AVENUE THERAPEUTICS INC

To the Stockholders and Board of Directors

Avenue Therapeutics, Inc.:

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Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of Avenue Therapeutics, Inc. and subsidiary (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years then ended, in conformity with U.S. generally accepted accounting principles.

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 consolidated financial statements, the Company has incurred substantial operating losses since its inception and expects to continue to incur significant operating losses for the foreseeable future that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to 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 consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. 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 audit 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 consolidated 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 audit, 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 audit included performing procedures to assess the risks of material misstatement of the consolidated 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 consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.

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Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated 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 consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a 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.

Valuation of warrant liabilities

As discussed in Note 1 to the consolidated financial statements, the Company has issued freestanding warrants to purchase shares of its common stock in connection with financing activities and accounts for them in accordance with applicable accounting guidance as either liabilities or as equity instruments depending on the specific terms of the warrant agreements. As discussed in Note 8, for issued warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded at their initial fair value on the date of issuance. The fair value of the warrants is re-measured at each financial reporting date. The outstanding October 2022 Warrants and January 2023 Warrants are classified as liabilities. The Black-Scholes model was used to value the October 2022 Warrants as of December 31, 2023, and the January 2023 Warrants at the time of issuance and as of December 31, 2023. Key inputs included the Company’s common stock price, risk-free interest rate, expected dividend yield, expected term in years, and expected volatility. At December 31, 2023, the Company recorded a warrant liability of $0.4 million related to the October 2022 Warrants. At January 31, 2023, the issuance date, and December 31, 2023, the Company recorded a warrant liability of $2.2 million and $0.2 million, respectively, related to the January 2023 Warrants.

We identified the evaluation of the fair value of the warrant liability for the October 2022 Warrants as of December 31, 2023 and for the January 2023 Warrants as of January 31, 2023 and as of December 31, 2023 as a critical audit matter. A high degree of auditor judgment and specialized skills and knowledge were required in the evaluation of the estimated fair values due to the degree of subjectivity associated with the expected volatility assumptions and their sensitivity to variation.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design of an internal control over the Company’s warrant liability valuation process, including determination of the expected volatility assumptions. We involved valuation professionals with specialized skills and knowledge, who assisted in:

● developing an independent expectation of the volatility assumptions based on consideration of historical and implied share price volatility information

● developing an independent range of the fair value of the warrant liability for the October 2022 Warrants as of December 31, 2023 and for the January 2023 Warrants as of January 31, 2023 and December 31, 2023, using independently developed assumptions, including volatility

● comparing the independently developed ranges to the respective fair value of the warrant liability recorded by the Company for the October 2022 Warrants as of December 31, 2023 and for the January 2023 Warrants as of January 31, 2023 and as of December 31, 2023.

We have served as the Company’s auditor since 2022.

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New York, New York

March 18, 2024

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