Avalo Therapeutics, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Avalo is a clinical-stage biotechnology company developing therapies targeting the LIGHT network. Its only commercial product was Millipred, which the company considers non-core.
Financial results and position
Amounts are in millions of dollars, except per-share data.
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Revenue | $0.5 | $1.2 |
| Operating expenses | $9.3 | $22.0 |
| Net loss | $10.0 | $22.1 |
| Net loss per share | $0.85 | $2.35 |
| Cash used in operations | $10.1 | $16.1 |
| Cash and cash equivalents at period end | $16.7 | $13.2 at Dec. 31, 2022 |
| Notes payable, gross | $21.2 | $21.2 at Dec. 31, 2022 |
| Total liabilities | $42.5 | $44.3 at Dec. 31, 2022 |
Cost of product sales was $0.6 million against $0.5 million of revenue, producing a gross loss of approximately $0.1 million. The filing does not provide a gross-margin percentage. Total assets were $36.2 million, current assets $19.3 million, and current liabilities $23.2 million. Stockholders’ deficit was $6.3 million. The $21.2 million gross debt balance includes a final payment fee; its carrying value was $19.8 million after unamortized debt discounts and issuance costs. The effective interest rate was 21.2%.
Changes and notable items
- Revenue declined 59% year over year, mainly because fewer Millipred units were sold. The Millipred license and supply agreement expires September 30, 2023; management expects product revenue and related cost of sales to decline during 2023.
- Research and development expense fell to $6.0 million from $9.6 million, while SG&A fell to $2.7 million from $11.7 million. Much of the SG&A comparison reflects $4.3 million of accelerated or modified stock-based compensation and severance-related costs in Q1 2022 that did not recur, as well as lower headcount and cost-saving measures.
- Net loss improved by $12.1 million year over year. Operating cash use improved by $6.0 million, but Q1 2023 cash flow included working-capital movements, including a $4.9 million decrease in accrued expenses and other liabilities.
- A February public offering of 3.77 million shares and warrants to buy up to 3.77 million additional shares generated net proceeds of approximately $13.7 million. Warrants are exercisable at $5.00 per share for one year from issuance. Shares outstanding increased from 9.43 million at year-end to 13.20 million at March 31.
- The $0.2 million increase in the fair value of a derivative liability was recorded as expense; the liability relates to economic rights sold in 2022 and does not affect Avalo’s future cash flows from the underlying milestone and royalty payments.
Outlook, liquidity, and risks
- Management expects Q2 2023 R&D and SG&A expenses to be relatively consistent with Q1. Spending after Q2 is difficult to predict and depends partly on clinical outcomes, financing, and business-development activity. No formal revenue or earnings guidance is provided.
- Avalo expected topline results from the fully enrolled AVTX-002 PEAK trial in non-eosinophilic asthma in Q2 2023. Management warned that a negative result could constitute a material adverse change under the loan agreement and potentially trigger default consequences.
- Management concluded that substantial doubt exists about the company’s ability to continue as a going concern within one year after issuance of the financial statements. Avalo expects to need additional financing and is considering financing, out-licensing, collaborations, asset sales, and grants. If funds are unavailable, it may cut, delay, suspend, or eliminate programs.
- Loan principal payments total $21.2 million, including $5.9 million due in 2023 beginning in Q3. Debt is secured by substantially all company assets other than specified exclusions. Certain additional borrowing, asset dispositions, and business combinations require lender consent; default could accelerate a substantial portion of the debt.
- Revenue is highly concentrated: two customers accounted for approximately 53% and 47% of Q1 2023 net product revenue. Avalo also reported an estimated $1.4 million receivable related to Aytu-managed Millipred operations; $1.0 million had been fully reserved, and $0.2 million was received in Q2 2023.
- The filing reports no material change to the risk factors in the 2022 Form 10-K, no legal proceedings, and effective disclosure controls at the end of the quarter. The company reported no known loan covenant breach or lender notice of default as of the filing date.
Important facts for investors to verify
- Whether the AVTX-002 PEAK trial delivered the expected Q2 2023 topline results, and the clinical and financing implications.
- Cash runway and financing needs relative to operating cash use, upcoming debt payments, and the going-concern warning.
- Terms, potential dilution, and any exercise activity for the February 2023 warrants, alongside the resulting share count.
- Millipred revenue, the September 2023 agreement expiration, and collectability of the Aytu-related receivable.
- Current debt terms, lender covenant status, and whether any prepayment or refinancing occurred.