Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section in this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

Avalo Therapeutics, Inc. (the “Company,” “Avalo” or “we”) is a leading clinical-stage precision medicine company that discovers, develops, and commercializes targeted therapeutics for patients with significant unmet clinical need in immunology and rare genetic diseases. We have built a diverse portfolio of innovative therapies to deliver meaningful medical impact for patients in urgent need. Our clinical candidates commonly have a proven mechanistic rationale, biomarkers and/or an established proof-of-concept to expedite development and increase the probability of success.

The Company’s focus in 2021 was on progressing the pipeline and executing financing activities to fund pipeline development. These will also be the primary areas of focus in 2022, with a broader focus on both non-dilutive and dilutive funding opportunities and potential business development related opportunities such as the out-license or partnering of assets. Management’s primary evaluation of the success of the Company is the ability to progress its pipeline assets forward towards commercialization or opportunistically out-license rights to indications or geographies. This success depends on not only the operational execution of the programs, but also the ability to secure sufficient funding to support the programs. We believe the ability to achieve the anticipated milestones as presented in the section entitled “Business” in Item 1 of this Annual Report on Form 10-K represents our most immediate evaluation points.

In 2021, we believe that we made significant progress in advancing our pipeline as reported during the year highlighted by the data release of the first two cohorts of the AVTX-002 Phase 1b trial in Crohn’s Disease, data release of the AVTX-002 Phase 2 proof-of-concept trial in COVID-19 ARDS and subsequent receipt of fast-track designation (“FTD”), receipt of FTD for AVTX-803 and enrollment of the first patient in the AVTX-007 Phase 1b open-label proof-of-concept trial in adult onset Still’s Disease. We also believe our licensing activity in the first half of 2021, including in-licenses of immunology and immuno-oncology assets (including the expanded license agreement for AVTX-002 and the license agreement of AVTX-008) and out-licenses of non-core assets, enhances our focus on the development of innovative therapies in areas of high unmet need within the fields of immunology and rare genetic disorders. Additionally, we executed financings in 2021 for total net proceeds of approximately $105 million, which served to strengthen and extend our financial resources to advance our clinical pipeline towards key development milestones.

Recent Updates

In February 2022, Dr. Garry Neil and Chris Sullivan were promoted to Chief Executive Officer and Chief Financial Officer, respectively. In early 2022, management has been focused on developing and beginning to execute an optimal strategy of prioritizing our most promising programs. As a result, we are winding down internal development efforts of AVTX-006 and AVTX-007 in multiple myeloma (previously announced in January 2022) and pausing current development efforts of AVTX-802. We plan to pursue strategic alternatives for AVTX-006. Regarding AVTX-802, current development has been paused due to an impasse related to FDA regulatory requirements of the trial design and feasibility based upon investigator feedback and will re-evaluate development plans in the event of an alignment with the FDA on the trial design. Additionally, we will not proceed with the extension of the Phase 1b, open-label trial in a cohort of ulcerative colitis (“UC”) patients with moderate to severe UC who are refractory to biologic therapy given the positive data we previously received in Crohn’s disease patients and the similarity of the conditions. Alternatively, we will consider a possible randomized, double-blind, placebo-controlled trial in moderate to severe refractory patients with IBD. Finally, we will conduct a new Phase 2 randomized, double-blind, placebo-controlled trial of AVTX-002 for the treatment of moderate to severe Non-eosinophilic Asthma and expect top-line data in the fourth quarter of 2022.

Impact of COVID-19 Pandemic

As of the filing date of this Annual Report on Form 10-K, we have not experienced significant financial impact directly related to the COVID-19 pandemic, however we have experienced some disruptions to clinical operations and manufacturing of drug supply for use in clinical trials. For example, we have experienced a slower pace of patient enrollment at many of our clinical trial sites than our initial projections. Some of our clinical sites have experienced challenges in conducting trial activities while they focus resources on COVID-19 patients and due to facility restrictions, remote work requirements and other precautions. Additionally, we have experienced manufacturing delays of drug product due to the limited available capacity of certain of our manufacturers due to staffing shortages, production slowdowns because of overall increased manufacturing in the biotechnology industry, as well as increased

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manufacturing of COVID-19 vaccines. We have worked (and will continue to work) closely with our third-party contractors, investigators and manufacturers to ensure our ongoing clinical trials proceed safely and efficiently. We will continue to assess the potential impact of COVID-19 pandemic on our business and operations, including our clinical operations and manufacturing activities.

2021 Financial Operations Overview

Research and development expense for the year ended December 31, 2021 significantly increased as compared to the prior year, which was driven by the advancement of our maturing pipeline. Notably, we incurred significant expenses related to the clinical development of AVTX-002, which included increased drug manufacturing to support clinical trials. We also recognized a $10 million upfront license fee related to the expanded indication license agreement for AVTX-002 entered into with KKC during the year. In addition, there were moderate increases to program costs for AVTX-007, AVTX-006 and AVTX-803 as we progressed the therapies toward pivotal trials. There was also a moderate increase to general and administrative expense related to the infrastructure needed to support the Company’s expansion of its research and development efforts. Such increases were the main drivers to our net loss of $84.4 million for the year ended December 31, 2021. Additionally, our net cash used in operations increased by $30.4 million for the year ended December 31, 2021, which was also driven by the advancement of our maturing pipeline. We do not expect a similar increase to operating expenses in 2022. Rather, it is likely we will incur similar operating expenses to begin 2022 as we finished 2021. Expenses beyond the start of 2022 are difficult to predict given it will be highly dependent on study outcomes, business development initiatives and access to capital. Furthermore, it is possible the recent and continued portfolio prioritization may result in decreases to research and development expenses and supporting general and administrative and marketing expenses in the intermediate future, while also potentially driving increases to expenses such as severance and wind down costs in the short term.

As of December 31, 2021, Avalo had $54.6 million in cash and cash equivalents, representing a $35.7 million increase as compared to December 31, 2020. The increase was driven by financings executed during the year partially offset by operating expenditures. We plan to use our current cash on hand along with cash inflows from investing and/or financing activities to support the ongoing clinical development of our maturing pipeline and for general corporate purposes to support such pipeline development.

Results of Operations

Comparison of the Years Ended December 31, 2021 and 2020

Product Revenue, net

Net product revenue was $4.8 million for the year ended December 31, 2021, compared to $6.7 million for the year ended December 31, 2020. While gross sales were higher in 2021 as compared to 2020, there was a decrease in net sales driven by a significant increase in sales return allowance due to a full return allowance on sales of short-dated inventory sold in the first quarter of 2021 and due to a $0.5 million accounts receivable write-off of remaining uncollected balances on sales managed by Aytu Bioscience, Inc. (“Aytu”).

The Company began managing commercial operations of Millipred® in the third quarter of 2021. Aytu, to which the Company sold its rights, title and interest in assets relating to certain commercialized products in 2019, managed Millipred® commercial operations until August 31, 2021. The transition may have caused disruptions to the sales channel potentially impacting units sold in the fourth quarter, thus contributing to the decrease in net product revenue.

License Revenue

License revenue was $0.6 million for the year ended December 31, 2021, which relates to upfront fees received as a result of the out-license and assignment, respectively, of the Company’s rights to its non-core neurology pipeline assets, AVTX-301 and AVTX-406 to Alto Neurosciences, Inc. (“Alto”) and ES Therapeutics, LLC (“ES”), respectively. ES is a wholly-owned subsidiary of Armistice, which is a significant stockholder of the Company and whose chief investment officer, Steven Boyd, and managing director, Keith Maher, currently serve on the Board of the Company. The transaction with ES was approved in accordance with Avalo’s related party transaction policy. There was no license revenue for the year ended December 31, 2020.

Avalo is eligible to receive additional payments upon achievement of specified development, regulatory and sales-based milestones for both AVTX-301 and AVTX-406 and is also entitled to royalty payments based on net sales of AVTX-301.

Cost of Product Sales

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Cost of product sales were $1.5 million for the year ended December 31, 2021, as compared to $0.3 million for the year ended December 31, 2020. The increase was primarily driven by the Company’s requirement to pay its supplier fifty percent of the net profit of the Millipred® product following each calendar quarter beginning on July 1, 2021, subject to a $0.5 million quarterly minimum payment. We expect cost of product sales to increase as compared to historic periods prior to the profit share beginning.

Research and Development Expenses

The following table summarizes our research and development expenses for the years ended December 31, 2021 and 2020:

Year Ended

December 31,

(in thousands)

License and milestone expenses 10,900 —

Internal expenses:

Salaries, benefits and related costs 9,114 5,763

Stock-based compensation expense 1,775 1,340

Research and development expenses increased $27.6 million for the year ended December 31, 2021, compared to the year ended December 31, 2020. The overall increase was driven by an increase in research and development activities in 2021 as the Company continues to develop its maturing pipeline assets.

The increase was driven by a $10 million upfront license fee, related to the expanded indication license agreement for AVTX-002 entered into with KKC in March 2021. Additionally, CMC expenses increased $9.4 million due to increased manufacturing to support development of the progressing pipeline and in anticipation of drug supply to support clinical trials. Clinical expenses increased $3.3 million due to costs incurred to advance the pipeline as we approach multiple clinical data read outs across our pipeline. Finally, salaries, benefits and related costs increased by $3.4 million mainly due to an increase in headcount to grow our research and development activities to support our maturing pipeline.

We do not expect a similar increase to research and development expenses in 2022. Rather, it is likely we will incur similar expenses to begin 2022 as we finished 2021. Research and development expenses beyond the start of 2022 are difficult to predict given it will be highly dependent on study outcomes, business development initiatives and access to capital.

Acquired In-Process Research and Development Expenses

In the first quarter of 2020, the Company consummated its merger with Aevi, resulting in us acquiring $25.5 million of in-process research and development (“IPR&D”). The fair value of the IPR&D was immediately recognized as acquired in-process research and development expense given such asset has no other alternate use due to the stage of development. There was no acquired in-process research and development expense for the year ended December 31, 2021.

General and Administrative Expenses

The following table summarizes our general and administrative expenses for the years ended December 31, 2021 and 2020:

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Year Ended

December 31,

(in thousands)

Salaries, benefits and related costs $ 4,561 $ 4,704

Legal, consulting and other professional expenses 10,029 6,606

Stock-based compensation expense 5,983 5,131

General and administrative expenses increased $4.4 million for the year ended December 31, 2021 compared to the same period in 2020. The increase was largely driven by a $3.4 million increase in legal, consulting and other professional expenses. The largest driver was higher legal expenses in the current period, including costs to execute the KKC expanded indication license agreement and the other licensing agreements executed in the year. Additionally, there were increases to information technology services, consulting and director and officer insurance. Such increases were partially offset by a legal settlement in the prior period that did not repeat in the current period. Stock-based compensation expense increased $0.9 million for the year ended December 31, 2021, which was attributable to new grants, including the annual stock option grant, and modifications to certain existing awards.

Sales and Marketing Expenses

The following table summarizes our sales and marketing expenses for the years ended December 31, 2021 and 2020:

Year Ended

December 31,

(in thousands)

Salaries, benefits and related costs $ 641 $ 749

Stock-based compensation expense 414 315

Advertising and marketing expense 1,657 1,240

Sales and marketing expenses primarily consist of expenses related to initiatives to support the go-to-market strategy of our pipeline assets. Sales and marketing expense increased $0.5 million for the year ended December 31, 2021 compared to the same period in 2020, which was largely driven by market research projects for multiple programs and indications and marketing expense related to the corporate name change to Avalo Therapeutics, Inc.

Amortization Expense

The following table summarizes amortization expense for the years ended December 31, 2021 and 2020:

Year Ended

December 31,

(in thousands)

Amortization of intangible assets $ 1,548 $ 1,741

For the year ended December 31, 2021, amortization expense consisted of the amortization of our intangible assets including product marketing rights acquired as part of a previous acquisition and an assembled workforce acquired as part of a previous merger. The product marketing rights asset was fully amortized in the fourth quarter of 2021, thus driving the decrease for the year ended December 31, 2021 as compared to the prior year.

We expect amortization expense to decrease as compared to historical periods given the product marketing rights asset was fully amortized in the fourth quarter of 2021 and the assembled workforce will be fully amortized in the first quarter of 2022.

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Other (Expense) Income, net

The following table summarizes our other (expense) income, net from continuing operations for the years ended December 31, 2021 and 2020:

Year Ended

December 31,

(in thousands)

Change in fair value of Investment in Aytu (as defined below) $ — $ 5,208

Other (expense) income, net (20) 409

Interest (expense) income, net (2,391) 49

Other expense, net was comprised of interest expense of $2.4 million for the year ended December 31, 2021. The interest expense recognized related to the venture debt financing agreement entered into in June 2021. We expect interest expense to increase in 2022 as a result of recognizing a full year of interest.

For the year ended December 31, 2020, other income, net was mainly comprised of a $5.2 million gain on change in the fair value of an investment. As consideration of the Company’s sale of its rights, title and interest in assets relating to certain commercialized products to Aytu in 2019, the Company received 9.8 million shares of Aytu preferred stock (the “Investment in Aytu”), which was remeasured at fair value each reporting period. In 2020, the Company sold the underlying Aytu common stock for net proceeds of $12.8 million, which represented a gain of $5.2 million from its fair value as of the period prior to the sale.

Income Tax Benefit

The Company recognized an income tax benefit of $0.2 million for the year ended December 31, 2021 and $2.8 million for the year ended December 31, 2020. The income tax benefit recognized in the current year was the result of the receipt of the Company’s federal refund in 2021 along with an additional $0.2 million related to additional interest received. The tax benefit recognized for the year ended December 31, 2020 was a result of a tax law change and the ability of the Company to carry back certain losses related to the CARES Act and related state provisions. The annual effective tax rate was 0.22% and 4.21% for the years ended December 31, 2021 and 2020, respectively.

Liquidity and Capital Resources, including Capital Expenditure and Cash Requirements

As of December 31, 2021, Avalo had $54.6 million in cash and cash equivalents. In 2021, the Company closed three equity offerings for net proceeds of approximately $72.0 million (see Note 12 to the consolidated financial statements for more information). In June 2021, the Company entered into a $35 million venture debt financing agreement (the “Loan Agreement”) with Horizon Technology Finance Corporation (“Horizon”) and Powerscourt Investments XXV, LP (“Powerscourt”, together with Horizon, the “Lenders”). As of December 31, 2021, the Company had received the full $35 million. The Loan Agreement contains certain covenants and certain other specified events that could result in an event of default, which if not cured or waived, could result in the immediate acceleration of all or a substantial portion of the notes. As of the filing date of this Annual Report on Form 10-K, the Company was not aware of any breach of covenants, occurrence of material adverse change, nor had it received any notice of event of default from the Lenders (see Note 11 to the consolidated financial statements for more information).

In order to meet its cash flow needs, the Company applies a disciplined decision-making methodology as it evaluates the optimal allocation of the Company's resources between investing in the Company's existing pipeline assets and acquisitions or in-licensing of new assets. For the year ended December 31, 2021, Avalo generated a net loss of $84.4 million and negative cash flows from operations of $70.9 million. As of December 31, 2021, Avalo had an accumulated deficit of $262.2 million.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern; however, losses are expected to continue as the Company continues to invest in its core research and development pipeline assets. The Company will require additional financing to fund its operations and to continue to execute its business strategy at least one year after the date the financial statements included herein were issued. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

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To mitigate these conditions and to meet the Company’s capital requirements, management plans to use its current cash on hand along with some combination of the following: (i) dilutive and/or non-dilutive financings, (ii) federal and/or private grants, (iii) other out-licensing or strategic alliances/collaborations of its current pipeline assets, and (iv) out-licensing or sale of its non-core assets. 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, our venture debt financing agreement prohibits us from incurring certain additional indebtedness, making certain asset dispositions, and entering into certain mergers, acquisitions or other business combination transactions without prior consent of the Lenders. If the Company requires but is unable to obtain additional funding, the Company may be forced to make reductions in spending, delay, suspend, reduce or eliminate some or all of its planned research and development programs, or liquidate assets where possible. Due to the uncertainty regarding future financing and other potential options to raise additional funds, management has concluded that substantial doubt exists with respect to the Company’s ability to continue as a going concern within one year after the date that the financial statements in this Annual Report on Form 10-K were issued.

Over the long term, the Company’s ultimate ability to achieve and maintain profitability will depend on, among other things, the development, regulatory approval, and commercialization of its pipeline assets, and the potential receipt and sale of any priority review vouchers it receives.

Uses of Liquidity

The Company uses cash to primarily fund the ongoing development of our research and development pipeline assets and costs associated with its organizational infrastructure.

Cash Flows

The following table summarizes our cash flows for the years ended December 31, 2021 and 2020:

Year Ended

December 31,

(in thousands)

Net cash (used in) provided by:

Net increase in cash and cash equivalents $ 35,757 $ 15,377

Net cash used in operating activities

Net cash used in operating activities was $70.9 million for the year ended December 31, 2021, and consisted primarily of a net loss of $84.4 million, which was driven by increased research and development activities as the Company continued to fund its maturing pipeline of development assets, and non-cash adjustments to reconcile net loss to net cash used in operating activities including stock-based compensation of $8.2 million. Additionally, changes in net liabilities increased by $2.8 million. The increase was mainly driven by a $3.2 million increase in accrued expenses and $1.1 million decrease in accounts receivable, partially offset by an increase of $1.5 million in other receivables.

We expect to continue to use significant amounts of cash related to operating activities as we advance our pipeline.

Net cash used in operating activities was $40.5 million for the year ended December 31, 2020, and consisted primarily of a net loss of $63.5 million and non-cash adjustments to reconcile net loss to net cash used in operating activities including the $5.2 million realized gain related to the change in fair value of the Investment in Aytu. This decrease was offset mainly by a non-cash acquired IPR&D expense of $25.5 million and non-cash stock-based compensation of $6.8 million.

Net cash (used in) provided by investing activities

Net cash used in investing activities was $0.1 million for the year ended December 31, 2021 and consisted primarily of the purchase of property and equipment.

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Net cash provided by investing activities was $11.1 million for the year ended December 31, 2020, and consisted primarily of net proceeds of $12.8 million from the sale of Aytu common stock underlying the Company’s previous Investment in Aytu, slightly offset by transaction costs incurred as part of the Aevi Merger.

Net cash provided by financing activities

Net cash provided by financing activities was $106.8 million for the year ended December 31, 2021, consisting primarily of net proceeds of $104.9 million from equity and debt financings. Specifically, the Company received net proceeds of $37.7 million from an underwritten public offering closed in January 2021, net proceeds of $32.9 million from the Loan Agreement entered into in the second quarter of 2021 and net proceeds of $29.0 million from an underwritten public offering that closed in September 2021.

We expect to continue to engage in financing activities to support clinical development.

Net cash provided by financing activities was $44.8 million for the year ended December 31, 2020 and consisted primarily of net proceeds of $35.4 million from an underwritten public offering of common stock. The Company also received net proceeds of $5.1 million from a registered direct offering with certain institutional investors, which included Armistice, that closed in February 2020, and net proceeds of $3.9 million from a private placement of equity securities with Armistice in March 2020.

Critical Accounting Estimates and Assumptions

In preparing the financial statements, the Company makes estimates and assumptions that have an impact on assets, liabilities, revenue and expenses reported. These estimates can also affect supplemental information disclosed by us, including information about contingencies, risk and financial condition. The Company believes, given current facts and circumstances, our estimates and assumptions are reasonable, adhere to GAAP and are consistently applied. Inherent in the nature of an estimate or assumption is the fact that actual results may differ from estimates, and estimates may vary as new facts and circumstances arise.

While our significant accounting policies are more fully described in Note 2 to the audited consolidated financial statements appearing at the end of this Annual Report on Form 10-K, we believe the following accounting policy is critical to the understanding of our financial condition and results.

Stock-Based Compensation

The Company applies the provisions of ASC 718, Compensation—Stock Compensation, which requires the measurement and recognition of compensation expense for all stock‐based awards made to employees, including employee stock options, in the statements of operations and comprehensive loss.

For stock options issued to employees and members of the board of directors for their services, 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. Additionally, the stock price on the date of grant is utilized in the Black-Scholes option pricing model. 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.

The assumptions we used to determine the fair value of stock options granted to employees and members of the board of directors are as follows:

Year Ended December 31,

Expected annual dividend yield 0% 0%

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The estimates involved in the valuations include inherent uncertainties and the application of our judgment. As a result, if factors change and we use significantly different assumptions or estimates when valuing our stock options, our stock‐based compensation expense could be materially different. We recognize compensation expense for only the portion of awards that are expected to vest.

Debt Financing Agreement and Warrants

In the June 2021, the Company entered into a $35 million venture debt financing agreement, under which the Company borrowed $20 million at closing and borrowed an additional $15 million upon the achievement of certain predetermined milestones. Pursuant to the Loan Agreement, the Company issued warrants to the Lenders to purchase an aggregate of 403,844 shares of the Company’s common stock with an exercise price of $2.60 (the “Warrants”).

We applied judgement in evaluating the identification of each instrument and feature requiring separate accounting recognition and determination of whether each should be classified as a liability or in stockholders’ equity. The issuance of debt and Warrants in one transaction resulted in estimating the fair values of each instrument and feature.

We allocated consideration received to the debt and Warrants (which we concluded met equity classification criteria and therefore recognized as a component of permanent stockholders’ equity within additional paid-in-capital) based on the relative fair value allocation method. We valued the Warrants at issuance, which resulted in a discount on the debt, and allocated proceeds proportionately to the debt and to the Warrants.

The debt is recorded on the balance sheet at carrying value, which is the gross balance, less the unamortized debt discount and issuance costs. All fees, costs paid to the Lenders, and all direct costs incurred by the Company are recognized as a debt discount and are amortized to interest expense using the effective interest method of the life of the loan.

Off‐Balance Sheet Arrangements

The Company does not have any off‐balance sheet arrangements, as defined by applicable SEC rules and regulations.

Recently Adopted Accounting Pronouncements

For a discussion of new accounting standards please see Note 2 to consolidated financial statements contained in this Annual Report on Form 10-K.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

As a smaller reporting company, we are not required to provide the information required by this Item.

Item 8. Financial Statements and Supplementary Data.

The consolidated financial statements required to be filed pursuant to this Item 8 are appended to this report. An index of those consolidated financial statements is found in Item 15 of Part IV of this Annual Report on Form 10-K.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report.

In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on their evaluation, our principal executive officer and principal financial officer concluded that as of December 31, 2021, our disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures as of December 31, 2021.

Management's Annual Report on Internal Control Over Financial Reporting

Our management, including our principal executive officer and principal financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2021, based on the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on this evaluation under the 2013 Framework, our principal executive officer and principal financial officer have concluded that our internal control over financial reporting was effective at a reasonable level of assurance as of December 31, 2021.

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Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Attestation Report of Registered Public Accounting Firm

This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm due to an exclusion for certain smaller reporting companies.

Item 9B. Other Information.

On February 8, 2022, the Company filed a Form 8-K with the Securities and Exchange Commission disclosing that on February 2, 2022, H. Jeffery Wilkins resigned as Chief Medical Officer, effective upon a date to be agreed upon. Dr. Wilkins’ resignation will be effective on March 21, 2022.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspection.

Not applicable.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance.

Information required by this Item concerning our directors and executive officers is incorporated by reference from the sections captioned “Election of Directors”, “Executive Officers” and “Corporate Governance Matters” contained in our definitive proxy statement related to the 2022 Annual Meeting of Stockholders to be filed with the SEC with 120 days after the end of the fiscal year pursuant to General Instruction G(3) of Form 10-K (the “Proxy Statement”).

The information required by this Item concerning our Audit Committee is incorporated by reference from the section of the proxy statement captioned “Information Regarding the Board and Corporate Governance – Information Regarding Committees of the Board – Audit Committee”.

The Company has adopted the Avalo Therapeutics, Inc. Code of Business Conduct and Ethics that applies to all officers, directors and employees. The Code of Business Conduct and Ethics is available on the Company’s website at ir.avalotx.com. If the Company makes any substantive amendments to the Code of Business Conduct and Ethics or grants any waiver from a provision of the Code to any executive officer or director, the Company will promptly disclose the nature of the amendment or waiver on its website.

Item 11. Executive Compensation.

The information required by this Item is incorporated by reference to the information under the sections of the proxy statement captioned “Executive Compensation” and “Director Compensation”.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table contains certain information with respect to our equity compensation plans (including individual compensation arrangements) in effect as of December 31, 2021:

(A) (B) (C)

Equity compensation plans not approved by stockholders 500,000 (3) $3.73 —

(1) The weighted-average exercise price does not take into account shares issuable upon the vesting of outstanding restricted stock units, which have no exercise price. As of December 31, 2021, there were 11,250 shares of unvested restricted stock units.

(2) Reflects shares of common stock available for future issuance under our Third Amended and Restated 2016 Equity Incentive Plan at December 31, 2021. In March 2018, our board of directors adopted the Amended and Restated 2016 Equity Incentive Plan, which was approved by our stockholders in May 2018. In June 2019, our board of directors adopted the Second Amended and Restated 2016

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Equity Incentive Plan, which was approved by our stockholders in August 2019. In April 2020, our board of directors adopted the Third Amended and Restated Equity Incentive Plan, which was approved by our stockholders in June 2020. During the term of the Third Amended and Restated 2016 Equity Incentive Plan, the share reserve will automatically increase on the first trading day in January of each calendar year, 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, 2022, pursuant to the terms of the Third Amended and Restated Equity Inventive Plan an additional 4,511,768 shares were made available for issuance.

(3) Consists of shares of common stock issuable upon exercise of outstanding stock options granted pursuant to the Nasdaq inducement grant exception as a component of employment compensation for employees. The inducement grant was made as an inducement material to Mr. Greenway, the Company’s former Chief Financial Officer, entering into employment with us in accordance with Nasdaq Listing Rule 5635(c)(4). The option was set to vest over four years, with one-quarter of such options vesting on the first anniversary of the grant date and the remaining three-quarters of the options vesting in equal monthly installments over the following 36 months, in each case, subject to continued employment with the Company through the applicable vesting date. Mr. Greenway was separated from the Company on February 14, 2022. Pursuant to his separation agreement, effective on February 14, 2022, the shares subject to this option that would have vested in the twelve months following the separation date immediately vested and are exercisable through February 14, 2023.

The other information required by this Item is incorporated by reference to the information under the section captioned “Security Ownership of Certain Beneficial Owners and Management” contained in the proxy statement.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information required by this Item is incorporated by reference to the information under the sections of the proxy statement captioned “Transactions with Related Persons” and “Information Regarding the Board and Corporate Governance – Independence of the Board”.

Item 14. Principal Accounting Fees and Services.

The information required by this Item is incorporated by reference to the information under the section of the proxy statement captioned “Information Regarding the Board and Corporate Governance – Information Regarding Committees of the Board – Audit Committee – Report of the Audit Committee of the Board”.

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PART IV

Item 15. Exhibits; Financial Statement Schedules.

(a)Documents filed as part of this report.

1.The following consolidated financial statements of Avalo Therapeutics, Inc. and Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, are included in this report:

Report of Independent Registered Public Accounting Firm (PCAOB ID: 42) F-2

Consolidated Balance Sheets as of December 31, 2021 and 2020 F-4

Notes to Consolidated Financial Statements F-9

2.List of financial statement schedules. All schedules are omitted because they are not applicable or the required information is shown in the financial statements described above.

3.List of Exhibits required by Item 601 of Regulation S-K. See part (b) below.

(b)Exhibits.

The following is a list of exhibits filed as part of this Annual Report on Form 10-K. Where so indicated by footnote, exhibits that were previously filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated.

ExhibitNumber Description of Exhibit

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4.15‡ Description of Registered Securities.

10.5 ‡ Non-Employee Director Compensation Policy, amended January 24, 2022.

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21.1 ‡ List of Subsidiaries of the Registrant

101.INS Inline XBRL Instance Document.

101.SCH Inline XBRL Taxonomy Extension Schema Document.

101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document.

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101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document.

* Confidential treatment has been requested for portions of this exhibit.

** Portions of this exhibit have been redacted in compliance with Regulation S-K Item 601(b)(10).

+ Management contract or compensatory agreement.

‡ Filed herewith.

# This certification is being furnished solely to accompany this 10-K pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

Item 16. 10-K Summary.

None.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Avalo Therapeutics, Inc.

/s/ Christopher Sullivan

Christopher Sullivan

Chief Financial Officer

Date: March 2, 2022

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Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature Title Date

/s/ Garry Neil, M.D. President and Chief Executive Officer March 2, 2022

Garry Neil, M.D. (Principal Executive Officer)

/s/ Christopher Sullivan Chief Financial Officer March 2, 2022

Christopher Sullivan (Principal Financial and Accounting Officer)

/s/ Steven Boyd Chairman of the Board of Directors and Director March 2, 2022

Steven Boyd

/s/ June Almenoff, M.D., Ph.D. Director March 2, 2022

June Almenoff, M.D., Ph.D.

/s/ Mitchell Chan Director March 2, 2022

Mitchell Chan

/s/ Gilla Kaplan, Ph.D. Director March 2, 2022

Gilla Kaplan, Ph.D.

/s/ Keith Maher, M.D. Director March 2, 2022

Keith Maher, M.D.

/s/ Joseph Miller Director March 2, 2022

Joseph Miller

/s/ Magnus Persson, M.D., Ph.D Director March 2, 2022

Magnus Persson, M.D., Ph.D

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AVALO THERAPEUTICS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm F-2

Consolidated Balance Sheets as of December 31, 2021 and 2020 F-4

Notes to Consolidated Financial Statements F-9

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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Avalo Therapeutics, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Avalo Therapeutics, Inc. and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

The Company's Ability to Continue as a Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations, has used significant cash in operations, expects to continue to incur losses, and has stated that substantial doubt exists about the Company’s ability to continue as a going concern. Management's evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

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Accounting for long-term debt

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2013.

Baltimore, Maryland

March 2, 2022

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AVALO THERAPEUTICS, INC. and SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share and per share data)

December 31,

Assets

Current assets:

Inventory, net 38 3

Prepaid expenses and other current assets 2,372 2,660

Restricted cash, current portion 51 38

Other long-term asset 1,000 —

Intangible assets, net 38 1,585

Restricted cash, net of current portion 227 149

Liabilities and stockholders’ equity

Current liabilities:

Accrued expenses and other current liabilities 16,519 11,310

Income taxes payable — —

Current liabilities of discontinued operations — 1,341

Notes payable, net 32,833 —

Deferred tax liability, net 113 90

Stockholders’ equity:

Total liabilities and stockholders’ equity $ 80,214 $ 43,755

See accompanying notes to the consolidated financial statements.

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AVALO THERAPEUTICS, INC. and SUBSIDIARIES

Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except per share data)

Year Ended December 31,

Revenues:

License revenue 625 —

Operating expenses:

Acquired in-process research and development — 25,549

Other (expense) income:

Change in fair value of Investment in Aytu — 5,208

Other (expense) income, net (20) 409

Interest (expense) income, net (2,391) 49

Total other (expense) income, net from continuing operations (2,411) 5,666

Loss from continuing operations before income taxes (84,545) (67,177)

(Loss) income from discontinued operations (27) 884

Net (loss) income per share of common stock, basic and diluted:

Continuing operations $ (0.83) $ (0.87)

Discontinued operations 0.00 0.01

Net loss per share of common stock, basic and diluted $ (0.83) $ (0.86)

Net (loss) income per share of preferred stock, basic and diluted:

Continuing operations $ (4.15) $ (4.38)

Discontinued operations 0.00 0.06

Net loss per share of preferred stock, basic and diluted $ (4.15) $ (4.32)

See accompanying notes to the consolidated financial statements.

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AVALO THERAPEUTICS, INC. and SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

(In thousands, except share amounts)

Additional Total

Common stock Preferred Stock paid‐in Accumulated stockholders’

Shares Amount Shares Amount capital deficit equity

Exercise of stock options and warrants 75,239 — — — 114 — 114

Restricted stock units vested during period 111,667 — — — — — —

Restricted stock units withheld for taxes (35,279) — — — (94) — (94)

Shares purchased through employee stock purchase plan 137,416 — — — 312 — 312

Stock-based compensation — — — — 6,786 — 6,786

Exercise of pre-funded warrants 308,697 — — — — — —

Shares purchased through employee stock purchase plan 189,697 — — — 366 — 366

Restricted stock units vested during period 144,583 — — — — — —

Stock-based compensation — — — — 8,172 — 8,172

See accompanying notes to the consolidated financial statements.

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AVALO THERAPEUTICS, INC. and SUBSIDIARIES

Consolidated Statements of Cash Flows

(Amounts in thousands)

Year Ended December 31,

Operating activities

Adjustments to reconcile net loss used in operating activities:

Depreciation and amortization 1,657 1,843

Accretion of debt discount 794 —

Change in fair value of Investment in Aytu — (5,208)

Change in value of Guarantee — (1,755)

Changes in assets and liabilities:

Accounts receivable, net 1,117 (678)

Other long-term asset (1,000) —

Inventory, net (35) 18

Prepaid expenses and other assets 287 (1,859)

Income taxes payable — 288

Accrued expenses and other liabilities, excluding lease liability 3,250 (196)

Lease liability, net (45) (2)

Net cash used in operating activities (70,892) (40,539)

Investing activities

Proceeds from sale of Investment in Aytu, net — 12,837

Net cash paid in merger with Aevi — (1,642)

Purchase of property and equipment (113) (63)

Net cash (used in) provided by investing activities (113) 11,132

Financing activities

Proceeds from Notes and warrants, net of debt issuance costs paid 32,900 —

Proceeds from common stock pursuant to ATM Program, net 5,230 —

Proceeds from registered direct offering, net — 5,136

Proceeds from exercise of stock options 1,567 114

Restricted stock units withheld for taxes — (94)

Net cash provided by financing activities 106,762 44,784

Increase in cash, cash equivalents, and restricted cash 35,757 15,377

Cash, cash equivalents, and restricted cash at beginning of period 19,106 3,729

Cash, cash equivalents, and restricted cash at end of period $ 54,863 $ 19,106

Supplemental disclosures of cash flow information

Cash paid for interest $ 1,585 $ —

Cash paid for taxes $ — $ 474

Supplemental disclosures of non-cash activities

Issuance of common stock in Aevi Merger $ — $ 15,496

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The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows:

December 31,

Restricted cash, current 51 38

Restricted cash, non-current 227 149

Total cash, cash equivalents and restricted cash $ 54,863 $ 19,106

See accompanying notes to the consolidated financial statements.

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AVALO THERAPEUTICS, INC. and SUBSIDIARIES

Notes to Consolidated Financial Statements

As of and for the Years Ended December 31, 2021 and 2020

1. Business

Avalo Therapeutics, Inc. (the “Company” or “Avalo”) is a leading clinical-stage precision medicine company that discovers, develops, and commercializes targeted therapeutics for patients with significant unmet clinical need in immunology and rare genetic diseases. The Company has built a diverse portfolio of innovative therapies to deliver meaningful medical impact for patients in urgent need. Avalo’s clinical candidates commonly have a proven mechanistic rationale, biomarkers and/or an established proof-of-concept to expedite and increase the probability of success.

In August 2021, the Company changed its corporate name change from Cerecor Inc. to Avalo Therapeutics, Inc. and merged certain wholly-owned subsidiaries into the Company to consolidate its corporate structure.

Avalo was incorporated and commenced operation in 2011 and completed its initial public offering in October 2015.

Liquidity

In order to meet its cash flow needs, the Company applies a disciplined decision-making methodology as it evaluates the optimal allocation of the Company’ resources between investing in the Company’s existing pipeline assets and acquisitions or in-licensing of new assets. For the year ended December 31, 2021, Avalo generated a net loss of $84.4 million and negative cash flows from operations of $70.9 million. As of December 31, 2021, Avalo had an accumulated deficit of $262.2 million.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern; however, losses are expected to continue as the Company continues to invest in its research and development pipeline assets. The Company will require additional financing to fund its operations and to continue to execute its business strategy at least one year after the date the financial statements included herein were issued. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

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2. Significant Accounting Policies

Basis of Presentation

The accompanying 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 (the “FASB”). The consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets, and the satisfaction of liabilities in the ordinary course of business. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and liabilities that might be necessary should the Company be unable to continue as a going concern (see Note 1).

Principles of Consolidation

The consolidated financial statements include the accounts of Avalo Therapeutics, Inc. and its wholly-owned subsidiaries after elimination of all intercompany balances and transactions.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. On an ongoing basis, management evaluates its estimates, including estimates related to but not limited to, revenue recognition, cost of product sales, stock-based compensation, fair value measurements, cash flows used in management's going concern assessment, income taxes, goodwill, and clinical trial accruals. 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.

Discontinued Operations

In 2019, the Company entered into an asset purchase agreement with Aytu Bioscience, Inc. (“Aytu”) to sell the Company’s rights, title and interest in assets relating to its pediatric portfolio, namely Aciphex® SprinkleTM, Cefaclor for Oral Suspension, KarbinalTM ER, FlexichamberTM, Poly-Vi-Flor® and Tri-Vi-FlorTM (the “Pediatric Portfolio”), as well as the corresponding commercial infrastructure consisting of the right to offer employment to Avalo’s sales force and the assignment of supporting commercial contracts (the “Aytu Divestiture”). The Aytu Divestiture closed on November 1, 2019.

Upon the sale of the Pediatric Portfolio during the fourth quarter of 2019, the Pediatric Portfolio met all conditions required to be classified as discontinued operations. Therefore, the operating results of the Pediatric Portfolio (as a result of the Company’s limited continued involvement) are reported as income from discontinued operations, net of tax in the accompanying consolidated financial statements for the years ended December 31, 2021 and 2020. The liabilities related to the Pediatric Portfolio are reported as liabilities of discontinued operations in the accompanying consolidated balance sheets as of December 31, 2020. For additional information, see Note 3.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. The carrying amounts reported in the balance sheets for cash and cash equivalents are valued at cost, which approximates their fair value.

Restricted Cash

Restricted cash consists of the 2016 Employee Stock Purchase Plan (the “ESPP”) deposits, credit card deposits, and security deposits for our leased corporate offices.

Accounts Receivable, net

Accounts receivable, net is comprised of amounts due from customers in the ordinary course of business. Accounts receivable are written off to net revenue when deemed uncollectible and recoveries of receivables previously written off are recorded when received.

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Accounts receivable are considered to be past due if any portion of the receivable balance is outstanding for more than the payment terms negotiated with the customer. The Company generally negotiates payment terms of 60 days. The Company offers wholesale distributors a prompt payment discount, which is typically 2% as an incentive to remit payment within this timeframe. Accounts receivable are stated net of the estimated prompt pay discount.

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 creditworthy. The Company has no financial instruments with off‐balance sheet risk of loss.

Leases

The Company determines if an arrangement is a lease at inception. If an arrangement contains a lease, the Company performs a lease classification test to determine if the lease is an operating lease or a finance lease. The Company has identified two operating leases, which both serve as administrative office space. Right-of-use (“ROU”) assets represent the right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease liabilities are recognized on the commencement date of the lease based on the present value of the future lease payments over the lease term and are included in other long-term liabilities and other current liabilities on the Company's consolidated balance sheet. ROU assets are valued at the initial measurement of the lease liability, plus any indirect costs or rent prepayments, and reduced by any lease incentives and any deferred lease payments. Operating ROU assets are recorded in property and equipment, net on the consolidated balance sheets and are amortized over the lease term. To determine the present value of lease payments on lease commencement, the Company uses the implicit rate when readily determinable, however, as most leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on information available at commencement date. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option. Furthermore, the Company has elected the practical expedient to account for the lease and non-lease components as a single lease component for the leased property asset class. Lease expense is recognized on a straight-line basis over the life of the lease and is included within general and administrative expenses.

Property and Equipment

Property and equipment consists of computers, office equipment, furniture, ROU assets (discussed above), and leasehold improvements 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. For leasehold improvements, deprecation of the asset will begin at the date it is placed in service and the depreciable life of the leasehold improvement is the shorter of the lease term or the improvement's useful life. The Company uses the lesser of the lease term or ten yearsfor leasehold improvements. 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.

Acquisitions

For acquisitions that meet the definition of a business under ASC 805, the Company records the acquisition using the acquisition method of accounting. All of the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration, when applicable, are recorded at fair value at the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. The application of the acquisition method of accounting requires management to make significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order to properly allocate purchase price consideration. For acquisitions that do not meet the definition of a business under ASC 805, Business Combinations, the Company accounts for the transaction as an asset acquisition.

Segment Information

Operating segments are identified as components of an enterprise for 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. As of December 31, 2021, the Company’s chief operating decision makers was its Chief Executive Officer. The Chief Executive Officer views the Company’s operations and manages the business as one operating segment. All long‐lived assets of the Company reside in the United States.

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Goodwill

The Company's goodwill relates to the amount that arose in connection with the Company's historical acquisitions which were accounted for as business combinations. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired when accounted for using the acquisition method of accounting for business combinations. Goodwill is not amortized but is evaluated for impairment on an annual basis or more frequently if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of the Company's reporting unit below its carrying amount. The Company consists of one reporting unit.

Upon disposal of a portion of a reporting unit that constitutes a business, the Company assigns goodwill based on the relative fair values of the portion of the reporting unit being disposed and the portion of the reporting unit remaining. This approach requires a determination of the fair value of both the business to be disposed of and the business (or businesses) within the reporting unit that will be retained.

Intangible Assets

Intangible assets with definite useful lives are amortized over their estimated useful lives and reviewed for impairment if certain events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment losses are measured and recognized to the extent the carrying value of such assets exceeds their fair value.

Notes Payable

Notes payable are recorded on the balance sheet at carrying value, which is the gross balance (inclusive of the final payment fee for the Notes), less the unamortized debt discount and issuance costs. All fees, costs paid to the Lenders and all direct costs incurred by the Company are recognized as a debt discount and are amortized to interest expense using the effective interest method over the life of the loan.

Product Revenues, net

The Company generates substantially all of its revenue from sales of prescription drugs to its customers. The Company has identified a single product delivery performance obligation, which is the provision of prescription drugs to its customers based upon master service agreements in place with wholesaler distributors. The performance obligation is satisfied at a point in time, when control of the product has been transferred to the customer, at the time the product has been received by the customer. The Company determines the transaction price based on fixed consideration in its contractual agreements and the transaction price is allocated entirely to the performance obligation to provide pharmaceutical products. In determining the transaction price, a significant financing component does not exist because the timing from when the Company delivers product to when the customers pay for the product is less than one year and the customers do not pay for product in advance of the transfer of the product.

Revenues from sales of products are recorded net of any variable consideration for estimated allowances for returns, chargebacks, distributor fees, prompt payment discounts, government rebates, and other common gross-to-net revenue adjustments. The identified variable consideration is recorded as a reduction of revenue at the time revenues from product sales are recognized. The Company recognizes revenue only to the extent that it is probable that a significant revenue reversal will not occur in a future period.

Provisions for returns and government rebates are included within current liabilities in the consolidated balance sheet. Provisions for prompt payment discounts and distributor fees are included as a reduction to accounts receivable. Calculating these items involves estimates and judgments based on sales or invoice data, contractual terms, historical utilization rates, new information regarding changes in these programs’ regulations and guidelines that would impact the amount of the actual rebates, its expectations regarding future utilization rates for these programs, and channel inventory data. These estimates may differ from actual consideration amount received and the Company will re-assess these estimates and judgments each reporting period to adjust accordingly.

Aytu, to which the Company sold its rights, title, and interests in assets relating to certain commercialized products in 2019, managed Millipred® commercial operations through August 31, 2021, pursuant to transition service agreements. In the third quarter of 2021, the Company finalized its trade and distribution channel to allow it to control third party distribution and began managing Millipred® commercial operations at that time.

Other receivables primarily relate to the amount due from Aytu within one year of December 31, 2021 for the cash collected by Aytu on behalf of Avalo for revenue generated by the sales of Millipred® from the second quarter of 2020 through the third quarter of 2021. Aytu is obligated to transfer the cash generated by such sales to Avalo. As of December 31, 2021, the Company believes the amount due from Aytu is fully collectible. See Note 4 to the consolidated financial statements for more information.

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Returns and Allowances

Consistent with industry practice, the Company maintains a return policy that allows customers to return product within a specified period both prior to and, in certain cases, subsequent to the product's expiration date. The Company’s return policy for sales made prior to August 31, 2021, generally allows for customers to receive credit for expired products within six months prior to expiration and within one year after expiration. The Company’s return policy for sales post August 31, 2021, generally allows for customers to receive credit for expired products within thirty days prior to expiration and within ninety days after expiration. The provision for returns and allowances consists of estimates for future product returns and pricing adjustments. The primary factors considered in estimating potential product returns include:

•the shelf life or expiration date of each product;

•historical levels of expired product returns;

•external data with respect to inventory levels in the wholesale distribution channel;

•external data with respect to prescription demand for each of the Company’s products; and

•the estimated returns liability to be processed by year of sale based on analysis of lot information related to actual historical returns.

License and Other Revenue

The Company recognizes revenues from collaboration, license or other research or sale arrangements when or as performance obligations are satisfied. For milestone payments, the Company assesses, at contract inception, whether the milestones are considered probable of being achieved. If it is probable that a significant revenue reversal will occur, the Company will not record revenue until the uncertainty has been resolved. Milestone payments that are contingent upon regulatory approval are not considered probable until the approvals are obtained as it is outside of the control of the Company. If it is probable that significant revenue reversal will not occur, the Company will estimate the milestone payments using the most likely amount method. The Company reassesses the milestones each reporting period to determine the probability of achievement.

Cost of Product Sales

Cost of product sales is comprised of (i) costs to acquire products sold to customers, (ii) license payments granting the Company rights to sell related products, (iii) royalty payments the Company is required to pay based on the product’s net profit pursuant to its license and supply agreement and (iv) the value of any write-offs of obsolete or damaged inventory that cannot be sold.

Research and Development Costs

Research and development costs are expensed as incurred. These costs include, but are not limited to, 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; costs associated with preclinical activities and regulatory operations, pharmacovigilance and quality; costs and milestones associated with certain licensing agreements, and employee‐related expenses, including salaries, benefits and stock‐based compensation of research and development personnel.

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.

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

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Clinical Trial Expense Accruals

The Company estimates 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 discussions 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 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 might vary and might result in it reporting amounts that are too high or too low for any particular period.

Acquired In-Process Research and Development Expenses

Acquired in-process research and development (“IPR&D”) expense includes the initial costs of IPR&D projects, acquired directly in a transaction other than a business combination, that do not have an alternative future use.

Amortization Expense

Amortization expense includes the amortization of the Company's acquired intangible assets. Amortization expense is included within its own standalone line in operating expenses in the Company's consolidated statements of operations and comprehensive loss and therefore there is no amortization expense included in cost of product sales or sales and marketing expense.

Stock‐Based Compensation

These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, the Company's stock-based compensation expense could be materially different in the future.

Income Taxes

The Company accounts for income taxes under the asset and liability method in accordance with ASC 740, Income Taxes. 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 (“NOL”) and tax credit carryforwards, accrued expenses not currently deductible and the cumulative temporary differences related to certain research and patent costs. Certain tax attributes, including NOLs and research and development credit carryforwards, may be subject to an annual limitation under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “IRC”). See Note 14 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

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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 December 31, 2021, the Company did not believe any material uncertain tax positions were present.

Comprehensive Loss

Comprehensive loss comprises net loss and other changes in equity that are excluded from net loss. For the years ended December 31, 2021 and 2020, the Company’s net loss was equal to comprehensive loss and, accordingly, no additional disclosure is presented.

Recently Adopted Accounting Pronouncements

There have been no new accounting pronouncements made effective during fiscal 2021 that have significance, or potential significance, to our consolidated financial statements.

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3. Aytu Divestiture

Overview of Sale of Pediatric Portfolio and Related Commercial Infrastructure to Aytu BioScience

On November 1, 2019, the Company closed on an asset purchase agreement to sell the Company’s rights, title and interest in the Pediatric Portfolio and the corresponding commercial infrastructure to Aytu. Aytu paid consideration of $4.5 million in cash and approximately 9.8 million shares of Aytu convertible preferred stock, and assumed certain of the Company’s liabilities, including the Company’s payment obligations to Deerfield CSF, LLC (“Deerfield”) and certain other liabilities primarily related to contingent consideration and sales returns. Steven Boyd, chief investment officer of Armistice Capital, LLC, a significant stockholder of the Company and a member of the Company’s Board of Directors, served on Aytu’s Board from March 2019 until August 30, 2021. The transactions and agreements between the Company and Aytu were approved in accordance with the Company’s related party transaction policy.

The Pediatric Portfolio met all conditions to be classified as discontinued operations on November 1, 2019. Therefore, the accompanying consolidated financial statements for the year ended December 31, 2021 and 2020 reflect the operations, net of taxes, and related assets and liabilities of the Pediatric Portfolio as discontinued operations. Refer to the “Discontinued Operations” section below for more information, including Avalo's continuing involvement, which the Company expects to end in the second quarter of 2022.

Deerfield Guarantee

As of the closing date of the Aytu Divestiture on November 1, 2019, Aytu assumed the Company’s debt obligation to Deerfield which included monthly payments of $0.1 million through January 2021, with a balloon payment of $15 million that was to be due in January 2021. Aytu also assumed the contingent consideration liability related to future royalties on Avadel Pharmaceuticals PLC’s (“Avadel”) pediatric products, which included minimum monthly payments of $0.1 million through February 2026. In conjunction with the closing of this transaction, the Company entered into a guarantee in favor of Deerfield, which guarantees the payment of the assumed liabilities to Deerfield, which included the debt obligation, the contingent consideration related to future royalties on Avadel’s pediatric products and certain quarterly fixed obligation payments (collectively referred to as the “Guarantee”).

Aytu publicly reported that it had paid the $15 million balloon payment to Deerfield before it came due in June 2020 and the fixed monthly payments to Deerfield ended in January 2021, thus satisfying the debt obligation. Aytu publicly reported that it had entered into a Waiver, Release and Consent in June 2021, pursuant to which it paid $2.8 million to Deerfield in early satisfaction of the remaining contingent consideration related to future royalties on Avadel’s pediatric products. Aytu also agreed to pay the remaining fixed obligation of $3 million in six equal quarterly payments of $0.5 million over the next six quarters commencing September 30, 2021.

Avalo is required to make a payment under the Guarantee upon demand by Deerfield if all or any part of the fixed payments are not paid by Aytu when due or upon breach of a covenant. The remaining minimum fixed obligation commitments payable (as most recently publicly reported by Aytu) was $3 million as of September 30, 2021, which represents Avalo’s maximum potential future payments under the Guarantee.

The fair value of the Guarantee, which relates to the Company's obligation to make future payments if Aytu defaults, was determined at the time of the Aytu Divestiture as the difference between (i) the estimated fair value of the assumed payments using Avalo's estimated cost of debt and (ii) the estimated fair value of the assumed payments using Aytu's estimated cost of debt. At each subsequent reporting period, the value of the Guarantee is determined based on the expected credit loss of the Guarantee with changes recorded in income from discontinued operations within the consolidated statements of operations and comprehensive loss. The Company concluded that the expected credit loss of the Guarantee was de minimis as of December 31, 2021 and 2020 based on considerations of Aytu’s ability to meet its financial commitments including recent financings, cash position, operating cash flows and trends.

Discontinued Operations

The following tables summarizes the liabilities of the discontinued operations as of December 31, 2021 and 2020 (in thousands):

December 31,

Accrued expenses and other current liabilities — 1,342

Total current liabilities of discontinued operations — 1,342

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Aytu assumed sales returns of the Pediatric Portfolio made after the transaction close date related to sales prior to November 1, 2019 only to the extent such post-Closing sales returns exceed $2 million and are less than $2.8 million (in other words, Aytu assumed a maximum of $0.8 million of such returns). Therefore, Avalo is liable for future sales returns of the Pediatric Portfolio sold prior to the transaction close date in excess of the $0.8 million assumed by Aytu. The Company estimated no future returns as of December 31, 2021 on sales made prior to the transaction close date.

Changes to the Company's estimate of sales returns related to the Pediatric Portfolio is included within discontinued operations on the statement of operations and comprehensive loss and is shown within product revenue, net in the table summarizing the results of discontinued operations below. In future periods, as additional information becomes available, the Company expects to recognize expense (or a benefit) related to actual sales returns of the Pediatric Portfolio in excess (or less than) the returns reserve recorded, which will be recognized within discontinued operations. The Company expects this involvement to continue until sales returns are no longer accepted on sales of the Pediatric Portfolio made prior to November 1, 2019. Returns on these products may be accepted through the second quarter of 2022 (in line with the products’ return policies).

The following table summarizes the results of discontinued operations for the year ended December 31, 2021 and 2020 (in thousands):

Year Ended December 31,

Product revenue, net $ 74 $ (871)

Operating expenses:

Sales and marketing 101 —

Total operating expenses 101 —

Other income:

Change in value of Guarantee — 1,755

Total other income — 1,755

(Loss) income from discontinued operations $ (27) $ 884

There were no non-cash operating items from discontinued operations for the year ended December 31, 2021 and no non-cash investing items from the discontinued operations for the year ended December 31, 2021 and 2020. The significant non-cash operating item from the discontinued operations for the year ended December 31, 2020 is contained below (in thousands):

Year Ended December 31,

Change in value of Guarantee — (1,755)

4. Revenue

The Company generates substantially all of its revenue from sales of Millipred®, an oral prednisolone indicated across a wide variety of inflammatory conditions, which is considered a prescription drug. The Company sells its prescription drug in the United States primarily through wholesale distributors. Wholesale distributors account for substantially all of the Company’s net product revenues and trade receivables. For the year ended December 31, 2021, the Company’s three largest customers accounted for approximately 63%, 21%, and 16% of the Company’s total net product revenues. For the year ended December 31, 2020, the Company’s three largest customers accounted for approximately 46%, 25%, and 27% of the Company’s total net product revenues. Revenue from sales of prescription drugs was $4.8 million and $6.7 million for the years ended December 31, 2021 and 2020, respectively.

The Company has a license and supply agreement for the Millipred® product with a wholly owned subsidiary of Teva Pharmaceutical Industries Ltd. (“Teva”), which expires on September 30, 2023. Beginning July 1, 2021, Avalo is required to pay Teva fifty percent of the net profit of the Millipred® product following each calendar quarter, subject to a $0.5 million quarterly minimum payment. For the year ended December 31, 2021, the Company recognized $1.0 million in cost of product sales related to the royalty. Dr. Sol Barer served as the Chairman of the Company’s board of directors until June 2021 and currently serves as the Chairman of Teva’s board of directors.

Aytu 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

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revenue generated by sales of Millipred® from the second quarter of 2020 through the third quarter of 2021 and is obligated to transfer the 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 third party distribution and began managing Millipred® commercial operations at that time. The current transition services agreement allows Aytu to withhold cash of $2 million until September 30, 2022 and $1 million until December 2024. As of December 31, 2021, the total receivable balance was estimated to be approximately $4.3 million, $1 million of which was recognized in other long-term assets and the remainder recognized in other receivables. Subsequent to December 31, 2021, the Company received $2.2 million from Aytu.

License revenue was $0.6 million for the year ended December 31, 2021, which was related to upfront fees received in the second quarter of 2021 as a result of the out-license and assignment, respectively, of the Company’s rights to its non-core neurology pipeline assets, AVTX-301 and AVTX-406 to Alto Neurosciences, Inc. (“Alto”) and ES Therapeutics, LLC (“ES”), respectively. ES is a wholly-owned subsidiary of Armistice Capital Master Fund Ltd. (an affiliate of Armistice Capital, LLC and collectively “Armistice”), which is a significant stockholder of the Company and whose chief investment officer, Steven Boyd, and managing director, Keith Maher, serve on the Company’s Board of Directors. The transaction with ES was approved in accordance with the Company’s related party transaction policy. Avalo is eligible to receive additional payments upon achievement of specified development, regulatory and sales-based milestones for both AVTX-301 and AVTX-406 and is also eligible to royalty payments based on net sales of AVTX-301; refer to Note 15 for more information.

5. Net Loss Per Share

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

The Company had two classes of stock outstanding during the year ended December 31, 2021; common stock and preferred stock. The convertible preferred stock outstanding during the period converted to shares of common stock on a 1-for-5 ratio and had the same rights, preferences, and privileges as common stock other than it held no voting rights. In April 2021, Armistice converted the remaining 1,257,143 shares of convertible preferred stock into 6,285,715 shares of Avalo’s common stock (refer to Note 11 for more information).

Under the two-class method, the convertible preferred stock was considered a separate class of stock until the time it was converted to common shares for EPS purposes and therefore basic and diluted EPS is provided below for both common stock and preferred stock for the years ended December 31, 2021 and 2020.

EPS for common stock and EPS for preferred stock is computed by dividing the sum of distributed earnings and undistributed earnings for each class of stock by the weighted average number of shares outstanding for each class of stock for the period. In applying the two-class method, undistributed earnings are allocated to common stock and preferred stock based on the weighted average shares outstanding during the period, which assumes the convertible preferred stock has been converted to common stock. The weighted average number of common shares outstanding as of December 31, 2021 includes the weighted average effect of the pre-funded warrants issued in connection with the underwritten public offering that closed in January 2021, the exercise of which requires nominal consideration for the delivery of the shares of common stock (refer to Note 11 for more information).

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

The following tables set forth the computation of basic and diluted net (loss) income per share of common stock for and preferred stock for the years ended December 31, 2021 and 2020 (in thousands, except per share amounts):

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Year Ended

Common stock Preferred Stock

Numerator:

Allocation of undistributed net (loss) income $ (82,849) $ (27) $ (1,500) $ —

Denominator:

Basic and diluted net (loss) income per share $ (0.83) $ 0.00 $ (4.15) $ 0.00

Year Ended

Common stock Preferred Stock

Numerator:

Allocation of undistributed net (loss) income $ (58,440) $ 802 $ (5,944) $ 82

Denominator:

Basic and diluted net (loss) income per share $ (0.87) $ 0.01 $ (4.38) $ 0.06

The following outstanding securities at December 31, 2021 and 2020 have been excluded from the computation of diluted weighted shares outstanding, as they could have been anti-dilutive:

December 31,

1 The weighted average number of common shares outstanding as of December 31, 2021 includes the weighted average effect of the 1,676,923 pre-funded warrants issued in connection with the underwritten public offering that closed in January 2021 because the exercise of such warrants requires nominal consideration ($0.001 per share exercise price for each pre-funded warrant). 308,880 of the pre-funded warrants have been exercised. Therefore, the 1,368,043 pre-funded warrants outstanding as of December 31, 2021 are not included in the table above.

6. Asset Acquisition

Aevi Merger

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”).

The Merger consideration included (i) stock valued at approximately $15.5 million, resulting in the issuance of approximately 3.9 million shares of Avalo common stock to Aevi stockholders, (ii) forgiveness of $4.1 million the Company had loaned Aevi prior to the Merger closing, (iii) contingent value rights for up to an additional $6.5 million in subsequent payments based on certain development milestones (discussed further in Note 14), and (iv) transaction costs of $1.5 million.

The Company recorded this transaction as an asset purchase as opposed to a business combination because management concluded that substantially all the value received was related to one group of similar identifiable assets, which was the in-process research and development (“IPR&D”) for two early phase therapies. The Company considered these pipeline assets similar due to similarities in the risks of development, stage of development, regulatory pathway, patient populations and economics of commercialization. The fair value of $25.5 million (consisting primarily of $24 million IPR&D, $0.3 million of cash and $0.9 million of assembled workforce) was immediately recognized as acquired in-process research and development expense in the Company's consolidated statement of

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operations and comprehensive loss because the IPR&D asset has no alternate use due to the stage of development. The assembled workforce asset was recorded to intangible assets and will be amortized over an estimated useful life of two years.

7. 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.

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 (in thousands):

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* $ 54,010 $ — $ —

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* $ 17,503 $ — $ —

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

As of December 31, 2021 and 2020, the Company’s financial instruments included cash and cash equivalents, restricted cash, accounts receivable, other receivables, prepaid and other current assets, accounts payable, accrued expenses and other current liabilities, and long term-debt. The carrying amounts reported in the accompanying 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 approximates its carrying value as of December 31, 2021 and is in Level Two of the fair value hierarchy (refer to Note 10 for more information).

No changes in valuation techniques or inputs occurred during the years ended December 31, 2021 and 2020. No transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy occurred during the years ended December 31, 2021 and 2020.

AVTX US Equity

AVTX · 10-K · period ended 2021-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Item 8. Financial Statements and Supplementary Data.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Item 9A. Controls and Procedures.

Item 9B. Other Information.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspection.

Item 10. Directors, Executive Officers and Corporate Governance.

Item 11. Executive Compensation.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Item 14. Principal Accounting Fees and Services.

Item 15. Exhibits; Financial Statement Schedules.

Item 16. 10-K Summary.

AVTX US Equity☆

AVTX · 10-K · period ended 2021-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Item 8. Financial Statements and Supplementary Data.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Item 9A. Controls and Procedures.

Item 9B. Other Information.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspection.

Item 10. Directors, Executive Officers and Corporate Governance.

Item 11. Executive Compensation.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Item 14. Principal Accounting Fees and Services.

Item 15. Exhibits; Financial Statement Schedules.

Item 16. 10-K Summary.

AVTX US Equity