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

See accompanying notes to the unaudited condensed consolidated financial statements.

~~CERECOR~~AVALO THERAPEUTICS, INC. and SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

1. Business

~~Cerecor~~Avalo Therapeutics, Inc. (the “Company” or ~~“Cerecor”~~“Avalo” or “we”) is a ~~biopharmaceutical~~clinical stage biotechnology company focused on the treatment of immune dysregulation by developing therapies that target the LIGHT network.

LIGHT (Lymphotoxin-like, exhibits Inducible expression, and competes with HSV Glycoprotein D for Herpesvirus Entry Mediator (“HVEM”), a receptor expressed by T lymphocytes; also referred to as TNFSF14) is ~~developing innovative drug candidates for commercialization, license~~an immunoregulatory cytokine. LIGHT and its signaling receptors, HVEM (TNFRSF14), and lymphotoxin β receptor (TNFRSF3), form an immune regulatory network with two co-receptors of herpesvirus entry mediator, checkpoint inhibitor B and T Lymphocyte Attenuator (“BTLA”), and CD160 (collectively, the “LIGHT-signaling network” or ~~sale~~the “LIGHT network”). Accumulating evidence points to ~~make~~the dysregulation of the LIGHT network as a ~~difference~~disease-driving mechanism in ~~the lives of patients with neurologic~~autoimmune and ~~psychiatric~~inflammatory reactions in barrier organs. Therefore, we believe reducing LIGHT levels can moderate immune dysregulation in many acute and chronic inflammatory disorders. ~~The Company’s operations since inception have been limited to organizing~~

Avalo was incorporated in Delaware and ~~staffing the Company, acquiring rights to~~commenced operation in 2011 and ~~developing certain product candidates, business planning and raising capital.~~completed its initial public offering in October 2015.

Liquidity

The Company's financial statements have been prepared on an accrual basis. The Company has not generated any product revenues and has not yet achieved profitable operations from commercialization. There is no assurance that profitable operations will ever be achieved, and if achieved, could be sustained on a continuing basis.

~~Prior to the quarter ended September 30, 2017, the Company had incurred recurring operating losses since inception.~~ For the ~~nine~~six months ended ~~September~~June 30, ~~2017, the Company~~2023, Avalo generated a net ~~income~~loss of ~~$15.0~~$18.1 million and ~~positive~~negative cash flows from operations of ~~$15.1~~$21.1 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 terms of the agreement provide that Janssen will assume ongoing clinical trials and be responsible for any new development and commercialization of CERC-501.

As of ~~September~~June 30, ~~2017, the Company~~2023, Avalo had ~~an accumulated deficit of $55.1 million and a balance of $24.0~~$6.3 million in cash and cash equivalents. The future principal payments inclusive of the final payment fee under the Company’s Loan Agreement (as defined in Note 9) were $15.2 million as of June 30, 2023, which gives effect of the $6.0 million partial prepayment in June of 2023, as collectively agreed upon with the Lenders (as defined in Note 9). On July 20, 2023, the Company ~~anticipates operating losses~~entered into a forbearance agreement (the “Forbearance Agreement”) with the Lenders, pursuant to ~~continue~~which the Company and the Lenders agreed that an event of default had occurred due to a material adverse change in the Company’s business (the “Existing Default”) and the Lenders agreed to forbear from enforcing its full remedies related to the Existing Default, including acceleration of the outstanding principal payments and final payment fees of $15.2 million, plus interest, fees, and other amounts accrued, until the earliest of (i) August 15, 2023, (ii) the occurrence of any default or event of default (other than the Existing Default) under the Loan Agreement, or (iii) the occurrence of a breach by the Company of any provision in the Forbearance Agreement. In exchange for the ~~foreseeable~~Lenders agreeing to enter the Forbearance Agreement, the Company agreed to maintain cash on deposit in deposit accounts subject to an Account Control Agreement (as defined in the Loan Agreement) in an amount not less than the sum of (a) $3.0 million plus (b) one-hundred percent (100%) of the aggregate cash proceeds received by the Company as a result of any future ~~due~~sale of the Company’s equity securities while the Forbearance Agreement is in effect. The Company closely monitors its cash and cash equivalents and intends to ~~among other things, costs related~~raise money through all means available to raise capital to meet its ~~preclinical programs, additional clinical development~~projected operating requirements, including but not limited to sale of equity securities under its “at-the-market” (or “ATM”) program or otherwise, out-licensing transactions, strategic alliances/collaborations, sale of its ~~product candidates, business development~~core and ~~costs associated with its organizational infrastructure.~~ non-core programs, and/or mergers and acquisitions. If the Company is able to negotiate extensions to the Forbearance Agreement and absent future cash raises or modifications to the originally planned principal and interest payments, the Company has approximately 60 days of cash on hand as of the filing date of this Quarterly Report on Form 10-Q.

The ~~Company will require substantial additional financing~~Company’s future success and ability to fund its operations ~~and~~within one year following the date on which this Quarterly Report on Form 10-Q is issued depend on its ability to continue to execute its strategy. The Company plans to meet its capital requirements primarily through a combination of equity or debt financings, collaborations, or out-licensing arrangements, strategic alliances, federal and private grants, marketing, distribution or licensing arrangements and in the longer term, revenue from product sales to the extent its product candidates receive marketing approval and are commercialized.obtain additional capital. There can be no assurance ~~however,~~that any financing or business development initiatives can be realized by the Company, or if realized, what the terms may be, or that any amount that the Company is able to raise will be ~~successful~~adequate. Further, 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. If the Company requires but is unable to obtain additional funding, the Company may be forced to make further reductions in ~~obtaining financing at the level needed to sustain operations~~spending, delay, suspend, reduce or eliminate some or all of its planned research and ~~develop its product candidates~~development programs, or ~~on terms acceptable~~liquidate assets where possible. Due to the ~~Company, or~~uncertainty regarding future financing and other potential options to raise funds, management has concluded that substantial doubt exists with respect to the Company’s ability to continue as a going concern within one year after the date that the financial statements in this Quarterly Report on Form 10-Q were issued.

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The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to obtain ~~approvals necessary to market its products or achieve profitability or sustainable positive cash flow.~~additional capital as described above. The unaudited financial statements as of June 30, 2023 do not include any adjustments that might result from the outcome of this uncertainty. If the Company ~~fails~~is unable to ~~raise capital or enter into any such arrangements,~~continue as a going concern, it ~~will~~may have to ~~further delay, scale back or discontinue~~liquidate its assets and may receive less than the ~~development of one or more~~value at which those assets are carried on the financial statements and less than the amount of its ~~product candidates or cease its operations altogether.~~outstanding debt, leaving no proceeds for stockholders.

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 the potential to raise additional cash through an equity distribution agreement with Maxim Group LLC ("Maxim Group") as described in Note 8.

~~The Company expects its cash on hand at September 30, 2017 to fund future expenses through at least December 31, 2018.~~

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, ~~2016~~2022 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, ~~2016~~2022 audited consolidated financial statements.

~~Use~~On July 7, 2022, Avalo effected a 1-for-12 reverse stock split of ~~Estimates~~the outstanding shares of the Company’s common stock. The Company retroactively applied the reverse stock split to common share and per share amounts for periods prior to July 7, 2022, including the unaudited condensed consolidated financial statements for the three and six months ended June 30, 2022. Additionally, pursuant to their terms, a proportionate adjustment was made to the per share exercise price and number of shares issuable under all of the Company’s outstanding options and warrants, and the number of shares authorized for issuance pursuant to the Company’s equity incentive plans have been reduced proportionately. Avalo retroactively applied such adjustments in the notes to the unaudited condensed consolidated financial statements for periods presented prior to July 7, 2022, including the three and six months ended June 30, 2022. The reverse stock split did not reduce the number of authorized shares of common and preferred stock and did not alter the par value.

Unless otherwise indicated, all amounts in the following tables are in thousands except share and per share amounts.

Accounting Pronouncements Adopted in 2023

In January 2017, the FASB issued ASU No. 2017-04 Intangibles - Goodwill and Other Topics (Topic 350): Simplifying the Test for Goodwill Impairment. This guidance eliminates the requirement to calculate the implied fair value of goodwill of a reporting unit to measure a goodwill impairment charge. Instead, a company will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. This new standard was adopted effective January 1, 2023 and will be applied upon any recognition of any future goodwill impairment charge. This ASU has not had a material impact on our financial statements.

Significant Accounting Policies

During the six months ended June 30, 2023, 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, 2022, as filed with the SEC on March 29, 2023.

3. Revenue

Avalo generates its product revenue from sales of Millipred®, an oral prednisolone indicated across a wide variety of inflammatory conditions, which is considered a prescription drug. The ~~preparation~~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

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receivables. For the three months ended June 30, 2023, the Company’s two largest customers accounted for approximately 65% and 35% of the Company’s total net product revenues. For the six months ended June 30, 2023, the Company’s two largest customers accounted for approximately 63% and 37% of the Company’s total net product revenues. Net revenue from sales of prescription drugs was $0.6 million and $1.0 million for the three months ended June 30, 2023 and 2022, respectively, and $1.1 million and $2.2 million for the six months ended June 30, 2023 and 2022, 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. Avalo is required to pay Teva fifty percent of the net profit of the Millipred® product following each calendar quarter, subject to a $0.5 million quarterly minimum payment, which commenced on July 1, 2021.

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 transition services agreement allowed Aytu to withhold cash of $2.0 million until September 30, 2022, and allows withholding of $1.0 million until December 2024. As of June 30, 2023, the total receivable balance, which represents revenue generated by sales of Millipred® during the time Aytu was managing its commercial operations partially offset by minimal operational liabilities Aytu paid on our behalf, was estimated to be approximately $1.0 million, all of which is due in December 2024. In the second quarter of 2022, Avalo fully reserved the $1.0 million due in December 2024 as a result of Aytu’s conclusion within its Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, that substantial doubt existed with respect to its ability to continue as a going concern within one year after the date of financial statements ~~in conformity with GAAP requires management~~were issued. This conclusion has remained unchanged within Aytu’s most recent publicly disclosed financial statements. We will continue 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.re-assess collectability each reporting period.

4. Net ~~Income (Loss)~~Loss Per Share

Basic and ~~Diluted~~

~~Earnings per share are computed using the two-class method. The two-class method of computing earnings per share~~diluted EPS is ~~an earnings allocation formula that determines earnings per share~~provided below for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. Shares of the unexercised warrants issued in the Armistice Private Placement transaction are considered participating securities because these warrants contain a non-forfeitable right to dividends irrespective of whether the warrants are ultimately exercised. Under the two-class method, earnings per common share for the three and six months ended June 30, 2023 and June 30, 2022.

EPS for common stock ~~and participating warrants are~~is computed by dividing the sum of distributed earnings ~~to common shareholders~~ and undistributed earnings ~~allocated to common shareholders~~ by the ~~weighted-average~~weighted average number of shares ~~of Common stock and participating warrants~~ outstanding for the period. ~~In applying the two-class method, undistributed earnings are allocated to~~The weighted average number of common ~~stock and participating warrants based on the weighted-average~~ shares outstanding ~~during~~as of June 30, 2023 and 2022 include the ~~period.~~weighted average effect of pre-funded warrants, the exercise of which requires nominal consideration for the delivery of the shares of common stock.

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 Plans~~and 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 purchased~~security only if the security has not only the right to ~~be cash equivalents. The carrying amounts reported~~participate 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 sets~~tables set forth the computation of basic and diluted net ~~income (loss)~~loss per share of common stock for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016:~~June 30, 2022 (in thousands, except share and per share amounts):


	Three Months Ended June 30,
	2023		2022
Net loss	$	(8,193)	$	(12,987)
Weighted average shares	13,971,968		9,400,902
Basic and diluted net loss per share	$	(0.59)	$	(1.38)

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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 )


	Six Months Ended June 30,
	2023		2022
Net loss	$	(18,148)	$	(35,038)
Weighted average shares	12,853,579		9,400,214
Basic and diluted net loss per share	$	(1.41)	$	(3.73)

~~Shares which~~The following outstanding securities have been excluded from the computation of diluted ~~per share amounts~~weighted shares outstanding for the three and six months ended June 30, 2023 and 2022, as they could have been anti-dilutive:


	Three and Six Months Ended
	June 30,
	2023	2022
Stock options	1,849,229	1,379,570
Warrants on common stock1	4,136,990	366,990
Restricted Stock Units	—	—

1The weighted average number of common shares outstanding includes the weighted average outstanding pre-funded warrants for the period because their ~~effect would have been antidilutive,~~exercise price is nominal. The weighted average shares outstanding for the three and six months ended June 30, 2023 include the ~~following:~~weighted average effect of 525,909 and 321,096 pre-funded warrants, respectively. The weighted average shares outstanding for the three and six months ended June 30, 2022 included the weighted average effect of 114,007 pre-funded warrants.

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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, 2023
	Fair Value Measurements Using
	Quoted prices in		Significant other		Significant
	active markets for		observable		unobservable
	identical assets		inputs		inputs
	(Level 1)		(Level 2)		(Level 3)
Assets
Investments in money market funds*	$	5,042	$	—	$	—
Liabilities
Derivative liability	$	—	$	—	$	5,050

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

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	December 31, 2022
	Fair Value Measurements Using
	Quoted prices in		Significant other		Significant
	active markets for		observable		unobservable
	identical assets		inputs		inputs
	(Level 1)		(Level 2)		(Level 3)
Assets
Investments in money market funds*	$	12,133	$	—	$	—
Liabilities
Derivative liability	$	—	$	—	$	4,830

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.~~unaudited condensed consolidated balance sheets.

As of June 30, 2023 and December 31, 2022, 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, derivative liability and debt. The carrying amounts reported in the accompanying unaudited condensed consolidated financial statements for cash and cash equivalents, restricted cash, accounts receivable, other receivables, prepaid and other current assets, accounts payable, and accrued expenses and other current liabilities approximate their respective fair values because of the short-term nature of these accounts. The estimated fair value of the Company’s debt was approximately $10 million as of June 30, 2023 and is in Level Two of the fair value hierarchy (refer to Note 9 for more information).

Level 3 Valuation

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) in the accompanying statements of operations until the warrants are exercised, expire or other facts and circumstances lead the warrant liability to be reclassified to stockholders’ equity. The 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 liability as of September 30, 2017, include (i) volatility of 65%, (ii) risk free interest rate of 1.63%, (iii) strike price ($8.40), (iv) fair value of common stock ($0.85), and (v) expected life of 3.1 years.

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 in the fair value of the Company’s Level 3 ~~warrant liability and unit purchase option~~valuation for the derivative liability for the ~~nine~~six months ended ~~September~~June 30, ~~2017:~~2023:


	Derivative liability
Balance at December 31, 2022	$	4,830
Change in fair value of derivative liability	220
Balance at June 30, 2023	$	5,050

In the fourth quarter of 2022, Avalo sold its economic rights to future milestone and royalty payments for previously out-licensed assets AVTX-501, AVTX-007, and AVTX-611 to ES Therapeutics, LLC (“ES”), an affiliate of Armistice, in exchange for $5.0 million (the “ES Transaction”). At the time of the transaction, Armistice was a significant stockholder of the Company and whose chief investment officer, Steven Boyd, and managing director, Keith Maher, served on Avalo’s Board until August 8, 2022. The ES Transaction was approved in accordance with Avalo’s related party transaction policy.

The economic rights sold include (a) rights to a milestone payment of $20.0 million upon the filing and acceptance of an NDA for AVTX-501 pursuant to an agreement with Janssen Pharmaceutics, Inc., (the “AVTX-501 Milestone”) and (b) rights to any future milestone payments and royalties relating to AVTX-007 under a license agreement with Apollo AP43 Limited, including up to $6.25 million of development milestones, up to $67.5 million in sales-based milestones, and royalty payments of a low single digit percentage of annual net sales (which percentage increases to another low single digit percentage if annual net sales exceed a specified threshold) (the “AVTX-007 Milestones and Royalties”). In addition, Avalo waived all its rights to AVTX-611 sales-based payments of up to $20.0 million that were payable by ES.

The exchange of the economic rights of the AVTX-501 Milestone and AVTX-007 Milestones and Royalties for cash meets the definition of a derivative instrument. The fair value of the derivative liability is determined using a combination of a scenario-based method and an option pricing method (implemented using a Monte Carlo simulation). The significant inputs including probabilities of success, expected timing, and forecasted sales as well as market-based inputs for volatility, risk-adjusted discount rates and allowance for counterparty credit risk are unobservable and based on the best information available to Avalo. Certain information used in the valuation is inherently limited in nature and could differ from Janssen and Apollo’s internal estimates.

The fair value of the derivative liability as of the transaction date was approximately $4.8 million, of which $3.5 million was attributable to the AVTX-501 Milestone and $1.3 million was attributable to the AVX-007 Milestones and Royalties. Subsequent to the transaction date, at each reporting period, the derivative liability is remeasured at fair value. As of June 30, 2023, the fair value of the derivative liability was $5.1 million, of which $3.7 million was attributable to the AVTX-501 Milestone and $1.3 million was

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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
attributable to the AVTX-007 Milestones and Royalties. For the six months ended June 30, 2023, the $0.2 million change in fair value was recognized in other expense, net in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss.

The fair value of the AVTX-501 Milestone was primarily driven by an approximate 23% probability of success to reach the milestone in approximately 4.3 years. The fair value of AVTX-007 Milestones and Royalties were primarily driven by an approximate 17% probability of success, time to commercialization of approximately 5.3 years, and sales forecasts with peak annual net sales reaching $300 million. As discussed above, these unobservable inputs were estimated by Avalo based on limited publicly available information and therefore could differ from Janssen and Apollo’s internal development plans. Any changes to these inputs may result in significant changes to the fair value measurement. Notably, the probability of success is the largest driver of the fair value and therefore changes to such input would likely result in significant changes to such fair value.

In the event that Janssen and/or Apollo are required to make payment(s) to ES Therapeutics pursuant to the underlying agreements, Avalo will recognize revenue under its existing contracts with those customers for that amount when it is no longer probable there would be a significant revenue reversal with any differences between the fair value of the derivative liability related to that payment immediately prior to the revenue recognition and revenue recognized to be recorded as other expense. However, given Avalo is no longer entitled to collect these payments, the potential ultimate settlement of the payments in the future from Janssen and/or Apollo to ES Therapeutics (and the future mark-to-market activity each reporting period) will not impact Avalo’s future cash flows.

No ~~other~~ changes in valuation techniques or inputs occurred during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and no2022. No transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy occurred during the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2023 and 2022.

5.6. Leases

Avalo currently occupies two leased properties, both of which serve as administrative office space. The Company determined that both of these leases are operating leases based on the lease classification test performed at lease commencement.

The annual base rent for the Company’s office located in Rockville, Maryland is $0.2 million, subject to annual 2.5% increases over the term of the lease. The applicable lease provided for a rent abatement for a period of 12 months following the Company’s date of occupancy. The lease has an initial term of 10 years from the date the Company made its first annual fixed rent payment, which occurred in January 2020. The Company has the option to extend the lease two times, each for a period of five years, and may terminate the lease as of the sixth anniversary of the first annual fixed rent payment, upon the payment of a termination fee.

The initial annual base rent for the Company’s office located in Chesterbrook, Pennsylvania is $0.2 million and the annual operating expenses are approximately $0.1 million. The annual base rent is subject to periodic increases of approximately 2.4% over the term of the lease. The lease 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, 2023 was 5.1 years.

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


	As of
	June 30, 2023		December 31, 2022
Property and equipment, net	$	1,457	$	1,750

Accrued expenses and other current liabilities	$	535	$	532
Other long-term liabilities	1,544		1,711
Total operating lease liabilities	$	2,079	$	2,243

The operating lease right-of-use (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 unaudited condensed consolidated balance sheets. The Company utilized a weighted average discount rate of 9.1% to determine the present value of the lease payments.

The components of lease expense for the three and six months ended June 30, 2023 and 2022 were as follows (in thousands):

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	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Operating lease cost*	$	132	$	122	$	253	$	239

*Includes short-term leases, which are immaterial.

The following table shows a maturity analysis of the operating lease liabilities as of June 30, 2023 (in thousands):



	Undiscounted Cash Flows
July 1, 2023 through December 31, 2023	$	267
2024	537
2025	547
2026	557
2027	258
2028	201
Thereafter	224
Total lease payments	$	2,591
Less implied interest	(512)
Total	$	2,079

7. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities as of June 30, 2023 and December 31, 2022 consisted of the ~~following:~~following (in thousands):


	As of
	June 30, 2023		December 31, 2022
Research and development	$	3,339	$	6,293
Compensation and benefits	527		2,699
Selling, general and administrative	717		1,008
Commercial operations	1,863		1,694
Royalty payment	607		508
Lease liability, current	535		532
Other	—		480
Total accrued expenses and other current liabilities	$	7,588	$	13,214

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”). A reduction in workforce plan was approved to reduce headcount and related expenses. The reduction in workforce plan was considered a one-time termination benefit as defined by ASC No. 420, Exit or Disposal Cost Obligations. 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. $1.4 million of severance payments were paid in the year ended December 31, 2022 and the remaining $0.1 million was paid in the six months ended June 30, 2023. 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 during the first quarter of 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 the first quarter of 2022.

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9. Notes Payable

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

~~6. License Agreements~~

~~Lilly CERC-611 License~~

On ~~September 22, 2016,~~June 4, 2021, the Company entered into ~~an exclusive license~~a $35.0 million venture loan and security agreement (the “Loan Agreement”) with ~~Eli Lilly~~Horizon Technology Finance Corporation (“Horizon”) and Powerscourt Investments XXV, LP (“Powerscourt”, and together with Horizon, the “Lenders”). In accordance with the Loan Agreement, $20.0 million was funded on the closing date (the “Initial Note”), with the remaining $15.0 million fundable upon the Company ~~(“Lilly”) pursuant to~~achieving certain predetermined milestones, which the Company ~~received exclusive, global rights to develop~~met in the third quarter of 2021. On July 30, 2021, after achieving a predetermined milestone, the Company borrowed an additional $10.0 million, which was evidenced by a second note payable (the “Second Note”). On September 29, 2021, after achieving a second predetermined milestone, the Company borrowed the remaining $5.0 million, which was evidenced by a third note payable (the “Third Note”, and ~~commercialize CERC-611, previously referred to~~collectively with the Initial and Second Notes, the “Notes”).

In June of 2023, the Company, 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 terms~~collectively agreed upon with the Lenders, prepaid $6.0 million of principal. Additionally, in the ~~license agreement provide for an upfront payment~~second quarter of ~~$2.0~~2022, the Company, as collectively agreed upon with the Lenders, prepaid $15.0 million, of which ~~$750,000~~$14.8 million was ~~due within~~applied to principal and the remainder applied to accrued interest. As of June 30, ~~days~~2023, the outstanding notes payable balance was $15.2 million, inclusive of the ~~effective date~~final payment fee.

Each advance under the Loan Agreement will mature 42 months from the first day of the ~~license agreement, and~~month following the ~~remaining balance~~funding of ~~$1.25 million is due after~~the advance. Each advance accrues interest at a per annum rate of interest equal to 6.25% plus the prime rate, as reported in the Wall Street Journal (subject to a floor of 3.25%). The Loan Agreement provides for interest-only payments for each advance for the first ~~subject is dosed with CERC-611 in~~18 months, however the interest-only period was extended to 24 months as 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~~result of ~~development and commercialization milestones, including the first commercial sale. Upon commercialization,~~ the Company ~~is obligated to pay Lilly milestone~~satisfying the Interest Only Extension Milestone (as defined in the Loan Agreement) in the third quarter of 2021. Thereafter, amortization payments will be payable in monthly installments of principal and ~~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,interest through each advance’s maturity date. Upon ten business days’ prior written notice, the Company may ~~be required~~prepay all of the outstanding advances by paying the entire principal balance and all accrued and unpaid interest, subject to ~~make initial payments totaling $1.5 million upon~~prepayment charges of up to 3% of the ~~achievement~~then outstanding principal balance. Upon the earlier of ~~certain milestones. Pursuant to~~(i) payment in full of the ~~license agreement~~principal balance, (ii) an event of default (see below), or (iii) 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 trialmaturity date, the Company will pay an additional ~~$750,000. Additional payments may be due upon achievement~~final payment of ~~development and regulatory milestones, including~~3% of the ~~first commercial sale. Upon commercialization,~~principal loan amount to the Lenders.

Each advance of the loan is secured by a lien on substantially all of the assets of the Company, ~~is obligated to pay Merck milestone payments~~other than Intellectual Property and ~~royalties~~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 ~~net sales.~~dividends, indebtedness, collateral, investments, distributions, transfers, mergers or acquisitions, taxes, corporate changes, deposit accounts, and subsidiaries.

~~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,~~July 20, 2023, the Company entered into a ~~separate exclusive license agreement~~Forbearance Agreement with ~~Merck~~the Lenders, pursuant to which ~~Merck granted~~ the Company ~~certain rights in small molecule compounds which are known to inhibit~~and 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 companyLenders agreed that ~~gave the finance company the right to assume control of the accounts in the~~an event of ~~a loan default. Loan defaults were defined in the loan agreement and~~

~~Table of Contents~~

~~included, among others, the finance company’s determination that there was~~default had occurred due to a material adverse change in the Company’s ~~operations. Interest~~business and the Lenders agreed to forbear from enforcing its full remedies related to the Existing Default, including acceleration of the outstanding principal payments and final payment fees of $15.2 million, plus interest, fees, other amounts accrued, until the earliest of (i) August 15, 2023, (ii) the occurrence of any default or event of default (other than the Existing Default) under the Loan Agreement, or (iii) the occurrence of a breach by the Company of any provision in the Forbearance Agreement. In exchange for the Lenders agreeing to enter the Forbearance Agreement, the Company agreed to maintain cash on deposit in deposit accounts subject to an Account Control Agreement (as defined in the Loan Agreement) in an amount not less than the sum of (a) $3.0 million plus (b) one-hundred percent (100%) of the aggregate cash proceeds received by Company as a result of the any future sale of the Company’s equity securities while the Forbearance Agreement is in effect. As of June 30, 2023, the carrying value of the notes payable was $14.1 million and is classified as a current liability.

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. Debt issuance costs and the amount allocated to the warrants were recognized as a debt discount on the ~~loan was at a~~date of issuance 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 ~~greater~~Notes was 17.1% as of ~~7.95%,~~June 30, 2023.

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

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	As of
	June 30, 2023		December 31, 2022		Maturity
Initial Note	$	8,711	$	12,139	January 2025
Second Note	4,355		6,070		February 2025
Third Note	2,178		3,035		April 2025
Notes payable, gross1	$	15,244	$	21,244
Less: Unamortized debt discount and issuance costs	1,129		1,828
Carrying value of notes payable, current	$	14,115	$	19,416
Less: Current portion	14,115		5,930
Carrying value of notes payable, non-current	$	—	$	13,486

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, 2023, the contractual future principal payments, excluding the Lender’s right to accelerate the maturity of the obligations on the earliest of (i) August 15, 2023, (ii) the occurrence of any default or ~~7.95% plus~~event of default (other than the ~~prime rate as reported in~~ ~~The Wall Street Journal~~ ~~minus 3.25%. On August 1, 2017,~~Existing Default) under the ~~term loan matured and~~Loan Agreement, or (iii) the occurrence of a breach by the Company ~~made a~~of any provision in the Forbearance Agreement, were as follows (in thousands):


	As of June 30, 2023
2023	$	4,168
2024	9,463
2025	1,613
2026	—
Total principal payments1	$	15,244

1 Balance includes $1.1 million final payment ~~of $494,231~~fee, which ~~included a termination fee of $187,500. Debt consisted~~represents 3% of the ~~following as~~original principal loan amount.

If the Company is unable to reach an agreement with its Lenders to waive the Existing Default or extend the forbearance period prior to the expiration of ~~September 30, 2017~~the Forbearance Agreement on August 15, 2023, the Forbearance Agreement will terminate automatically and ~~December 31, 2016:~~without further notice or action, the effect of which shall permit the Lenders to immediately exercise any and all rights and remedies available under the Loan Agreement, including acceleration of the outstanding principal payments and final payment fees, plus interest, fees, and other amounts accrued.

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 and~~Pursuant 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 an~~Company’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 two classes of stock, common stock and preferred ~~stock, and eliminates all references to the previously existing series of preferred~~ stock. At ~~September~~June 30, ~~2017,~~2023, 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. ~~On April 27, 2017,~~

Common Stock

Exchange Agreement

In May 2023, the Company ~~further amended its amended and restated certificate~~entered into an exchange agreement (the “Exchange Agreement”) with entities affiliated with Venrock Healthcare Capital Partners (“Venrock”), pursuant to which the Company exchanged an aggregate of incorporation in connection with the closing of the Armistice Private Placement with the filing of a Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (“Series A Preferred Stock”) of Cerecor Inc. (the “Certificate of Designation”). The Certificate of Designation authorized the issuance of 4,179 shares of Series A Preferred Stock to Armistice with a stated value of $1,000 per share, convertible into 11,940,0001.3 million shares of the Company’s common stock, ~~at a conversion price~~par value $0.001 per share, owned by Venrock for pre-funded warrants (the “Exchange Warrants”) to purchase an aggregate of ~~$0.35 per share. On July 6, 2017, Armistice converted all of its outstanding~~1.3 million shares ~~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.~~

~~Common Stock~~

~~Initial Public Offering~~

~~On October 20, 2015, the Company closed an IPO of its units. Each unit consisted of one share~~ of common stock ~~one Class A warrant~~(subject to ~~purchase one share~~adjustment in the event of stock splits, recapitlizations and other similar events affecting common ~~stock at~~stock), with an exercise price of ~~$4.55~~$0.001 per ~~share~~share. The Exchange Warrants are exercisable at any time, except that the Exchange Warrants will not be exercisable by Venrock if, upon giving effect or immediately prior thereto, Venrock would beneficially own more than 9.99% of the total number of issued and ~~one Class B warrant to purchase one-half share of~~outstanding common stock, which percentage may change at ~~an exercise price of $3.90 per full share (the “units”).~~the holders’ election to any other number less than or equal to 19.99% upon 61 days’ notice to the Company. The ~~Class A warrants expire on October 20, 2018 and the Class B warrants expired on April 20, 2017 (the "Class B Expiration Date.") The closing~~holders of the ~~IPO resulted in~~Exchange Warrants will not have 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~~right to vote on any matter except to the extend required by Delaware law. In accordance with ASC No. 505, Equity, the Company recorded the retirement of the ~~IPO, after underwriting discounts, commissions and expenses, and before offering expenses, to the Company were 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~~exchanged as a reduction of the IPO exercised its over-allotment option for 20,000 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’ equity 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~~common shares outstanding and a corresponding impact 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 into shares of common stockadditional paid-in-capital and the Underwriters’ Warrants such that, upon exercise, 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 A 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,accumulated deficit 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~~Exchange Warrants on the issuance date. The Exchange Warrants were classified as equity in accordance with ASC 480 and the ~~change in~~ fair value of the Exchange Warrants was recorded as a credit to additional paid-in-capital and is ~~recognized in~~not subject to remeasurement. The Company determined that the ~~statement~~fair value of ~~operations (see Note 4).~~the Exchange Warrants is substantially similar to the fair value of the retired shares on the issuance date due to the negligible exercise price for the Exchange Warrants. As of June 30, 2023, none of the Exchange Warrants have been exercised.

~~The Aspire Capital Transaction~~At-the-Market Offering Program

~~On September 8, 2016,~~In May 2023, the Company entered into ~~a common stock purchase~~an “at-the-market” sales agreement ~~(the “Purchase Agreement”)~~ with ~~Aspire Capital,~~Oppenheimer & Co. Inc. (“Oppenheimer”), pursuant to which ~~Aspire Capital committed~~the Company may sell from time to ~~purchase~~time, shares of its common stock having an aggregate offering price of up to ~~an aggregate~~$9,032,567 through Oppenheimer. In the second quarter of ~~$15.0 million of shares of the Company’s common stock over the 30-month term of the Purchase Agreement. Upon execution of the Purchase Agreement,~~2023, the Company ~~issued and~~ sold ~~to Aspire Capital 250,000~~approximately 2.0 million shares ~~of common stock at a price per share of $4.00,~~under the ATM program 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,~~approximately $6.5 million.

Subsequent 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 SeptemberJune 30, ~~2017, the Company sold an additional 965,165 shares of common stock to Aspire Capital under the terms~~2023 and as of the ~~Purchase Agreement for gross proceeds of approximately $789,000. As of the~~filing date of this Quarterly Report on Form 10-Q, the Company ~~does not have any remaining~~sold an additional 6.2 million shares ~~available to issue~~ under the ~~purchase agreement. The Company may not issue any additional shares~~ATM program for gross proceeds of ~~common stock to Aspire Capital under the Purchase Agreement unless shareholder approval is obtained.~~approximately $1.3 million.

Q1 2023 Financing

~~The Maxim Group Equity Distribution Agreement~~

On ~~January 27, 2017,~~February 7, 2023, the Company ~~entered into~~closed 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~~underwritten public offering 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~~ 3,770,000 shares of its common stock ~~through Maxim under the Equity Distribution Agreement for gross proceeds of$938,000~~ and ~~the Company has the potential~~warrants to ~~sell~~purchase up to ~~approximately~~ ~~$2.9 million~~ ~~in additional~~3,770,000 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~~combined price to the public of ~~$0.35~~$3.98 per share and ~~4,179 shares of Series A Preferred Stock at a price of $1,000 per share. The Company received $4.65 million~~warrant, resulting in net proceeds of approximately $13.7 million, after deducting the underwriting discounts and commissions and offering expenses paid by us. The warrants were immediately exercisable at an exercise price of $5.00 per share and are exercisable for one year from the issuance date. Armistice, ~~Private Placement.~~ who was a significant stockholder of the Company at the time of the financing, participated in the offering by purchasing 0.5 million shares of common stock and 0.5 million warrants, on the same terms as all other investors. Certain affiliates of Nantahala Capital Management LLC and Point72 Asset Management, L.P., which each beneficially owned greater than 5% of the Company’s outstanding common stock at the time of the offering, participated in the offering on the same terms as all other investors.

The warrants were classified as a component of permanent stockholders’ deficit within additional paid-in capital. The warrants are equity classified because they (i) are freestanding financial instruments that are legally detachable and separately exercisable from the equity instruments, (ii) are immediately exercisable, (iii) do not embody an obligation for the Company to repurchase its shares, (iv) permit the holders to receive a fixed number of shares of common stock ~~that were purchased in the private placement constituted approximately 19.99% of the Company’s outstanding shares of common stock immediately prior~~upon exercise, (v) are indexed 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~~and (vi) meet the equity classification criteria. In addition, such warrants do not provide any guarantee 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 the 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.value or return.

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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 ~~September~~June 30, ~~2017,~~2023, the following common stock ~~purchase~~ warrants were outstanding:


Number of common shares	Exercise price		Expiration
underlying warrants	per share		date
333,334	$	150.00	June 2024
41,701	$	0.012	—
33,656	$	31.20	June 2031
3,770,000	$	5.00	February 2024
1,300,000	$	0.001	—
5,478,691

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’s~~our 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 Plan~~which was approved by our stockholders in May 2016 and which was subsequently amended and restated in May 2018 and August 2019 with the ~~Company’s~~approval 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,~~2023, pursuant to the terms of the 2016 Third Amended and Restated Plan, an additional 377,221 shares ~~reserved~~were

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made available for ~~issuance increased by 377,365.~~issuance. As of ~~September~~June 30, ~~2017,~~2023, there were ~~483,214~~41,183 shares available for future issuance under the 2016 Third Amended Plan.

~~The~~Option 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 and fourth quarters of 2022 and second quarter of 2023, 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‑based~~stock-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 and employee stock purchase plan shares. The amount of stock-based compensation expense recognized for the three and six months ended June 30, 2023 and 2022 was as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Research and development	$	331	$	365	$	658	$	653
Selling, general and administrative	562		304		1,090		5,327
Total stock-based compensation	$	893	$	669	$	1,748	$	5,980

17As 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. The Company recognized $4.3 million of compensation cost in the first quarter of 2022, all of which was recognized in selling, general and administrative expense.

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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 ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 is as follows:


	Options Outstanding
	Number of shares	Weighted average exercise price per share		Weighted average grant date fair value per share		Weighted average remaining contractual term (in years)
Balance at December 31, 2022	1,345,532	$	28.24	$	17.48	6.7
Granted	760,272	$	2.72	$	2.06


Expired	(339,910)	$	42.99	$	27.13
Balance at June 30, 2023	1,765,894	$	14.42	$	8.98	8.6

Exercisable at June 30, 2023	563,963	$	31.73	$	18.54	7.1

In February 2023, 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. In May 2023, the Company granted 0.3 million options with service-based vesting conditions to its employees that vest over one year.

The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those stock options that had exercise prices lower than the fair value of the Company’s common stock. As of June 30, 2023, the aggregate intrinsic value of options outstanding was zero. There were 0.2 million options that vested during the six months ended June 30, 2023 with a weighted average exercise price of $11.13 per share. The total grant date fair value of shares which vested during the six months ended June 30, 2023 was $1.7 million.

The Company recognized stock-based compensation expense of $0.9 million and $1.7 million related to stock options with service-based vesting conditions for the three and six months ended June 30, 2023, respectively. At June 30, 2023, there was $4.5 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 1.8 years.

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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
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, 2023:


Service-based options
Expected term of option (in years)						5 - 6.25
Expected stock price volatility						89.8% - 146.0%
Risk-free interest rate						3.43% - 4.13%
Expected annual dividend yield						0%

Stock options with market-based vesting conditions

As of June 30, 2023, 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 1.0 years. There were no stock options with market-based vesting conditions granted, exercised, or forfeited for the six months ended June 30, 2023.

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 ESPP~~The Company initially reserved and authorized up to ~~500,000~~41,667 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 ~~increase~~increases 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) ~~500,000~~41,667 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 20,000~~The 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, 2023. As of ~~September~~June 30, ~~2017, 540,935~~2023, 192,079 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 thousand and ~~$69,492~~$0.1 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2023, respectively.

~~Stock‑based compensation~~

12. Income Taxes

The Company recognized minimal income tax expense ~~recognized~~ for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 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 provision for income taxes was $3.2 million for the nine months ended September 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 primarily~~2022 due to the sale of CERC-501. In addition, the Company was able to utilize net operating loss ("NOL") carryforwards of $2.7 million, which were previously subject to a valuation allowance, to offset a portion of projected income for the year considering Internal Revenue Code Section 382 limitations.

As of December 31, 2016 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 by the Internal Revenue Service and state tax authorities. NOL and tax credit carryforwards are also subject to an annual limitation in the event 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.

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~~Company’s deferred tax assets ~~as of September 30, 2017~~ and ~~December 31, 2016.~~the current and prior period losses.

~~11.~~13. Commitments and Contingencies

~~Office Lease~~Litigation

The Company’s corporate office space, which is leased under an operating lease, is located in Baltimore, Maryland. The lease provided for three months of rent abatement and includes escalating rent payments. Rent expense is recognized on a straight‑line basis over the term of the lease. Rent expense for the office lease amounted to approximately $125,000 for the nine months ended September 30, 2017 and 2016. Pursuant to the terms of such lease, the Company’s future lease obligation is as follows:Litigation - General

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Year ending December 31,
2017* $ 39,433
2018 158,716
$ 198,149

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.

* Three

Possible Future Milestone Payments for In-Licensed Compounds

General

Avalo is a party to license and development agreements with various third parties, which contain future payment obligations such as royalties and milestone payments. 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 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 of $10.0 million, which we recognized within research and development expenses in 2021. The Company is also required to pay KKC up to an aggregate of $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 any 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). In addition to the KKC License Agreement, Avalo is subject to additional royalties upon commercialization of up to an amount of less than 10% of net sales.

No expense related to the KKC License Agreement was recognized in the six months ~~remaining in 2017~~ended June 30, 2023. There has been no cumulative expense recognized as of June 30, 2023 related to the milestones under this license agreement. The Company will continue to monitor the milestones at each reporting period.

~~Obligations to Contract Research Organizations and External Service Providers~~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 an aggregate of $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 any 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, 2023.There has been $0.5 million of cumulative expense recognized as of June 30, 2023 related to the milestones under this license agreement, which was recognized in 2021. The Company will continue to monitor the remaining milestones at each reporting period.

AVTX-008 Sanford Burnham Prebys License Agreement

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On June 22, 2021, the Company entered into ~~agreements~~an Exclusive Patent License Agreement with ~~contract~~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 Sanford Burnham Prebys License Agreement, the Company incurred an upfront license fee of $0.4 million, as well as patent costs of $0.5 million, which we recognized within research ~~organizations~~ and development expenses and within selling, general and administrative expenses, respectively, in 2021. The Company is required to pay Sanford Burnham Prebys up to an aggregate of $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, 2023. There has been no cumulative expense recognized as of June 30, 2023 related to the milestones under this 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. in 2013.

Under the out-license agreement, the Company received a mid-six digit upfront payment from Alto, which we recognized as license revenue in 2021. The Company is also eligible to receive up to an aggregate of $18.6 million based on the achievement of specified development, regulatory and commercial sales 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.

The Company has not recognized any milestones as of June 30, 2023.

AVTX-406 License Assignment

On June 9, 2021, the Company assigned its rights, title, interest, and obligations under an in-license covering its non-core asset, AVTX-406, to ES, a wholly owned subsidiary of Armistice, who was a significant stockholder of the Company at the time of the financing and whose chief investment officer, Steven Boyd, and managing director, Keith Maher, served on Avalo’s Board until August 8, 2022. 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, which we recognized as license revenue in 2021. The Company is also eligible to receive up to an aggregate of $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.

The Company has not recognized any milestones as of June 30, 2023.

Acquisition Related and Other 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 two 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.

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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, 2023 and no future contingent consideration will be recognized.

The second milestone is the receipt of an 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 second development milestone has been recognized as of June 30, 2023. The Company will continue to monitor the second milestone at each reporting period.

Ichorion Asset Acquisition Possible Future Milestone Payments

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

The first and second milestones were marketing approval of the first 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, 2023 and no future contingent consideration will be recognized.

The third milestone is 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. No contingent consideration related to the third milestone has been recognized as of June 30, 2023. The Company will continue to monitor the third development milestone 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 Avalo upon close of the Aevi Merger in February 2020. The royalty agreement provided certain investors, including LeoGroup Private Investment Access, LLC on behalf of Garry Neil, the Company’s Chief Executive Officer and Chairman of the Board, 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 years after the date of the 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 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 the audit committee of Aevi approved the Royalty Agreement.

Avalo assumed this Royalty Agreement upon closing of the Aevi Merger and it is recorded as a royalty obligation within the Company's accompanying unaudited condensed consolidated balance sheet as of June 30, 2023 and December 31, 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 prospective basis based on such estimates, which will result in a corresponding increase in the liability balance.

Karbinal Royalty Make-Whole Provision

In 2018, in connection with the ~~clinical trials~~acquisition of certain commercialized products, the Company entered into a supply and ~~development~~distribution agreement (the “Karbinal Agreement”) with TRIS Pharma Inc. (“TRIS”). As part of the ~~Company’s product candidates.~~Karbinal Agreement, the Company had an annual minimum sales commitment, which is based on a commercial year that spans from August 1 through July 31, of 70,000 units

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through 2025. The Company was ~~contractually obligated~~required to pay TRIS a royalty make whole payment (“Make-Whole Payments”) of $30 for ~~up to approximately $1.2 million~~each unit under the 70,000 units annual minimum sales commitment through 2025.

As a part of ~~future services under these agreements as of September 30, 2017. The Company’s actual contractual~~the Aytu transaction, the Company assigned all its payment obligations, ~~will vary depending upon several factors,~~ including the ~~progress and results~~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 ~~the underlying services.~~

units sold.

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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, 2017~~29, 2023, 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, ~~2016~~2022 appearing in our Annual Report on Form 10-K filed with the SEC on March ~~10, 2017.~~29, 2023.

Overview

~~We are a biopharmaceutical company that is developing innovative drug candidates for either commercialization, license~~Avalo Therapeutics, Inc. (the “Company” or sale to make a difference in the lives of patients with neurologic and psychiatric disorders. Our lead drug candidate is CERC-301, which we currently intend to explore as a novel treatment for orphan neurologic indications. We also have two pre-clinical stage compounds, CERC-611 and CERC-406.

~~Our portfolio of product candidates is summarized below:~~

~~CERC-301: Orphan Neurologic Diseases.~~ ~~CERC‑301 belongs to a class of compounds known as antagonists of the N‑methyl‑D‑aspartate,~~“Avalo” or NMDA, receptor, a receptor subtype of the glutamate neurotransmitter system that is responsible for controlling neurologic adaptation. We believe CERC‑301 specifically blocks the NMDA receptor subunit 2B, or NR2B. Given its specific mechanism 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.

~~CERC-611: Adjunctive Treatment of Partial-Onset Seizures in Epilepsy.~~ ~~CERC-611~~“we”) 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 found 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 therapy forclinical stage biotechnology company focused on the treatment of ~~partial-onset seizures,~~immune dysregulation by developing therapies that target the LIGHT network.

LIGHT (Lymphotoxin-like, exhibits Inducible expression, and competes with HSV Glycoprotein D for Herpesvirus Entry Mediator (“HVEM”), a receptor expressed by T lymphocytes; also referred to as TNFSF14) is an immunoregulatory cytokine. LIGHT and its signaling receptors, HVEM (TNFRSF14), and lymphotoxin β receptor (TNFRSF3), form an immune regulatory network with two co-receptors of herpesvirus entry mediator, checkpoint inhibitor B and T Lymphocyte Attenuator (“BTLA”), and CD160 (collectively, the “LIGHT-signaling network” or ~~without secondarily generalized seizures,~~the “LIGHT network”). Accumulating evidence points to the dysregulation of the LIGHT-signaling network as a disease-driving mechanism in ~~patients with epilepsy.~~

autoimmune and inflammatory reactions in barrier organs. Therefore, we believe reducing LIGHT levels can moderate immune dysregulation in many acute and chronic inflammatory disorders.

Management’s primary evaluation of the success of the Company is 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.

The following chart summarizes key information about our pipeline:

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Pipeline Chart (July 2023)_V2_803 LOI.jpg

~~CERC-406: Residual Cognitive Impairment.~~ ~~CERC-406 is~~Liquidity

For the six months ended June 30, 2023, Avalo generated a ~~preclinical candidate~~net loss of $18.1 million and negative cash flows from ~~our proprietary platform~~operations 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 developed for the treatment~~$21.1 million. As of ~~residual cognitive impairment symptoms.~~



☒☑			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended ~~September~~June 30, ~~2017~~2023
OR
☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



Delaware (State of incorporation)			45-0705648 (I.R.S. Employer Identification No.)
~~400 E. Pratt Street,~~540 Gaither Road, Suite ~~606~~400 ~~Baltimore,~~Rockville, Maryland ~~21202~~20850 (Address of principal executive offices)			(410) ~~522‑8707~~522-8707 (Registrant’s telephone number, including area code)


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.001 par value	AVTX	Nasdaq Capital Market



Large accelerated filer ¨☐		Accelerated filer ¨ ☐
Non-accelerated filer ¨ ☑	~~(Do not check if a smaller reporting company)~~	Smaller reporting company þ ☑
Emerging growth company þ ☐


	June 30, 2023		December 31, 2022
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	6,307	$	13,172
Accounts receivable	38		—
Other receivables	6		1,919
Inventory, net	18		20
Prepaid expenses and other current assets	1,135		1,290
Restricted cash, current portion	15		15
Total current assets	7,519		16,416
Property and equipment, net	2,176		2,411
Goodwill	14,409		14,409
Restricted cash, net of current portion	131		131
Total assets	$	24,235	$	33,367
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable	$	751	$	2,882
Deferred revenue	—		88
Accrued expenses and other current liabilities	7,588		13,214
Notes payable, current	14,115		5,930
Total current liabilities	22,454		22,114
Notes payable, non-current	—		13,486
Royalty obligation	2,000		2,000
Deferred tax liability, net	156		141
Derivative liability	5,050		4,830
Other long-term liabilities	1,544		1,711
Total liabilities	31,204		44,282
Stockholders’ deficit:
Common stock—$0.001 par value; 200,000,000 shares authorized at June 30, 2023 and December 31, 2022; 14,036,940 and 9,430,535 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively	14		9

Additional paid-in capital	314,755		292,900
Accumulated deficit	(321,738)		(303,824)
Total stockholders’ deficit	(6,969)		(10,915)
Total liabilities and stockholders’ deficit	$	24,235	$	33,367



	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



	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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Revenues:
Product revenue, net	$	643	$	1,033	$	1,117	$	2,206

Total revenues, net	643		1,033		1,117		2,206

Operating expenses:
Cost of product sales	708		1,567		1,259		2,286
Research and development	4,658		8,510		10,667		18,094
Selling, general and administrative	2,427		2,784		5,134		14,468
Amortization expense	—		—		—		38
Total operating expenses	7,793		12,861		17,060		34,886
	(7,150)		(11,828)		(15,943)		(32,680)
Other expense:
Interest expense, net	(996)		(1,154)		(1,945)		(2,323)
Change in fair value of derivative liability	(40)		—		(220)		—
Other expense, net	—		—		(25)		(20)
Total other expense, net	(1,036)		(1,154)		(2,190)		(2,343)
Loss before taxes	(8,186)		(12,982)		(18,133)		(35,023)
Income tax expense	7		5		15		15
Net loss and comprehensive loss	$	(8,193)	$	(12,987)	$	(18,148)	$	(35,038)
Net loss per share of common stock, basic and diluted1	$	(0.59)	$	(1.38)	$	(1.41)	$	(3.73)


	Common stock			Additional paid-in	Accumulated		Total stockholders’
	Shares	Amount			capital		deficit		deficit
Three Months Ended June 30, 2023
Balance, March 31, 2023	13,200,535	$	13		$	307,499	$	(313,779)	$	(6,267)
Issuance of common shares pursuant to ATM Program, net	2,044,672	2			6,529		—		6,531
Retirement of common shares in exchange for pre-funded warrants	(1,300,000)	(1)			(3,873)		234		(3,640)
Issuance of pre-funded warrants in exchange for retirement of common shares	—	—			3,640		—		3,640
Exercise of pre-funded warrants for common shares	72,110	—			—		—		—
Shares purchased through employee stock purchase plan	19,623	—			67		—		67
Stock-based compensation	—	—			893		—		893
Net loss	—	—			—		(8,193)		(8,193)
Balance, June 30, 2023	14,036,940	$	14		$	314,755	$	(321,738)	$	(6,969)



	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



	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, 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



	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



	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



	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



Exhibit Number		Description of Exhibit

~~2.1~~4.1			Asset Purchase Agreement, dated as of August 14, 2017, by and among Cerecor Inc. and Janssen Pharmaceuticals, Inc. (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on August 14, 2017).

~~3.1~~	~~Amended and Restated Certificate of Incorporation of Cerecor Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on October 20, 2015).~~

~~3.1.1~~	Form of ~~Certificate~~Exchange Warrant to Purchase Shares of ~~Designation of Preferences, Rights and Limitations of Series A Convertible Preferred~~Common Stock of ~~Cerecor Inc. (incorporated by reference~~ Avalo T herapeutics, I nc. issued to ~~Exhibit 3.1 to the Current Report on Form 8-K filed on April 28, 2017).~~

~~3.2~~	~~Amended~~Venrock Healthcare Capital Partners EG, L.P., Venrock Healthcare Partners III, L.P. 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).~~VHCP Co-Invest

~~4.1~~	~~Second Amended and Restated Investors' Rights Agreement, dated as of July 11, 2014~~ment Holdings, LLC. (incorporated by reference to Exhibit 4.1 to the ~~Registration Statement on~~ Form ~~S-1~~8-K filed on June ~~12, 2015)~~2, 2023).

~~4.2~~10.1			~~Form~~Exchange Agreement, dated as of ~~Warrant to Purchase Shares of Common Stock issued in connection with the sale of Series A Convertible Preferred Stock~~May 31, 2023, between Avalo Therapeutics, Inc. and Venrock Healthcare Capital Partners EG, L.P., Venrock Healthcare Partners III, L.P. and VHCP Co-Investement Holdings, LLC. (incorporated by reference to Exhibit ~~4.2~~10.1 to the ~~Registration Statement on~~ Form ~~S-1~~8-K filed on June ~~12, 2015)~~2, 2023).

~~4.3~~10.2			~~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,~~Forbearance Agreement, dated as of July ~~11, 2014~~20, 2023, between Avalo Therapeutics, Inc. and Horizon Credit II LLC, Horizon Funding Trust 2019-1, Horizon Funding I, LLC, Powerscourt Investments XXV Trust and Horizon Technology Finance Corporation (incorporated by reference to the Exhibit ~~4.3~~10.1 to ~~the Registration Statement on~~ Form ~~S-1~~8-K filed on ~~June 12, 2015)~~July 21, 2023 ).

~~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).~~



~~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.

~~31.2~~31.2+			Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

~~32.1~~32.1+†		*	Certification of ~~Chief~~Principal Executive Officer and ~~Chief~~Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

~~101.INS~~101				~~XBRL Instance Document.~~ Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Condensed Consolidated Balance Sheets as of June 30, 2023 (Unaudited) and December 31, 2022; (ii) Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2023 and 2022; (iii) Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2023 and 2022; (iv) Condensed Consolidated Statements of Changes in Stockholders’ (Deficit) Equity (Unaudited) for the Three and Six Months Ended June 30, 2023 and 2022; and (v) Notes to Unaudited Financial Statements.

~~101.SCH~~104				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.~~