avtx-20230930

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 September 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 November 7, 2023, the registrant had 192,382,419 shares of common stock outstanding.

AVALO THERAPEUTICS, INC.

FORM 10-Q

For the Quarter Ended September 30, 2023

TABLE OF CONTENTS

Page

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets as of September 30, 2023 (Unaudited) and December 31, 2022

Condensed Consolidated Statements of Operations and Comprehensive (Loss ) Income (Unaudited) for the Three and Nine Months Ended Se p tember 30, 2023 and 2022

Condensed Consolidated Statements of Changes in Stockholders’ (Deficit) Equity (Unaudited) for the Three and Nine Months Ended September 30, 2023 and 2022

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 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)


	September 30, 2023		December 31, 2022
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	10,180	$	13,172

Other receivables	1,538		1,919
Inventory, net	—		20
Prepaid expenses and other current assets	940		1,290
Restricted cash, current portion	1		15
Total current assets	12,659		16,416
Property and equipment, net	2,071		2,411
Goodwill	14,409		14,409
Restricted cash, net of current portion	131		131
Total assets	$	29,270	$	33,367
Liabilities and stockholders’ equity (deficit)
Current liabilities:
Accounts payable	$	789	$	2,882
Deferred revenue	—		88
Accrued expenses and other current liabilities	5,216		13,214
Notes payable, current	—		5,930
Total current liabilities	6,005		22,114
Notes payable, non-current	—		13,486
Royalty obligation	2,000		2,000
Deferred tax liability, net	164		141
Derivative liability	4,950		4,830
Other long-term liabilities	1,456		1,711
Total liabilities	14,575		44,282
Stockholders’ equity (deficit):
Common stock—$0.001 par value; 200,000,000 shares authorized at September 30, 2023 and December 31, 2022; 192,382,419 and 9,430,535 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively	192		9

Additional paid-in capital	341,469		292,900
Accumulated deficit	(326,966)		(303,824)
Total stockholders’ equity (deficit)	14,695		(10,915)
Total liabilities and stockholders’ equity (deficit)	$	29,270	$	33,367

See accompanying notes to the unaudited condensed consolidated financial statements.

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AVALO THERAPEUTICS, INC. and SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income (Unaudited)

(In thousands, except per share data)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Revenues:
Product revenue, net	$	236	$	432	$	1,353	$	2,638
License revenue	—		14,517		—		14,517
Total revenues, net	236		14,949		1,353		17,155

Operating expenses:
Cost of product sales	247		528		1,505		2,814
Research and development	1,249		7,042		11,917		25,136
Selling, general and administrative	2,490		3,284		7,624		17,752
Amortization expense	—		—		—		38
Total operating expenses	3,986		10,854		21,046		45,740
	(3,750)		4,095		(19,693)		(28,585)
Other expense:
Interest expense, net	(1,553)		(898)		(3,498)		(3,221)
Change in fair value of derivative liability	100		—		(120)		—
Other expense, net	(17)		—		(42)		(20)
Total other expense, net	(1,470)		(898)		(3,660)		(3,241)
(Loss) income before taxes	(5,220)		3,197		(23,353)		(31,826)
Income tax expense	8		5		23		20
Net (loss) income and comprehensive loss	$	(5,228)	$	3,192	$	(23,376)	$	(31,846)
Net (loss) income per share of common stock, basic and diluted	$	(0.11)	$	0.34	$	(0.96)	$	(3.39)

See accompanying notes to the unaudited condensed consolidated financial statements.

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AVALO THERAPEUTICS, INC. and SUBSIDIARIES

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

(In thousands, except share amounts)


	Common stock			Additional paid-in	Accumulated		Total stockholders’
	Shares	Amount			capital		deficit		(deficit) equity
Three Months Ended September 30, 2023
Balance, June 30, 2023	14,036,940	$	14		$	314,755	$	(321,738)	$	(6,969)
Issuance of common shares pursuant to ATM Program, net	177,013,776	177			25,762		—		25,939
Exercise of pre-funded warrants for common shares	1,331,703	1			(1)		—		—
Stock-based compensation	—	—			953		—		953
Net loss	—	—			—		(5,228)		(5,228)
Balance, September 30, 2023	192,382,419	$	192		$	341,469	$	(326,966)	$	14,695


	Common stock			Additional paid-in	Accumulated		Total stockholders’
	Shares	Amount			capital		deficit		(deficit) equity
Nine Months Ended September 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	179,058,448	179			32,291		—		32,470
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	1,403,813	1			(1)		—		—
Shares purchased through employee stock purchase plan	19,623	—			67		—		67
Stock-based compensation	—	—			2,701		—		2,701
Net loss	—	—			—		(23,376)		(23,376)
Balance, September 30, 2023	192,382,419	$	192		$	341,469	$	(326,966)	$	14,695

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	Common stock			Additional paid-in	Accumulated		Total stockholders’
	Shares	Amount			capital		deficit		deficit
Three Months Ended September 30, 2022
Balance, June 30, 2022	9,405,724	$	9		$	291,244	$	(297,204)	$	(5,951)
Impact of reverse stock split fractional share round-up	8,380	—			—		—		—
Stock-based compensation	—	—			731		—		731
Net loss	—	—			—		3,192		3,192
Balance, September 30, 2022	9,414,104	$	9		$	291,975	$	(294,012)	$	(2,028)


	Common stock			Additional paid-in	Accumulated		Total stockholders’
	Shares	Amount			capital		deficit		(deficit) equity
Nine Months Ended September 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
Impact of reverse stock split fractional share round-up	8,380	—			—		—		—
Stock-based compensation	—	—			6,711		—		6,711
Net loss	—	—			—		(31,846)		(31,846)
Balance, September 30, 2022	9,414,104	$	9		$	291,975	$	(294,012)	$	(2,028)

See accompanying notes to the unaudited condensed consolidated financial statements.

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AVALO THERAPEUTICS, INC. and SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Amounts in thousands)


	Nine Months Ended September 30,
	2023		2022
Operating activities
Net loss	$	(23,376)	$	(31,846)
Adjustments to reconcile net loss used in operating activities:
Depreciation and amortization	115		131
Stock-based compensation	2,701		6,711
Accretion of debt discount	1,828		1,040
Allowance for other long-term asset	—		1,000
Deferred taxes	23		20
Change in fair value of derivative liability	120		—
Changes in assets and liabilities:
Accounts receivable, net	—		1,060
Other receivables	381		2,425

Inventory, net	20		16
Prepaid expenses and other assets	350		1,254

Lease incentive	158		—
Accounts payable	(2,094)		(1,922)

Deferred revenue	—		442
Accrued expenses and other liabilities	(8,088)		(3,144)
Lease liability, net	(52)		2
Net cash used in operating activities	(27,914)		(22,811)
Investing activities
Leasehold improvements	(158)		—
Disposal of property and equipment	25		—
Purchase of property and equipment	—		(95)
Net cash used in investing activities	(133)		(95)
Financing activities


Proceeds from sale of common stock pursuant to ATM Program, net	32,470		—
Proceeds from issuance of common stock and warrants in underwritten public offering, net	13,748		—
Principal payments on Notes	(21,244)		(14,806)



Proceeds from issuance of common stock under employee stock purchase plan	67		25
Net cash provided by (used in) financing activities	25,041		(14,781)
Decrease in cash, cash equivalents and restricted cash	(3,006)		(37,687)
Cash, cash equivalents, and restricted cash at beginning of period	13,318		54,864
Cash, cash equivalents, and restricted cash at end of period	$	10,312	$	17,177
Supplemental disclosures of cash flow information
Cash paid for interest	$	1,925	$	2,256

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):


	September 30,
	2023		2022
Cash and cash equivalents	$	10,180	$	16,943
Restricted cash, current	1		53
Restricted cash, non-current	131		181
Total cash, cash equivalents and restricted cash	$	10,312	17,177

See accompanying notes to the unaudited condensed consolidated financial statements.

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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 nine months ended September 30, 2023, Avalo generated a net loss of $23.4 million and negative cash flows from operations of $27.9 million. As of September 30, 2023, Avalo had $10.2 million in cash and cash equivalents. In the three months ended September 30, 2023, the Company raised approximately $25.9 million of net proceeds under its “at-the-market” (or “ATM”) program. On September 22, 2023, the Company and its lenders entered into a Payoff Letter (the “Payoff Letter”), pursuant to which the Company repaid all outstanding principal, inclusive of the final payment fee, and interest under the Loan Agreement (as defined in Note 9) in the aggregate amount of $14.3 million. As a result of the payment, all obligations of the parties under the Loan Agreement were deemed satisfied and terminated.

The Company will require additional financing to fund its operations and to continue to execute its business strategy within one year after the date the unaudited condensed consolidated financial statements included herein were issued. 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) financings, (ii) out-licensing, strategic alliances/collaborations or sale of core and non-core programs, and (iii) mergers and acquisitions. 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. Raising capital would be more difficult if our common stock is delisted from Nasdaq. The Company is currently in the delisting hearings process with Nasdaq (for more information refer to the “Recent Developments” section under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”). 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. 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.

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The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to obtain additional capital as described above. The unaudited financial statements as of September 30, 2023 do not include any adjustments that might result from the outcome of this uncertainty.

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.

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 nine months ended September 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.

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3. Revenue

Avalo generated its product revenue from sales of Millipred®, an oral prednisolone indicated across a wide variety of inflammatory conditions, which is considered a prescription drug. Avalo’s license and supply agreement for Millipred® expired on September 30, 2023. The Company sold its prescription drug in the United States primarily through wholesale distributors. Wholesale distributors accounted for substantially all of the Company’s net product revenues and trade receivables. For the three months ended September 30, 2023, the Company’s two largest customers accounted for approximately 72% and 28% of the Company’s total net product revenues. For the nine months ended September 30, 2023, the Company’s two largest customers accounted for approximately 58% and 42% of the Company’s total net product revenues. Net revenue from sales of prescription drugs was $0.2 million and $0.4 million for the three months ended September 30, 2023 and 2022, respectively, and $1.4 million and $2.6 million for the nine months ended September 30, 2023 and 2022, respectively.

The Company does not expect future gross revenue related to the Millipred® product given the product’s license and supply agreement expired on September 30, 2023. However, the Company will continue to monitor estimates for commercial liabilities, such as sales returns. As additional information becomes available, the Company could recognize expense (or a benefit) for differences between actuals or updated estimates to the reserves previously recognized.

Pursuant the Millipred® license and supply agreement, Avalo was required to pay the supplier fifty percent of the net profit of the Millipred® product following each calendar quarter, subject to a $0.5 million quarterly minimum payment dependent on Avalo reaching certain net profit amounts as stipulated in the agreement. The profit share commenced on July 1, 2021 and ended on September 30, 2023. Within twenty-five months of September 30, 2023, the net profit share is subject to a reconciliation process where estimated deductions to arrive at net profit will be trued up to actuals and could result in Avalo owing additional amounts to Teva or vice versa.

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. As a result, 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. The transition services agreement allows Aytu to withhold up to $1.0 million until December of 2024. In the second quarter of 2022, Avalo fully reserved the $1.0 million receivable 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 those financial statements were issued. As of September 30, 2023, the total receivable balance was approximately $0.9 million. The receivable remains fully reserved given Aytu’s conclusion in its most recent publicly disclosed financial statements that substantial doubt exists with respect to its ability to continue as a going concern within one year after the date of financial statements were issued, which is prior to December of 2024. We will continue to re-assess its collectability each reporting period.

4. Net Loss Per Share

Basic and diluted EPS is provided below for common stock for the three and nine months ended September 30, 2023 and September 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 September 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.

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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 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 the three and nine months ended September 30, 2023 and September 30, 2022 (in thousands, except share and per share amounts):


	Three Months Ended September 30,
	2023		2022
Basic (loss) income per share:
Net (loss) income	$	(5,228)	$	3,192
Weighted average shares	46,764,117		9,413,466
Basic net (loss) income per share	$	(0.11)	$	0.34

Diluted (loss) income per share:
Net (loss) income	$	(5,228)	$