Avalo Therapeutics, Inc. annual report, FY2022

Avalo Therapeutics, Inc. — Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2022. This is an annual report, not a standalone fourth-quarter report; quarterly results are not clearly provided in the supplied filing text. The company is a clinical-stage biotechnology company focused on therapies targeting the LIGHT-signaling network. Its only marketed product was Millipred.

Financial performance

Metric	2022	2021
Total revenue	$18.1 million	$5.4 million
Millipred net product revenue	$3.4 million	$4.8 million
License and other revenue	$14.7 million	$0.6 million
Research and development expense	$31.3 million	$59.8 million
Selling, general and administrative expense	$20.7 million	$24.7 million
Operating loss	$37.4 million	$82.1 million
Net loss	$41.7 million	$84.4 million
Net loss per share	$4.43	$9.95
Net cash used in operating activities	$26.8 million	$70.9 million

2022 license revenue primarily reflected a $14.5 million upfront payment for licensing AVTX-007 to Apollo. Product revenue fell 29%, which the company attributed mainly to lower units sold and possible disruption during the transition of Millipred commercial operations.
Operating expenses declined $32.0 million year over year, driven by lower R&D spending, fewer active programs, reduced manufacturing activity, and cost-reduction measures. Net loss and operating cash use also fell substantially.
Product sales barely covered cost of product sales: $3.4 million of revenue versus $3.4 million of cost. The filing does not present a comparable consolidated gross-margin measure.

Financial position, debt and liquidity

At December 31, 2022, cash and cash equivalents were $13.2 million, down from $54.6 million a year earlier. Current assets were $16.4 million and current liabilities were $22.1 million; total liabilities were $44.3 million and stockholders’ equity was negative $10.9 million.
Cash, cash equivalents and restricted cash totaled $13.3 million. Operating cash use was $26.8 million; investing cash use was $0.1 million; financing cash use was $14.7 million, largely reflecting a $15.0 million loan prepayment ($14.8 million applied to principal).
Loan principal payments remaining were $21.2 million, including $5.9 million scheduled in 2023. The reported notes payable carrying value was $19.4 million. Interest is at 6.25% plus prime, subject to a floor; the effective interest rate was 20.7% at year-end. The loan is secured by substantially all company assets, subject to exceptions, and includes covenants and a material-adverse-change default provision.
Management and the auditor disclosed substantial doubt about Avalo’s ability to continue as a going concern, citing recurring losses, negative operating cash flow and working-capital deficiency. Management said additional financing is required within one year after issuance of the financial statements. The company reported no known covenant breach, material-adverse-change event or lender default notice as of the filing date.
After year-end, Avalo raised approximately $13.7 million net in a February 2023 offering of 3.77 million shares and warrants for another 3.77 million shares. The warrants were immediately exercisable at $5 per share for one year. This financing adds liquidity but creates potential dilution.

Material changes, outlook and risks

Pipeline: The Phase 2 PEAK trial of AVTX-002 for non-eosinophilic asthma was fully enrolled in February 2023, with 91 patients; topline results were expected in the second quarter of 2023. AVTX-008 was in lead optimization, with an IND submission targeted for 2024. The Phase 3 LADDER trial of AVTX-803 for LAD II was ongoing.
Portfolio focus: Avalo prioritized AVTX-002, AVTX-008 and AVTX-803. It wound down internal development of AVTX-006, paused AVTX-802 and was exploring strategic alternatives for legacy programs. AVTX-007 was out-licensed in 2022.
Revenue outlook: The Millipred license and supply agreement expires September 30, 2023; the company expected Millipred revenue and related costs to decrease in 2023. Management expected early-2023 operating expenses to be similar to late-2022 levels, while later spending depended on trial outcomes, financing and business-development activity. No quantified earnings or revenue guidance was provided.
Funding and development risks: The business depends on raising capital, licensing assets or forming collaborations. Failure to secure funds could force delays, reductions or termination of development programs. Clinical-trial outcomes, regulatory approval, manufacturing availability, and the ability to enroll patients remain significant uncertainties.
Unusual and related-party item: In November 2022, Avalo received $5.0 million from ES Therapeutics, an Armistice affiliate, in exchange for specified future milestone and royalty rights relating to AVTX-501, AVTX-007 and AVTX-611. The company recorded a $4.8 million derivative liability using significant unobservable assumptions; the transaction was approved under its related-party policy. The auditor identified valuation of this derivative as a critical audit matter.
Other contingencies: Avalo fully reserved a $1.0 million receivable due from Aytu in December 2024 after Aytu disclosed substantial doubt about its ability to continue as a going concern. Aytu owed Avalo about $1.8 million at year-end; Avalo reported receiving $0.4 million of the $0.8 million then-current amount in January 2023. A contingent employee bonus estimated at approximately $1.4 million, dependent on positive PEAK data and other criteria, was not accrued because the company did not consider it probable.
Other notable risks include dependence on third-party manufacturers and clinical research organizations, potential dilution from future equity financing, Millipred customer concentration, loan covenants and acceleration risk, and Armistice’s significant ownership and influence. The company reported no material legal proceedings. Management concluded disclosure controls and internal control over financial reporting were effective at a reasonable level of assurance.

Most important facts for investors to verify

PEAK topline results, their clinical significance, and the next steps and funding required for AVTX-002.
Cash burn and runway after the February 2023 financing, including any subsequent capital raises, asset licenses or spending changes.
The loan’s payment schedule, current interest cost, covenant compliance and any lender action or consent requirements.
Millipred revenue and supply arrangements after the September 2023 agreement expiration, and collectability of the remaining Aytu receivable.
The terms and fair-value assumptions of the Armistice-affiliated ES transaction, plus the potential dilution from the February 2023 warrants and other securities.
Progress and financing needs for AVTX-008 and AVTX-803, and any changes to the stated development timelines.