1,396 
Stock-based compensation— — — — 3,074 — 3,074 
Net loss— — — — — (17,105)(17,105)
Balance, June 30, 20218,000,746 $8 — $— $247,155 $(225,575)$21,588 

 Common stockPreferred StockAdditional paid-inAccumulatedTotal stockholders’
 
Shares1
Amount1
SharesAmount
capital1
deficitequity
Six Months Ended June 30, 2021
Balance, December 31, 20206,250,344 $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, net1,164,323 1 — — 37,652 — 37,653 
Conversion of preferred stock to common stock523,810 1 (1,257,143)(1)— — — 
Restricted stock units vested during period6,493 — — — — — — 
Shares purchased through employee stock purchase plan7,391 — — — 207 — 207 
Issuance of equity classified warrants related to venture loan and security agreement— — — — 861 — 861 
Exercise of stock options and warrants48,385 — — — 1,568 — 1,568 
Stock-based compensation— — — — 4,522 — 4,522 
Net loss— — — — — (47,785)(47,785)
Balance, June 30, 20218,000,746 $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,
 20222021
Operating activities        
Net loss$(35,038)$(47,785)
Adjustments to reconcile net loss used in operating activities:
Depreciation and amortization97 907 
Stock-based compensation5,980 4,522 
Accretion of debt discount686 104 
Allowance for other long-term asset1,000 — 
Deferred taxes15 31 
Changes in assets and liabilities:
Accounts receivable, net516 (1,943)
Other receivables2,433 1,210 
Inventory, net15 (17)
Prepaid expenses and other assets487 910 
Accounts payable(1,205)(324)
Accrued expenses and other liabilities(3,537)4,916 
Lease liability, net14 (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 plan25 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 period54,864 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 
  Nine Months Ended September 30,
  2017 2016
Operating activities          
Net income (loss) $14,961,458
 $(14,832,899)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:    
Depreciation 17,050
 20,468
Stock-based compensation expense 852,210
 1,439,194
Non-cash interest expense 20,365
 134,096
Change in fair value of warrant liability and unit purchase option liability 1,586
 57,595
Changes in assets and liabilities:    
Grants receivable 102,337
 (379,256)
Prepaid expenses and other assets 50,228
 191,527
Escrowed funds receivable (3,750,803) —
Restricted cash (18,067) (79,051)
Accounts payable (697,695) 109,908
Accrued expenses and other liabilities 341,109
 2,478,234
        Income taxes payable 3,230,000
 —
Net cash provided by (used in) operating activities 15,109,778
 (10,860,184)
Investing activities    
Purchase of property and equipment (7,990) (25,646)
Net cash used in investing activities (7,990) (25,646)
Financing activities    
Proceeds from sale of shares under common stock purchase agreements, net 1,693,498
 1,000,000
Proceeds from sale of shares pursuant to private placement, net 4,650,000
 —
Proceeds from sales of common stock under employee stock purchase plan, net 35,430
 —
Principal payments on term debt (2,374,031) (2,459,493)
Payment of financing costs (279,246) (1,467)
Net cash provided by (used in) financing activities 3,725,651
 (1,460,960)
Increase (decrease) in cash and cash equivalents 18,827,439
 (12,346,790)
Cash and cash equivalents at beginning of period 5,127,958
 21,161,967
Cash and cash equivalents at end of period $23,955,397
 $8,815,177
Supplemental disclosures of cash flow information    
Cash paid for interest $72,526
 $287,841
Supplemental disclosures of noncash financing activities    
Accrued financing costs $—
 $101,728

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,
20222021
Cash and cash equivalents$11,249 $40,435 
Restricted cash, current14 41 
Restricted cash, non-current227 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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CERECORAVALO THERAPEUTICS, INC. and SUBSIDIARIES
 
Notes to Unaudited Condensed Consolidated Financial Statements

1. Business


CerecorAvalo Therapeutics, Inc. (the “Company” or “Cerecor”“Avalo” or “we”) is a biopharmaceuticalleading clinical-stage precision medicine company that is developing innovative drug candidatesdiscovers, develops, and commercializes targeted therapeutics for commercialization, license or sale to make a difference in the lives of patients with neurologicsignificant unmet clinical need in immunology and psychiatric disorders. The Company’s operations since inception have been limited to organizing and staffing the Company, acquiring rights to and developing certain product candidates, business planning and raising capital.
Liquidity
The Company's financial statements have been prepared on an accrual basis.rare genetic diseases. The Company has not generated any product revenuesbuilt 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 not yet achieved profitable operations from commercialization. There is no assurance that profitable operations will ever be achieved,retroactively applied the reverse stock split made effective on July 7, 2022 to share and if achieved, could be sustained onper 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 continuing basis.
Priorproportionate adjustment was made to the quarterper 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 SeptemberJune 30, 2017,2022 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 had incurred recurring operating losses since inception. Forapplies a disciplined decision-making methodology as it evaluates the nine months ended September 30, 2017, the Company generated net income of $15.0 million and positive cash flows from operations of $15.1 million. In August 2017, the Company sold all of its rights to a prior product candidate, CERC-501, to Janssen Pharmaceuticals, Inc. (“Janssen”) in exchange for initial gross proceeds of $25.0 million, of which$3.75 million was deposited into a twelve-month escrow to secure certain indemnification obligations, as well as a potential future $20.0 million regulatory milestone payment. The termsoptimal allocation of the agreement provide that Janssen will assume ongoing clinical trialsCompany’s resources between investing in the Company’s existing pipeline assets and be responsible for anyacquisitions or in-licensing of new development and commercialization of CERC-501.

assets. As of SeptemberJune 30, 2017, the Company2022, Avalo had an accumulated deficit of $55.1 million and a balance of $24.0$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 anticipates operatingwill continue as a going concern; however, losses are expected to continue foras the foreseeable future dueCompany continues to among other things, costs related toinvest in its preclinical programs, additional clinicalresearch and development of its product candidates, business development and costs associated with its organizational infrastructure.pipeline assets. The Company will require substantial additional financing to fund its operations and to continue to execute its strategy. The Companybusiness 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 meetuse its capital requirements primarily through acurrent cash on hand along with some combination of equity the following: (i) dilutive and/or debtnon-dilutive financings, (ii) other out-licensing or strategic alliances/collaborations of its current pipeline assets, (iii) out-licensing or out-licensing arrangements,sale of its non-core assets, and (iv) federal and/or private grants. If the Company raises additional funds through collaborations, strategic alliances federal and private grants, marketing, distribution 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 longer term, revenue from product sales toimmediate acceleration of all or a substantial portion of the extent its product candidates receive marketing approval and are commercialized. There can be no assurance, however, thatoutstanding notes. As of the filing date of this Quarterly Report on Form 10-Q, the Company will be successful in obtaining financing atwas 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 level neededLenders (refer to sustain operations and develop its product candidates or on terms acceptable toNote 9 of the Company, or that the Company will obtain approvals necessary to market its products or achieve profitability or sustainable positive cash flow. condensed consolidated financial statements for more information).

If the Company failsrequires but is unable to raise capitalobtain additional funding, the Company may be forced to make reductions in spending, delay, suspend, reduce or enter into any such arrangements, it will have to further delay, scale backeliminate some or discontinue the development of one or moreall of its product candidatesplanned research and development programs, or cease its operations altogether.liquidate assets where possible. Due to

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In April 2017 the Company received $5.0 million in gross proceeds pursuant to a securities purchase agreement with Armistice Capital Master Fund Ltd (“Armistice”). The Company has theuncertainty regarding future financing and other potential options to raise additional cash through an equity distribution agreementfunds, management has concluded that substantial doubt exists with Maxim Group LLC ("Maxim Group")respect to the Company’s ability to continue as describeda going concern within one year after the date that the financial statements in Note 8.this Quarterly Report on Form 10-Q were issued.


The Company expectsOver 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 cash on hand at September 30, 2017 to fund future expenses through at least December 31, 2018.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, 20162021 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”).

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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, 20162021 audited consolidated financial statements.


UseIn the second quarter of Estimates2022, 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 50 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 preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, other comprehensive income and related disclosures. On an ongoing basis, management evaluates its estimates, including estimates related to clinical trial accruals, the warrant liability and the unit purchase option liability. The Company bases its estimates on historical experience and other market‑specific or other relevant assumptions that it believes to be reasonable under the circumstances. Actual results may differ from those estimates or assumptions.
Net Income (Loss) Per Share, Basic and Diluted
Earningscomputes earnings per share are computed(“EPS”) using the two-class method. The two-class method of computing earnings per shareEPS is an earnings allocation formula that determines earnings per shareEPS for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. Shares

The Company had only common stock outstanding during the three and six months ended June 30, 2022. The Company had 2 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 unexercised warrants issued inCompany and whose chief investment officer, Steven Boyd, and managing director, Keith Maher, serve on the Armistice Private Placement transaction are considered participating securities because these warrants contain a non-forfeitable rightBoard 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 dividends irrespective of whether the warrants are ultimately exercised.Note 10 for more information). Under the two-class method, earnings perthe convertible preferred stock was considered a separate class of stock until the time it was converted to common shareshares 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 participating warrants arepreferred 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 to common shareholders and undistributed earnings allocated to common shareholdersfor each class of stock by the weighted-averageweighted average number of shares outstanding for each class of Common stock and participating warrants outstanding for the period. In applying the two-class method, undistributed earnings are allocated to common stock and participating warrantspreferred stock based on the weighted-averageweighted average shares outstanding during the period.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 income (loss)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 issued under the Company's Long-Term Incentive Plansand restricted stock units, which are included under the "treasury“treasury stock method"method” when dilutive,dilutive; and (ii) common stock to be issued upon the assumed conversion of the Company's unit purchase option shares, which are included under the "if-converted method" when dilutive, and (iii) common stock to be issued upon the exercise of outstanding warrants, which are included under the "treasury“treasury stock method"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 addition,periods of net loss, losses are not allocated to the participating securities.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchasedsecurity only if the security has not only the right to be cash equivalents. The carrying amounts reportedparticipate in earnings, but also a contractual obligation to share in the balance sheets for cash and cash equivalents are valued at cost, which approximates their fair value.Company’s losses.

Escrowed Cash Receivable
On August 14. 2017, the Company sold all of its rights to CERC-501 to Janssen in exchange for initial gross proceeds of $25.0 million, of which $3.75 million was deposited into a twelve month escrow to secure certain indemnification obligations to Janssen Pharmaceuticals, Inc. The Company evaluates its escrowed cash receivable balance each reporting period and establishes a reserve for amounts deemed uncollectible. No reserve was recorded as of September 30, 2017.


Restricted Cash
The Company established the Employee Stock Purchase Plan in 2016. Eligible employees can purchase common stock through accumulated payroll deductions at such times as are established by the Plan administrator. At September 30, 2017, $29,200 of deposits had been made by employees for potential future stock purchases.

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In 2016 the Company entered into a bank services pledge agreement with Silicon Valley Bank. In exchange for receiving business credit card services from Silicon Valley Bank, the Company deposited $50,000 as collateral with Silicon Valley Bank. This amount will remain deposited with Silicon Valley Bank for the duration the business credit card services are used by the Company. In addition, the Company has deposited $13,000 with the landlord of the Company's office space as a security deposit. These deposits are recorded as restricted cash, net of current portion on the balance sheet at September 30, 2017.

Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash and cash equivalents. The Company maintains a portion of its cash and cash equivalent balances in the form of a money market account with a financial institution that management believes to be credit worthy. The Company has no financial instruments with off‑balance sheet risk of loss.
Debt and Equity Issuance Costs
The Company may record debt and equity discounts in connection with raising funds through the issuance of convertible notes or equity instruments. These discounts may arise from (i) the receipt of proceeds less than the face value of the convertible notes or equity instruments, (ii) allocation of proceeds to beneficial conversion features and/or (iii) recording derivative liabilities related to embedded features. For debt instruments, these costs are amortized over the life of the debt to interest expense utilizing the effective interest method. For equity instruments, these costs are netted against the gross proceeds received from the issuance of the equity.
Property and Equipment
Property and equipment consists of computers, office equipment, and furniture and is recorded at cost. Maintenance and repairs that do not improve or extend the lives of the respective assets are expensed to operations as incurred. Property and equipment are depreciated on a straight‑line basis over their estimated useful lives. The Company uses a life of four years for computers and software, and five years for equipment and furniture. Upon retirement or sale, the cost of the disposed asset and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized.
License and Other Revenue

The Company recognizes revenues from collaboration, license or other research or sale arrangements when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably assured. Revenue from potential future milestones, if substantive, is recognized when the milestone is achieved and the payment is due and collectible.

Grant Revenue Recognition
The Company recognizes grant revenue when there is (i) reasonable assurance of compliance with the conditions of the grant and (ii) reasonable assurance that the grant will be received.
Research and Development
Research and development costs are expensed as incurred. These costs include, but are not limited to, employee‑related expenses, including salaries, benefits and stock‑based compensation of research and development personnel; expenses incurred under agreements with contract research organizations and investigative sites that conduct clinical trials and preclinical studies; the cost of acquiring, developing and manufacturing clinical trial materials; other supplies; facilities, depreciation and other expenses, which include direct and allocated expenses for rent, utilities and insurance; and costs associated with preclinical activities and regulatory operations.
Costs for certain development activities, such as clinical trials, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations, or information provided to the Company by its vendors, such as clinical research organizations, with respect to their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected in the financial statements as prepaid or accrued research and development expense, as the case may be.

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Comprehensive Loss
Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non‑owner sources. Comprehensive loss was equal to net loss for all periods presented.
Income Taxes
The Company accounts for income taxes under the asset and liability method in accordance with ASC 740, Income Taxes (“ASC 740”). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Deferred tax assets primarily include net operating loss and tax credit carry-forwards, accrued expenses not currently deductible and the cumulative temporary differences related to certain research and patent costs. Certain tax attributes, including net operating losses and research and development credit carryforwards, may be subject to an annual limitation under Sections 382 and 383 of the Internal Revenue Code (the "Code"). See Note 10 for further information. The portion of any deferred tax asset for which it is more likely than not that a tax benefit will not be realized must then be offset by recording a valuation allowance. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position. The amount for which an exposure exists is measured as the largest amount of benefit determined on a cumulative probability basis that the Company believes is more likely than not to be realized upon ultimate settlement of the position.
The Company’s policy is to record interest and penalties on uncertain tax positions as income tax expense. As of September 30, 2017, the Company does not believe any material uncertain tax positions are present.
Stock‑Based Compensation
The Company applies the provisions of ASC 718, Compensation—Stock Compensation (“ASC 718”), which requires the measurement and recognition of compensation expense for all stock‑based awards made to employees and non‑employees, including employee stock options, in the statements of operations.
For stock options issued to employees and members of the board of directors for their services on the board of directors, the Company estimates the grant date fair value of each option using the Black‑Scholes option pricing model. The use of the Black‑Scholes option pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the common stock consistent with the expected life of the option, risk‑free interest rates and expected dividend yields of the common stock. For awards subject to service‑based vesting conditions, including those with a graded vesting schedule, the Company recognizes stock‑based compensation expense equal to the grant date fair value of stock options on a straight‑line basis over the requisite service period, which is generally the vesting term. Forfeitures are recorded as they are incurred as opposed to being estimated at the time of grant and revised.
For stock options issued to non‑employees, the Company initially measures the options at their grant date fair values and revalues as the underlying equity instruments vest and are recognized as expense over the earlier of the period ending with the performance commitment date or the date the services are completed in accordance with the provisions of ASC 718 and ASC 505‑50, Equity‑Based Payments to Non‑Employees (“ASC 505‑50”).
Clinical Trial Expense Accruals
As part of the process of preparing its financial statements, the Company is required to estimate its expenses resulting from its obligations under contracts with vendors, clinical research organizations and consultants and under clinical site agreements in connection with conducting clinical trials. The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided under such contracts. The Company’s objective is to reflect the appropriate trial expenses in its financial statements by matching those expenses with the period in which services are performed and efforts are expended. The Company accounts for these expenses according to the progress of the trial as measured by subject progression and the timing of various aspects of the trial. The Company determines accrual estimates by taking into account discussion with applicable personnel and outside service providers as to the progress or state of consummation of trials, or the services completed. During the course of a clinical trial, the Company adjusts its clinical expense recognition if actual results differ from its estimates. The Company makes estimates of its accrued expenses as of each balance sheet date based on the facts and circumstances known to it at that time. The Company’s clinical trial accruals are dependent upon the timely and accurate reporting of contract research

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organizations and other third‑party vendors. Although the Company does not expect its estimates to be materially different from amounts actually incurred, its understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in it reporting amounts that are too high or too low for any particular period.

Segment Information
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision‑making group, in making decisions on how to allocate resources and assess performance. The Company’s chief operating decision maker is the chief executive officer. The Company and the chief executive officer view the Company’s operations and manage its business as one operating segment. All long‑lived assets of the Company reside in the United States.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014‑9, Revenue From Contracts With Customers (“ASU 2014‑9”). Pursuant to this update, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, Revenue From Contracts With Customers(Topic 606), which delays the effective date of ASU 2014-9 by one year.  As a result, ASU 2014-9 will be effective for annual reporting periods beginning after December 15, 2017 with early adoption permitted for annual reporting periods beginning after December 15, 2016. In March 2016, the FASB issued ASU No. 2016-8, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-8”) and ASU No. 2016-10, Revenue From Contracts With Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”), and in May 2016 the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”), each of which clarify the guidance in ASU 2014-9 and have the same effective date as the original standard. The Company has substantially completed it's assessment of the impact of adoption of ASU 2014-9, ASU 2016-8, ASU 2016-10, or ASU 2016-12 on the financial statements, and the impact is not expected to be significant. The Company plans to adopt the new standard effective January 1, 2018. The Company continues to monitor additional changes, modifications, clarifications or interpretations being undertaken by the FASB, which may impact the Company’s current conclusions.
In February 2016, the FASB issued ASU No. 2016-2, Leases (Topic 842). This guidance revises existing practice related to accounting for leases under ASC 840, Leases (“ASC 840”) for both lessees and lessors. The new guidance in ASU 2016-2 requires lessees to recognize a right-of-use asset and a lease liability for nearly all leases (other than leases that meet the definition of a short-term lease). The lease liability will be equal to the present value of lease payments and the right-of-use asset will be based on the lease liability, subject to adjustment such as for initial direct costs. For income statement purposes, the new standard retains a dual model similar to ASC 840, requiring leases to be classified as either operating leases or capital leases. For lessees, operating leases will result in straight-line expense (similar to current accounting by lessees for operating leases under ASC 840) while capital leases will result in a front-loaded expense pattern (similar to current accounting by lessees for capital leases under ASC 840). The new standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. The Company is currently evaluating the potential impact of the adoption of this standard on its financial statements.
In March 2016, the FASB issued ASU No. 2016-9, Improvements to Employee Share-Based Payment Accounting.  The guidance is intended to simplify several areas of accounting for share-based compensation, including income tax impacts, classification on the statement of cash flows and forfeitures. The new standard is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early application is permitted. The new guidance was adopted by the Company effective January 1, 2017 and its adoption did not have any impact on its financial position, results of operations or cash flows. In connection with adoption, the Company has elected to account for forfeitures as they occur as opposed to being estimated at the time of grant and revised.

In August 2016, the FASB issued ASU No. 2016-15 Statement of Cash Flows, Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which reduces existing diversity in the classification of certain cash receipts and cash payments on the statements of cash flows. ASU 2016-15 I effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the potential impact of the adoption of this standard on its financial statements.

In November 2016, the FASB issued ASU 2016-18, Restricted Cash. The guidance is intended to address the diversity

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that currently exists in the classification and presentation of changes in restricted cash on the statement of cash flows. The new standard requires that entities show the changes in the total of cash and cash equivalents, restricted cash and restricted cash equivalents on the statement of cash flows and no longer present transfers between cash and cash equivalents, restricted cash and restricted cash equivalents on the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted. The Company is currently evaluating the potential impact of the adoption of this standard on its financial statements.


3. Net Income (Loss) Per Share of Common Stock, Basic and Diluted

The following table setstables set forth the computation of basic and diluted net income (loss)loss per share of common stock for the three and ninesix months ended SeptemberJune 30, 20172022, and 2016: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 Nine Months Ended
  September 30, September 30,
  2017 2016 2017 2016
Basic income (loss) per share:        
Net income (loss) $18,720,610
 $(6,168,725) $14,961,458
 $(14,832,899)
Undistributed earnings (loss) allocable to common shares $18,720,610
 $(6,168,725) $14,961,458
 $(14,832,899)
         
Weighted average shares, basic        
   Common stock 21,382,683
 8,756,393
 14,952,391
 8,685,818
   Participating warrants 14,285,714
 —
 8,163,265
 —
  35,668,397
 8,756,393
 23,115,656
 8,685,818
Basic income (loss) per share:        
   Common shares $0.52
 $(0.70) $0.65
 $(1.71)
   Participating warrants $0.52
 $—
 $0.65
 $—
         
Diluted income (loss) per share:        
Net income (loss) $11,222,732
 $(6,168,725) $9,677,838
 $(14,832,899)
Net income (loss) reallocated 5,256
 —
 1,746
 —
Undistributed earnings (loss) allocable to common shares $11,227,988
 $(6,168,725) $9,679,584
 $(14,832,899)
         
Weighted average number of shares - basic 21,382,683
 8,756,393
 14,952,391
 8,685,818
Effect of dilutive securities:        
   Stock options 25,019
 —
 7,641
 —
   Underwriters' unit purchase option —
 —
 —
 —
      Potentially dilutive shares 25,019
 —
 7,641
 —
Weighted average number of shares - diluted 21,407,702
 8,756,393
 14,960,032
 8,685,818
         
Diluted income (loss) per share $0.52
 $(0.70) $0.65
 $(1.71)
Three Months Ended
June 30, 2022
Common stock
Numerator:
Allocation of undistributed net loss$(12,987)
Denominator:
Weighted average shares9,400,902 
Basic and diluted net loss per share$(1.38)



Six Months Ended
June 30, 2022
Common stock
Numerator:
Allocation of undistributed net loss$(35,038)
Denominator:
Weighted average shares9,400,214 
Basic and diluted net loss per share$(3.73)



Three Months Ended
 June 30, 2021
Common stockPreferred stock
Continuing OperationsDiscontinued OperationsContinuing OperationsDiscontinued Operations
Numerator:
Allocation of undistributed net loss$(16,991)$68 $(183)$1 
Denominator:
Weighted average shares8,014,966 8,014,966 207,221 207,221 
Basic and diluted net loss per share$(2.12)$0.01 $(0.88)$0.00 

Six Months Ended
 June 30, 2021
Common stockPreferred stock
Continuing OperationsDiscontinued OperationsContinuing OperationsDiscontinued Operations
Numerator:
Allocation of undistributed net loss$(45,934)$(37)$(1,813)$(1)
Denominator:
Weighted average shares7,699,923 7,699,923 729,282 729,282 
Basic and diluted net loss per share$(5.97)$0.00 $(2.49)$0.00 
Shares which
The following outstanding securities have been excluded from the computation of diluted per share amounts because their effect wouldweighted shares outstanding for the three and six months ended June 30, 2022 and 2021, as they could have been antidilutive, include the following:anti-dilutive: 


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 Three and Six Months Ended
June 30,
 20222021
Stock options1,379,5701,053,785
Warrants on common stock1
366,990367,186
Restricted Stock Units—6,493
1The 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.

  Three Months Ended Nine Months Ended
  September 30, September 30,
  2017 2016 2017 2016
Stock options 2,384,560 1,828,441 2,401,938 1,828,441
Warrants 4,661,145 7,400,934 4,661,145 7,400,934
Unit purchase option shares 40,000 40,000 40,000 40,000



4.5. 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.
 
At September 30, 2017 and December 31, 2016, the Company’s financial instruments included cash and cash equivalents, restricted cash, accounts payable, accrued expenses and other current liabilities, term debt (prior to its payoff in August 2017), the term loan warrant liability and the underwriters’ unit purchase option liability. The carrying amounts reported in the accompanying financial statements for cash and cash equivalents, restricted cash, accounts payable, and accrued expenses and other current liabilities approximate their respective fair values because of the short‑term nature of these accounts.

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:basis (in thousands):
June 30, 2022
Fair Value Measurements Using
Quoted prices inSignificant otherSignificant
active markets forobservableunobservable
identical assetsinputsinputs
(Level 1)(Level 2)(Level 3)
Assets
Investments in money market funds*$10,508 $— $— 
  September 30, 2017
  Fair Value Measurements Using
  
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Assets               
Investments in money market funds* $23,715,016
 $—
 $—
Liabilities      
Warrant liability $—
 $—
 $531
Unit purchase option liability $—
 $—
 $6,607
December 31, 2021
Fair Value Measurements Using
Quoted prices inSignificant otherSignificant
active markets forobservableunobservable
identical assetsinputsinputs
(Level 1)(Level 2)(Level 3)
Assets
Investments in money market funds*$54,010 $— $— 

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   December 31, 2016
   Fair Value Measurements Using
   
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Assets                
Investments in money market funds*  $4,758,539
 $—
 $—
Liabilities       
Warrant liability  $—
 $—
 $5,501
Unit purchase option liability  $—
 $—
 $51
        

*Investments in money market funds are reflected in cash and cash equivalents on the accompanying Balance Sheets.condensed consolidated balance sheets.

Level 3 Valuation
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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 warrant liability (which relates to warrants to purchase shares of common stock as part of the term loan agreement) is marked‑to‑market each reporting period with the change in fair value recorded to other income (expense)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 operations until the warrants are exercised, expire or other facts and circumstances lead the warrant liability to be reclassified to stockholders’ equity.short-term nature of these accounts. The estimated fair value of the warrant liability is estimated using a Black‑Scholes option-pricing model. The significant assumptions used in preparing the option pricing model for valuing the warrant liabilityCompany’s debt approximates its carrying value as of SeptemberJune 30, 2017, include (i) volatility2022 and is in Level Two of 65%, (ii) risk free interest rate of 1.63%, (iii) strike price ($8.40), (iv)the fair value of common stock ($0.85), and (v) expected life of 3.1 years.hierarchy (refer to Note 9 for more information).

The underwriters’ unit purchase option (the “UPO”) was issued to the underwriters of the Company’s initial public offering (“IPO”) and provides the underwriters the option to purchase up to a total of 40,000 units. The units underlying the UPO will be, immediately upon exercise, separated into shares of common stock, underwriters’ Class A warrants and underwriters’ Class B warrants (such warrants together referred to as the Underwriters’ Warrants). The Underwriters’ Warrants are warrants to purchase shares of common stock. The Company classifies the UPO as a liability as it is a freestanding marked-to-market derivative instrument that is precluded from being classified in stockholders’ equity. The UPO liability is marked‑to‑market each reporting period with the change in fair value recorded to other income (expense) in the accompanying statements of operations until the UPO is exercised, expire or other facts and circumstances lead the UPO to be reclassified to stockholders’ equity. The fair value of the UPO liability is estimated using a Black-Scholes option-pricing model within a Monte Carlo simulation model framework. The significant assumptions used in preparing the simulation model for valuing the UPO as of September 30, 2017, include (i) volatility range of 65% to 75%, (ii) risk free interest rate range of 0.74% to 1.63%, (iii) unit strike price ($7.48), (iv) underwriters’ Class A warrant strike price ($5.23), (v) underwriters’ Class B warrant strike price ($4.49), (vi) fair value of underlying equity ($0.85), and (vii) optimal exercise point of immediately prior to the expiration of the underwriters’ Class B warrants, which occurred on April 20, 2017.
The table presented below is a summary of changes of the Company’s Level 3 warrant liability and unit purchase option liability for the nine months ended September 30, 2017:
  
Warrant
Liability
 
Unit purchase
option liability
 Total
Balance at December 31, 2016 $5,501
 $51
 $5,552
Change in fair value (4,970) 6,556
 1,586
Balance at September 30, 2017 $531
 $6,607
 $7,138
No other changes in valuation techniques or inputs occurred during the ninesix months ended SeptemberJune 30, 20172022 and no2021. No transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy occurred during the ninesix months ended SeptemberJune 30, 2017.2022 and 2021.


5.6. Leases

The Company currently occupies 2 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 2 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, 2022December 31, 2021
Property and equipment, net$1,877 $2,001 
Accrued expenses and other current liabilities$524 $485 
Other long-term liabilities1,869 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,
2022202120222021
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 
2023528 
2024537 
2025547 
2026557 
2027258 
Thereafter426 
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:following (in thousands): 
 As of
 June 30, 2022December 31, 2021
Research and development$6,183 $8,221 
Compensation and benefits3,327 4,310 
Selling, general and administrative1,142 1,386 
Commercial operations1,770 1,733 
Royalty payment282 375 
Lease liability, current524 485 
Other3 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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  September 30,
2017		 December 31,
2016
Compensation and benefits $524,409
 $272,601
Research and development expenses 452,139
 315,937
General and administrative 306,997
 160,116
Accrued interest —
 193,781
Warrant and UPO liability 7,138
 5,552
Total accrued expenses and other current liabilities $1,290,683
 $947,987
9. Notes Payable


6. License Agreements
Lilly CERC-611 License
On September 22, 2016,June 4, 2021, the Company entered into an exclusive license agreementthe $35.0 million Loan Agreement with Eli Lilly andthe 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 (“Lilly”) pursuant toachieving certain predetermined milestones, which the Company received exclusive, global rightsmet 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 developthe Lenders, of which $14.8 million was applied to principal and commercialize CERC-611, previously referredthe remainder applied to as LY3130481, a potent and selective Transmembrane AMPA Receptor Regulatory Proteins (“TARP”) γ-8-dependent α-amino-3-hydroxy-5-methyl-4-isoxazolepropionic acid (“AMPA”) receptor antagonist. The termsaccrued interest. As of June 30, 2022, the outstanding notes payable balance was $18.7 million, inclusive of the license agreement provide for an upfrontfinal payment of $2.0 million, of which $750,000 wasfee. Avalo intends to consider additional prepayments prior to principal loan amounts coming due, within 30 daysif collectively agreed upon with the Lenders.

Each advance under the Loan Agreement will mature 42 months from the first day of the effective datemonth following the funding of the license agreement, and the remaining balance of $1.25 million is due after the first subject is dosed with CERC-611 in a multiple ascending dose study and is recorded as license obligations on the balance sheet at September 30, 2017. Additional payments may be due upon achievement of development and commercialization milestones, including the first commercial sale. Upon commercialization, the Company is obligated to pay Lilly milestone payments and a royalty on net sales.
Merck CERC-301 License
In 2013, the Company entered into an exclusive license agreement with Merck & Co., Inc. (“Merck”) pursuant to which Merck granted the Company rights relating to certain small molecule compounds. In consideration of the license, the Company may be required to make initial payments totaling $1.5 million upon the achievement of certain milestones. Pursuant to the license agreement the Company paid an initial payment of $750,000, and upon achievement of acceptance by the United States Food and Drug Administration, or FDA, of Merck pre-clinical data and FDA approval of a Phase 3 clinical trial the Company will pay an additional $750,000. Additional payments may be due upon achievement of development and regulatory milestones, including the first commercial sale. Upon commercialization, the Company is obligated to pay Merck milestone payments and royalties on net sales.
Lilly CERC-501 License
On August 14. 2017, the Company sold all of its rights to CERC-501 to Janssen in exchange for initial gross proceeds of $25.0 million, of which $3.75 million was deposited into a twelve month escrow to secure certain indemnification obligations to Janssen (see Note 11). In addition to the initial proceeds, the terms of the agreement provide for a potential future $20 million regulatory milestone payment. Further, the terms of the agreement provide that Janssen will assume ongoing clinical trials and be responsible for any new development and commercialization of CERC-501.
Merck CERC-406 License
In 2013, the Company entered into a separate exclusive license agreement with Merck pursuant to which Merck granted the Company certain rights in small molecule compounds which are known to inhibit the activity of COMT. In consideration of the license, the Company made a $200,000 upfront payment to Merck. Additional payments may be due upon the achievement of development and regulatory milestones. Upon commercialization of a COMT product, the Company is required to pay Merck royalties on net sales.

7. Term Loan
In August 2014, the Company entered into a $7.5 million secured term loan from a finance company. The loan was secured by a lien on all of the Company’s assets, excluding intellectual property, which was subject to a negative pledge. The loan contained certain additional nonfinancial covenants. In connection with the loan agreement, the Company’s cash and investment accounts were subject to account control agreements with the finance company that gave the finance company the right to assume control of the accounts in the event of a loan default. Loan defaults were defined in the loan agreement and

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included, among others, the finance company’s determination that there was a material adverse change in the Company’s operations. Interest on the loan wasadvance. Each advance accrues interest at a per annum rate of the greater of 7.95%, or 7.95%interest equal to 6.25% plus the prime rate, as reported in Thethe Wall Street Journal minus (subject to a floor of 3.25%). On August 1, 2017,The Loan Agreement provides for interest-only payments for each advance for the term loan matured andfirst 18 months, however the interest-only period was extended to 24 months as a result of the Company made asatisfying 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 10 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 $494,231 which included a termination fee of $187,500. Debt consisted3% of the followingprincipal 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 SeptemberJune 30, 2017 and December 31, 2016:2022.

Balance sheet information related to the note payable for the Notes is as follows (in thousands):
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As of
 June 30, 2022December 31, 2021Maturity
Initial Note12,139 20,600 January 2025
Second Note6,070 10,300 February 2025
Third Note3,035 5,150 April 2025
Notes payable, gross1
21,244 36,050 
Less: Unamortized debt discount and issuance costs2,531 3,217 
Carrying value of notes payable, non-current18,713 32,833 

1 Balance includes $1.1 million final payment fee for the Notes, which represents 3% of the original principal loan amount.

As of June 30, 2022, the estimated future principal payments due on the Notes were as follows (in thousands):

 As of June 30, 2022
2022$— 
20235,930 
202413,463 
20251,851 
Total principal payments1
$21,244 

1 Balance includes $1.1 million final payment fee, which represents 3% of the original principal loan amount.


10. Capital Structure
 
  September 30, 2017 December 31,
2016
Term loan $—
 $2,374,031
Less: debt discount —
 (20,364)
Term Loan, net of debt discount $—
 $2,353,667
Interest expense, which includes amortization of a discount andPursuant to the accrual of a termination fee, was approximately $1,000 and $110,000 for the three months ended September 30, 2017 and 2016, respectively, and $95,000 and $404,000 for the nine months ended September 30, 2017 and 2016, respectively, in the accompanying statements of operations.
8. Capital Structure

On October 20, 2015, the Company filed anCompany’s amended and restated certificate of incorporation, in connection with the closing of its IPO. The amended and restated certificate of incorporation authorizes the Company is authorized to issue two2 classes of stock, common stock and preferred stock, and eliminates all references to the previously existing series of preferred stock. At SeptemberJune 30, 2017,2022, the total number of shares of capital stock the Company was authorized to issue was 205,000,000 of which 200,000,000 was common stock and 5,000,000 waspreferred stock. All shares of common andpreferred stock have a par value of $0.001 per share.

Common Stock

2021 Financings

Q3 2021 Equity Financing

On April 27, 2017,September 17, 2021, the Company further amendedclosed an underwritten public offering of approximately 1.2 million shares of its amended and restated certificatecommon stock for net proceeds of incorporation$29.0 million. Armistice participated in connection with the closingoffering by purchasing approximately 0.5 million shares of common stock, on the same terms as all other investors. Certain affiliates of Nantahala Capital Management LLC (collectively, “Nantahala”), which beneficially owned greater than 5% of the Armistice Private PlacementCompany’s outstanding common stock at the time of the offering, participated in the offering on the same terms as all other investors.

At-the-Market Offering Program

In July 2021, the Company entered into an “at-the-market” sales agreement with Cantor Fitzgerald & Co. and RBC Capital Markets, LLC (together, the filing of a Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (“Series A Preferred Stock”“Agents”) of Cerecor Inc. (the “Certificate of Designation”). The Certificate of Designation authorized, pursuant to which the issuance of 4,179Company may sell from time to time, shares of Series A Preferred Stockits common stock having an aggregate offering price of up to Armistice with a stated value$50.0 million through the Agents. In August 2021, the Company sold approximately 0.2 million shares of $1,000 per share, convertiblecommon stock under the ATM Program for net proceeds of approximately $5.2 million.

Q2 2021 Debt Financing Agreement

As part of the Loan Agreement entered into 11,940,000in the second quarter of 2021, on June 4, 2021, the Company issued Warrants to Horizon and Powerscourt to purchase 33,656 shares of the Company’s common stock at a conversionwith an exercise price of $0.35$31.20 per share. On July 6, 2017, Armistice converted allThe Warrants are exercisable for ten years from the date of its outstanding sharesissuance. Refer to Note 9 for additional information.

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Table of Series A Preferred Stock into common stock. Subsequent to the conversion of Armistice’s Series A Preferred Stock into common stock, Armistice has a majority voting control over the Company.Contents

Q1 2021 Financing
Common Stock
Initial Public Offering
On October 20, 2015,In January 2021, the Company closed an IPOunderwritten public offering of approximately 1.2 million shares of its units. Each unit consisted of one share of common stock one Class A warrant to purchase one share of common stock at an exercise price of $4.55 per share and one Class B warrant to purchase one-half share of common stock at an exercise price of $3.90 per full share (the “units”). The Class A139,747 pre-funded warrants expire on October 20, 2018 and the Class B warrants expired on April 20, 2017 (the "Class B Expiration Date.") The closing of the IPO resulted in the sale of 4,000,000 units at an initial public offering price of $6.50 per unit for gross proceeds of $26.0 million. The net proceeds of $37.7 million. Armistice participated in the IPO, after underwriting discounts, commissions and expenses, and before offering expenses, to the Company wereby purchasing approximately $23.6 million. On November 13, 2015, the units separated into common stock, Class A warrants and Class B warrants and began trading separately on the NASDAQ Capital Market. On the Class B Expiration Date, the Class B warrants ceased trading on the NASDAQ Capital Market. No Class B warrants were exercised prior to the Class B Expiration Date.
On November 23, 2015, the underwriter of the IPO exercised its over-allotment option for 20,0000.2 million shares of common stock, 551,900 Class A warrants to purchase one share of common stock and 551,900 Class B warrants to purchase one-half share of common stock for additional gross proceeds of $135,319.
The common stock and accompanying Class A warrants and Class B warrants have been classified to stockholders’ equityon the same terms as all other investors. Nantahala participated in the Company’s balance sheet.
Underwriter’s Unit Purchase Option

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The underwriter of the IPO received, for $100 in the aggregate, the right to purchase up to a total of 40,000 units (or 1% of the units sold in the IPO) exercisable at $7.48 per unit (or 115% of the public offering price per unit in the IPO). The units underlying the UPO will be, immediately upon exercise, separated intoby purchasing approximately 0.1 million shares of common stock, andon the Underwriters’ Warrants such that, upon exercise,same terms as all other investors.

Nantahala also purchased the holder of a UPO will not receive actual units but will instead receive the shares of common stock and Underwriters’ Warrants, to the extent that any portion of the Underwriters’ Warrants underlying such units have not otherwise expired. The exercise prices of the underwriters’ Class Apre-funded warrants and underwriter’s Class B warrants underlying the UPO are $5.23 and $4.49, respectively. The UPO may be exercised for cash or on a cashless basis, at the holder’s option, and expires on October 14, 2020; however, following the expiration of underwriters’ Class B warrants on April 20, 2017, the UPO is exercisable only for shares of common stock and underwriters’ Class A warrants at an exercise price of $7.475 per unit; provided further, that, following the expiration of underwriters’ Class A warrants on October 20, 2018, the UPO will be exercisable only for shares of common stock at an exercise price of $7.47. The Company classified the UPO as a liability as it is a freestanding marked-to-market derivative instrument that is precluded from being classified in stockholders’ equity. The fair value of the UPO is re-measured each reporting period and the change in fair value is recognized in the statement of operations (see Note 4).
The Aspire Capital Transaction
On September 8, 2016, the Company entered into a common stock purchase agreement (the “Purchase Agreement”) with Aspire Capital, pursuant to which Aspire Capital committed to purchase up to an aggregate of $15.0 million of139,747 shares of the Company’s common stock over the 30-month term of the Purchase Agreement. Upon execution of the Purchase Agreement, the Company issued and sold to Aspire Capital 250,000 shares of common stock at a price per share of $4.00, for gross proceeds of $1.0 million. Additionally, as consideration for Aspire Capital entering into the Purchase Agreement, the Company issued 175,000 shares of common stock as a commitment fee. The net proceeds of the Aspire Capital transaction, after offering expenses, to the Company were approximately $1,900,000 for the year ended December 31, 2016. As of December 31, 2016, the Company had sold 763,998 shares of common stock to Aspire Capital under the Purchase Agreement. During the nine months ended September 30, 2017, the Company sold an additional 965,165 shares of common stock to Aspire Capital under the terms of the Purchase Agreement for gross proceeds of approximately $789,000. As of the date of this Quarterly Report on Form 10-Q, the Company does not have any remaining shares available to issue under the purchase agreement. The Company may not issue any additional shares of common stock to Aspire Capital under the Purchase Agreement unless shareholder approval is obtained.


The Maxim Group Equity Distribution Agreement

On January 27, 2017, the Company entered into an Equity Distribution Agreement with Maxim Group LLC ("Maxim"), as sales agent, pursuant to which the Company may offer and sell, from time to time, through Maxim, up to $12,075,338 in shares of its common stock. The Company has no obligation to sell any of the shares, and may at any time suspend offers under the Equity Distribution Agreement.

As of the September 30, 2017, the Company had sold 1,336,433 shares of its common stock through Maxim under the Equity Distribution Agreement for gross proceeds of$938,000 and the Company has the potential to sell up to approximately $2.9 million in additional shares of its common stock under the registration statement on Form S-3.

Armistice Private Placement

On April 27, 2017, the Company entered into a securities purchase agreement with Armistice, pursuant to which Armistice purchased $5.0 million of the Company’s securities, consisting of 2,345,714 shares of the Company’s common stock at a purchase price of $0.35$31.188, which represents the per share and 4,179 shares of Series A Preferred Stock at apublic offering price of $1,000 per share. The Company received $4.65 million in net proceeds fromfor the Armistice Private Placement. The number of shares of common stock that were purchased inless the private placement constituted approximately 19.99%$0.012 per share exercise price for each pre-funded warrant. During 2021, the holder exercised 25,740 of the Company’s outstanding sharespre-funded warrants. As of common stock immediately prior to the closing of the Armistice Private Placement. Armistice also received warrantsto purchase up to 14,285,714 shares of the Company’s common stock at an exercise price of $0.40 per share. Under the terms of the securities purchase agreement, the Series A Preferred Stock were not convertible into common stock, and theJune 30, 2022, 114,007 pre-funded warrants were not exercisable until the Company received approval of the private placement by the Company’s shareholders as required by the rules and regulations of the NASDAQ Capital Market.  The Company received shareholder approval for this transaction on June 30, 2017, at which time the warrants became exercisable and the Series A Preferred Stock became convertible into common stock.outstanding.


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As multiple instruments were issued in a single transaction, the Company initially allocated the issuance proceeds among the preferred stock, common stock and warrants using the relative allocation method. As the warrants were determined to be indexed to the Company’s stock, and would only be settled in common shares, entirely in the control of the Company, the warrant instrument was accounted for as an equity instrument. Fair value of the warrants was initially determined upon issuance using the Black-Scholes Model (level 3 fair value measurement). Armistice converted all of the Series A Preferred Stock into 11,940,000 shares of common stock on July 6, 2017.

Common Stock Warrants
 
At SeptemberJune 30, 2017,2022, the following common stock purchase warrants were outstanding:
Number of common sharesExercise priceExpiration
underlying warrantsper sharedate
333,334$150.00 June 2024
114,007$0.012 —
33,656$31.20 June 2031
480,997  

Number of shares Exercise price Expiration
underlying warrants per share date
80,966 $28.00
 August 2018
4,551,900 $4.55
 October 2018
40,000* $5.23
 October 2018
3,571 $28.00
 December 2018
22,328* $8.40
 October 2020
2,380 $8.68
 May 2022
14,285,714 $0.40
 June 2022
18,986,859    
*    Accounted for as a liability instrument (see Note 4)



9.11. Stock-Based Compensation

2016 Equity Incentive Plan

OnIn April 5, 2016, the Company’sour board of directors adopted the 2016 Equity Incentive Plan, (the “2016 Plan”) as the successor to the 2015 Omnibus Plan (the “2015 Plan”). The 2016 Planwhich was approved by our stockholders in May 2016 and which was subsequently amended and restated in May 2018 and August 2019 with the Company’sapproval of our board of directors and our stockholders and became effective on May 18, 2016 (the “2016 Plan Effective Date”Third Amended Plan”).
As of the 2016 Plan Effective Date, no additional grants will be made under the 2015 Plan or the 2011 Stock Incentive Plan (the “2011 Plan”), which was previously succeeded by the 2015 Plan effective October 13, 2015. Outstanding grants under the 2015 Plan and 2011 Plan will continue in effect according to their terms as in effect under the applicable plan.
Upon the 2016 Plan Effective Date, the 2016 Plan reserved and authorized up to 600,000 additional shares of common stock for issuance, as well as 464,476 unallocated shares remaining available for grant of new awards under the 2015 Plan. During the term of the 2016 Third Amended Plan, the share reserve will automatically increase on the first trading day in January of each calendar year beginning in 2017,ending on (and including) January 1, 2026, by an amount equal to 4% of the total number of outstanding shares of common stock of the Company on the last trading day in December of the prior calendar year. On January 1, 2017,2022, pursuant to the terms of the 2016 Third Amended and Restated Plan an additional 375,981 shares reservedwere made available for issuance increased by 377,365.issuance. As of SeptemberJune 30, 2017,2022, there were 483,214243,228 shares available for future issuance under the 2016 Third Amended Plan.


TheOption grants expire after ten years. Employee options typically vest over four years. Employees typically receive a new hire option grant, as well as an annual grant in the first or second quarter of each year. In addition, in the first quarter of 2022, employees were also granted options that vest on the first anniversary of the grant date. Options granted to directors typically vest either immediately or over a period of one or three years. Directors may elect to receive stock options in lieu of board compensation, which vest immediately. For stock options granted to employees and non-employee directors, the estimated grant date fair market value of the Company’s stock‑basedstock-based awards is amortized ratably over the employees’individuals’ service periods, which is the period in which the awards vest. Stock-based compensation expense includes expense related to stock options, restricted stock units and employee stock purchase plan shares. The amount of stock-based compensation expense recognized for the three and six months ended June 30, 2022 and 2021 was as follows (in thousands): 

 Three Months Ended June 30,Six Months Ended June 30,
 2022202120222021
Research and development$365 $467 $653 $765 
Selling, general and administrative304 2,607 5,327 3,757 
Total stock-based compensation$669 $3,074 $5,980 $4,522 


As a result of separation agreements that the Company entered into in the first quarter of 2022 and in accordance with the terms of the pre-existing employment agreements, the Company accelerated the vesting of certain separated employees’ stock options and modified certain awards to extend the exercisability periods. As a result, the Company recognized $4.3 million of compensation cost
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in the first quarter of 2022, all of which was recognized in selling, general and administrative expense. There was 0 additional expense related to the modifications in the three months ended June 30, 2022.

Stock options with service-based vesting conditions

The Company has granted options that contain service-based vesting conditions. The compensation cost for these options is recognized on a straight-line basis over the vesting periods. A summary of option activity for the ninesix months ended SeptemberJune 30, 20172022 is as follows:
 Options Outstanding
 Number of sharesWeighted average exercise price per shareWeighted average grant date fair value per shareWeighted average remaining contractual term (in years)
Balance at December 31, 20211,054,277 $44.26 $27.45 8.1
Granted439,590 $9.29 $6.66 
Forfeited(168,063)$32.37 $21.64 
Expired(29,569)$54.12 $42.09 
Balance at June 30, 20221,296,235 $33.72 $20.82 6.8
Exercisable at June 30, 2022707,059 $45.36 $27.01 4.8

In March 2022, the Company granted 0.3 million options with service-based vesting conditions to its employees as part of its annual stock option award that vest over four years. Additionally in March 2022, the Company granted 0.1 million options to its employees that vest on the first anniversary of the grant date. As a result of the reduction of workforce plan, 0.1 million options were forfeited in the first quarter of 2022, and 0.1 million options were forfeited as a result of other terminations during the six months ended June 30, 2022.

There were 311,164 options that vested during the six months ended June 30, 2022 with a weighted average exercise price of $40.79 per share, which included the acceleration of vesting of certain options in accordance with the separation agreements entered in in the first quarter of 2022. The total grant date fair value of shares which vested during the six months ended June 30, 2022 was $8.2 million.

The Company recognized stock-based compensation expense of $0.6 million and $5.9 million related to stock options with service-based vesting conditions for the three and six months ended June 30, 2022, respectively. At June 30, 2022, there was $6.3 million of total unrecognized compensation cost related to unvested service-based vesting condition awards. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.4 years.

Stock-based compensation assumptions

The following table shows the assumptions used to compute stock-based compensation expense for stock options with service-based vesting conditions granted under the Black-Scholes valuation model for the six months ended June 30, 2022:
Service-based options
Expected term of option (in years)5 - 6.25
Expected stock price volatility84.0% - 86.8%
Risk-free interest rate1.50% - 3.61%
Expected annual dividend yield0%

Stock options with market-based vesting conditions

As of June 30, 2022 there were 0.1 million exercisable stock options that contained market-based vesting conditions (that had been previously satisfied). The options have a weighted average share price per share of $39.53 and a weighted average remaining contractual term of 2.0 years. There were no stock options with market-based vesting conditions granted, exercised, or forfeited for the six months ended June 30, 2022.

Restricted Stock Units
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  Options Outstanding
  
Number of
shares
 
Weighted‑average
exercise price
 
Fair value of
options
granted
 
Weighted average
remaining
contractual term
(in years)
Balance, December 31, 2016 1,849,359
 $5.57
       
Granted 578,611
 $0.74
 $301,743
  
     Forfeited (18,391) $5.63
    
Balance, September 30, 2017 2,409,579
 $4.41
   8.12
Exercisable at September 30, 2017 1,467,463
 $5.25
   7.65

The Company measures the fair value of the restricted stock units using the stock price on the date of the grant. The restricted shares typically vest annually over a four-year period beginning on the first anniversary of the award. As of June 30, 2022, there were no unvested restricted stock units outstanding. 937 restricted stock units vested during the three and six months ended June 30, 2022 and had a weighted average grant date fair value of $54.00.

Employee Stock Purchase Plan

On April 5, 2016, the Company’s board of directors approved the 2016 Employee Stock Purchase Plan (the “ESPP”). The ESPP was approved by the Company’s stockholders and became effective on May 18, 2016 (the “ESPP Effective Date”).

Under the ESPP, eligible employees can purchase common stock through accumulated payroll deductions at such times as are established by the administrator. The ESPP is administered by the compensation committee of the Company’s board of directors. Under the ESPP, eligible employees may purchase stock at 95%85% of the lower of the fair market value of a share of the Company’s common stock (i) on the first day of an offering period or (ii) on the purchase date. Eligible employees may contribute up to 15% of their earnings during the offering period. The Company’s board of directors may establish a maximum number of shares of the Company’s common stock that may be purchased by any participant, or all participants in the aggregate, during each offering or offering period. Under the ESPP, a participant may not purchase more than 10,000 shares during any purchase period or accrue rights to purchase more than $25,000 of the fair market value of the Company’s common stock for each calendar year in which such right is outstanding.

Upon the ESPP Effective Date, the ESPPThe Company initially reserved and authorized up to 500,00041,667 shares of common stock for issuance.issuance under the ESPP. On January 1 of each calendar year, the aggregate number of shares that may be issued under the ESPP shall automatically increaseincreases by a number equal to the lesser of (i) 1% of the total number of shares of the Company’s capital stock outstanding on December 31 of the preceding calendar year, and (ii) 500,00041,667 shares of the Company’s common stock, or (iii) a number of shares of the Company’s common stock as determined by the Company’s board of directors or compensation committee. Employees purchased 20,000The number of shares during 2016 and 33,406 shares during the nine months ended September 30, 2017.were increased by 41,667 on January 1, 2022. As of SeptemberJune 30, 2017, 540,9352022, 181,028 shares remained available for issuance.

In accordance with the guidance in ASC 718-50,Employee Share Purchase Plans (“ASC 718-50”), the ability to purchase shares of the Company’s common stock at the lower of the offering date price or the purchase date price represents an option and, therefore, the ESPP is a compensatory plan under this guidance. Accordingly, stock-based compensation expense is determined based on the option’s grant-date fair value and is recognized over the requisite service period of the option. The Company used the Black-Scholes valuation model and recognized stock-based compensation expense of $20,886$41.5 thousand and $69,492$84.7 thousand for the three and ninesix months ended SeptemberJune 30, 2017.2022, respectively.


Stock‑based compensation
12. Income Taxes

The Company recognized minimal income tax expense recognized for the three and ninesix months ended SeptemberJune 30, 20172022 due to the significant valuation allowance against the Company’s deferred tax assets and 2016 was as follows:
  Three Months Ended Nine Months Ended
  September 30, September 30,
  2017 2016 2017 2016
Research and development $41,323
 $43,861
 $123,883
 $95,013
General and administrative 222,924
 243,913
 728,327
 1,344,181
Total stock-based compensation $264,247
 $287,774
 $852,210
 $1,439,194

10. Income Taxes
the current year losses. The provision forCompany recognized an income taxes was $3.2tax benefit of $0.2 million for the ninethree and six months ended SeptemberJune 30, 2017. The effective tax rate for the nine-month period ended September 30, 2017 was 17.76% as compared to 0% for the corresponding period in the

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prior year. The increase in the rate is attributable to changes in projected incomeas well as limitations on the utilization of NOL carryforwards as described below for the year primarily2021 due to the salereceipt of CERC-501. In addition,its refund claim related to the tax year 2017. The tax benefit recognized for the six months ended June 30, 2020 was a result of a tax law change signed into law as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which allowed the Company to carry back certain losses for taxes paid in fiscal year 2017 and thus resulted in a refund claim. The 2021 income tax benefit was able to utilize net operating loss ("NOL") carryforwardsa result of $2.7 million, which were previously subject to a valuation allowance, to offset a portionthe updated estimate of projected income forinterest receivable and abatement of penalties on the year considering Internal Revenue Code Section 382 limitations.
As of December 31, 2016refund claim, as the Company had $52.2 million of federal and Maryland state NOL carryforwards that will begin to expire in 2031. As of December 31, 2016 the Company also had $1.8 million and $57,000 of federal and Maryland state research and development credits, respectively, that will begin to expire in 2018. The NOL and research and development credit carryforwards are subject to review and possible adjustment byfinal refund payment was received from the Internal Revenue Service and state tax authorities. NOL and tax credit carryforwards are also subject to an annual limitation in the eventsecond quarter of certain cumulative changes in the ownership interest of significant shareholders over a three‑year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, as well as similar state tax provisions. The amount of the annual limitation depends upon the value of the Company immediately before the change, changes to the Company’s capital during a specified period prior to the change, and the federal published interest rate. Considering ownership changes that took place previously as well as during 2017 including the Armistice transaction, the Company is completing an analysis under Section 382 of the Code, and has initially determined the utilization of the NOLs and other tax attributes will be limited on a go forward basis. Approximately $2.7 million of NOL carryforwards will be available in 2017 and the Company will be able to utilize the NOL carryforwards to offset a portion of projected income for the year. Upon completion of the analysis by year end, to the extent there is a limitation, which could be significant, there would be a reduction in the deferred tax assets with an offsetting reduction in the valuation allowance, with no impact on current period income tax expense.2021.
In assessing the realizability of the remaining net deferred tax assets, the Company considers all relevant positive and negative evidence to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent on several factors, including the generation of sufficient taxable income prior to the expiration of the net operating loss carryforwards. Other than the amount of NOL that is available to offset net income generated through September 30, 2017 there was a full valuation allowance against the net deferred tax assets as of September 30, 2017 and December 31, 2016.


11.13. Commitments and Contingencies
 
Office LeaseLitigation

Litigation - General
    
The Company may become party to various contractual disputes, litigation, and potential claims arising in the ordinary course of business. The Company currently does not believe that the resolution of such matters will have a material adverse effect on its financial position or results of operations except as otherwise disclosed in this report.

Deerfield Guarantee

As consideration of the sale of the rights to the Company’s corporate office space,rights, title and interest in assets relating to certain commercialized products to Aytu in 2019, Aytu assumed our financial obligations to Deerfield CSF, LLC (“Deerfield”), which currently includes the
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remaining contingent consideration related to future royalties on the divested products. In conjunction with the closing of the transaction in 2019, the Company entered into a guarantee in favor of Deerfield, which guarantees the payment of the assumed liabilities to Deerfield (the “Guarantee”). Aytu publicly reported that it had entered into a Waiver, Release and Consent in June 2021, pursuant to which it paid a portion of the contingent consideration early and agreed to pay the remaining fixed obligations of $3.0 million in 6 equal quarterly payments of $0.5 million commencing September 30, 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. In accordance with the Waiver, Release and Consent, as of June 30, 2022, the Company estimates Aytu has 2 quarterly payments of $0.5 million remaining, which represents Avalo’s estimated maximum potential future payments under the Guarantee. The Company concluded that the expected credit loss of the Guarantee was de minimis as of June 30, 2022, based on considerations of Aytu’s ability to meet its current financial commitments including recent financings, cash position, operating cash flows and trends.

Karbinal Royalty Make-Whole Provision

In 2018, in connection with the acquisition of certain commercialized products, the Company entered into a supply and distribution agreement (the “Karbinal Agreement”) with TRIS Pharma Inc. (“TRIS”). As part of the Karbinal Agreement, the Company had an annual minimum sales commitment, which is leasedbased on a commercial year that spans from August 1 through July 31, of 70,000 units through 2025. The Company was required to pay TRIS a royalty make whole payment (“Make-Whole Payments”) of $30 for each unit under the 70,000 units annual minimum sales commitment through 2025. 

As a part of the Aytu transaction, the Company assigned all payment obligations, including the Make-Whole Payments, under the Karbinal Agreement (collectively, the “TRIS Obligations”) to Aytu. However, under the original license agreement, the Company could ultimately be liable for the TRIS Obligations to the extent Aytu fails to make the required payments. The future Make-Whole Payments to be made by Aytu are unknown as the amount owed to TRIS is dependent on the number of units sold.

Possible Future Milestone Payments for In-Licensed Compounds

General

The Company is a party to license and development agreements with various third parties, which contain future payment obligations such as royalties and milestone payments (discussed further below). The Company recognizes a liability (and related expense) for each milestone if and when such milestone is probable and can be reasonably estimated. As typical in the biotechnology industry, each milestone has its own unique risks that the Company evaluates when determining the probability of achieving each milestone and the probability of success evolves over time as the programs progress and additional information is obtained. The Company considers numerous factors when evaluating whether a given milestone is probable including (but not limited to) the regulatory pathway, development plan, ability to dedicate sufficient funding to reach a given milestone and the probability of success.

AVTX-002 KKC License Agreement

On March 25, 2021, the Company entered into a license agreement with Kyowa Kirin Co., Ltd. (“KKC”) for exclusive worldwide rights to develop, manufacture and commercialize AVTX-002, KKC’s first-in-class fully human anti-LIGHT (TNFSF14) monoclonal antibody for all indications (the “KKC License Agreement”). The KKC License Agreement replaced the Amended and Restated Clinical Development and Option Agreement between the Company and KKC dated May 28, 2020.

Under the KKC License Agreement, the Company paid KKC an upfront license fee equal to $10.0 million. The Company is also required to pay KKC up to $112.5 million based on the achievement of specified development and regulatory milestones.Upon commercialization, the Company is required to pay KKC sales-based milestones aggregating up to $75.0 million tied to the achievement of annual net sales targets.

Additionally, the Company is required to pay KKC royalties during a country-by-country royalty term equal to a mid-teen percentage of annual net sales. The Company is required to pay KKC a double-digit percentage (less than 30%) of the payments that the Company receives from sublicensing of its rights under the KKC License Agreement, subject to certain exclusions. Avalo is responsible for the development and commercialization of AVTX-002 in all indications worldwide (other than the option in the KKC License Agreement that, upon exercise by KKC, allows KKC to develop, manufacture and commercialize AVTX-002 in Japan).

No expense related to the KKC License Agreement was recognized in the six months ended June 30, 2022. The Company recognized the upfront license fee of $10.0 million within research and development expenses in the six months ended June 30, 2021. There has
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been no cumulative expense recognized as of June 30, 2022 related to the milestones under this license agreement. The Company will continue to monitor the milestones at each reporting period.

AVTX-006 Astellas License Agreement

The Company has an exclusive license agreement with OSI Pharmaceuticals, LLC, an indirect wholly owned subsidiary of Astellas Pharma, Inc. (“Astellas”), for the worldwide development and commercialization of the novel, second generation mTORC1/2 inhibitor (AVTX-006). Under the terms of the license agreement, there was an upfront license fee of $0.5 million. The Company is required to pay Astellas up to $5.5 million based on the achievement of specified development and regulatory milestones. The Company is also required to pay Astellas a tiered mid-to-high single digit percentage of the payments that Avalo receives from sublicensing of its rights under the Astellas license agreement, subject to certain exclusions. Upon commercialization, the Company is required to pay Astellas royalties during a country-by-country royalty term equal to a tiered mid-to-high single digit percentage of annual net sales. Avalo is fully responsible for the development and commercialization of the program.

No expense related to this license agreement was recognized in the six months ended June 30, 2022.There has been $0.5 million of cumulative expense recognized as of June 30, 2022 related to the milestones under this license agreement, which was recognized in the six months ended June 30, 2021. The Company will continue to monitor the remaining milestones at each reporting period.

AVTX-007 MedImmune License Agreement

As discussed further in Note 14, on July 29, 2022, the Company granted Apollo AP43 Limited, a wholly owned subsidiary of Apollo Therapeutics Group Limited (collectively, “Apollo”), a worldwide, exclusive license to research, develop, manufacture and commercialize AVTX-007. Under the terms of the agreement, Apollo will assume responsibility for the future development of AVTX-007.

The AVTX-007 program was originally licensed to Avalo by MedImmune Limited, a subsidiary of AstraZeneca plc (“MedImmune”), and such license was transferred to Apollo as part of the transaction. Accordingly, the Company is no longer responsible for future milestones or royalties under the original license with MedImmune. Refer to Note 14 for further information.

AVTX-008 Sanford Burnham Prebys License Agreement

On June 22, 2021, the Company entered into an Exclusive Patent License Agreement with Sanford Burnham Prebys Medical Discovery Institute (the “Sanford Burnham Prebys License Agreement”) under which the Company obtained an exclusive license to a portfolio of issued patents and patent applications covering an immune checkpoint program (AVTX-008).

Under the terms of the agreement, the Company incurred an upfront license fee of $0.4 million, as well as patent costs of $0.5 million. The Company is required to pay Sanford Burnham Prebys up to $24.2 million based on achievement of specified development and regulatory milestones. Upon commercialization, the Company is required to pay Sanford Burnham Prebys sales-based milestone payments aggregating up to $50.0 million tied to annual net sales targets.Additionally, the Company is required to pay Sanford Burnham Prebys royalties during a country-by-country royalty term equal to a low-to-mid single digit percentage of annual net sales. The Company is also required to pay Sanford Burnham Prebys a tiered low-double digit percentageof the payments that Avalo receives from sublicensing of its rights under the Sanford Burnham Prebys License Agreement, subject to certain exclusions. Avalo is fully responsible for the development and commercialization of the program.

No expense related to the Sanford Burnham Prebys License Agreement was recognized in the six months ended June 30, 2022. The Company recognized the upfront license fee of $0.4 million within research and development expenses and the upfront patent expense of $0.5 million within selling, general and administrative expenses in the three and six months ended June 30, 2021. There has been no cumulative expense recognized as of June 30, 2022 related to the milestones under the Sanford Burnham Prebys License Agreement. The Company will continue to monitor the milestones at each reporting period.

Possible Future Milestone Proceeds for Out-Licensed Compounds

AVTX-301 Out-License

On May 28, 2021, the Company out-licensed its rights in respect of its non-core asset, AVTX-301, to Alto Neuroscience, Inc. (“Alto”). The Company initially in-licensed the compound from an affiliate of Merck & Co., Inc. (“Merck”) in 2013.

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Under the out-license agreement, the Company received a mid-six digit upfront payment from Alto. The Company is also eligible to receive up to $18.6 million based on the achievement of specified development, regulatory and commercial sale milestones. Additionally, the Company is entitled to a less than single digit percentage royalty based on annual net sales. Alto is fully responsible for the development and commercialization of the program.

Avalo recognized the upfront fee as license revenue in the three and six months ended June 30, 2021. The Company has not recognized any milestones as of June 30, 2022.

AVTX-406 License Assignment

On June 9, 2021, the Company assigned its rights, title, interest, and obligations under an operating lease,in-license covering its non-core asset, AVTX-406, to ES Therapeutics, LLC (“ES”), a wholly-owned subsidiary of Armistice. The transaction with ES was approved in accordance with Avalo’s related party transaction policy.

Under the assignment agreement, the Company received a low-six digit upfront payment from ES. The Company is locatedalso eligible to receive up to $6.0 million based on the achievement of specified development and regulatory milestones. Upon commercialization, the Company is eligible to receive sales-based milestone payments aggregating up to $20.0 million tied to annual net sales targets. ES is fully responsible for the development and commercialization of the program.

Avalo recognized the upfront fee as license revenue in Baltimore, Maryland.the three and six months ended June 30, 2021. The leaseCompany has not recognized any milestones as of June 30, 2022.

AVTX-501 Sale to Janssen

In August 2017, the Company sold its worldwide rights to AVTX-501 to Janssen Pharmaceuticals, Inc. (“Janssen”) in exchange for initial gross proceeds of $25.0 million. The Company is also eligible to receive up to $20.0 million based on the achievement of specified development and regulatory milestones. Janssen is fully responsible for the development and commercialization of the program.

The Company has not recognized any milestones as of June 30, 2022.

AVTX-611 License Assignment

In August 2019, the Company assigned its rights, title, interest, and obligations under an in-license covering its non-core asset, AVTX-611, to ES, a wholly-owned subsidiary of Armistice. The transaction with ES was approved in accordance with Avalo’s related-party transaction policy.

Upon commercialization, the Company is eligible to receive sales-based milestone payments aggregating up to $20.0 million tied to annual net sales targets. ES is fully responsible for the development and commercialization of the program.

The Company has not recognized any milestones as of June 30, 2022.

Acquisition Related and Related Party Contingent Liabilities

Aevi Merger Possible Future Milestone Payments

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”). A portion of the consideration for the Aevi Merger included 2 future contingent development milestones worth up to an additional $6.5 million, payable in either shares of Avalo’s common stock or cash, at the election of Avalo.

The first milestone was the enrollment of a patient in a Phase 2 study related to AVTX-002 (for treatment of pediatric onset Crohn’s disease), AVTX-006 (for treatment of any indication) or AVTX-007 (for treatment of any indication) prior to February 3, 2022, which would have resulted in a milestone payment of $2.0 million. The Company did not meet the first milestone prior to February 3, 2022. Therefore, no contingent consideration related to this milestone was recognized as of June 30, 2022 and no future contingent consideration will be recognized.

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The second milestone is the receipt of NDA approval for either AVTX-006 or AVTX-007 from the FDA on or prior to February 3, 2025. If this milestone is met, the Company is required to make a milestone payment of $4.5 million. The contingent consideration related to the second development milestone will be recognized if and when such milestone is probable and can be reasonably estimated. No contingent consideration related to the development milestone has been recognized as of June 30, 2022. The Company will continue to monitor the second development milestones at each reporting period.

AVTX-006 Royalty Agreement with Certain Related Parties

In July 2019, Aevi entered into a royalty agreement, and liabilities thereunder were assumed by the Company upon closing the Aevi Merger in February 2020. The royalty agreement provided certain Aevi investors, including LeoGroup Private Investment Access, LLC on behalf of Garry Neil, the Company’s Chief Executive Officer, and Mike Cola, the Company’s former Chief Executive Officer (collectively, the “Investors”), a royalty stream, in exchange for a one-time aggregate payment of $2.0 million (the “Royalty Agreement”). Pursuant to the Royalty Agreement, the Investors will be entitled collectively to an aggregate amount equal to a low-single digit percentage of the aggregate net sales of the Company’s second generation mTORC1/2 inhibitor, AVTX-006. At any time beginning three monthsyears after the date of rent abatementthe first public launch of AVTX-006, Avalo may exercise, at its sole discretion, a buyout option that terminates any further obligations under the Royalty Agreement in exchange for a payment to the Investors of an aggregate of 75% of the net present value of the royalty payments. A majority of the independent members of the board of directors and includes escalating rent payments. Rent expensethe audit committee of Aevi approved the Royalty Agreement.

Avalo assumed this Royalty Agreement upon closing of the Aevi Merger and it is recognizedrecorded as a royalty obligation within the Company's accompanying condensed consolidated balance sheet as of June 30, 2022. Because there is a significant related party relationship between the Company and the Investors, the Company has treated its obligation to make royalty payments under the Royalty Agreement as an implicit obligation to repay the funds advanced by the Investors. As the Company makes royalty payments in accordance with the Royalty Agreement, it will reduce the liability balance. At the time that such royalty payments become probable and estimable, and if such amounts exceed the liability balance, the Company will impute interest accordingly on a straight‑lineprospective basis overbased on such estimates, which will result in a corresponding increase in the termliability balance.

Ichorion Asset Acquisition Possible Future Milestone Payments

In September 2018, the Company acquired Ichorion Therapeutics, Inc. including acquiring 3 compounds for inherited metabolic disorders known as CDGs (AVTX-801, AVTX-802 and AVTX-803) and 1 other preclinical compound. Consideration for the transaction included shares of Avalo common stock and 3 future contingent development milestones for the acquired compounds worth up to an additional $15.0 million, payable in either shares of Avalo’s common stock or cash, at the election of Avalo.

The first and second milestones were marketing approval of the lease. Rent expensefirst and second product, respectively, by the FDA on or prior to December 31, 2021, which would have resulted in milestone payments of $6.0 million and $5.0 million, respectively. The Company did not meet the first or second milestone as of December 31, 2021. As a result, no contingent consideration related to these milestones was recognized as of June 30, 2022 and no future contingent consideration will be recognized.

The third milestone is the marketing approval of a protide molecule by the FDA on or prior to December 31, 2023. If this milestone is met, the Company is required to make a milestone payment of $4.0 million. The contingent consideration related to the third development milestone will be recognized if and when such milestone is probable and can be reasonably estimated. NaN contingent consideration related to the third development milestone has been recognized as of June 30, 2022. The Company will continue to monitor the third development milestones at each reporting period.

14. Subsequent Events

On July 29, 2022, the Company entered into a license agreement with Apollo pursuant to which the Company: (i) granted to Apollo a worldwide, exclusive license granting rights to Apollo to research, develop, manufacture and commercialize AVTX-007 (the “Apollo License Agreement”) and (ii) entered into a novation agreement, dated July 29, 2022, pursuant to which the MedImmune license, dated August 6, 2019, between the Company and MedImmune, was replaced by a substantially similar novated license agreement between Apollo and MedImmune.

In August 2022, the Company received $5 million as an upfront fee and an additional approximate $10 million as partial consideration for transition, consulting and transfer activities. The Company is also eligible to receive up to $6.25 million in regulatory or development milestones and up to $67.5 million in milestones based on annual global net sales of products licensed under the office lease amountedApollo License Agreement. Additionally, the Company is entitled to approximately $125,000 for the nine months ended September 30, 2017 and 2016. a royalty payment of a low single digit percentage of annual net sales,
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which percentage increases to another low single digit percentage if annual net sales exceed a specified amount, subject to certain adjustments.

Pursuant to the terms of such lease, the Company’sApollo License Agreement, Apollo will assume responsibility for future lease obligation is as follows:
Year ending December 31,  
2017* $39,433
2018 158,716
  $198,149
   
*    Three months remaining in 2017
Obligations to Contract Research Organizations and External Service Providers
development of AVTX-007, including the ongoing clinical trial of AVTX-007 for the treatment of adult-onset Still’s disease. The Company has entered into agreements with contract research organizationswill also assign certain AVTX-007 related contracts and other external service providers for services, primarily in connection withassets to Apollo. The Company will evaluate the clinical trials and developmentaccounting impact of the Company’s product candidates. The Company was contractually obligated for up to approximately $1.2 milliontransaction in the third quarter of future services under these agreements as of September 30, 2017. The Company’s actual contractual obligations will vary depending upon several factors, including the progress and results of the underlying services.2022.





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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
This Quarterly Report on Form 10-Q and the information incorporated herein by reference contain forward-looking statements that involve a number of risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Forward-looking statements can be identified by the use of forward-looking words such as “believes,” “expects,“projects,” “may,” “will,“might,” “plans,” “intends,” “estimates,“will,” “could,” “should,“would,” “would,“should,” “continue,” “seeks,” “aims,” “projects,” “predicts,” “pro forma,“believes,” “expects,” “anticipates,” “potential”“estimates,” “intends,” “plans,” “potential,” “pro forma” or other similar words (including their use in the negative), or by discussions of future matters such asas: the receipt of the escrowed initial gross proceeds amount or the potential future regulatory milestone payment from Janssen,financial and operational outlook; the development of product candidates or products, potential attributes and benefits of product candidates, the expansion of Cerecor's drug portfolio, Cerecor's ability to identify new indications for it's current portfolio and new product candidates that could be in-licensed, technology enhancements, possible changes in legislation,candidates; and other statements that are not historical. Although our forward-looking statements reflect the good faith judgment of our management, these statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from results and outcomes discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those below and elsewhere in this Quarterly Report on Form 10-Q, particularly in Part II – Item 1A, “Risk Factors,” as well as in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 10, 20172, 2022, and in our other filings with the SEC. Statements made herein are as of the date of the filing of this Quarterly Report on Form 10-Q with the SEC and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim any obligation to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and related notes that appear in Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and related notes for the year ended December 31, 20162021 appearing in our Annual Report on Form 10-K filed with the SEC on March 10, 2017.2, 2022.     


Overview


We areAvalo Therapeutics, Inc. (the “Company” or “Avalo” or “we”) is a biopharmaceuticalleading clinical-stage precision medicine company that is developing innovative drug candidatesdiscovers, develops, and commercializes targeted therapeutics for either commercialization, license or sale to make a difference in the lives of patients with neurologicsignificant unmet clinical need in immunology and psychiatric disorders. Our lead drug candidate is CERC-301, which we currently intend to explore asrare genetic diseases. We have built a novel treatment for orphan neurologic indications. We also have two pre-clinical stage compounds, CERC-611 and CERC-406.

Ourdiverse portfolio of productinnovative therapies to deliver meaningful medical impact for patients in urgent need. Our clinical candidates is summarized below:commonly have a proven mechanistic rationale, biomarkers and/or an established proof-of-concept to expedite and increase the probability of success.


CERC-301: Orphan Neurologic Diseases. CERC‑301 belongs to a class of compounds known as antagonistsManagement’s primary evaluation of the N‑methyl‑D‑aspartate, or NMDA, receptor, a receptor subtypesuccess of the glutamate neurotransmitter system thatCompany is responsible for controlling neurologic adaptation.the ability to progress its pipeline assets forward towards commercialization or opportunistically out-licensing rights to indications or geographies. This success depends not only on the operational execution of the programs, but also the ability to secure sufficient funding to support the programs. We believe CERC‑301 specifically blocks the NMDA receptor subunit 2B, or NR2B. Given its specific mechanismability to achieve the anticipated milestones represents our most immediate evaluation points. The following chart summarizes key information about our clinical-stage pipeline and anticipated research & development milestones:

avtx-20220630_g1.jpg


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Table of action and demonstrated tolerability profile, we believe CERC-301 may be well suited to address unmet medical needs in neurologic indications. We are now embarking on a pre-clinical and clinical program to explore the use of CERC-301 in orphan neurologic conditions.Contents

Recent Developments

CERC-611: Adjunctive TreatmentOur focus during the second quarter of Partial-Onset Seizures in Epilepsy. CERC-611 is a potent and selective transmembrane AMPA receptor regulatory proteins, or TARP, 8-dependent á -amino-3-hydroxy-5-methyl-4-isoxazolepropionic acid, or AMPA, receptor antagonist, or inhibitor. TARPs are a recently discovered family of proteins that have been found2022 was progressing our pipeline programs forward to associate with, and modulate the activity of, AMPA receptors. TARP 8-dependent AMPA receptors are localized primarily in the hippocampus, a region of the brain with importance in complex partial seizures and particularly relevant to seizure origination and/or propagation. We believe CERC-611 may be the first drug candidate to selectively target and functionally block region-specific AMPA receptors after oral dosing, which we believe may improve the efficacy and side effect profile of CERC-611 over current anti-epileptics. We intend to develop CERC-611 as an adjunctive therapymeaningful data readouts, notably AVTX-002 for the treatment of partial-onset seizures, with or without secondarily generalized seizures, in patients with epilepsy.



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CERC-406: Residual Cognitive Impairment. CERC-406 is a preclinical candidate from our proprietary platform of compounds that inhibit catechol-O-methyltransferase, or COMT, within the brain, which we refer to as our COMTi platform. We believe CERC‑406 may have the potential to be developednon-eosinophilic asthma (“NEA”) and AVTX-803 for the treatment of residual cognitive impairment symptoms.
leukocyte adhesion deficiency type II (“LAD-II”). In May 2022, we dosed the first patient in the Company’s Phase 2 PEAK (A Phase 2, Randomized, Double-Blind, Placebo-Controlled, Parallel Group Study to Evaluate the Safety and Efficacy of AVTX-002 for the Treatment of Poorly Controlled Non-Eosinophilic Asthma K) trial evaluating AVTX-002 for NEA.


We plan bothFurther, in July 2022, we dosed the first patient in the Company’s Phase 3 LADDER (A Phase 3, Randomized, Double-Blind, Two-Period, Crossover, Withdrawal Study to evaluate our current portfolio for potential new indicationsAssess the Efficacy and Safety of AVTX-803 in Subjects with Leukocyte ADhesion Deficiency Type II (LADD) (ER)) trial evaluating AVTX-803 in patients with LAD II. This trial is to identify potential new product candidatesbe followed by an open-label extension.

On July 7, 2022, Avalo effected a 1-for-12 reverse stock split. The Company implemented the reverse stock split to increase the per share price of its common stock to regain compliance with the listing requirements of the Nasdaq Capital Market. Avalo regained compliance on July 22, 2022.

On July 29, 2022, Avalo granted a worldwide, exclusive license to Apollo Therapeutics Group Limited (“Apollo”), granting rights to Apollo to research, develop, manufacture and / or commercialized assets.

At September 30, 2017, we had $24.0 million in cash and cash equivalents and $4.8 million in current liabilities.commercialize AVTX-007, Avalo’s anti-IL-18 monoclonal antibody product. In August 2017, we sold all of our rights to a prior product candidate, CERC-501, to Janssen in exchange for initial gross proceeds of $25.02022, Avalo received the approximate $15 million of which $3.75upfront payment. Avalo is also eligible to receive up to $74 million was deposited into a twelve month escrow to secure certain indemnification obligations to Janssen,of milestones, as well as a potential future $20.0 millionroyalty payment of a low single digit percentage of annual net sales. The AVTX-007 program was originally licensed to Avalo by MedImmune Limited, a subsidiary of AstraZeneca plc, and such license was transferred to Apollo as part of the transaction.

Our Strategy
Our strategy for increasing stockholder value includes:

•Advancing our pipeline of compounds through development and to regulatory milestone payment.approval;

We will need additional funding•Developing the go-to-market strategy to complete the development of anyquickly and effectively market, launch, and distribute each of our existing product candidatescompounds that receive regulatory approval;
•Opportunistically out-licensing rights to indications or any new product candidates we decidegeographies; and
•Acquiring or licensing rights to pursue. We intend to seek future funding for our development programs and operations from further offerings of equity or debt securities, non-dilutive financing arrangements such as federal grants, collaboration agreements or out-licensing arrangements. However, we may be unable to raise additional funds or enter into such other agreements or transactions on favorable terms, or at all. If we fail to raise capital or enter into such other arrangements or transactions, we may experience a significant delay, scale-back or discontinue the development of one or more of our product candidates or be forced to cease our operations altogether.

We were incorporated in Delaware in 2011 and commenced operations in the second quarter of 2011. Since inception, our operations have included organizing and staffing our company, business planning, raising capital and developing our product candidates. We have no products approved for commercial sale and have not generated any revenue from product sales to date, and we continue to incur significant research, development and other expenses related to our ongoing operations. We have incurred losses in each period since our inception. As of September 30, 2017 we had an accumulated deficit of $55.1 million. We expect to incur significant expenses and operating losses for the foreseeable future as we continue the developmenttargeted, complementary differentiated preclinical and clinical trials of our product candidates.stage compounds.

We have financed our operations primarily through a public offering, private placements of our common stock and convertible preferred stock, the issuance of debt and the sale of our rights to CERC-501. Our ability to become and remain profitable depends on our ability to generate product revenue. We do not expect to generate any product revenue unless, and until, we obtain marketing approval for, and commercialize, any of our product candidates. There can be no assurance as to whether or when we will achieve profitability. 
Components of Operating Results
Revenue
To date, we have primarily derived revenue from the sale of CERC-501 and research grants from the National Institutes of Health. We have not generated any revenue from commercial product sales to date. We will not generate any commercial revenue, if ever, until one of our product candidates receives marketing approval and we successfully commercialize such product candidates.
In April 2016, we received a research and development grant from the National Institute on Drug Abuse, or NIDA, at the National Institutes of Health to provide additional resources for the period from May 2016 through April 2017 for a Phase 2 clinical trial for CERC-501. Additionally, in July 2016, we received a research and development grant from the National Institute on Alcohol Abuse and Alcoholism, or NIAAA, at the National Institutes of Health to provide additional resources for the period of July 2016 through August 2017 to progress the development of CERC-501 for the treatment of alcohol use disorder. We recognize revenue under grants in earnings on a systemic basis in the period the related expenditures for which the grants are intended to compensate are incurred.

In August 2017, we sold all of our rights to a prior product candidate, CERC-501, to Janssen Pharmaceuticals, Inc., or Janssen, in exchange for initial gross proceeds of $25.0 million, of which $3.75 million was deposited into a twelve-month escrow to secure certain indemnification obligations, as well as a potential future $20.0 million regulatory milestone payment. The terms of the agreement provide that Janssen will assume ongoing clinical trials and be responsible for any new development and commercialization of CERC-501.

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Research and Development Expenses
Our research and development expenses consist primarily of costs incurred developing, testing and seeking marketing approval for our product candidates. These costs include both external costs, which are study‑specific costs, and internal research and development costs, which are not directly allocated to our product candidates.
External costs include: 
expenses incurred under agreements with third‑party contract research organizations and investigative sites that conduct our clinical trials, preclinical studies and regulatory activities;
payments made to contract manufacturers for drug substance and acquiring, developing and manufacturing clinical trial materials; and
payments related to acquisitions of our product candidates and preclinical platform, milestone payments, and fees associated with the prosecution and maintenance of patents.
Internal costs include: 
personnel‑related expenses, including salaries, benefits and stock‑based compensation expense;
consulting costs related to our internal research and development programs;
allocated facilities, depreciation and other expenses, which include rent and utilities, as well as other supplies; and
product liability insurance.
Research and development costs are expensed as incurred. We record costs for some development activities, such as clinical trials, based on an evaluation of the progress to completion of specific tasks using data such as subject enrollment, clinical site activations or information provided to us by our vendors.
We track external costs by program and subsequently by product candidate once a product candidate has been selected for development. Product candidates in later stage clinical development generally have higher research and development expenses than those in earlier stages of development, primarily due to the increased size and duration of the clinical trials.
As of September 30, 2017, we had four full-time employees who were primarily engaged in research and development.
General and Administrative Expenses
General and administrative expenses consist primarily of professional fees, patent costs and salaries, benefits and related costs for executive and other personnel, including stock‑based compensation and travel expenses. Other general and administrative expenses include facility‑related costs, communication expenses and professional fees for legal, including patent‑related expenses, consulting, tax and accounting services, insurance, depreciation and general corporate expenses.

Interest Expense, Net
Net interest expense is primarily related to interest payments pursuant to the terms of our term debt facility entered into in August 2014, as well as the amortization of the debt discounts and premiums and deferred financing fees in connection with such term debt facility. We made the final payment under this facility on August 1, 2017.
Income Tax Expense

Income tax expense was incurred during the quarter ended September 30, 2017 as a result of our net income for the same period.

Critical Accounting Policies and Significant Judgments and Estimates

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This discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. In accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. On an ongoing basis, we evaluate our estimates and assumptions, including those related to clinical and preclinical trial expenses and stock‑based compensation. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 2 to the audited financial statements appearing at the end of our Annual Report on Form 10-K, we believe the following accounting policies are critical to the portrayal of our financial condition and results. We have reviewed these critical accounting policies and estimates with the audit committee of our board of directors.

License and Other Revenue

We recognize revenues from collaboration, license or other research or sale arrangements when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably assured.

Grant Revenue Recognition
We recognize grant revenue when there is (i) reasonable assurance of compliance with the conditions of the grant and (ii) reasonable assurance that the grant will be received. We recognize revenue under grants in earnings on a systemic basis in the period the related expenditures for which the grants are intended to compensate are incurred.


Results of Operations

Comparison of the Three Months Ended SeptemberJune 30, 20172022 and 20162021


Product Revenue, Net    

Net product revenue was $1.0 million for the three months ended June 30, 2022, compared to $2.7 million for the three months ended June 30, 2021. The decrease was mainly attributable to a decrease in units sold, which may have been caused by disruptions to the sales channel as a result of the transition of commercial operations from Aytu BioScience, Inc. (“Aytu”) to Avalo in the second half of 2021. The Company is uncertain whether these potential disruptions will be temporary or have a permanent impact on future sales.

License and Other Revenue


On August 14. 2017, we sold CERC-501 to Janssen in exchange for initial gross proceeds of $25.0Avalo recognized $0.6 million of which $3.75 million was deposited into a twelve month escrow to secure certain indemnification obligations to Janssen. In addition to the initial proceeds, the terms of the agreement provide for a potential future $20 million regulatory milestone payment. The terms of the agreement provide that Janssen will assume ongoing clinical trials and be responsible for any new development and commercialization of CERC-501.
Grant Revenue

The following table summarizes our grantlicense revenue for the three months ended SeptemberJune 30, 20172021 related to upfront fees received pursuant to the out-license and 2016:assignment, respectively, of the rights to its non-core neurology pipeline assets, AVTX-301 and AVTX-406 to Alto Neurosciences, Inc. (“Alto”) and ES Therapeutics, LLC (“ES”), respectively. These transactions were unique to the prior period.

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 the Company and whose chief investment officer, Steven Boyd, and managing director, Keith Maher, currently serve on the Board of the Company. The transaction with ES was approved in accordance with Avalo’s related party transaction policy.

Cost of Product Sales

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  Three Months Ended
  September 30,
  2017 2016
  (in thousands)
Grant revenue $38
 $321
Grant revenue under the NIAAA grant was approximately $38,000Cost of product sales were $1.6 million for the three months ended SeptemberJune 30, 2017.2022, compared to $0.1 million for the same period in 2021. $0.4 million of the increase was driven by the fifty percent net profit share with the supplier that began on July 1, 2021. Further, in the second quarter of 2022, we fully reserved for the $1.0 million receivable due in December 2024 pursuant to the transition service agreement with Aytu, given Aytu disclosed in their Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, 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. We recognized approximately $321,000the expense in cost of grant revenueproduct sales for the three months ended SeptemberJune 30, 2016 for2022, which drove the NIDA grant. Our grant revenues are dependent upon the timing and progressremainder of the underlying studies and development activities. We had a reduced level of research and development activities in the third quarter of 2017 compared to the prior year period, which resulted in a reduction in grant revenue under the current NIAAA grant compared to the ongoing research conducted under the NIDA grant in 2016. The Company sold CERC-501 to Janssen in August 2017 and does not expect any further grant revenues.increase.


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Research and Development Expenses

The following table summarizes our research and development expenses for the three months ended SeptemberJune 30, 20172022 and 2016:2021 (in thousands):
  Three Months Ended
  September 30,
  2017 2016
  (in thousands)
CERC-301 $362
 $1,142
CERC-501 14
 896
CERC-611 175
 2,019
CERC-406 —
 17
Internal expenses not allocated to programs:    
Salaries, benefits and related costs 194
 400
Stock-based compensation expense 41
 44
Other 179
 64
  $965
 $4,582
 Three Months Ended June 30,
 20222021
Preclinical expenses$569 $2,110 
Clinical expenses3,248 2,460 
CMC expenses2,967 4,905 
License and milestone expenses— 400 
Internal expenses:
Salaries, benefits and related costs1,291 2,160 
Stock-based compensation expense365 467 
Other70 67 
 $8,510 $12,569 
 
Research and development expenses were $965,000 for the three months ended September 30, 2017, a decrease of approximately $3.6 million compared to the three months ended September 30, 2016. Costs for CERC-301 decreased by $780,000, primarily due to the completion of the Phase 2 clinical trial for the adjunctive treatment of MDD. Costs for CERC-501 decreased by $882,000 from the prior year period as our Phase 2 clinical trial with CERC-501 was completed in the fourth quarter of 2016. The Company sold CERC-501 to Janssen in August 2017. We purchased CERC-611 for $2.0 million in September 2016 and are currently in the process of preparing that compound for additional development.
General and Administrative Expenses
  Three Months Ended
  September 30,
  2017 2016
  (in thousands)
Salaries, benefits and related costs $744
 $556
Legal, consulting and other professional expenses 1,047
 725
Stock-based compensation expense 223
 244
Other general and administrative expenses 138
 178
  $2,152
 $1,703
General and administrative expenses were $2.2$4.1 million for the three months ended SeptemberJune 30, 2017, an increase of $0.4 million2022, compared to the three months ended September 30, 2016. This increase was primarilysame period in 2021.

Notably, chemistry, manufacturing, and controls (“CMC”) and preclinical expenses decreased $1.9 million and $1.5 million, respectively. CMC expenses decreased largely due to severance accruals for our former chief executive officer, who resignedthe timing of raw material purchases in August, 2017the second quarter of 2021 that did not repeat in the second quarter of 2022. Preclinical expenses decreased due to non-clinical activities and biomarker studies in the second quarter of 2021 that did not repeat in the second quarter of 2022. These decreases were partially offset by increased legal fees associated withclinical expenses related to the saleAVTX-002 PEAK study.

Additionally, salaries, benefits and related costs decreased $0.9 million due to the reduction in headcount implemented in the first quarter of all of our rights to CERC-501.2022 and cost savings initiatives.

Selling, General and Administrative Expenses
 
Change in Fair Value of Warrant LiabilityThe following table summarizes our selling, general and Unit Purchase Option Liability
We recognized a net gain on the change in fair value of our warrant liability and UPO liability of $64 during the three months ended September 30, 2017 compared to a net gain of $101,000administrative expenses for the three months ended SeptemberJune 30, 2016.2022 and 2021 (in thousands): 
 Three Months Ended June 30,
 20222021
Salaries, benefits and related costs$496 $1,300 
Legal, consulting and other professional expenses1,554 2,685 
Stock-based compensation expense304 2,607 
Advertising and marketing expense14 432 
Other416 380 
 $2,784 $7,404 
 
The $101,000 gain on the change in fair value during the 2016 period was primarily due to the increase in fair value of the warrant liabilitySelling, general and UPO liability. These increases were attributable to a decrease in our common stock price compared to the previous quarter-end.
Interest Expense, Net
Net interest expenseadministrative expenses decreased by $134,000 for the three months ended September 30, 2017 compared to the three months ended September 30, 2016. The decrease was primarily due to a decrease in interest associated with a reduction in the principal balance of our secured term loan facility. We made the final payment under this term loan on August 1, 2017.

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Income Tax Expense

The provision for income taxes was $3.2$4.6 million for the three months ended SeptemberJune 30, 20172022 compared to the same period in 2021 due to the net income generated from the sale of CERC-501. Our annual effective tax rate as of September 30, 2017 was approximately 18 percent. Our effective tax rate differs from the federal statutory ratedecreased headcount and cost savings initiatives. Notably, non-cash stock based compensation expense decreased $2.3 million due to decreased headcount and $1.4 million of modification expense recognized in the Company’s ability to utilize a portionprior period that did
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Table of its prior net operating losses, which were previously subject to a valuation allowance, to offset current period income. We currently expect to generate an income tax benefit during the 4th quarterContents
not repeat. Legal, consulting and other professional expenses decreased $1.1 million due to additional expected operating losses during that period.reduced recruiting, consulting and legal expenses as a result of cost savings initiatives.


Comparison of the Nine Months Ended September 30, 2017We expect selling, general and 2016

License and Other Revenue

On August 14. 2017, we sold CERC-501administrative expenses to Janssen in exchange for initial gross proceeds of $25.0 million, of which $3.75 million was deposited into a twelve month escrowdecrease as compared to secure certain indemnification obligations to Janssen. In additionhistorical periods prior to the initial proceeds,reduction in headcount and other cost savings initiatives implemented in the termsfirst quarter of the agreement provide for a potential future $20 million regulatory milestone payment. The terms of the agreement provide that Janssen will assume ongoing clinical trials and be responsible for any new development and commercialization of CERC-501.2022.


Grant RevenueAmortization Expense


The following table summarizes our grantamortization expense for the three months ended June 30, 2022 and 2021 (in thousands):

 Three Months Ended June 30,
 20222021
Amortization of intangible assets$— $428 

Avalo’s acquired assembled workforce and acquired product marketing rights were fully amortized in the first quarter of 2022 and fourth quarter of 2021, respectively, thus driving the $0.4 million decrease as compared to the prior period. We expect amortization expense to decrease as compared to historical prior periods given the intangible assets are fully amortized.

Other Expense, Net

The following table summarizes our other expense, net for the three months ended June 30, 2022 and 2021 (in thousands):
 Three Months Ended June 30,
 20222021
Other expense, net— (5)
Interest expense, net(1,154)(239)
$(1,154)$(244)

Other expense, net was mainly comprised of interest expense related to the venture loan and security agreement for the three months ended June 30, 2022. Avalo entered into the loan agreement in June 2021 and therefore only recognized a partial period of interest expense in the prior period, which drove the increase for the three months ended June 30, 2022.

In June 2022, the Company made a partial prepayment of $15.0 million under the venture loan and security agreement. Therefore, we expect future interest expense to decrease as compared to prior periods.

Income Tax Expense

The following table summarizes our income tax expense for the three months ended June 30, 2022 and 2021 (in thousands):
 Three Months Ended June 30,
 20222021
Income tax expense (benefit)$5 $(199)
The Company recognized minimal income tax expense for the three months ended June 30, 2022 compared to an income tax benefit of $0.2 million for the three months ended June 30, 2021. The income tax benefit in the prior period was a result of the updated estimate of interest receivable and abatement of penalties on the refund claim, as the final refund payment was received from the Internal Revenue Service in the second quarter of 2021.

Comparison of the Six Months Ended June 30, 2022 and 2021

Product Revenue, Net    

Net product revenue was $2.2 million for the six months ended June 30, 2022, compared to $3.2 million for the six months ended June 30, 2021. The decrease was mainly attributable to a decrease in units sold, which may have been caused by disruptions to the sales channel as a result of the transition of commercial operations from Aytu to Avalo in the second half of 2021. The Company is uncertain whether these potential disruptions will be temporary or have a permanent impact on future sales.

License Revenue
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Avalo recognized $0.6 million of license revenue for the ninesix months ended SeptemberJune 30, 20172021, related to upfront fees received pursuant to the out-license and 2016:assignment, respectively, of the rights to its non-core neurology pipeline assets, AVTX-301 and AVTX-406, to Alto and ES, respectively. These transactions were unique to the prior period.

  Nine Months Ended
  September 30,
  2017 2016
  (in thousands)
Grant revenue $580
 $972
ES is a wholly-owned subsidiary of Armistice. The transaction with ES was approved in accordance with Avalo’s related party transaction policy.

Grant revenue from the NIAAA grant was $580,000Cost of Product Sales

Cost of product sales were $2.3 million for the ninesix months ended SeptemberJune 30, 2017. Revenue of $972,0002022, compared to $0.2 million for the ninesame period in 2021. $1.0 million of the increase was driven by the fifty percent net profit share with the supplier that began on July 1, 2021. Further, in the second quarter of 2022, we fully reserved for the $1.0 million receivable due in December 2024 pursuant to the transition service agreement with Aytu, given Aytu disclosed in their Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 that substantial doubt exists with respect to their ability to continue as a going concern within one year after the date the financial statements were issued, or May 2023. We recognized expense in the cost of product sales for the six months ended SeptemberJune 30, 2016 was derived from2022, which drove the NIDA grant. Our grant revenues are dependent upon the timing and progressremainder of the underlying studies and development activities. We had a reduced level of research and development activities in the current year period compared to the on-going clinical trial work in prior year period, which resulted in a reduction of grant revenue under the current NIAAA grant compared to the NIDA grant in 2016.increase.

Research and Development Expenses

The following table summarizes our research and development expenses for the ninesix months ended SeptemberJune 30, 20172022 and 2016:2021 (in thousands):
  Nine Months Ended
  September 30,
  2017 2016
  (in thousands)
CERC-301 $484
 $2,534
CERC-501 596
 3,145
CERC-611 216
 2,019
CERC-406 2
 121
Internal expenses not allocated to programs:    
Salaries, benefits and related costs 743
 1,285
Stock-based compensation expense 124
 95
Other 246
 178
  $2,411
 $9,377
 Six Months Ended June 30,
 20222021
Preclinical expenses$1,568 $4,344 
Clinical expenses6,034 7,900 
CMC expenses5,113 9,639 
License and milestone expenses— 10,900 
Internal expenses:
Salaries, benefits and related costs4,559 4,097 
Stock-based compensation expense653 765 
Other167 129 
 $18,094 $37,774 
 
Research and development expenses were $2.4decreased $19.7 million for the ninesix months ended SeptemberJune 30, 2017, a decrease of approximately $7.0 million2022 compared to the nine months ended September 30, 2016. Costssame period in 2021. In the first quarter of 2021, the Company recognized a $10.0 million upfront license fee related to the expanded indication license agreement for CERC-301AVTX-002 with Kyowa Kirin Co., Ltd. (“KKC”), which did not repeat in the current period.

The remaining $9.7 million decrease was primarily driven by a decrease in CMC, preclinical and clinical expenses. CMC expenses decreased by $2.0

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Table$4.5 million due to the timing of Contents

million fromraw material purchases in the prior year period,first half of 2021 that did not repeat in the first half of 2022. Preclinical expenses decreased $2.8 million primarily due to non-clinical activities and biomarker studies in the completion of enrollment during the Phase 2 clinical trial for the adjunctive treatment of MDD in 2016. Wefirst half 2021 that did not perform anyrepeat in the first half of 2022. Clinical expenses decreased $1.9 million due to fewer clinical trials for CERC-301ongoing in 2017, however costs were incurred to analyze potential other indications for CERC-301 in 2017. Costs for CERC-501 decreased by $2.5 million from the prior yearcurrent period as our Phase 2a result of certain programs being paused or wound down in 2022. However, these decreases were partially offset by increased clinical trial with CERC-501 was completed in the fourth quarter of 2016. We sold all of our rights to CERC-501 to Janssen in August 2017. We purchased CERC-611 in September 2016 for $2.0 million and are currently in the process of preparing that compound for additional development.
General and Administrative Expenses
  Nine Months Ended
  September 30,
  2017 2016
  (in thousands)
Salaries, benefits and related costs $1,665
 $1,808
Legal, consulting and other professional expenses 2,150
 2,186
Stock-based compensation expense 728
 1,344
Other general and administrative expenses 378
 651
  $4,921
 $5,989
General and administrative expenses were $4.9 million for the nine months ended September 30, 2017, a decrease of $1.1 million comparedactivities related to the nine months ended September 30, 2016. Salaries,AVTX-002 PEAK study.

The decreases noted above were partially offset by a $0.5 million increase to salaries, benefits and related costs decreased by $143,000 primarily due to a temporary reduction in headcount and certain employee benefits. Stock-based compensation expense decreased by $616,000, which was primarily driven by severance expense incurred as a result of the modification of grants made to our former chief executive officerheadcount reduction implemented in the first quarter of 2016. Other2022.

Selling, General and Administrative Expenses
The following table summarizes our selling, general and administrative expenses decreased by $273,000 due to efforts to reduce certain other operating costs in order to preserve cash.for the six months ended June 30, 2022 and 2021 (in thousands): 
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 Six Months Ended June 30,
 20222021
Salaries, benefits and related costs$4,597 $2,409 
Legal, consulting and other professional expenses3,797 5,277 
Stock-based compensation expense5,327 3,757 
Advertising and marketing expense57 562 
Other690 746 
 $14,468 $12,751 
 
Change in Fair Value of Warrant LiabilitySelling, general and Unit Purchase Option Liability
We recognized a net gain onadministrative expenses increased $1.7 million for the change in fair value of our warrant liability and UPO liability of $2,000 during the ninesix months ended SeptemberJune 30, 2017 compared to a net gain of $58,000 for the nine months ended September 30, 2016.
The $58,000 gain on the change in fair value during the 2016 period was primarily due to the decrease in fair value of the warrant liability and UPO liability. These decreases were attributable to a decrease in our common stock price2022 compared to the previous year-end.same period in 2021 due to expenses related to headcount reductions from the pipeline prioritization plan and other separations. Avalo recognized $2.4 million of severance expense and $4.3 million of stock-based compensation expense related to modifications of separated employee’s stock options during the period.


These increases were partially offset by a $1.5 million decrease in legal, consulting and other professional expenses and a $0.5 million decrease in advertising and marketing expenses. The decreases were driven by reduced recruiting, marketing, consulting and legal expenses as a result of cost savings initiatives.
Interest
We expect selling, general and administrative expenses to decrease as compared to historical periods prior to the reduction in headcount and other cost savings initiatives implemented in the first quarter of 2022.

Amortization Expense

The following table summarizes our amortization expense for the six months ended June 30, 2022 and 2021 (in thousands):

 Six Months Ended June 30,
 20222021
Amortization of intangible assets$38 $853 

Avalo’s acquired assembled workforce and acquired product marketing rights were fully amortized in the first quarter of 2022 and fourth quarter of 2021, respectively, thus driving the $0.8 million decrease as compared to the prior period. We expect amortization expense to decrease as compared to historical periods given the intangible assets are fully amortized.

Other Expense, Net

NetThe following table summarizes our other expense, net for the six months ended June 30, 2022 and 2021 (in thousands):
 Six Months Ended June 30,
 20222021
Other expense, net(20)(5)
Interest expense, net(2,323)(222)
$(2,343)$(227)

Other expense, net was comprised of interest expense decreased by $328,000related to the venture loan and security agreement for the ninesix months ended SeptemberJune 30, 20172022 and 2021. Avalo entered into the loan agreement in June 2021 and therefore only recognized a partial period of interest expense in the prior period, which drove the increase for the six months ended June 30, 2022.

In June 2022, the Company made a partial prepayment of $15.0 million under the venture loan and security agreement. Therefore, we expect future interest expense to decrease as compared to the nine months ended September 30, 2016. The decrease was primarily due to a decrease in interest associated with a reduction in the principal balance of our secured term loan facility. We made the final payment under this term loan on August 1, 2017.prior periods.



Income Tax Expense


The provisionfollowing table summarizes our income tax expense for the six months ended June 30, 2022 and 2021 (in thousands):
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 Six Months Ended June 30,
 20222021
Income tax expense (benefit)$15 $(188)
The Company recognized minimal income taxes was $3.2tax expense for the six months ended June 30, 2022 compared to an income tax benefit of $0.2 million for the ninesix months ended SeptemberJune 30, 20172021. The income tax benefit in the prior period was a result of the updated estimate of interest receivable and abatement of penalties on the refund claim, as the final refund payment was received from the Internal Revenue Service in the second quarter of 2021.

Liquidity and Capital Resources

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 of the condensed consolidated financial statements 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 of the condensed consolidated financial statements) 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 the net income generated from the sale of CERC-501. Our annual effective tax rate as of September 30, 2017 was approximately 18 percent. Our effective tax rate differs from the federal statutory rate dueuncertainty 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 utilizecontinue as a portiongoing 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 prior net operating losses, which were previously subjectpipeline assets, and the potential receipt and sale of any priority review vouchers it receives.

Uses of Liquidity

The Company uses cash to a valuation allowance, to offset current period income. We currently expect to generate an income tax benefit duringprimarily fund the 4th quarter due to additional expected operating losses during that period.
Liquidity and Capital Resources
We have devoted mostongoing development of our cash resources to research and development pipeline assets and general and administrative activities. Since our inception, we have incurred net losses and negative cash flows from our operations. We expect to incur significant expenses and operating losses for the foreseeable future as we continue the development, preclincial and clinical trials of, and seek marketing approval for, our product candidates. We incurred net income (losses) of $15.0 million and $(14.8) million for

costs associated with its organizational infrastructure.
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the nine months ended September 30, 2017 and 2016, respectively. At September 30, 2017 we had an accumulated deficit of $55.1 million, net working capital of $23.3 million and cash and cash equivalents of $24.0 million primarily due to the sale of CERC-501. To date, we have not generated any commercial revenues from the sale of products and we do not anticipate generating any revenues from the commercial sale of our product candidates for the foreseeable future. Historically, we have financed our operations principally through private and public placements of common stock, private placements of convertible preferred stock and convertible and nonconvertible debt. In April 2017, we raised gross proceeds of $5.0 million from a private placement of our equity securities. On August 14. 2017, we sold all of our rights to CERC-501 to Janssen in exchange for initial gross proceeds of $25.0 million, of which $3.75 million was deposited into a twelve month escrow to secure certain indemnification obligations to Janssen. In addition to the initial proceeds, the terms of the agreement provide for a potential future $20 million regulatory milestone payment. Further, the terms of the agreement provide that Janssen will assume ongoing clinical trials and be responsible for any new development and commercialization of CERC-501.

We will require substantial additional financing to fund our operations to continue to execute our strategy. Our strategy is to seek funding for our operations from further offerings of equity or debt securities, non-dilutive financing arrangements such as federal grants, collaboration agreements or out-licensing arrangements, and to explore strategic alternatives such as an acquisition, merger, or business combination. Based on our current research and development plans we expect that our existing cash and cash equivalents, together with the initial proceeds from the Janssen sale, will enable us to fund our operating expenses and capital expenditure requirements through 2018.
Term Loan
In August 2014, we received a $7.5 million secured term loan from a finance company. The loan was secured by a lien on all our assets, excluding intellectual property, which was subject to a negative pledge. The loan agreement contained certain additional nonfinancial covenants. In connection with the loan agreement, our cash and investment accounts were subject to account control agreements with the finance company that give the finance company the right to assume control of the accounts in the event of a loan default. Loan defaults were defined in the loan agreement and include, among others, the finance company’s determination that there was a material adverse change in our operations, other than adverse results of clinical trials. Interest on the loan was at a rate of the greater of 7.95%, or 7.95% plus the prime rate as reported in The Wall Street Journal minus 3.25%. On August 1, 2017, we made the final payment of $494,231 under the loan, which included a termination fee of $187,500.

Cash Flows
 
The following table summarizes our cash flows for the ninesix months ended SeptemberJune 30, 20172022 and 2016:2021 (in thousands): 
  Nine Months Ended September 30,
  2017 2016
  (in thousands)
Net cash provided by (used in):    
Operating activities $15,110
 $(10,860)
Investing activities (8) (26)
Financing activities 3,726
 (1,461)
Net increase (decrease) in cash and cash equivalents $18,828
 $(12,347)
Net cash provided by (used in) operating activities
Net cash provided by operating activities was $15.1 million for the nine months ended September 30, 2017 and consisted primarily of net income of $15.0 million, offset by an increase in escrowed cash receivable of $3.8 million which resulted from the sale of all of our rights to CERC-501 and a $698,000 decrease in accounts payable. These were offset by non‑cash stock-based compensation expense of $852,000.
 Six Months Ended June 30,
 20222021
Net cash (used in) provided by:  
Operating activities$(28,537)$(37,503)
Investing activities(56)(21)
Financing activities(14,781)59,043 
Net (decrease) increase in cash and cash equivalents$(43,374)$21,519 
 
Net cash used in operating activities

Net cash used in operating activities was $10.9$28.5 million for the ninesix months ended SeptemberJune 30, 20162022, and consisted primarily of a net loss of $14.8$35.0 million and non-cash adjustments to reconcile net loss to net cash used in operating activities including stock-based compensation of $6.0 million and the $1.0 million reserve on the other long-term asset due to the full reserve on the Aytu receivable due December 2024. Additionally, changes in net liabilities decreased by $1.3 million. The decrease was mainly driven by a $3.5 million decrease in accrued expenses and a $1.2 million decrease in accounts payable, partially offset by non-cash stock-based compensation expensea $2.4 million decrease in other receivables, primarily due to the receipt of $1.4$2.2 million from Aytu in the first quarter of 2022.

Net cash used in operating activities was $37.5 million for the six months ended June 30, 2021 and anconsisted primarily of a net loss of $47.8 million. Changes in net liabilities increased $4.6 million, mainly driven by a $4.9 million increase in accrued expenses and a $1.2 million decrease in other liabilitiesreceivables, partially offset by increased accounts receivable of $2.5$1.9 million. In April 2021, the Company paid the $10.0 million upfront license fee related to the expanded indication license agreement for AVTX-002 with KKC.

Net cash provided by (used in)used in investing activities

Net cash used in investing activities was minimal for the six months ended June 30, 2022 and June 30, 2021 and consistent primarily of the purchase of property and equipment.

Net cash used in financing activities


27Net cash used in financing activities for the six months ended June 30, 2022 consisted of the $14.8 million partial prepayment applied to principal under the Loan Agreement.

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Net cash provided by financing activities was $3.7$59.0 million for the ninesix months ended SeptemberJune 30, 2017, which2021 and consisted primarily of grossnet proceeds of $1.7$37.7 million from an underwritten public offering. Armistice participated in the offering by purchasing approximately 0.5 million shares of common stock, on the same terms as all other investors. Additionally, Avalo received net proceeds of $19.6 million from the saleLoan Agreement in June 2021.

Critical Accounting Policies, Estimates, and Assumptions

This Management’s Discussion and Analysis of common stock under an equity distribution agreement with the Maxim GroupFinancial Condition and $4.6 million, net from a private placementResults of equity securities to Armistice Capital Master Fund Ltd, offset by principal paymentsOperations is based on our term loan of $2.4 million.

Net cash usedunaudited condensed consolidated financial statements included in financing activities was $1.5 million for the nine months ended September 30, 2016, which consisted primarily of proceeds of $1.0 million from the sale of common stock offset by principal payments on our term loan of $2.5 million.

Operating and Capital Expenditure Requirements
We have not achieved profitability since our inception and, while we did recognize license and other revenue from the sale of CERC-501, we expect to continue to incur net losses for the foreseeable future. We expect to continue to incur significant legal, accounting and other expenses that relate to being a public company. In addition, the Sarbanes‑Oxley Act, as well as rules adopted by the Securities and Exchange Commission, or SEC, and the NASDAQ Stock Market, requires public companies to implement specified corporate governance practices that are inapplicable to private companies. We expect these rules and regulations will continue to increase our legal and financial compliance costs and will make some activities more time consuming and costly. Based on our research and development plans, we expect that our existing cash and cash equivalents, together with the initial proceeds of $25.0 million from the Janssen sale, of which $3.75 million will be held in escrow for twelve months, which will enable us to fund our operating expenses and capital expenditure requirements through 2018. We will require substantial additional financing to fund our operations and to continue to develop our product candidates. Our strategy is to seek funding for our operations from further offerings of equity or debt securities, non-dilutive financing arrangements such as federal grants, collaboration agreements or out-licensing arrangements, and to explore strategic alternatives such as an acquisition, merger, or business combination.
Each of our product candidates are still in the early stages of preclinical and clinical development and the outcome of these efforts is uncertain. We cannot estimate the actual amounts necessary to successfully complete the development and commercialization of our product candidates or whether, or when, we may generate revenue.
We will need to raise substantial additional capital in the future to fund our operations and to further develop our product candidates and we anticipate funding our operations from further offerings of equity or debt securities, non-dilutive financing arrangements such as federal grants, collaboration agreements or out-licensing arrangements, and to explore strategic alternatives such as an acquisition, merger, or business combination. However, there can be no assurance that we will be able to obtain additional equity or debt financing, or strategic alternatives, on terms acceptable to us, if at all. If we raise additional funds through collaboration and licensing agreements with third parties, it may be necessary to relinquish valuable rights to our product candidates, technologies or future revenue streams or to grant licenses on terms that may not be favorable to us. There can also be no assurance that the exploration of strategic alternatives will result in any such transaction. Our future capital requirements will depend on many forward‑looking factors, including:

the progress and results of any clinical trials for CERC-301

the progress and results of any clinical trials for CERC-611 and any changes to our development plan with respect to CERC-611, if any;
our plan and ability to enter into collaborative or licensing agreements for the development and commercialization of our product candidates; 
the number and development requirements of any other product candidates that we may pursue; 
the scope, progress, results and costs of researching and developing our product candidates or any future product candidates, both in the United States and in territories outside the United States; 
the costs, timing and outcome of regulatory review of our product candidates or any future product candidates, both in the United States and in territories outside the United States; 

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the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution for any of our product candidates for which we receive marketing approval;
the costs and timing of any product candidate acquisition or in‑licensing opportunities;
any product liability or other lawsuits related to our products; 
the expenses needed to attract and retain skilled personnel; 
the revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval; and

the costs involved in preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending our intellectual property‑related claims, both in the United States and in territories outside the United States.

We have entered into agreements with contract research organizations and other external service providers for services, primarily in connection with the clinical trials and development of our product candidates. We were contractually obligated for up to approximately $1.2 million of future services under these agreements as of September 30, 2017. Our actual contractual obligations will vary depending upon several factors, including the progress and results of the underlying services.

Please refer to the section entitled “Risk Factors” at Item 1A of this Quarterly Report on Form 10-Q, which have been prepared in accordance with GAAP. In preparing the financial statements in conformity with GAAP, the Company makes estimates and assumptions that have an impact on assets, liabilities, revenue and expenses reported. These estimates can also affect supplemental information disclosed by us, including information about contingencies, risk, and financial condition. In our unaudited condensed consolidated financial statements, estimates are used for, additional risks associatedbut not limited to, revenue recognition, cost of product sales, stock-based compensation, fair value measurements, cash flows used in management’s going concern assessment, income taxes, goodwill, and other intangible assets and clinical trial accruals. The Company believes, given current facts and circumstances, that our estimates and assumptions are reasonable, adhere to GAAP and are consistently applied. Inherent in the nature of an estimate or assumption is the fact that actual results may differ from estimates, and estimates may vary as new facts and circumstances arise. Our most critical accounting estimates and assumptions are included in our Annual Report on Form 10-K for the year ended December 31,
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2021 filed with the SEC on March 2, 2022. There have been no material changes to our substantial capital requirements.critical accounting policies during the six months ended June 30, 2022.

Off-Balance Sheet Arrangements
 

Off‑Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, as defined by applicable SEC rules and regulations.
Recent Accounting Pronouncements
See Item 1 of Part I, “Notes to Unaudited Financial Statements,” Note 2, of this Quarterly Report on Form 10-Q.


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Item 3. Quantitative and Qualitative Disclosures aboutAbout Market RiskRisk.
 
Interest Rate Risk

We maintainAs a short-term investment portfolio consisting mainly of highly liquid short-term money market funds, whichsmaller reporting company, we considerare not required to be cash equivalents. These investments earn interest at variable rates and, as a result, decreases in market interest rates would generally result in decreased interest income. We do not believe that a 10% increase or decrease in interest rates would have a material effect onprovide the fair value of our investment portfolio due to the short-term nature of these instruments, and accordingly we do not expect our operating results or cash flows to be materially affectedinformation required by a sudden change in market interest rates.this Item.
 

Item 4. Controls and ProceduresProcedures.
 
Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(b) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, our management, including our principal executive officer and our principal financial officer, conducted an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q of the effectiveness of the design and operation of our disclosure controls and procedures. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures arewere effective at the reasonable assurance level in ensuring that information required to be disclosedas of the end of the period covered by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. this Quarterly Report on Form 10-Q.

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control overOver Financial Reporting

There have not been anywere no changes in our internal controlscontrol over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended September 30, 2017period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.




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PART II – OTHER INFORMATION


Item 1. Legal ProceedingsProceedings.

We are not currently a party to any material legal proceedings and we are not aware of any pending or threatened legal proceeding against us that we believe could have a material adverse effect on our business, operating results, cash flows or financial condition.None.


Item 1A. Risk FactorsFactors.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016,2021, filed with the SEC on March 10, 2017,2, 2022, which could materially affect our business, financial condition, or future results. Our risk factors as of the date of this Quarterly Report on Form 10-Q have not changed materially from those described in our Annual Report onthe Form 10-K. However, the10-K referenced above. The risks described in our Annual Report onthe Form 10-K referenced above are not the only risks facing our company.Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or future results of operations and the trading price of our common stock.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.Defaults Upon Senior Securities.

None.

Item 4.Mine Safety Disclosures.

None.

Item 5.Other Information.

None.



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Item 6.  Exhibits
Exhibits.
Exhibit

Number
Description of Exhibit

2.13.1
Asset Purchase Agreement, dated asCertificate of August 14, 2017, by and among Cerecor Inc. and Janssen Pharmaceuticals, Inc. (incorporated by reference to Exhibit 2.1Amendment to the Current Report on Form 8-K filed on August 14, 2017).
3.1
Company’s Amended and Restated Certificate of Incorporation, of Cerecor Inc.as amended, dated July 5, 2022 and effective July 7, 2022 (incorporated by referencereference to Exhibit 3.1 to the Current Report on Form 8-K filed on October 20, 2015).

3.1.1
Form of Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock of Cerecor Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on April 28, 2017).
3.2
Amended and Restated Bylaws of Cerecor Inc. (incorporated by reference to Exhibit 3.2 to Amendment No. 1 to the Current Report on Form 8-K filed on October 20, 2015).

4.1
Second Amended and Restated Investors' Rights Agreement, dated as of July 11, 2014 (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-1 filed on June 12, 2015).7, 2022.

4.2
Form of Warrant to Purchase Shares of Common Stock issued in connection with the sale of Series A Convertible Preferred Stock (incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-1 filed on June 12, 2015).

4.3
Form of Warrant to Purchase Shares of Common Stock issued in connection with the sale of Series A-1 Convertible Preferred Stock, as amended by the Amendment to Common Stock Warrants, dated as of July 11, 2014 (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-1 filed on June 12, 2015).

4.4
Form of Warrant to Purchase Shares of Common Stock, issued to CIFCO International Group and its affiliate (incorporated by reference to Exhibit 4.5 to the Registration Statement on Form S-1 filed on June 12, 2015).

4.5
Form of Warrant to Purchase Shares of Common Stock issued in connection with the issuance of convertible promissory notes from April 2014 through June 2014 (incorporated by reference to Exhibit 4.6 to the Registration Statement on Form S-1 filed on June 12, 2015).

4.6
Warrant Agreement, dated as of August 19, 2014, issued to Hercules Technology Growth Capital, Inc. (incorporated by reference to Exhibit 4.7 to the Registration Statement on Form S-1 filed on June 12, 2015).

4.7
Form of Unit Purchase Option (incorporated by reference to Annex IV of Exhibit 1.1 to the Registration Statement on Form S-1 filed on June 12, 2015).

4.9
Form of Class A Warrant Agreement (incorporated by reference to Exhibit 4.9 to the Registration Statement on Form S-1 filed on October 13, 2015).

4.1
Specimen Class A Warrant Certificate (incorporated by reference to Exhibit 4.10 to the Registration Statement on Form S-1 filed on October 13, 2015).

4.11
Form of Class B Warrant Agreement (incorporated by reference to Exhibit 4.11 to the Registration Statement on Form S-1 filed on October 13, 2015).

4.12
Specimen Class B Warrant Certificate (incorporated by reference to Exhibit 4.12 to the Registration Statement on Form S-1 filed on October 13, 2015).

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4.13
Specimen Unit Certificate (incorporated by reference to Exhibit 4.13 to the Registration Statement on Form S-1 filed on October 13, 2015).

31.1+
4.14
Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-8 filed on May 20, 2016).
4.15
Form of Warrant to Purchase Common Stock of Cerecor Inc. (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on April 28, 2017).
31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.231.2+
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.132.1+†
*
Certification of ChiefPrincipal Executive Officer and ChiefPrincipal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS101
XBRL Instance Document.
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Condensed Consolidated Balance Sheets (Unaudited) as of June 30, 2022 and December 31, 2021; (ii) Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2022 and 2021; (iii) Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2022 and 2021; (iv) Condensed Consolidated Statements of Changes in Stockholders’ (Deficit) Equity (Unaudited) for the Three and Six Months Ended June 30, 2022 and 2021; and (v) Notes to Unaudited Financial Statements.

101.SCH104
Cover Page Interactive Data File, formatted in XBRL Taxonomy Extension Schema Document.(included in Exhibit 101).

101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB
XBRL Taxonomy Extension Label Linkbase Document.

101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
+ Filed herewith.
*  These certifications are† This certification is being furnished solely to accompany this Quarterly Report on Form 10-Q pursuant to 18 U.S.C. Section 1350, and areis not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and areis not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.




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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CerecorAvalo Therapeutics, Inc.
Date: August 4, 2022/s/ John KaiserChristopher Sullivan
John KaiserChristopher Sullivan
Interim Chief ExecutiveFinancial Officer
(on behalf of the registrant and as the registrant’s Principal Executive Officer)principal financial officer)
Date: November 6, 2017
/s/    Mariam E. Morris
Mariam E. Morris
Chief Financial Officer
(Principal Financial Officer)
Date: November 6, 2017

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