atxi20230630

atxi20230630_10q.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-38114

AVENUE THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

Delaware	47-4113275
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1111 Kane Concourse, Suite 301, Bay Harbor Islands, FL 33154

(Address of principal executive offices and zip code)

(781) 652‑4500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of Class	Trading Symbol(s)	Exchange Name
Common Stock	ATXI	Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer” , “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Class of Common Stock		Outstanding Shares as of August 7, 2023
Common Stock, $0.0001 par value		8,182,985

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AVENUE THERAPEUTICS, INC.

Form 10‑Q

For the Quarter Ended June 30, 2023

Table of Contents

		Page No.
PART I. FINANCIAL INFORMATION

Item 1.	Unaudited Condensed Consolidated Financial Statements

	Unaudited Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022	1

	Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2023 and 2022	2

	Unaudited Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the three and six months ended June 30, 2023 and 2022	3

	Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022	4

	Notes to Unaudited Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	15

Item 4.	Controls and Procedures	15

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	16

Item 1A.	Risk Factors	16

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	16

Item 3.	Defaults Upon Senior Securities	16

Item 4.	Mine Safety Disclosures	16

Item 5.	Other Information	16

Item 6.	Exhibits	17

Signatures		18

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AVENUE THERAPEUTICS, INC.

Unaudited Condensed Consolidated Balance Sheets

($ in thousands, except share and per share amounts)

	*June 30,*			*December 31,*
	*2023*			*2022*

ASSETS
Current assets:
Cash and cash equivalents	$	1,571		$	6,708
Other receivables - related party		26			—
Prepaid expenses and other current assets		69			137
Total assets	$	1,666		$	6,845

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued expenses	$	886		$	949
Accounts payable and accrued expenses - related party		54			21
Accrued licenses acquired		1,000			—
Warrant liability		5,872			2,609
Total current liabilities		7,812			3,579

Total liabilities		7,812			3,579

Commitments and contingencies

Stockholders’ equity (deficit)
Preferred stock ($0.0001 par value), 2,000,000 shares authorized
Class A Preferred Stock, 250,000 shares issued and outstanding as of June 30, 2023 and December 31, 2022		—			—
Common stock ($0.0001 par value), 75,000,000 shares authorized
Common shares, 7,920,485 and 4,773,841 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively		1			—
Additional paid-in capital		86,757			84,456
Accumulated deficit		(92,094	)		(80,551	)
Total stockholders’ equity attributed to the Company		(5,336	)		3,905

Non-controlling interests		(810	)		(639	)
Total stockholders’ equity (deficit)		(6,146	)		3,266
Total liabilities and stockholders’ equity	$	1,666		$	6,845

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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AVENUE THERAPEUTICS, INC.

Unaudited Condensed Consolidated Statements of Operations

($ in thousands, except share and per share amounts)

	*For the Three Months Ended June 30,*						*For the Six Months Ended June 30,*
	*2023*			*2022*			*2023*			*2022*
Operating expenses:
Research and development	$	3,027		$	151		$	4,242		$	1,959
Research and development – licenses acquired		—			—			4,230			—
General and administrative		896			454			1,880			1,509
Loss from operations		(3,923	)		(605	)		(10,352	)		(3,468	)

Other income (expense)
Interest income		57			1			94			3
Financing costs – warrant liabilities		—			—			(332	)		—
Change in fair value of warrant liabilities		(150	)		—			(1,028	)		—
Total other income (expense)		(93	)		1			(1,266	)		3
Net loss	$	(4,016	)	$	(604	)	$	(11,618	)	$	(3,465	)

Net loss attributable to non-controlling interests		9			—			75			—
Net loss attributable to common stockholders	$	(4,007	)	$	(604	)	$	(11,543	)	$	(3,465	)

Net loss per common share attributable to common stockholders, basic and diluted	$	(0.52	)	$	(0.41	)	$	(1.73	)	$	(2.42	)

Weighted average number of common shares outstanding, basic and diluted		7,758,153			1,461,067			6,667,550			1,429,283

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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AVENUE THERAPEUTICS, INC.

Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity (Deficit)

($ in thousands, except share amounts)

*Three months ended June 30, 2023*

	*Class A Preferred*								*Additional*					*Non-*			*Total*
	*Shares*				*Common Shares*				*Paid-in*		*Accumulated*			*Controlling*			*Stockholders’*
	*Shares*		*Amount*		*Shares*		*Amount*		*Capital*		*Deficit*			*Interests*			*Equity (Deficit)*
Balance at March 31, 2023		250,000	$	—		6,828,186	$	1	$	86,634	$	(88,087	)	$	(705	)	$	(2,157	)
Share based compensation		—		—		—		—		27		—			—			27
Exercise of warrants		—		—		1,092,299		—		—		—			—			—
Non-controlling interest in subsidiaries		—		—		—		—		96		—			(96	)		—
Net loss attributable to non-controlling interest		—		—		—		—		—		—			(9	)		(9	)
Net loss attributable to common stockholders		—		—		—		—		—		(4,007	)		—			(4,007	)
Balance at June 30, 2023		250,000	$	—		7,920,485	$	1	$	86,757	$	(92,094	)	$	(810	)	$	(6,146	)

*Six Months Ended June 30, 2023*

		Class A Preferred								Additional					Non-			Total
	*Shares*				*Common Shares*				*Paid-in*		*Accumulated*			*Controlling*			*Stockholders’*
	*Shares*		*Amount*		*Shares*		*Amount*		*Capital*		*Deficit*			*Interests*			*Equity (Deficit)*
Balance at December 31, 2022		250,000	$	—		4,773,841	$	—	$	84,456	$	(80,551	)	$	(639	)	$	3,266
Share based compensation		—		—		—		—		38		—			—			38
Issuance of common stock to Fortress		—		—		374,644		—		72		—			—			72
Issuance of common stock and pre-funded warrants, net of offering costs - registered direct offering and private placement		—		—		448,000		1		865		—			—			866
Issuance of common stock for license expense		—		—		831,618		—		1,230		—			—			1,230
Exercise of warrants		—		—		1,492,382		—		—		—			—			—
Non-controlling interest in subsidiaries		—		—		—		—		96		—			(96	)		—
Net loss attributable to non-controlling interest		—		—		—		—		—		—			(75	)		(75	)
Net loss attributable to common stockholders		—		—		—		—		—		(11,543	)		—			(11,543	)
Balance at June 30, 2023		250,000	$	—		7,920,485	$	1	$	86,757	$	(92,094	)	$	(810	)	$	(6,146	)

*Three months ended June 30, 2022*

	*Class A Preferred*								*Additional*					*Non-*		*Total*
	*Shares*				*Common Shares*				*Paid-in*		*Accumulated*			*Controlling*		*Stockholders’*
	*Shares*		*Amount*		*Shares*		*Amount*		*Capital*		*Deficit*			*Interests*		*Equity (Deficit)*
Balance at March 31, 2022		250,000	$	—		1,475,652	$	2	$	81,017	$	(79,860	)	$	—	$	1,159
Share based compensation		—		—		—		—		43		—			—		43
Net loss		—		—		—		—		—		(604	)		—		(604	)
Balance at June 30, 2022		250,000	$	—		1,475,652	$	2	$	81,060	$	(80,464	)	$	—	$	598

*Six Months Ended June 30, 2022*

		Class A Preferred								Additional					Non-		Total
	*Shares*				*Common Shares*				*Paid-in*		*Accumulated*			*Controlling*		*Stockholders’*
	*Shares*		*Amount*		*Shares*		*Amount*		*Capital*		*Deficit*			*Interests*		*Equity (Deficit)*
Balance at December 31, 2021		250,000	$	—		1,405,977	$	2	$	80,448	$	(76,999	)	$	—	$	3,451
Share based compensation		—		—		69,675		—		612		—			—		612
Net loss		—		—		—		—		—		(3,465	)		—		(3,465	)
Balance at June 30, 2022		250,000	$	—		1,475,652	$	2	$	81,060	$	(80,464	)	$	—	$	598

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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AVENUE THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

($ in thousands)

	*For the Six Months Ended*
	*June 30, 2023*			*June 30, 2022*
Cash Flows from Operating Activities:
Net loss	$	(11,618	)	$	(3,465	)
Reconciliation of net loss to net cash used in operating activities:
Share based compensation		38			612
Change in fair value of warrant liability		1,028			—
Issuance of common stock for licenses acquired		1,230			—
Research and development-licenses acquired, expense		2,000			—
Issuance of common stock to Fortress		72			—
Changes in operating assets and liabilities:
Other receivables - related party		(26	)		90
Prepaid expenses and other current assets		68			(8	)
Accounts payable and accrued expenses		(63	)		(54	)
Accrued licenses acquired		1,000			—
Accounts payable and accrued expenses - related party		33			(48	)
Net cash used in operating activities		(6,238	)		(2,873	)

Cash flows from Investing Activities:
Purchase of research and development licenses		(2,000	)		—
Net cash used in investing activities		(2,000	)		—

Cash flows from Financing Activities:
Issuance of common stock, pre-funded warrants and warrants, net of offering costs - registered direct offering and private placement		3,101			—
Net cash provided by financing activities		3,101			—

Net change in cash and cash equivalents		(5,137	)		(2,873	)
Cash and cash equivalents, beginning of period		6,708			3,763
Cash and cash equivalents, end of period	$	1,571		$	890

Supplemental cash flow information:
Unpaid research and development licenses acquired	$	1,000		$	—

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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AVENUE THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Organization, Plan of Business Operations

Avenue Therapeutics, Inc. (the “Company” or “Avenue”) was incorporated in Delaware on February 9, 2015, as a wholly-owned subsidiary of Fortress Biotech, Inc. (“Fortress”). Avenue is a specialty pharmaceutical company focused on the development and commercialization of therapies for the treatment of neurologic diseases. Our current product candidates include AJ201 for the treatment of spinal and bulbar muscular atrophy ("SBMA"), intravenous tramadol ("IV tramadol") for the management of acute post-operative pain, and BAER-101 for the treatment of CNS diseases. We may in the future acquire additional product candidates.

Reverse Stock Split

As a result of the reverse stock split effective on September 23, 2022, every 15 shares of common stock outstanding immediately prior to the effectiveness of the reverse stock split were combined and converted into one share of common stock without any change in the par value per share. No fractional shares were issued in connection with the reverse stock split. In connection with the reverse stock split, the holders of a majority of the voting power of our capital stock executed a written consent approving the reduction of the number of authorized shares of Common Stock immediately after the reverse stock split from 50,000,000 to 20,000,000 shares, which reduction became effective on September 23, 2022. On February 2, 2023, following the approval of our Board of Directors and our stockholders at the Company’s 2022 annual meeting of stockholders, we filed an amendment to our Third Amended and Restated Certificate of Incorporation to increase the number of authorized shares of Common Stock from 20,000,000 to 75,000,000 shares. All share and per share information has been retroactively adjusted to give effect to the reverse stock split for all periods presented, unless otherwise indicated.

Liquidity and Capital Resources

Going Concern

These consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") assuming the Company will continue as a going concern. The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. However, as described below, substantial doubt about the Company’s ability to continue as a going concern exists.

The Company is not yet generating revenue, has incurred substantial operating losses since its inception and expects to continue to incur significant operating losses for the foreseeable future as it executes on its product development plan and may never become profitable. As of June 30, 2023, the Company had an accumulated deficit of $92.1 million. Due to uncertainties regarding future operations of the Company for a study protocol that could form the basis for the submission of a complete response to the second Complete Response Letter for IV tramadol, and the expansion of the Company’s development portfolio within neuroscience with the consummation of the transaction with Fortress for the acquisition of Baergic Bio, Inc. ("Baergic"), the Company will need to secure additional funds through equity or debt offerings, or other potential sources, the timing of which is unknown at this time. The Company will require additional funds to cover operational expenses over the next 12 months. The Company cannot be certain that additional funding will be available to it on acceptable terms, or at all. These factors individually and collectively cause substantial doubt about the Company’s ability to continue as a going concern to exist within one year from the date of the issuance of this report. The consolidated financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that may be necessary if the Company were unable to continue as a going concern.

Note 2 - Significant Accounting Policies

Basis of Presentation

The Company’s consolidated financial statements have been prepared in conformity with U.S. GAAP, include all adjustments necessary for the fair presentation of the Company’s financial position for the periods presented and are stated in U.S. dollars. The Company’s consolidated financial statements include the accounts of the Company and the accounts of the Company’s subsidiary, Baergic. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the balances and results for the periods presented.

Certain information and footnote disclosures normally included in the Company’s annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These unaudited interim condensed financial statement results are not necessarily indicative of results to be expected for the full fiscal year or any future period. Therefore, these unaudited interim condensed financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto for the fiscal year ended December 31, 2022, which were included in the Company’s Annual Report on Form 10-K (the “2022 Form 10-K”) and filed with the U.S. Securities and Exchange Commission (“SEC”) on March 31, 2023.

The accompanying consolidated financial statements include the accounts of the Company’s subsidiary. For consolidated entities where the Company owns less than 100% of the subsidiary, the Company records net loss attributable to non-controlling interests in its consolidated statements of operations equal to the percentage of the economic or ownership interest retained in such entities by the respective non-controlling parties. The Company continually assesses whether changes to existing relationships or future transactions may result in the consolidation or deconsolidation of partner companies.

The preparation of the Company's unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of expenses during the reporting period.

Use of Estimates

The Company's consolidated financial statements include certain amounts that are based on management's best estimates and judgements. The Company's significant estimates include, but are not limited to, fair value of warrants, stock-based compensation, common stock issued to acquire licenses, accrued expenses, provisions for income taxes and contingencies. Due to the uncertainty inherent in such estimates, actual results may differ from these estimates.

Other Receivables – Related Party

Other receivables consist of amounts due from Urica Therapeutics, Inc. ("Urica"), a consolidated entity under Fortress, and are recorded at the invoiced amount.

Non-Controlling Interests

Non-controlling interests in consolidated entities represent the component of equity in consolidated entities held by third parties. Any change in ownership of a subsidiary while the controlling financial interest is retained is accounted for as an equity transaction between the controlling and non-controlling interests. Intercompany activity is eliminated entirely in consolidation prior to the allocation of net gain/loss attributable to non-controlling interest, which is based on ownership interests.

Summary of Significant Accounting Policies

There have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 2022 Form 10-K.

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Note 3 — Licenses/Supplier Agreements

Effective as of February 17, 2015, Fortress transferred the Revogenex license and all other rights and obligations under the IV Tramadol License Agreement to the Company, pursuant to the terms of the Founders Agreement. In connection with the terms of the IV Tramadol License Agreement, Fortress purchased an exclusive license to IV tramadol for the U.S. market from Revogenex, a privately held company in Dublin, Ireland. Fortress made an upfront payment of $2.0 million to Revogenex upon execution of the exclusive license, and on June 17, 2015, Fortress paid an additional $1.0 million to Revogenex after receiving all the assets specified in the agreement. In December 2019, $1.0 million became due to Revogenex in accordance with the Company’s submission of its NDA. In addition, under the terms of the agreement, Revogenex is eligible to receive an additional milestone payment totaling $3.0 million upon the approval of IV tramadol from the U.S. Food and Drug Administration ("FDA")as well as royalty payments on net sales of the product ranging in the high single digits to low double digits.

On October 29, 2018, the Company and Zaklady Farmaceutyczne Polpharma (“Polpharma”) extended the term of their exclusive supply agreement for drug product of IV tramadol to eight years from the date of the launch of the product. In addition, under the terms of the amended agreement, Polpharma is eligible to receive a milestone payment totaling $2.0 million upon the approval of IV tramadol from the FDA, as well as a low single digit royalty on net sales of the product for five years after launch.

Baergic Licenses

In December 2019, Baergic entered into two license agreements: (i) a license agreement (the “AZ License”) with AstraZeneca AB (“AZ”) to acquire an exclusive license to patent and related intellectual property rights pertaining to their proprietary compound Gamma-aminobutyric acid receptor A alpha 2 & 3 (GABAA α2,3) positive allosteric modulators; and (ii) a license agreement (the “CCHMC License”) with Cincinnati Children’s Hospital Medical Center (“CCHMC”) to acquire patent and related intellectual property rights pertaining to a GABA inhibitor program for neurological disorders. Baergic paid an upfront fee of $3.0 million to AZ and $0.2 million to CCHMC, as well as issued common shares of Baergic of approximately 20% and 5% of Baergic to each at the time of the license agreement, respectively.

Development milestones totaling approximately $81.5 million in the aggregate are due upon achievement of each milestone. Commercial and sales-based milestone payments totaling approximately $151 million are due upon achievement of each milestone, as well as royalty payments in the low to high single digits on any future aggregate, annual, worldwide net sales.

AnnJi License Agreement

On February 28, 2023, the Company entered into a license agreement with AnnJi Pharmaceutical Co. Ltd. ("AnnJi"), whereby the Company obtained an exclusive license (the "AnnJi License Agreement") from AnnJi to intellectual property rights pertaining to the molecule known as JM17, which activates Nrf1 and Nrf2, enhances androgen receptor degradation and underlies AJ201, a clinical product candidate currently in a Phase 1b/2a clinical trial in the U.S. for the treatment of SBMA, also known as Kennedy's Disease. Under the AnnJi License Agreement, in exchange for exclusive rights to the intellectual property underlying the AJ201 product candidates, the Company agreed to pay $3.0 million, of which $2.0 million was paid on April 27, 2023 and $1.0 million is payable within 180 day after the effective date of the AnnJi License Agreement.

The license provided under the AnnJi License Agreement is exclusive as to all oral forms of AJ201 for use in all indications (other than androgenetic alopecia and Alzheimer’s disease) in the United States, Canada, the European Union, the United Kingdom and Israel. The AnnJi License Agreement also contains customary representations and warranties and provisions related to confidentiality, diligence, indemnification and intellectual property protection. The Company will initially be obligated to obtain both clinical and commercial supply of AJ201 exclusively through AnnJi. AnnJi retains the manufacturing rights for AJ201 and the Company has the option to acquire those rights from AnnJi as described in the AnnJi License Agreement.

The Company is also obligated to issue shares of its common stock under the Subscription Agreement and make additional payments over the course of the AnnJi License Agreement including: reimbursement payments of up to $10.8 million in connection with the product’s Phase 1b/2a clinical trial, (which AnnJi is administering with Joint Steering Committee Oversight before assigning the Investigational New Drug Application ("IND") to the Company upon such trial’s conclusion, and which is reflective of market pricing for the services to be received), up to $14.5 million in connection with certain development milestones pertaining to the first indication in the U.S., up to $27.5 million in connection with certain drug development milestones pertaining to additional indications and development outside the U.S., up to $165 million upon the achievement of certain net sales milestones ranging from $75 million to $750 million in annual net sales, and royalty payments based on a percentage of net sales ranging from mid-single digits (on annual net sales at or below $50 million) to the low double digits (on annual net sales equal to or greater than $300 million), which are subject to potential diminution in certain circumstances.

In connection with the signing of the AnnJi License Agreement, the Company issued 831,618 shares of its common stock to AnnJi (“First Tranche Shares”) at a fair value of $0.9 million on March 30, 2023. The Company will issue an additional 276,652 shares of common stock, recorded at a fair value of $0.3 million, upon enrollment of the eighth patient in the ongoing Phase 1b/2a SBMA clinical trial (“Second Tranche Shares”). The fair value was calculated based on the closing price of the Company's stock as of February 28, 2023. The Company and AnnJi entered into a Subscription Agreement, dated as of February 28, 2023, that provided for the issuance of First Tranche Shares which were issued March 30, 2023. The Company and AnnJi will enter into a subsequent subscription agreement, in substantially the same form as the Subscription Agreement, with respect to the issuance of the Second Tranche Shares. In the event that the common stock of the Company ceases to be traded on a national securities exchange, AnnJi has the right to sell common stock of the Company back to the Company at a price of $2.10 per share subject to the terms in the AnnJi License Agreement.

In connection with execution of the AnnJi License Agreement, Avenue entered into a registration rights agreement with AnnJi (“AnnJi Registration Rights Agreement”), pursuant to which Avenue filed a registration statement to register the resale of the First Tranche Shares and Second Tranche Shares issued to AnnJi. The Company filed such registration statement on Form S-3 with the SEC on June 16, 2023, which was declared effective on June 27, 2023.

Note 4 — Fair Value Measurements

The Company follows accounting guidance on fair value measurements for financial assets and liabilities measured at fair value on a recurring basis. Under the accounting guidance, fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.

The accounting guidance requires fair value measurements be classified and disclosed in one of the following three categories:

Level 1: Quoted prices in active markets for identical assets or liabilities.

Level 2: Observable inputs other than Level 1 prices for similar assets or liabilities that are directly or indirectly observable in the marketplace.

Level 3: Unobservable inputs which are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.

Certain of the Company’s financial instruments are not measured at fair value on a recurring basis but are recorded at amounts that approximate their fair value due to their liquid or short-term nature, such as accounts payable, accrued expenses and other current liabilities.

Fair Value of Warrant Liabilities

Warrant liabilities are categorized within Level 3 of the fair value hierarchy and are measured at fair value on a recurring basis as follows (in thousands):

	*October 2022*		*January 2023*
	*Warrants*		*Warrants*			*Total*
Fair value of warrants outstanding as of December 31, 2022	$	2,609	$	—		$	2,609
Fair value of warrants at issuance as of January 31, 2023		—		2,235			2,235
Change in fair value of warrants		1,458		(430	)		1,028
Fair value of warrants outstanding as of June 30, 2023	$	4,067	$	1,805		$	5,872

Warrant Liability

The Company has issued freestanding warrants to purchase shares of our common stock in connection with financing activities (Warrants as described in Note 8). The Company's outstanding common stock warrants issued in connection with the equity offering completed in October 2022 ( “October 2022 Warrants”) and January 2023 ( "January 2023 Warrants") are classified as liabilities in the balance sheet as they contain terms for redemption of the underlying security that are outside our control. The Company used a Monte Carlo simulation approach, which allows to factor in the effect of a down-round protection feature, to value the October 2022 Warrants at the time of issuance on October 11, 2022 and for the period ending December 31, 2022. The Black-Scholes model was used to value the January 2023 Warrants at the time of issuance on January 31, 2023. The approach required management to estimate inputs including expected volatility and expected term, and is most significantly impacted by the volatility of our common stock price. These inputs are inherently subjective and require significant analysis and judgment to develop.

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The fair value of the warrants is re-measured at each financial reporting date with any changes in fair value being recognized in change in fair value of warrant liabilities, a component of other income (expense), in the condensed consolidated statements of operations and comprehensive income (loss). The Company will continue to re-measure the fair value of the October 2022 Warrant liabilities until exercise or expiration of the warrants on October 10, 2027 and the January 2023 Warrants until exercise or expiration of the warrants on January 31, 2026. The October 2022 Warrants originally contained a one-time down-round price protection feature. In connection with the January 31, 2023 Registered Direct and Private Placement, the down-round price protection feature was used and the exercise price for the October 2022 Warrants was permanently adjusted to $1.55. The Black-Scholes model was used to value the October 2022 Warrants and January 2023 Warrants as of June 30, 2023.

The key inputs for the October 2022 Warrants for the Monte Carlo simulation and Black-Scholes model were as follows:

	*June 30,*			*December 31,*
	*2023*			*2022*
	*(Black-Scholes*			*(Monte Carlo*
	*model)*			*simulation)*
Stock price	$	1.17		$	1.16
Risk-free interest rate		4.13	%		4.02	%
Expected dividend yield		—			—
Expected term in years		4.3			4.8
Expected volatility		137	%		93	%

The key inputs for the January 2023 Warrants using the Black-Scholes model were as follows:

				*January 31,*
				*2023*
	*June 30,*			*(Initial*
	*2023*			*measurement)*
Stock price	$	1.17		$	1.38
Risk-free interest rate		4.49	%		3.90	%
Expected dividend yield		—			—
Expected term in years		2.6			3.0
Expected volatility		162	%		160	%

Note 5 — Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following (in thousands):

	*As of June 30,*		*As of December 31,*
	*2023*		*2022*
Accounts payable	$	446	$	129
Accrued employee compensation		154		199
InvaGen contingent fee		—		208
Accrued contracted services and other		286		413
Total accounts payable and accrued expenses	$	886	$	949

Note 6 - Related Party Transactions

Founders Agreement and Management Services Agreement with Fortress

Fortress entered into a Founders Agreement with Avenue in February 2015 (as amended, the “Fortress-Avenue Founders Agreement”), pursuant to which Fortress assigned to Avenue all of its rights and interest under Fortress’s license agreement with Revogenex for IV tramadol (the “IV Tramadol License Agreement”). As additional consideration for the transfer of rights under the original Fortress-Avenue Founders Agreement, Avenue also agreed to: (i) issue annually to Fortress, on the anniversary date of the Fortress-Avenue Founders Agreement, shares of common stock equal to two and one half percent (2.5%) of the fully-diluted outstanding equity of Avenue; (ii) pay an equity fee in shares of Avenue common stock, payable within five (5) business days of the closing of any equity or debt financing for Avenue or any of its respective subsidiaries that occurs after the effective date of the Founders Agreement and ending on the date when Fortress no longer has majority voting control in Avenue’s voting equity, equal to two and one half percent (2.5%) of the gross amount of any such equity or debt financing; and (iii) pay a cash fee equal to four and one half percent (4.5%) of Avenue’s annual net sales, payable on an annual basis, within ninety (90) days of the end of each calendar year. In the event of a change in control (as it is defined in the Founders Agreement), Fortress will be paid a one-time change in control fee equal to five (5x) times the product of (i) net sales for the twelve (12) months immediately preceding the change in control and (ii) four and one-half percent (4.5%).

Effective as of February 17, 2015, Fortress entered into a Management Services Agreement (the “Fortress-Avenue MSA”) with Avenue pursuant to which Fortress provides advisory and consulting services to Avenue pursuant to the terms thereof. The Fortress-Avenue MSA contained an initial five-year term and shall be automatically extended for additional five-year periods unless Fortress or the Company provides written notice of its desire not to automatically extend the term of the Fortress-Avenue MSA at least 90 days prior to the applicable expiration date. Services provided under the Fortress-Avenue MSA may include, without limitation, (i) advice and assistance concerning any and all aspects of Avenue’s operations, clinical trials, financial planning and strategic transactions and financings and (ii) conducting relations on behalf of Avenue with accountants, attorneys, financial advisors and other professionals (collectively, the “Services”). Avenue is obligated to utilize clinical research services, medical education, communication and marketing services and investor relations/public relation services of companies or individuals designated by Fortress, provided those services are offered at market prices. However, Avenue is not obligated to take or act upon any advice rendered from Fortress, and Fortress shall not be liable for any of Avenue’s actions or inactions based upon their advice. Fortress and its affiliates, including all members of Avenue’s Board of Directors, have been contractually exempt from fiduciary duties to Avenue relating to corporate opportunities. In consideration for the Services, Avenue will pay Fortress an annual consulting fee of $0.5 million (the “Annual Consulting Fee”), payable in advance in equal quarterly installments on the first business day of each calendar quarter in each year, provided, however, that such Annual Consulting Fee shall be increased to $1.0 million for each calendar year in which Avenue has net assets in excess of $100.0 million at the beginning of the calendar year. The Fortress-Avenue MSA fee was reinstated upon the consummation of the InvaGen Share Repurchase Agreement and termination of any prior investment agreements between InvaGen, Avenue and Fortress.

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Founders Agreement and Management Services Agreement with Baergic

Pursuant to the Share Contribution Agreement between Avenue and Fortress, the Founders Agreement and Management Services Agreement that had previously been existing between Fortress and Baergic were assigned to Avenue, such that they now exist between Avenue and Baergic; those agreements are referred to herein as the Avenue-Baergic Founders Agreement and the Avenue-Baergic MSA, as applicable. The Annual Stock Dividend payable to the Company is 2.5% of common stock calculated as a percentage of fully diluted outstanding capital and became effective as of November 8, 2022. For the year ended December 31, 2022, Baergic recorded an Annual Stock Dividend of $10.5 thousand to Avenue on December 31, 2022, which was paid in shares on January 1, 2023.

The Avenue-Baergic Founders Agreement has an effective date of March 9, 2017, and a term of 15 years, which upon expiration automatically renews for successive one-year periods unless terminated by Avenue and Baergic or a Change in Control (as defined in the Avenue-Baergic Founders Agreement) occurs.

As additional consideration under the Avenue-Baergic Founders Agreement, Baergic will also: (i) pay an equity fee in shares of common stock, payable within five (5) business days of the closing of any equity or debt financing for Baergic that occurs after the effective date of the Avenue-Baergic Founders Agreement and ending on the date when Avenue no longer has majority voting control in the Baergic’s voting equity, equal to two and one-half (2.5%) of the gross amount of any such equity or debt financing; and (ii) pay a cash fee equal to four and one-half percent (4.5%) of the Baergic’s annual net sales, payable on an annual basis, within ninety (90) days of the end of each calendar year. In the event of a Change in Control, Baergic will pay a one-time change in control fee equal to five (5x) times the product of (A) net sales for the twelve (12) months immediately preceding the change in control and (B) four and one-half percent (4.5%).

The Avenue-Baergic MSA has an effective date of March 9, 2017, pursuant to which Avenue renders management, advisory and consulting services to the Company. The Avenue-Baergic MSA has an initial term of five years and is automatically renewed for successive five-year terms unless terminated in accordance with its provisions. Services provided under the Avenue-Baergic MSA may include, without limitation, (i) advice and assistance concerning any and all aspects of the Baergic’s operations, clinical trials, financial planning and strategic transactions and financings and (ii) conducting relations on behalf of the Baergic with accountants, attorneys, financial advisors and other professionals (collectively, the “Avenue Services”). Baergic is obligated to utilize clinical research services, medical education, communication and marketing services and investor relations/public relation services of companies or individuals designated by Avenue, provided those services are offered at market prices. However, Baergic is not obligated to take or act upon any advice rendered from Avenue and Avenue shall not be liable for any of its actions or inactions based upon their advice. Pursuant to the Avenue-Baergic MSA and Baergic’s Certificate of Incorporation, Avenue and its affiliates, including all members of Baergic’s Board of Directors, will have no fiduciary or other duty to communicate or present any corporate opportunities to Baergic or to refrain from engaging in business that is similar to that of Baergic. In consideration for the Avenue Services, Baergic will pay Avenue an annual consulting fee of $0.5 million (the “Avenue-Baergic Annual Consulting Fee”), payable in advance in equal quarterly installments on the first business day of each calendar quarter in each year, provided, however, that such Avenue-Baergic Annual Consulting Fee shall be increased to $1.0 million for each calendar year in which Baergic has net assets in excess of $100 million at the beginning of the calendar year.

Shared Services Agreement with Urica Therapeutics

Effective February 1, 2023, and amended on April 30, 2023, the Company and Urica entered into a sharing arrangement for a certain Avenue employee to be shared with Urica. During the arrangement, Urica has the authority to supervise the Avenue employee and will reimburse the Company for the employee’s salary and salary-related costs. The term of this agreement lasted until July 31, 2023 and can be extended for consecutive three-month periods. The amounts reimbursable to Avenue was $39,634 and $66,762 for the three and six months ended June 30, 2023. The amounts were recorded as a reduction in research and development expenses on the Company’s consolidated statements of operations. The amount due to the Company as of

SEC Form 10-Q filed by Avenue Therapeutics Inc.