[PART I. FINANCIAL INFORMATION](index=3&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This section presents Avalo Therapeutics, Inc.'s unaudited condensed consolidated financial statements and related notes for the periods ended June 30, 2025, and December 31, 2024 [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents Avalo Therapeutics, Inc.'s unaudited condensed consolidated financial statements and related notes for the periods ended June 30, 2025, and December 31, 2024 [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This section provides a snapshot of Avalo Therapeutics, Inc.'s financial position, detailing assets, liabilities, and equity as of June 30, 2025, and December 31, 2024 Condensed Consolidated Balance Sheets (in thousands): | Item | June 30, 2025 | December 31, 2024 | Change (2025 vs 2024) | | :-------------------------------- | :------------ | :---------------- | :-------------------- | | Cash and cash equivalents | $42,290 | $134,546 | $(92,256) | | Short-term investments | $70,972 | — | $70,972 | | Total current assets | $115,185 | $138,890 | $(23,705) | | Total assets | $126,583 | $150,732 | $(24,149) | | Total current liabilities | $9,259 | $6,960 | $2,299 | | Total liabilities | $22,009 | $17,700 | $4,309 | | Total stockholders' equity | $104,574 | $133,032 | $(28,458) | [Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20(Loss)%20Income) This section outlines Avalo Therapeutics, Inc.'s financial performance, including revenues, expenses, and net loss or income for the three and six months ended June 30, 2025, and 2024 Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income (in thousands, except per share data): | Item | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total operating expenses | $19,316 | $9,575 | $33,984 | $42,341 | | Loss from operations | $(19,316) | $(9,575) | $(33,984) | $(42,341) | | Change in fair value of derivative liability | $(2,530) | $(5,040) | $(2,150) | $(5,160) | | Interest income, net | $1,102 | $1,039 | $2,249 | $1,138 | | Change in fair value of warrant liability | — | $112,046 | — | $112,046 | | Net (loss) income | $(20,765) | $98,463 | $(33,914) | $(22,827) | | Net (loss) income per share - basic | $(1.92) | $4.21 | $(3.18) | $(24.11) | | Net loss per share - diluted | $(1.92) | $(14.07) | $(3.18) | $(30.63) | - The company experienced a **significant shift** from net income of **$98.5 million** in Q2 **2024** to a net loss of **$20.8 million** in Q2 **2025**, **primarily due to** the absence of a large gain from the change in fair value of warrant liability recognized in the prior year[10](index=10&type=chunk) - For the six months ended June 30, **2025**, **net loss increased** to **$33.9 million** from **$22.8 million** in the prior year, despite a decrease in total operating expenses, **largely influenced by** the non-recurring warrant liability fair value changes in **2024**[10](index=10&type=chunk) [Condensed Consolidated Statements of Mezzanine and Stockholders' Equity](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Mezzanine%20and%20Stockholders'%20Equity) This section details changes in Avalo Therapeutics, Inc.'s mezzanine and stockholders' equity for the six months ended June 30, 2025, and 2024 Changes in Stockholders' Equity (in thousands): | Item | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------------------ | :----------------------------- | :----------------------------- | | Balance, December 31, prior year | $133,032 | $7,304 | | Issuance of common stock | $1 | $815 | | Vesting of Restricted Stock Units | $(510) | — | | Shares purchased through ESPP | $40 | — | | Stock-based compensation | $5,959 | $1,100 | | Unrealized loss on investments, net | $(34) | — | | Net loss | $(33,914) | $(22,827) | | Balance, June 30, current year | $104,574 | $(13,608) | - **Stockholders' equity decreased** from **$133.0 million** at December 31, **2024**, to **$104.6 million** at June 30, **2025**, **primarily due to** the net loss of **$33.9 million**, **partially offset by** stock-based compensation[12](index=12&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section presents Avalo Therapeutics, Inc.'s cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2025, and 2024 Condensed Consolidated Statements of Cash Flows (in thousands): | Activity | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------------------ | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(20,847) | $(22,485) | | Net cash (used in) provided by investing activities | $(70,860) | $356 | | Net cash (used in) provided by financing activities | $(469) | $108,140 | | Net (decrease) increase in cash, cash equivalents and restricted cash | $(92,176) | $86,011 | | Cash, cash equivalents, and restricted cash at end of period | $42,520 | $93,557 | - The company experienced a **significant net decrease in cash**, cash equivalents, and restricted cash of **$92.2 million** for the six months ended June 30, **2025**, compared to a net increase of **$86.0 million** in the prior year, **primarily driven by** substantial purchases of investments and reduced financing activities[16](index=16&type=chunk) [Notes to Unaudited Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed explanations and disclosures supporting the unaudited condensed consolidated financial statements [1. Business](index=8&type=section&id=1.%20Business) This note describes Avalo Therapeutics, Inc.'s clinical-stage biotechnology focus, lead asset development, and financial sustainability - Avalo Therapeutics, Inc. is a clinical-stage biotechnology company focused on developing IL-1β-based treatments for immune-mediated inflammatory diseases, with its lead asset, AVTX-009, currently in a Phase **2** clinical trial for hidradenitis suppurativa (HS)[18](index=18&type=chunk) - The company has **incurred significant operating and cash losses** since inception, funding operations **primarily through** equity sales, out-licensing, and asset sales[20](index=20&type=chunk) - As of June 30, **2025**, Avalo had **$113.3 million** in cash and cash equivalents and short-term investments, which are **expected to fund operations for at least twelve months** from the filing date[20](index=20&type=chunk)[21](index=21&type=chunk) [2. Basis of Presentation and Significant Accounting Policies](index=8&type=section&id=2.%20Basis%20of%20Presentation%20and%20Significant%20Accounting%20Policies) This note outlines the accounting principles, presentation basis, and significant policies used in preparing the financial statements - The unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP, with certain information condensed or omitted as permitted by SEC rules for interim reporting[22](index=22&type=chunk)[23](index=23&type=chunk) - In Q1 **2025**, the company **reclassified other receivables** into prepaid and other current assets to conform with current period presentation[25](index=25&type=chunk) - **All investments are classified as available-for-sale** as of June 30, **2025**, reported at fair value with unrealized gains/losses included in accumulated other comprehensive loss[31](index=31&type=chunk) - The FASB issued ASU **2023-09** (Income Tax Disclosures) and ASU **2024-03** (Disaggregation of Income Statement Expenses), with the company evaluating the impact of ASU **2024-03**[32](index=32&type=chunk)[33](index=33&type=chunk) [3. Asset Acquisition](index=10&type=section&id=3.%20Asset%20Acquisition) This note details the acquisition of AVTX-009 through the AlmataBio Transaction and its accounting treatment as an asset acquisition - On March **27**, **2024**, Avalo **acquired** AVTX-009 through the AlmataBio Transaction, structured as a stock-for-stock merger, resulting in the issuance of common stock and Series C Preferred Stock[34](index=34&type=chunk) - The **acquisition was treated as an asset acquisition**, with **substantially all consideration allocated to acquired in-process research and development (IPR&D)** for AVTX-009, **recognized as an operating expense**[36](index=36&type=chunk) AlmataBio Transaction Consideration and Acquired Assets (in thousands): | Item | Six Months Ended June 30, 2024 | | :---------------------------------------------------- | :----------------------------- | | Stock consideration | $12,272 | | Milestone payment due upon close of private placement | $7,500 | | Milestone payment due upon first patient dosed in Phase 2 trial | $5,000 | | Transaction costs | $2,402 | | **Total GAAP Purchase Price at Close** | **$27,174** | | Acquired IPR&D | $27,641 | | Cash | $356 | | Accrued expenses and other current liabilities | $(823) | | **Total net assets acquired and liabilities assumed** | **$27,174** | [4. Revenue](index=11&type=section&id=4.%20Revenue) This note discusses Avalo Therapeutics, Inc.'s revenue recognition policies and the expiration of its Millipred® license and supply agreement - The **license and supply agreement for Millipred® expired** on September **30**, **2023**, and Avalo recognized **no gross revenue from product sales** for the three and six months ended June 30, **2025**, or June 30, **2024**[38](index=38&type=chunk) - The company continues to monitor estimates for commercial liabilities related to Millipred®, including sales returns and profit share reconciliation, which could result in future expense or benefit[38](index=38&type=chunk) [5. Net (Loss) Income Per Share](index=12&type=section&id=5.%20Net%20(Loss)%20Income%20Per%20Share) This note explains the calculation of net loss per share for common stock and the treatment of anti-dilutive securities - **Net loss per share for common stock was computed using the two-class method**, with no allocation of undistributed losses to participating securities during net loss periods[39](index=39&type=chunk)[40](index=40&type=chunk) Net (Loss) Income Per Share (in thousands, except per share amounts): | Item | Three Months Ended June 30, 2025 | Six Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2024 | | :------------------------------------ | :------------------------------- | :----------------------------- | :------------------------------- | :----------------------------- | | Net (loss) income | $(20,765) | $(33,914) | $98,463 | $(22,827) | | Basic net (loss) income per share | $(1.92) | $(3.18) | $4.21 | $(24.11) | | Diluted net (loss) income per share | $(1.92) | $(14.07) | $(3.18) | $(30.63) | | Weighted average common shares outstanding - basic | 10,829,760 | 10,673,200 | 1,034,130 | 946,756 | | Weighted average common shares outstanding - diluted | 10,829,760 | 10,673,200 | 7,653,302 | 4,402,640 | - Outstanding stock options, warrants, Series C Preferred Stock, and Restricted Stock Units were **excluded from diluted EPS calculations** for the three and six months ended June 30, **2025** and **2024**, as their inclusion would have been anti-dilutive[44](index=44&type=chunk) [6. Fair Value Measurements](index=14&type=section&id=6.%20Fair%20Value%20Measurements) This note describes the company's fair value hierarchy for financial instruments and changes in derivative and warrant liabilities - The company **measures fair value using a three-level hierarchy**, maximizing observable inputs. As of June 30, **2025**, money market funds were **Level 1**, U.S. Treasury securities were **Level 2**, and derivative liabilities were **Level 3**[46](index=46&type=chunk)[47](index=47&type=chunk)[48](index=48&type=chunk) Fair Value Measurements (in thousands): | Item | Level 1 (June 30, 2025) | Level 2 (June 30, 2025) | Level 3 (June 30, 2025) | Total (June 30, 2025) | | :------------------------ | :---------------------- | :---------------------- | :---------------------- | :-------------------- | | Money market funds | $22,259 | — | — | $22,259 | | U.S. Treasury securities | — | $84,524 | — | $84,524 | | Derivative liability | — | — | $10,630 | $10,630 | | Item | Level 1 (December 31, 2024) | Level 2 (December 31, 2024) | Level 3 (December 31, 2024) | Total (December 31, 2024) | | :------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Money market funds | $133,148 | — | — | $133,148 | | Derivative liability | — | — | $8,480 | $8,480 | - The **derivative liability, related to the sale of economic rights, increased** from **$8.48 million** at December 31, **2024**, to **$10.63 million** at June 30, **2025**, with the change recognized in other (expense) income[51](index=51&type=chunk)[55](index=55&type=chunk) - The **warrant liability, classified as Level 3, was fully exercised** in Q4 **2024**, resulting in **no outstanding warrant liability** as of June 30, **2025**[60](index=60&type=chunk)[61](index=61&type=chunk) [7. Investments](index=18&type=section&id=7.%20Investments) This note provides details on Avalo Therapeutics, Inc.'s available-for-sale investments and the assessment of unrealized losses Available-for-Sale Investments (in thousands) as of June 30, 2025: | Item | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | | :---------------------- | :------------- | :--------------- | :---------------- | :--------- | | Money market funds | $22,259 | — | — | $22,259 | | U.S. Treasury securities | $84,558 | $2 | $(36) | $84,524 | | **Total** | **$106,817** | **$2** | **$(36)** | **$106,783** | - As of June 30, **2025**, the aggregate fair value of securities in an **unrealized loss position** for less than **twelve months** was **$59.1 million**, with the company considering these **losses temporary and having the intent and ability to hold securities until recovery**[64](index=64&type=chunk) [8. Leases](index=19&type=section&id=8.%20Leases) This note outlines Avalo Therapeutics, Inc.'s lease arrangements for office space, including terms and associated costs - Avalo leases administrative office space in Wayne, Pennsylvania (expiring Feb **2027**) and **early-terminated a lease** for Rockville, Maryland office space effective January **31**, **2026**, incurring a **$0.3 million** early termination fee[66](index=66&type=chunk)[67](index=67&type=chunk) Lease Information (in thousands): | Item | June 30, 2025 | December 31, 2024 | | :-------------------------- | :------------ | :---------------- | | Right-of-use assets | $487 | $741 | | Lease liability, current | $482 | $568 | | Lease liability, non-current | $197 | $350 | | Total operating lease liabilities | $679 | $918 | | Weighted average remaining term | **1.5 years** | N/A | | Weighted average discount rate | **9.7%** | N/A | Operating Lease Cost (in thousands): | Period | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Operating lease cost | $148 | $113 | $294 | $222 | [9. Accrued Expenses and Other Current Liabilities](index=20&type=section&id=9.%20Accrued%20Expenses%20and%20Other%20Current%20Liabilities) This note details the composition and changes in Avalo Therapeutics, Inc.'s accrued expenses and other current liabilities Accrued Expenses and Other Current Liabilities (in thousands): | Item | June 30, 2025 | December 31, 2024 | | :------------------------------------ | :------------ | :---------------- | | Research and development | $2,891 | $1,625 | | Compensation and benefits | $2,143 | $2,883 | | General and administrative | $321 | $380 | | Commercial operations | $359 | $534 | | Royalty payment | $327 | $327 | | Lease liability, current | $482 | $568 | | **Total** | **$6,523** | **$6,317** | - **Total accrued expenses and other current liabilities increased** by **$206 thousand** from December **31**, **2024**, to June **30**, **2025**, **primarily driven by** an increase in research and development accruals[72](index=72&type=chunk) [10. Capital Structure](index=20&type=section&id=10.%20Capital%20Structure) This note describes Avalo Therapeutics, Inc.'s authorized and outstanding capital stock, recent equity financings, and ATM sales agreement - As of June 30, **2025**, Avalo had **200,000,000 shares** of common stock and **5,000,000 shares** of preferred stock authorized, with **10,837,356 common shares** and **24,696 Series C Preferred Stock shares** outstanding[9](index=9&type=chunk) - The March **2024** **private placement generated** **$115.6 million** in gross proceeds from the issuance of Series C Preferred Stock and warrants, with an additional **$69.4 million** from warrant exercises in Q4 **2024**[76](index=76&type=chunk) - Series C Preferred Stock, initially recognized outside permanent equity, **met equity classification** in Q4 **2024** after a contract amendment and is now a **component of permanent stockholders' equity**[80](index=80&type=chunk) - In June **2025**, the company **entered into an at-the-market (ATM) sales agreement** to **sell up to $75.0 million** of common stock, with **$7.3 million** in gross proceeds from sales subsequent to June 30, **2025**[84](index=84&type=chunk) [11. Stock-Based Compensation](index=22&type=section&id=11.%20Stock-Based%20Compensation) This note explains Avalo Therapeutics, Inc.'s stock-based compensation plans, expense recognition, and unrecognized compensation costs - The **2016** Fourth Amended Plan automatically increases its share reserve annually by **5%** of outstanding common and as-converted Series C Preferred Stock, with **1,768,393 additional shares** made available on January **1**, **2025**[87](index=87&type=chunk) Stock-Based Compensation Expense (in thousands): | Item | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Research and development | $1,116 | $219 | $2,418 | $488 | | General and administrative | $1,602 | $252 | $3,541 | $612 | | **Total** | **$2,718** | **$471** | **$5,959** | **$1,100** | - **Total stock-based compensation expense significantly increased** to **$5.96 million** for the six months ended June 30, **2025**, from **$1.1 million** in the prior year, **driven by** new option and RSU grants and headcount additions[88](index=88&type=chunk) - As of June 30, **2025**, there was **$24.8 million** of **unrecognized compensation cost** for stock options and **$3.6 million** for RSUs, expected to be recognized over weighted-average periods of **3.0 years** and **1.7 years**, respectively[91](index=91&type=chunk)[94](index=94&type=chunk) [12. Income Taxes](index=25&type=section&id=12.%20Income%20Taxes) This note discusses Avalo Therapeutics, Inc.'s income tax expense, valuation allowance, and the impact of new tax legislation - The company **recognized minimal income tax expense** for the three and six months ended June 30, **2025** and **2024**, **due to a significant valuation allowance** against deferred tax assets and current/prior period losses[100](index=100&type=chunk) - Avalo is currently **assessing the impact of the recently enacted One Big Beautiful Bill Act (OBBB)** on its consolidated financial statements[101](index=101&type=chunk) [13. Commitments and Contingencies](index=25&type=section&id=13.%20Commitments%20and%20Contingencies) This note outlines Avalo Therapeutics, Inc.'s contractual obligations, including license agreements, milestone payments, and royalty obligations - Avalo is party to various license and development agreements with **future payment obligations**, including **up to $70.0 million** in development/regulatory milestones and **$650.0 million** in sales-based milestones to Lilly for AVTX-009, **plus tiered royalties**[105](index=105&type=chunk) - For quisovalimab (AVTX-002), Avalo is **not currently pursuing clinical development and is exploring strategic alternatives**, but has **potential milestone payments of up to $112.5 million** (development/regulatory) and **$75.0 million** (sales-based) to KKC, plus royalties[110](index=110&type=chunk)[111](index=111&type=chunk)[112](index=112&type=chunk) - The company has **potential future milestone proceeds from out-licensed compounds** AVTX-301 (**up to $18.6 million** plus royalties from Alto), AVTX-406 (**up to $26.0 million** from ES), and the **800** Series assets (**up to $45.0 million** from AUG)[128](index=128&type=chunk)[132](index=132&type=chunk)[135](index=135&type=chunk) - Avalo has a **royalty obligation for AVTX-006 to certain related parties, recorded as a liability**, and may exercise a buyout option[139](index=139&type=chunk) [14. Segments](index=31&type=section&id=14.%20Segments) This note clarifies that Avalo Therapeutics, Inc. operates as a single segment and details its research and development expenses - The company **operates and manages its business as one operating segment**, with the CEO evaluating performance based on net loss and total assets[143](index=143&type=chunk)[144](index=144&type=chunk) - The **primary evaluation of success is the ability to progress research and development pipeline programs toward commercialization or opportunistic out-licensing**[144](index=144&type=chunk) Research and Development Expenses (in thousands): | Item | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Nonclinical expenses | $179 | $195 | $262 | $347 | | Clinical expenses | $7,215 | $1,579 | $11,065 | $1,641 | | CMC expenses | $3,266 | $740 | $5,245 | $993 | | Internal expenses: Salaries, benefits and related costs | $2,181 | $1,810 | $4,030 | $3,134 | | Stock-based compensation expense | $1,116 | $219 | $2,418 | $488 | | Other | $117 | $58 | $175 | $113 | | **Total** | **$14,074** | **$4,601** | **$23,195** | **$6,716** | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=33&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Avalo Therapeutics, Inc.'s financial condition, operational results, strategic focus, and liquidity for the three and six months ended June 30, 2025, compared to prior periods [Overview](index=33&type=section&id=Overview) This section provides a high-level summary of Avalo Therapeutics, Inc.'s strategic focus, lead asset development, and measures of success - Avalo Therapeutics is a clinical-stage biotechnology company focused on IL-1β-based treatments for immune-mediated inflammatory diseases, with its lead asset, AVTX-009, in a Phase **2** clinical trial for hidradenitis suppurativa (HS)[149](index=149&type=chunk) - The company's **2025** focus is on the operational execution of the Phase **2** LOTUS trial for AVTX-009 in HS, with **topline results expected in mid-2026**[150](index=150&type=chunk) - **Management's primary measure of success is the ability to advance its pipeline towards commercialization or opportunistically out-license rights**[151](index=151&type=chunk) [Recent Developments](index=34&type=section&id=Recent%20Developments) This section highlights key recent events, including board appointments, impacting Avalo Therapeutics, Inc.'s operations - In June **2025**, Dr. Rita Jain was **appointed to the Board of Directors, bringing extensive experience in clinical development and regulatory strategy**[153](index=153&type=chunk) [Liquidity](index=34&type=section&id=Liquidity) This section assesses Avalo Therapeutics, Inc.'s cash position, funding sources, and future capital needs to support operations - Avalo has **incurred significant operating and cash losses** since inception, **primarily funding operations through** equity sales, out-licensing, and asset sales[154](index=154&type=chunk) - As of June 30, **2025**, the company had **$113.3 million** in cash, cash equivalents, and short-term investments, **expected to fund operations for at least twelve months** from the filing date and into **2028**[154](index=154&type=chunk)[155](index=155&type=chunk) - **Future cash needs may be met through equity financings** (including an at-the-market program), out-licensing, strategic alliances, program sales, or M&A, with **potential for stockholder dilution**[155](index=155&type=chunk) [Our Strategy](index=34&type=section&id=Our%20Strategy) This section outlines Avalo Therapeutics, Inc.'s strategic objectives, pipeline advancement, and approach to product development and licensing - The company's **strategy focuses on advancing its pipeline**, particularly the Phase **2** LOTUS trial for AVTX-009 in HS, and exploring further indication expansion[156](index=156&type=chunk) - Strategic initiatives include acquiring or in-licensing targeted preclinical and clinical stage compounds for immune-mediated diseases and opportunistically out-licensing rights[156](index=156&type=chunk) - The **FDA approval process is complex, time-consuming, and expensive, with no guarantee of regulatory approval for products**[157](index=157&type=chunk) [Results of Operations](index=35&type=section&id=Results%20of%20Operations) This section analyzes Avalo Therapeutics, Inc.'s financial performance, including operating expenses and other income/expense, for the reporting periods [Comparison of the Three Months Ended June 30, 2025 and 2024](index=35&type=section&id=Comparison%20of%20the%20Three%20Months%20Ended%20June%2030,%202025%20and%202024) This section compares Avalo Therapeutics, Inc.'s financial results for the three months ended June 30, 2025, against the same period in 2024 - **Cost of product sales was zero** for Q2 **2025**, down from **$0.3 million** in Q2 **2024**, as the company **ceased selling Millipred® in September 2023**[158](index=158&type=chunk) - **Research and development expenses increased** by **$9.5 million** to **$14.1 million** in Q2 **2025**, **primarily due to** a **$5.6 million** **increase in clinical expenses** for the Phase **2** LOTUS trial and a **$2.5 million** **increase in CMC expenses**[159](index=159&type=chunk)[160](index=160&type=chunk) - **General and administrative expenses increased** by **$0.7 million** to **$5.2 million** in Q2 **2025**, **driven by** a **$1.4 million** **increase in stock-based compensation**, **partially offset by** lower legal and consulting fees[164](index=164&type=chunk) - **Other (expense) income, net, shifted** from **$108.0 million** income in Q2 **2024** to **$1.4 million** expense in Q2 **2025**, **mainly due to** the absence of the **$112.0 million** gain from the change in fair value of warrant liability in the prior year[167](index=167&type=chunk) [Comparison of the Six Months Ended June 30, 2025 and 2024](index=37&type=section&id=Comparison%20of%20the%20Six%20Months%20Ended%20June%2030,%202025%20and%202024) This section compares Avalo Therapeutics, Inc.'s financial results for the six months ended June 30, 2025, against the same period in 2024 - **Cost of product sales was zero** for YTD **2025**, down from **$0.3 million** in YTD **2024**[169](index=169&type=chunk) - **Research and development expenses increased** by **$16.5 million** to **$23.2 million** for YTD **2025**, **driven by** **$9.4 million** in clinical expenses and **$4.3 million** in CMC expenses for the AVTX-009 LOTUS trial[171](index=171&type=chunk) - **Acquired in-process research and development was zero** for YTD **2025**, compared to **$27.6 million** in YTD **2024** related to the AlmataBio Transaction[174](index=174&type=chunk) - **General and administrative expenses increased** by **$3.1 million** to **$10.8 million** for YTD **2025**, **primarily due to** a **$2.9 million** **increase in stock-based compensation**[175](index=175&type=chunk) - **Other income, net, decreased** by **$19.4 million** to **$0.09 million** for YTD **2025**, **mainly due to** the prior year's accounting impact of warrant liability changes and private placement transaction costs[178](index=178&type=chunk) [Liquidity and Capital Resources](index=39&type=section&id=Liquidity%20and%20Capital%20Resources) This section details Avalo Therapeutics, Inc.'s cash flow activities and capital resources, highlighting changes in cash and equivalents - The company **primarily uses cash to fund AVTX-009 development and organizational infrastructure costs**[180](index=180&type=chunk) Summary of Cash Flows (in thousands): | Activity | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------------------ | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(20,847) | $(22,485) | | Net cash (used in) provided by investing activities | $(70,860) | $356 | | Net cash (used in) provided by financing activities | $(469) | $108,140 | | Net (decrease) increase in cash and cash equivalents | $(92,176) | $86,011 | - **Net cash used in operating activities decreased** to **$20.8 million** for YTD **2025**, from **$22.5 million** in YTD **2024**, **driven by** net loss **partially offset by** non-cash charges and changes in operating assets/liabilities[182](index=182&type=chunk) - **Net cash used in investing activities was $70.9 million** for YTD **2025** **due to** purchases of available-for-sale investments, a **significant shift from** **$0.4 million** provided in YTD **2024**[184](index=184&type=chunk) - **Net cash used in financing activities was $0.5 million** for YTD **2025**, a **substantial decrease from** **$108.1 million** provided in YTD **2024**, which included proceeds from a private placement[185](index=185&type=chunk)[186](index=186&type=chunk) [Critical Accounting Policies, Estimates, and Assumptions](index=40&type=section&id=Critical%20Accounting%20Policies,%20Estimates,%20and%20Assumptions) This section discusses the significant accounting policies, estimates, and assumptions underlying Avalo Therapeutics, Inc.'s financial statements - The **financial statements rely on estimates and assumptions** for items such as clinical trial accruals, stock-based compensation, fair value measurements, derivative liabilities, revenue recognition, and going concern assessment[187](index=187&type=chunk) - **No significant changes to critical accounting policies occurred** during the six months ended June 30, **2025**, except as described in Note **2**[187](index=187&type=chunk) [Off-Balance Sheet Arrangements](index=40&type=section&id=Off-Balance%20Sheet%20Arrangements) This section confirms Avalo Therapeutics, Inc.'s lack of off-balance sheet arrangements as defined by SEC regulations - The company **does not have any off-balance sheet arrangements** as defined by SEC rules and regulations[188](index=188&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=41&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Avalo Therapeutics, Inc. is exempt from providing quantitative and qualitative disclosures about market risk due to its smaller reporting company status - Avalo Therapeutics, Inc. is **exempt from providing quantitative and qualitative disclosures about market risk** due to its status as a smaller reporting company[189](index=189&type=chunk) [Item 4. Controls and Procedures](index=41&type=section&id=Item%204.%20Controls%20and%20Procedures) This section details management's evaluation of Avalo Therapeutics, Inc.'s disclosure controls and procedures and reports on changes in internal control over financial reporting [Evaluation of Disclosure Controls and Procedures](index=41&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) This section presents management's conclusion on the effectiveness of Avalo Therapeutics, Inc.'s disclosure controls and procedures - Management, including the principal executive and financial officers, **concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level** as of June 30, **2025**[190](index=190&type=chunk) [Changes in Internal Control Over Financial Reporting](index=41&type=section&id=Changes%20in%20Internal%20Control%20Over%20Financial%20Reporting) This section reports on any material changes in Avalo Therapeutics, Inc.'s internal control over financial reporting during the period - There were **no changes in internal control over financial reporting** during the period covered by this report that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[192](index=192&type=chunk) [PART II. OTHER INFORMATION](index=42&type=section&id=PART%20II.%20OTHER%20INFORMATION) This section includes additional required information not covered in the financial statements, such as legal proceedings and risk factors [Item 1. Legal Proceedings](index=42&type=section&id=Item%201.%20Legal%20Proceedings) This section incorporates by reference information on litigation from Note 13 to the unaudited condensed consolidated financial statements - **Information regarding legal proceedings is incorporated by reference** from Note **13** - Commitments and Contingencies, under the heading 'Litigation,' in the financial statements[194](index=194&type=chunk) [Item 1A. Risk Factors](index=42&type=section&id=Item%201A.%20Risk%20Factors) This section states that Avalo Therapeutics, Inc.'s risk factors have not materially changed from its 2024 Annual Report on Form 10-K - The company's **risk factors have not materially changed** from those described in its Annual Report on Form **10-K** for the year ended December **31**, **2024**[195](index=195&type=chunk) - **Readers should carefully consider the factors discussed** in the **2024** **10-K**, as well as additional unknown or immaterial risks, which could adversely affect the business[195](index=195&type=chunk) [Item 6. Exhibits](index=43&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including agreements, plans, certifications, and interactive data files - **Key exhibits include** the Sales Agreement with TD Securities (USA) LLC, the Amended and Restated Non-Employee Director Compensation Plan, certifications from principal officers, and interactive data files (XBRL)[196](index=196&type=chunk) [SIGNATURES](index=44&type=section&id=SIGNATURES) This section contains the required signatures for the Quarterly Report on Form 10-Q, confirming its submission by Avalo Therapeutics, Inc.'s Chief Financial Officer - The **report was signed by Christopher Sullivan, Chief Financial Officer, on August 7, 2025, on behalf of Avalo Therapeutics, Inc**[203](index=203&type=chunk)

Financial Performance - Cash and short-term investments were approximately $113 million as of June 30, 2025, expected to fund operations into 2028[3] - Net loss for Q2 2025 was $20.8 million, compared to net income of $98.5 million in Q2 2024, reflecting a significant change in other expenses[4] - Basic and diluted net loss per share for Q2 2025 was $1.92, compared to basic net income per share of $4.21 in Q2 2024[4] - Total operating expenses for Q2 2025 were $19.3 million, compared to $9.6 million in Q2 2024[8] - Total assets as of June 30, 2025, were $126.6 million, down from $150.7 million as of December 31, 2024[6] Research and Development - Research and development expenses for Q2 2025 were $14.1 million, an increase of 74% from $4.6 million in Q2 2024[4] - The Phase 2 LOTUS trial has enrolled over 75% of the planned patients, with top-line data expected in mid-2026[2] - The LOTUS trial will evaluate the efficacy and safety of AVTX-009 in approximately 222 adults with hidradenitis suppurativa[4] Administrative Expenses - General and administrative expenses for Q2 2025 were $5.2 million, up from $4.5 million in Q2 2024, primarily due to stock-based compensation[4] - The company appointed Rita Jain, M.D. to the Board of Directors, bringing extensive experience in clinical development and regulatory strategy[4] Risks and Uncertainties - Avalo Therapeutics faces risks related to reliance on key personnel and regulatory uncertainties, including impacts from geopolitical events like the war in Ukraine and the Middle East[15] - Actual results may differ from forward-looking statements due to various market risks and uncertainties[15]

Core Insights - Avalo Therapeutics, Inc. is focused on developing IL-1β-based treatments for immune-mediated inflammatory diseases, with significant progress in the Phase 2 LOTUS trial for hidradenitis suppurativa (HS) [1][10] Recent Corporate Highlights and Upcoming Anticipated Milestones - The Phase 2 LOTUS trial has enrolled over 75% of the planned patients, with completion expected by year-end and top-line results anticipated in mid-2026 [2] - Rita Jain, M.D. has been appointed to the Board of Directors, bringing extensive experience in clinical development and regulatory strategy [5][6] Second Quarter 2025 Financial Update - As of June 30, 2025, the company reported cash and short-term investments of approximately $113 million, expected to fund operations into 2028 [5][6] - Research and development expenses for Q2 2025 were $14.1 million, an increase of $9.5 million from Q2 2024, primarily due to costs associated with the LOTUS trial [6][8] - General and administrative expenses were $5.2 million for Q2 2025, up $0.7 million from the same period in 2024 [6][8] - The net loss for Q2 2025 was $20.8 million, compared to a net income of $98.5 million in Q2 2024, largely due to a $109.5 million change in other expenses related to warrants from a prior private placement [6][9] Consolidated Balance Sheets - Total current assets as of June 30, 2025, were $115.2 million, down from $138.9 million as of December 31, 2024 [4][7] - Total assets decreased to $126.6 million from $150.7 million at the end of 2024 [7] Consolidated Statements of Operations - Total operating expenses for Q2 2025 were $19.3 million, compared to $9.6 million in Q2 2024 [8][9] - The loss from operations for Q2 2025 was $19.3 million, compared to a profit of $9.6 million in Q2 2024 [9]

AVTX-009 and HS Market - AVTX-009, an anti-IL-1β mAb, is a lead compound with potential for best-in-class and best-in-disease profile in hidradenitis suppurativa (HS)[7] - The HS market is expected to grow to over $10 billion by 2035[8] - Avalo is enrolling patients in a Phase 2 LOTUS trial for HS, with topline data expected in mid-2026[8] - AVTX-009 has 15x higher affinity than lutikizumab, potentially predictive of higher efficacy and less frequent dosing[10] Financials and Strategy - Avalo expects its cash runway to extend into 2028[8] - As of March 31, 2025, Avalo had approximately $125 million in cash[70] - As of March 31, 2025, Avalo's adjusted market capitalization was $284.5 million, based on an adjusted common share count of 35.5 million and a stock price of $8.01[70] IL-1β and AVTX-009 Advantages - IL-1β gene expression is up to 100x increased in HS lesions compared to healthy skin[26] - AVTX-009 is designed to target the inflammatory driver of Hidradenitis Suppurativa (HS) to address significant unmet need[15] - AVTX-009 has a subcutaneous bioavailability of 73% and a half-life of 19 days[35]

Financial Data and Key Metrics Changes - The company has sufficient cash to complete its trials, with an expected cash runway extending into 2028, indicating no immediate financial overhang [8] Business Line Data and Key Metrics Changes - The lead compound, ABTX009, is currently in Phase 2b of the LOTUS trial, with results expected in mid-2026 [7] - The company is targeting hidradenitis suppurativa (HS), a severe skin disease, with a significant unmet medical need [5][12] Market Data and Key Metrics Changes - The HS market is evolving, with new therapies emerging, but there remains a substantial unmet need for more effective treatments [11][12] - The market for HS is projected to grow significantly, with conservative estimates suggesting it could reach $10 billion by 2035 [42] Company Strategy and Development Direction - The company aims to transition rapidly into Phase 3 trials following the Phase 2 results, with a potential BLA filing anticipated around 2029 [34] - The strategy includes differentiating ABTX009 from competitors by focusing on its higher potency and longer half-life compared to existing therapies [6][22] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the mechanism of action of ABTX009, highlighting its potential to treat additional immune-mediated inflammatory diseases [8] - The management noted that dermatologists are increasingly looking for new therapies due to the limitations of current treatments, indicating a favorable environment for new entrants [35][38] Other Important Information - The trial design for ABTX009 is similar to that of other recent studies, with a focus on clinically relevant endpoints [27] - The company is studying a diverse patient demographic across the US, Canada, Australia, and Europe, which may help in achieving robust treatment effects [31] Q&A Session Summary Question: Can you discuss the current state of HS and the effectiveness of emerging therapies? - Management highlighted that HS is a severe disease with significant pain and disability, and there is a growing recognition of the need for better therapies [11] Question: What differentiates ABTX009 from other IL-1 strategies? - Management emphasized that targeting IL-1 beta specifically is advantageous, as it plays a pivotal role in chronic inflammation associated with HS [20][21] Question: What are the expectations for the Phase 2 trial data readout in 2026? - The study is powered to show a placebo-subtracted efficacy rate of 25-30%, with a robust treatment effect expected [28][30] Question: How does the company plan to carve out a commercial niche in the HS market? - Management believes that with a differentiated side effect profile and superior efficacy, ABTX009 can capture a significant share of the market [39][42] Question: What are the potential additional indications for IL-1 beta? - Management mentioned several potential indications, including Crohn's disease and rheumatoid arthritis, highlighting the broad applicability of IL-1 beta targeting [43][44]

Company Overview - Avalo Therapeutics, Inc. is a clinical stage biotechnology company focused on the treatment of immune dysregulation [3] - The company's lead asset is AVTX-009, an anti-IL-1β monoclonal antibody targeting inflammatory diseases [3] Leadership Appointment - Dr. Rita Jain has been appointed to Avalo's Board of Directors, bringing over two decades of leadership experience in biopharmaceutical development [2] - Dr. Jain's previous roles include Executive Vice President and Chief Medical Officer at ChemoCentryx, where she advanced the development of Tavneos® [2] - Her expertise spans clinical development, regulatory strategy, and executive leadership across multiple therapeutic areas, including immunology and inflammation [2] Product Development - AVTX-009 is currently in a Phase 2 trial for hidradenitis suppurativa (HS), with results expected in the middle of next year [2] - The drug is a humanized monoclonal antibody that binds to interleukin-1β (IL-1β), a key driver in the inflammatory process, and is implicated in various autoimmune and inflammatory diseases [4] - Inhibition of IL-1β is considered a validated target for therapeutic intervention in multiple inflammatory diseases [4]

Summary of Avalo Therapeutics (AVTX) Conference Call Company Overview - **Company**: Avalo Therapeutics (AVTX) - **Lead Asset**: AVTX009NHS, targeting hidradenitis suppurativa (HS) Key Points and Arguments Industry and Market Dynamics - **Hidradenitis Suppurativa (HS)**: A chronic inflammatory skin condition with significant unmet medical needs, particularly among patients who do not respond to existing treatments like TNF inhibitors and IL-17 therapies [37][39] - **Current Treatment Landscape**: Approximately 50% of HS patients do not achieve remission with current biologics, indicating a large unsatisfied patient population seeking new treatment options [38] AVTX009NHS Mechanism and Efficacy - **Mechanism of Action**: AVTX009 targets IL-1 beta, which is identified as a key inflammatory driver in HS, with levels in lesions being 133 times higher than normal [11][12] - **Comparison with Other Treatments**: - Lutekizumab, another IL-1 beta targeting drug, has shown efficacy but has potential flaws that AVTX009 aims to address, such as a bispecific mechanism that may not effectively target the disease [5][20] - AVTX009 has a significantly higher affinity (15-30 times) compared to lutekizumab and can achieve better neutralization of IL-1 beta in lesions [18][24] Clinical Development and Study Design - **Phase II LOTUS Study**: - Designed to evaluate the efficacy of AVTX009 with a focus on rapid response using a loading dose of 600 mg followed by 300 mg every four weeks [30][31] - The study aims to enroll a diverse patient population, including those with moderate to severe HS, while ensuring robust data collection through rigorous investigator training [35][36] Safety and Long-term Use - **Safety Profile**: AVTX009 is characterized as a true anti-inflammatory drug rather than an immunosuppressant, reducing concerns about opportunistic infections and cancer risks associated with other treatments [10][13] - **Long-term Efficacy**: The drug's mechanism is expected to maintain lower IL-1 beta levels, promoting healing of lesions and reducing inflammation over time [24] Future Opportunities - **Expansion Potential**: There are plans to explore AVTX009 in other indications driven by IL-1 beta, such as inflammatory bowel disease (IBD) and various forms of arthritis, indicating a broad pipeline potential [44][45] - **Market Positioning**: The company aims to position AVTX009 as a first-line therapy in HS, capitalizing on the dissatisfaction with current treatment options and the need for new mechanisms [41] Conclusion - **Outlook**: The company is optimistic about the upcoming data release in mid-2026 and believes that AVTX009 has the potential to significantly improve treatment outcomes for HS patients, addressing a critical gap in the current market [47]

Financial Performance - Avalo generated a net loss of $13.1 million for the three months ended March 31, 2025, with negative cash flows from operations of $9.5 million[152]. - Net cash used in operating activities was $9.5 million for the three months ended March 31, 2025, compared to $6.2 million for the same period in 2024[169]. - Other income, net increased by $90.0 million for the three months ended March 31, 2025, primarily due to the absence of prior period private placement transaction costs[164]. - For the three months ended March 31, 2024, net cash provided by financing activities was $115.6 million from a private placement investment, offset by transaction costs of $7.0 million[173]. - There was no net cash provided by financing activities for the three months ended March 31, 2025[173]. Expenses - Research and development expenses increased by $7.0 million to $9.1 million for the three months ended March 31, 2025, primarily due to a $3.8 million increase in clinical expenses related to the LOTUS trial[158]. - General and administrative expenses rose by $2.4 million to $5.5 million for the three months ended March 31, 2025, driven by a $1.6 million increase in stock-based compensation[162]. - Stock-based compensation expense increased by $1.0 million to $1.3 million for the three months ended March 31, 2025, due to option and restricted stock unit grants[160]. Cash Position - The Company had $125.0 million in cash and cash equivalents as of March 31, 2025, sufficient to fund operations into at least 2027[153]. - The Company plans to balance cash levels with projected needs to withstand funding uncertainties, potentially through equity sales or strategic collaborations[153]. - The Company expects future cash used in operating activities to increase due to ongoing development plans for AVTX-009[171]. Clinical Trials - The Phase 2 LOTUS trial of AVTX-009 is evaluating efficacy in approximately 180 adults with moderate to severe hidradenitis suppurativa[149]. Accounting Policies - The company adheres to GAAP in preparing its financial statements, utilizing estimates and assumptions that impact reported assets, liabilities, revenue, and expenses[175]. - There have been no significant changes to the company's critical accounting policies during the three months ended March 31, 2025[175]. - The company does not have any off-balance sheet arrangements as defined by SEC rules[176]. - As a smaller reporting company, the company is not required to provide certain market risk disclosures[177].

Financial Performance - Avalo Therapeutics reported a net loss of $13.1 million for Q1 2025, a significant decrease of $108.2 million from a net loss of $121.3 million in Q1 2024[6]. - Basic and diluted net loss per share was $1.25 for Q1 2025, compared to $141.14 for Q1 2024[6]. - Total operating expenses for Q1 2025 were $14.7 million, a decrease from $32.8 million in Q1 2024[8]. Cash and Assets - Cash and cash equivalents were approximately $125 million as of March 31, 2025, expected to fund operations into at least 2027, with potential extension into 2028[4]. - Current liabilities decreased to $5.6 million as of March 31, 2025, from $7.0 million at the end of 2024[7]. - Total assets decreased to $138.5 million as of March 31, 2025, down from $150.7 million at the end of 2024[7]. Research and Development - Research and development expenses increased to $9.1 million in Q1 2025, up from $2.1 million in Q1 2024, primarily due to costs associated with the Phase 2 LOTUS trial[5]. - The Phase 2 LOTUS trial for AVTX-009 is expected to deliver topline data in 2026, involving approximately 180 adults with hidradenitis suppurativa[4]. - The company is evaluating a second indication for AVTX-009 for additional immune-mediated diseases, with plans to announce this in the future[5]. General and Administrative Expenses - General and administrative expenses rose to $5.5 million in Q1 2025, an increase of $2.4 million from Q1 2024, mainly driven by stock-based compensation[5].

Core Insights - Avalo Therapeutics, Inc. is making significant progress in its Phase 2 LOTUS trial for AVTX-009, targeting hidradenitis suppurativa (HS), with topline data expected in 2026 [2][5] - The company has sufficient capital, approximately $125 million as of March 31, 2025, to fund operations into at least 2027, with potential to extend into 2028 [5][6] - The company is evaluating additional development activities beyond the LOTUS trial, considering current market conditions [2][5] Financial Performance - Cash and cash equivalents were reported at $125.0 million as of March 31, 2025, down from $134.5 million at the end of 2024 [7] - Net cash used in operating activities for Q1 2025 was $9.5 million, with research and development expenses increasing to $9.1 million, up from $2.1 million in Q1 2024 [6][9] - The net loss for Q1 2025 was $13.1 million, a significant decrease from $121.3 million in Q1 2024, primarily due to a reduction in other expenses related to prior period warrants [6][9] Trial and Development Updates - The LOTUS trial involves approximately 180 adults with HS, evaluating the efficacy and safety of AVTX-009 with expected topline data in 2026 [6][12] - The primary efficacy endpoint is the proportion of subjects achieving Hidradenitis Suppurativa Clinical Response (HiSCR75) at Week 16 [12] - Avalo is also exploring AVTX-009 for additional immune-mediated diseases and plans to announce a second indication [6][12] Corporate Highlights - Mike Heffernan has been appointed as Chairman of the Board [5] - The company continues to focus on its lead asset, AVTX-009, which targets inflammatory diseases by neutralizing interleukin-1β [10][11]