Avalo Therapeutics, Inc. (AVTX) Corporate Presentation May 2023 ...

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 March 31, 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) 540 Gaither Road, Suite 400 Rockville, Maryland 20850 (Address of principal executive of ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2022 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______to______ Commission File No. 001-37590 AVALO THERAPEUTICS, INC. (Exact name of registrant as specified in its charter) Delaware (State or o ...

Avalo Therapeutics, Inc. (AVTX) Corporate Presentation March 2023 ...

PART I. FINANCIAL INFORMATION [Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) For H1 2022, the company reported a $35.0 million net loss and a significant cash decrease, with stockholders' equity turning into a deficit Condensed Consolidated Balance Sheet Highlights (Unaudited, in thousands) | Account | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $11,249 | $54,585 | | Total current assets | $15,021 | $61,845 | | Total assets | $32,224 | $80,214 | | Total current liabilities | $15,395 | $19,888 | | Total liabilities | $38,175 | $57,132 | | Total stockholders' (deficit) equity | $(5,951) | $23,082 | Condensed Consolidated Statements of Operations Highlights (Unaudited, in thousands) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Total revenues, net | $1,033 | $3,355 | $2,206 | $3,829 | | Research and development | $8,510 | $12,569 | $18,094 | $37,774 | | Selling, general and administrative | $2,784 | $7,404 | $14,468 | $12,751 | | Net loss | $(12,987) | $(17,105) | $(35,038) | $(47,785) | | Net loss per share, basic and diluted | $(1.38) | $(2.11) | $(3.73) | $(5.97) | Condensed Consolidated Statements of Cash Flows Highlights (Unaudited, in thousands) | Cash Flow Activity | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(28,537) | $(37,503) | | Net cash used in investing activities | $(56) | $(21) | | Net cash (used in) provided by financing activities | $(14,781) | $59,043 | | (Decrease) increase in cash | $(43,374) | $21,519 | [Notes to Unaudited Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) The notes detail a reverse stock split, a going concern warning, debt obligations, and the subsequent out-licensing of AVTX-007 [Note 1. Business and Liquidity](index=8&type=section&id=Note%201.%20Business%20and%20Liquidity) The company faces substantial doubt about its ability to continue as a going concern due to significant losses and liquidity issues - The company is a clinical-stage precision medicine company focused on immunology and rare genetic diseases[23](index=23&type=chunk) - A **1-for-12 reverse stock split** was effected on July 7, 2022, with all share and per-share amounts retroactively adjusted[24](index=24&type=chunk) - Management has concluded that **substantial doubt exists about the Company's ability to continue as a going concern** due to recurring losses and the need for additional financing within one year[27](index=27&type=chunk)[31](index=31&type=chunk) - As of June 30, 2022, the company had **$11.2 million in cash** and cash equivalents and received an approximate **$15 million upfront payment** in August 2022 from the transfer of AVTX-007[25](index=25&type=chunk) [Note 3. Revenue](index=9&type=section&id=Note%203.%20Revenue) Revenue is primarily from Millipred® and shows high customer concentration, with a significant decline in H1 2022 Net Product Revenue (in millions) | Period | 2022 | 2021 | | :--- | :--- | :--- | | Three Months Ended June 30 | $1.0 | $2.7 | | Six Months Ended June 30 | $2.2 | $3.2 | - For the six months ended June 30, 2022, the company's two largest customers accounted for approximately **79% and 21% of total net product revenues**[36](index=36&type=chunk) - The company fully reserved for a **$1.0 million receivable** from Aytu BioScience due in December 2024, citing substantial doubt about Aytu's ability to continue as a going concern[39](index=39&type=chunk) [Note 8. Cost Reduction Plan](index=14&type=section&id=Note%208.%20Cost%20Reduction%20Plan) A Q1 2022 cost reduction plan involved program cessations and headcount reductions, resulting in significant one-time charges - In Q1 2022, the Board approved a cost reduction plan, which included winding down internal development of AVTX-006 and pausing development of AVTX-802[65](index=65&type=chunk) - The company recognized **$1.5 million in one-time termination benefits** and **$0.4 million in accelerated stock-based compensation expense** related to the workforce reduction[65](index=65&type=chunk)[66](index=66&type=chunk) - Separately, the company recognized **$1.7 million in expense** and **$3.9 million in stock compensation cost** related to the separation of certain section 16 executive officers in Q1 2022[67](index=67&type=chunk) [Note 9. Notes Payable](index=15&type=section&id=Note%209.%20Notes%20Payable) The company made a $15.0 million voluntary prepayment on its loan, reducing the carrying value to $18.7 million - In June 2022, the company made a partial prepayment of **$15.0 million** on its loan agreement[70](index=70&type=chunk) Notes Payable Balance (in thousands) | Description | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Notes payable, gross | $21,244 | $36,050 | | Less: Unamortized debt discount and issuance costs | $2,531 | $3,217 | | **Carrying value of notes payable, non-current** | **$18,713** | **$32,833** | - The loan is secured by a lien on substantially all company assets and contains covenants; the company was not aware of any breach of covenants[72](index=72&type=chunk)[73](index=73&type=chunk) [Note 13. Commitments and Contingencies](index=19&type=section&id=Note%2013.%20Commitments%20and%20Contingencies) The company faces significant potential milestone payments for in-licensed drugs and is eligible for payments from out-licensed assets - Under the KKC License Agreement for AVTX-002, the company may be required to pay up to **$112.5 million in development/regulatory milestones** and up to **$75.0 million in sales-based milestones**[112](index=112&type=chunk) - Under the Sanford Burnham Prebys License Agreement for AVTX-008, potential payments include up to **$24.2 million in development/regulatory milestones** and up to **$50.0 million in sales-based milestones**[120](index=120&type=chunk) - The company is eligible to receive up to **$18.6 million** in future milestones for out-licensed AVTX-301 and up to **$20.0 million** for AVTX-501 sold to Janssen[124](index=124&type=chunk)[127](index=127&type=chunk) [Note 14. Subsequent Events](index=23&type=section&id=Note%2014.%20Subsequent%20Events) Post-quarter, the company licensed AVTX-007 to Apollo, receiving an upfront fee and transition payments totaling approximately $15 million - On July 29, 2022, the company granted a worldwide, exclusive license to Apollo for AVTX-007[137](index=137&type=chunk) - In August 2022, Avalo received a **$5 million upfront fee** and approximately **$10 million for transition activities** from Apollo[138](index=138&type=chunk) - The company is eligible for up to **$6.25 million in regulatory/development milestones** and up to **$67.5 million in sales-based milestones**, in addition to low single-digit royalties[138](index=138&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=25&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses clinical trial progress, financial results showing lower revenue and R&D costs, and reiterates the going concern doubt [Overview and Recent Developments](index=25&type=section&id=Overview%20and%20Recent%20Developments) Recent developments include initiating Phase 2 and Phase 3 trials, a reverse stock split, and the out-licensing of AVTX-007 - Dosed the first patient in the **Phase 2 PEAK trial for AVTX-002** for the treatment of non-eosinophilic asthma (NEA) in May 2022[147](index=147&type=chunk) - Dosed the first patient in the **Phase 3 LADDER trial for AVTX-803** in patients with Leukocyte Adhesion Deficiency Type II (LAD II) in July 2022[147](index=147&type=chunk) - On July 29, 2022, granted a worldwide, exclusive license for AVTX-007 to Apollo, receiving an approximate **$15 million upfront payment** in August 2022[148](index=148&type=chunk) [Results of Operations](index=26&type=section&id=Results%20of%20Operations) H1 2022 saw decreased revenue and a sharp drop in R&D expenses, while SG&A costs rose due to severance charges Comparison of Operating Results (Six Months Ended June 30, in thousands) | Item | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Product Revenue, Net | $2,206 | $3,204 | $(998) | | Research and Development Expenses | $18,094 | $37,774 | $(19,680) | | Selling, General and Administrative Expenses | $14,468 | $12,751 | $1,717 | | Net Loss | $(35,038) | $(47,785) | $12,747 | - The **$19.7 million decrease in R&D expenses** for H1 2022 was primarily driven by a non-recurring **$10.0 million upfront license fee** for AVTX-002 in Q1 2021 and lower CMC and preclinical expenses[169](index=169&type=chunk)[170](index=170&type=chunk) - The **$1.7 million increase in SG&A expenses** for H1 2022 was due to **$2.4 million in severance** and **$4.3 million in stock-based compensation** related to separations, partially offset by cost-saving initiatives[173](index=173&type=chunk) [Liquidity and Capital Resources](index=31&type=section&id=Liquidity%20and%20Capital%20Resources) With only $11.2 million in cash and significant losses, management has substantial doubt about the company's going concern status - As of June 30, 2022, the company had **$11.2 million in cash** and cash equivalents, with an accumulated deficit of **$297.2 million**[180](index=180&type=chunk) - Management has concluded that **substantial doubt exists regarding the company's ability to continue as a going concern**, as it will require additional financing to fund operations within one year[182](index=182&type=chunk)[184](index=184&type=chunk) - **Net cash used in operating activities was $28.5 million** for the six months ended June 30, 2022, compared to $37.5 million in the prior year period[188](index=188&type=chunk)[189](index=189&type=chunk) - **Net cash used in financing activities was $14.8 million** in H1 2022 due to a loan prepayment, a sharp contrast to the **$59.0 million provided by financing activities** in H1 2021 from an equity offering and new debt[191](index=191&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=34&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) As a smaller reporting company, Avalo Therapeutics is not required to provide the information for this item - The company is not required to provide information on market risk as it qualifies as a smaller reporting company[197](index=197&type=chunk) [Controls and Procedures](index=34&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of June 30, 2022, with no material changes - Management concluded that the company's disclosure controls and procedures were **effective** at the reasonable assurance level as of the end of the period covered by the report[198](index=198&type=chunk) - **No changes in internal control over financial reporting** were identified during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[200](index=200&type=chunk) PART II – OTHER INFORMATION [Legal Proceedings](index=35&type=section&id=Item%201.%20Legal%20Proceedings) The company reported no legal proceedings during the period - None[202](index=202&type=chunk) [Risk Factors](index=35&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in the company's 2021 Annual Report - The company's risk factors have **not changed materially** from those described in the Form 10-K for the year ended December 31, 2021[203](index=203&type=chunk) [Exhibits](index=36&type=section&id=Item%206.%20Exhibits) This section lists filed exhibits, including the reverse stock split amendment and Sarbanes-Oxley certifications - Filed exhibits include the Certificate of Amendment for the **1-for-12 reverse stock split**[205](index=205&type=chunk) - **Certifications from the Principal Executive Officer and Principal Financial Officer** pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 were filed[206](index=206&type=chunk)[207](index=207&type=chunk)[208](index=208&type=chunk)