avtx-20230630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

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

COMMISSION FILE NUMBER: 001-37590

AVALO THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)


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

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


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.001 par value	AVTX	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 Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically 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 the definitions 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 ☑

As of August 2, 2023, the registrant had 20,249,447 shares of common stock outstanding.

AVALO THERAPEUTICS, INC.

FORM 10-Q

For the Quarter Ended June 30, 2023

TABLE OF CONTENTS

Page

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets as of June 3 0 , 2023 (Unaudited) and December 31, 2022

Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) for the Three a nd Six Months Ended June 3 0 , 2023 and 2022

Condensed Consolidated Statements of Changes in Stockholders’ (Deficit ) Equity (Unaudited) for the Three and Six Months Ended June 3 0 , 2023 and 2022

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 3 0 , 2023 and 2022

Notes to Unaudited Condensed Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

AVALO THERAPEUTICS, INC. and SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)


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

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

See accompanying notes to the unaudited condensed consolidated financial statements.

Table of Contents

AVALO THERAPEUTICS, INC. and SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)

(In thousands, except per share data)


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

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

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

1 Amounts for prior periods presented have been retroactively adjusted to reflect the 1-for-12 reverse stock split effected on July 7, 2022. See Note 2 for details.

See accompanying notes to the unaudited condensed consolidated financial statements.

Table of Contents

AVALO THERAPEUTICS, INC. and SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Deficit (Unaudited)

(In thousands, except share amounts)


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

Table of Contents


	Common stock			Additional paid-in	Accumulated		Total stockholders’
	Shares	Amount			capital		deficit		deficit
Six Months Ended June 30, 2023
Balance, December 31, 2022	9,430,535	$	9		$	292,900	$	(303,824)	$	(10,915)
Issuance of shares of common stock and warrants in underwritten public offering, net	3,770,000	4			13,744		—		13,748
Issuance of common shares pursuant to ATM Program, net	2,044,672	2			6,529		—		6,531
Retirement of common shares in exchange for pre-funded warrants	(1,300,000)	(1)			(3,873)		234		(3,640)
Issuance of pre-funded warrants in exchange for retirement of common shares	—	—			3,640		—		3,640
Exercise of pre-funded warrants for common shares	72,110	—			—		—		—
Shares purchased through employee stock purchase plan	19,623	—			67		—		67
Stock-based compensation	—	—			1,748		—		1,748
Net loss	—	—			—		(18,148)		(18,148)
Balance, June 30, 2023	14,036,940	$	14		$	314,755	$	(321,738)	$	(6,969)


	Common stock			Additional paid-in	Accumulated		Total stockholders’
	Shares1	Amount1			capital1		deficit		equity (deficit)
Three Months Ended June 30, 2022
Balance, March 31, 2022	9,399,517	$	9		$	290,550	$	(284,217)	$	6,342
Restricted stock units vested during period	938	—			—		—		—
Shares purchased through employee stock purchase plan	5,269	—			25		—		25
Stock-based compensation	—	—			669		—		669
Net loss	—	—			—		(12,987)		(12,987)
Balance, June 30, 2022	9,405,724	$	9		$	291,244	$	(297,204)	$	(5,951)

Table of Contents


	Common stock			Additional paid-in	Accumulated		Total stockholders’
	Shares1	Amount1			capital1		deficit		equity (deficit)
Six Months Ended June 30, 2022
Balance, December 31, 2021	9,399,517	$	9		$	285,239	$	(262,166)	$	23,082
Restricted stock units vested during period	938	—			—		—		—
Shares purchased through employee stock purchase plan	5,269	—			25		—		25
Stock-based compensation	—	—			5,980		—		5,980
Net loss	—	—			—		(35,038)		(35,038)
Balance, June 30, 2022	9,405,724	$	9		$	291,244	$	(297,204)	$	(5,951)

1 Amounts for prior periods presented have been retroactively adjusted to reflect the 1-for-12 reverse stock split effected on July 7, 2022. See Note 2 for details.

See accompanying notes to the unaudited condensed consolidated financial statements.

Table of Contents

AVALO THERAPEUTICS, INC. and SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Amounts in thousands)


	Six Months Ended June 30,
	2023		2022
Operating activities
Net loss	$	(18,148)	$	(35,038)
Adjustments to reconcile net loss used in operating activities:
Depreciation and amortization	74		97
Stock-based compensation	1,748		5,980
Accretion of debt discount	699		686
Allowance for other long-term asset	—		1,000
Deferred taxes	15		15
Change in fair value of derivative liability	220		—
Changes in assets and liabilities:
Accounts receivable, net	(38)		516
Other receivables	1,913		2,433

Inventory, net	2		15
Prepaid expenses and other assets	155		487

Lease incentive	158
Accounts payable	(2,131)		(1,205)

Deferred revenue	(88)		—
Accrued expenses and other liabilities	(5,627)		(3,537)
Lease liability, net	(30)		14
Net cash used in operating activities	(21,078)		(28,537)
Investing activities
Leasehold improvements	(158)		—
Disposal of property and equipment	25		—
Purchase of property and equipment	—		(56)
Net cash used in investing activities	(133)		(56)
Financing activities


Prepayment on Notes	(6,000)		(14,806)
Proceeds from issuance of common stock and warrants in underwritten public offering, net	13,748		—
Proceeds from sale of common stock pursuant to ATM Program, net	6,531		—



Proceeds from issuance of common stock under employee stock purchase plan	67		25
Net cash provided by financing activities	14,346		(14,781)
Decrease in cash, cash equivalents and restricted cash	(6,865)		(43,374)
Cash, cash equivalents, and restricted cash at beginning of period	13,318		54,864
Cash, cash equivalents, and restricted cash at end of period	$	6,453	$	11,490
Supplemental disclosures of cash flow information
Cash paid for interest	$	1,439	$	1,657

Supplemental disclosures of non-cash activities
Fair value of common stock retired in exchange for issuance of prefunded warrants	$	3,640	$	—

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


	June 30,
	2023		2022
Cash and cash equivalents	$	6,307	$	11,249
Restricted cash, current	15		14
Restricted cash, non-current	131		227
Total cash, cash equivalents and restricted cash	$	6,453	11,490

Table of Contents

See accompanying notes to the unaudited condensed consolidated financial statements.

Table of Contents

AVALO THERAPEUTICS, INC. and SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

1. Business

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

LIGHT (Lymphotoxin-like, exhibits Inducible expression, and competes with HSV Glycoprotein D for Herpesvirus Entry Mediator (“HVEM”), a receptor expressed by T lymphocytes; also referred to as TNFSF14) is an immunoregulatory cytokine. LIGHT and its signaling receptors, HVEM (TNFRSF14), and lymphotoxin β receptor (TNFRSF3), form an immune regulatory network with two co-receptors of herpesvirus entry mediator, checkpoint inhibitor B and T Lymphocyte Attenuator (“BTLA”), and CD160 (collectively, the “LIGHT-signaling network” or the “LIGHT network”). Accumulating evidence points to the dysregulation of the LIGHT network as a disease-driving mechanism in autoimmune and inflammatory reactions in barrier organs. Therefore, we believe reducing LIGHT levels can moderate immune dysregulation in many acute and chronic inflammatory disorders.

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

Liquidity

For the six months ended June 30, 2023, Avalo generated a net loss of $18.1 million and negative cash flows from operations of $21.1 million. As of June 30, 2023, Avalo had $6.3 million in cash and cash equivalents. The future principal payments inclusive of the final payment fee under the Company’s Loan Agreement (as defined in Note 9) were $15.2 million as of June 30, 2023, which gives effect of the $6.0 million partial prepayment in June of 2023, as collectively agreed upon with the Lenders (as defined in Note 9). On July 20, 2023, the Company entered into a forbearance agreement (the “Forbearance Agreement”) with the Lenders, pursuant to which the Company and the Lenders agreed that an event of default had occurred due to a material adverse change in the Company’s business (the “Existing Default”) and the Lenders agreed to forbear from enforcing its full remedies related to the Existing Default, including acceleration of the outstanding principal payments and final payment fees of $15.2 million, plus interest, fees, and other amounts accrued, until the earliest of (i) August 15, 2023, (ii) the occurrence of any default or event of default (other than the Existing Default) under the Loan Agreement, or (iii) the occurrence of a breach by the Company of any provision in the Forbearance Agreement. In exchange for the Lenders agreeing to enter the Forbearance Agreement, the Company agreed to maintain cash on deposit in deposit accounts subject to an Account Control Agreement (as defined in the Loan Agreement) in an amount not less than the sum of (a) $3.0 million plus (b) one-hundred percent (100%) of the aggregate cash proceeds received by the Company as a result of any future sale of the Company’s equity securities while the Forbearance Agreement is in effect. The Company closely monitors its cash and cash equivalents and intends to raise money through all means available to raise capital to meet its projected operating requirements, including but not limited to sale of equity securities under its “at-the-market” (or “ATM”) program or otherwise, out-licensing transactions, strategic alliances/collaborations, sale of its core and non-core programs, and/or mergers and acquisitions. If the Company is able to negotiate extensions to the Forbearance Agreement and absent future cash raises or modifications to the originally planned principal and interest payments, the Company has approximately 60 days of cash on hand as of the filing date of this Quarterly Report on Form 10-Q.

The Company’s future success and ability to fund its operations within one year following the date on which this Quarterly Report on Form 10-Q is issued depend on its ability to obtain additional capital. There can be no assurance that any financing or business development initiatives can be realized by the Company, or if realized, what the terms may be, or that any amount that the Company is able to raise will be adequate. Further, if the Company raises additional funds through collaborations, strategic alliances or licensing arrangements with third parties, the Company might have to relinquish valuable rights to its technologies, future revenue streams, research programs or product candidates. Subject to limited exceptions, the Loan Agreement prohibits the Company from incurring certain additional indebtedness, making certain asset dispositions, and entering into certain mergers, acquisitions or other business combination transactions without the prior consent of the Lenders. If the Company requires but is unable to obtain additional funding, the Company may be forced to make further reductions in 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 funds, management has concluded that substantial doubt exists with respect to the Company’s ability to continue as a going concern within one year after the date that the financial statements in this Quarterly Report on Form 10-Q were issued.

Table of Contents

The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to obtain additional capital as described above. The unaudited financial statements as of June 30, 2023 do not include any adjustments that might result from the outcome of this uncertainty. If the Company is unable to continue as a going concern, it may have to liquidate its assets and may receive less than the value at which those assets are carried on the financial statements and less than the amount of its outstanding debt, leaving no proceeds for stockholders.

2. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”).

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly the Company’s financial position, results of operations, and cash flows. The condensed consolidated balance sheet at December 31, 2022 has been derived from audited financial statements at that date. The interim results of operations are not necessarily indicative of the results that may occur for the full fiscal year. Certain information and footnote disclosure normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to instructions, rules, and regulations prescribed by the United States Securities and Exchange Commission (“SEC”).

The Company believes that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited condensed consolidated financial statements are read in conjunction with the December 31, 2022 audited consolidated financial statements.

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

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

Accounting Pronouncements Adopted in 2023

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

Significant Accounting Policies

During the six months ended June 30, 2023, there were no significant changes to the Company’s summary of significant accounting policies contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 29, 2023.

3. Revenue

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

Table of Contents

receivables. For the three months ended June 30, 2023, the Company’s two largest customers accounted for approximately 65% and 35% of the Company’s total net product revenues. For the six months ended June 30, 2023, the Company’s two largest customers accounted for approximately 63% and 37% of the Company’s total net product revenues. Net revenue from sales of prescription drugs was $0.6 million and $1.0 million for the three months ended June 30, 2023 and 2022, respectively, and $1.1 million and $2.2 million for the six months ended June 30, 2023 and 2022, respectively.

The Company has a license and supply agreement for the Millipred® product with a wholly owned subsidiary of Teva Pharmaceutical Industries Ltd. (“Teva”), which expires on September 30, 2023. Avalo is required to pay Teva fifty percent of the net profit of the Millipred® product following each calendar quarter, subject to a $0.5 million quarterly minimum payment, which commenced on July 1, 2021.

Aytu BioScience, Inc. (“Aytu”), to which the Company sold its rights, title, and interests in assets relating to certain commercialized products in 2019 (the “Aytu Transaction”), managed Millipred® commercial operations until August 31, 2021 pursuant to transition service agreements, which included managing the third-party logistics provider and providing accounting reporting services. Aytu collected cash on behalf of Avalo for revenue generated by sales of Millipred® from the second quarter of 2020 through the third quarter of 2021 and is obligated to transfer cash generated by such sales to Avalo. In the third quarter of 2021, Avalo finalized its trade and distribution channel to allow it to control the third-party distribution and began managing Millipred® commercial operations at that time. The transition services agreement allowed Aytu to withhold cash of $2.0 million until September 30, 2022, and allows withholding of $1.0 million until December 2024. As of June 30, 2023, the total receivable balance, which represents revenue generated by sales of Millipred® during the time Aytu was managing its commercial operations partially offset by minimal operational liabilities Aytu paid on our behalf, was estimated to be approximately $1.0 million, all of which is due in December 2024. In the second quarter of 2022, Avalo fully reserved the $1.0 million due in December 2024 as a result of Aytu’s conclusion within its Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, that substantial doubt existed with respect to its ability to continue as a going concern within one year after the date of financial statements were issued. This conclusion has remained unchanged within Aytu’s most recent publicly disclosed financial statements. We will continue to re-assess collectability each reporting period.

4. Net Loss Per Share

Basic and diluted EPS is provided below for common stock for the three and six months ended June 30, 2023 and June 30, 2022.

EPS for common stock is computed by dividing the sum of distributed earnings and undistributed earnings by the weighted average number of shares outstanding for the period. The weighted average number of common shares outstanding as of June 30, 2023 and 2022 include the weighted average effect of pre-funded warrants, the exercise of which requires nominal consideration for the delivery of the shares of common stock.

Diluted net loss per share includes the potential dilutive effect of common stock equivalents as if such securities were converted or exercised during the period, when the effect is dilutive. Common stock equivalents include: (i) outstanding stock options 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 on

SEC Form 10-Q filed by Avalo Therapeutics Inc.