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Avalo Therapeutics(AVTX) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements 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 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 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 diseases23 - A 1-for-12 reverse stock split was effected on July 7, 2022, with all share and per-share amounts retroactively adjusted24 - 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 year2731 - 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-00725 Note 3. Revenue 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 revenues36 - 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 concern39 Note 8. Cost Reduction Plan 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-80265 - 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 reduction6566 - 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 202267 Note 9. Notes Payable 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 agreement70 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 covenants7273 Note 13. Commitments and Contingencies 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 milestones112 - 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 milestones120 - 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 Janssen124127 Note 14. Subsequent Events 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-007137 - In August 2022, Avalo received a $5 million upfront fee and approximately $10 million for transition activities from Apollo138 - 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 royalties138 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses clinical trial progress, financial results showing lower revenue and R&D costs, and reiterates the going concern doubt Overview and Recent Developments 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 2022147 - 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 2022147 - On July 29, 2022, granted a worldwide, exclusive license for AVTX-007 to Apollo, receiving an approximate $15 million upfront payment in August 2022148 Results of Operations 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 expenses169170 - 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 initiatives173 Liquidity and Capital Resources 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 million180 - 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 year182184 - 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 period188189 - 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 debt191 Quantitative and Qualitative Disclosures About Market Risk 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 company197 Controls and Procedures 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 report198 - No changes in internal control over financial reporting were identified during the quarter that materially affected, or are reasonably likely to materially affect, internal controls200 PART II – OTHER INFORMATION Legal Proceedings The company reported no legal proceedings during the period - None202 Risk Factors 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, 2021203 Exhibits 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 split205 - Certifications from the Principal Executive Officer and Principal Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 were filed206207208