Avalo Therapeutics, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Avalo is a clinical-stage biotechnology company focused on immunology and rare genetic diseases. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $1.03 | $3.36 | $2.21 | $3.83 |
| Operating expenses | $12.86 | $20.48 | $34.89 | $51.54 |
| Net loss | $12.99 | $17.11 | $35.04 | $47.79 |
| Net loss per common share | $1.38 | $2.11 | $3.73 | $5.97 |
- Q2 product revenue was $1.03 million, down from $2.73 million; six-month product revenue was $2.21 million, down from $3.20 million. The company attributed the declines mainly to lower unit sales and possible distribution-channel disruption during the transition from Aytu to Avalo. It said the duration and lasting impact were uncertain.
- Q2 cost of product sales was $1.57 million, exceeding product revenue; this included a $1.0 million reserve against an amount due from Aytu and the supplier’s 50% net-profit share. The filing does not present a product gross-margin figure.
- Q2 R&D expense decreased to $8.51 million from $12.57 million. Six-month R&D fell to $18.09 million from $37.77 million, reflecting the prior-year $10.0 million AVTX-002 license payment, lower manufacturing and preclinical spending, and fewer active trials, partly offset by AVTX-002 clinical activity.
- Q2 SG&A decreased to $2.78 million from $7.40 million, while six-month SG&A increased to $14.47 million from $12.75 million. The six-month increase included severance and $4.3 million of stock-compensation expense from executive and employee separations.
- Six-month operating cash use was $28.54 million, compared with $37.50 million in 2021. Investing cash use was $0.06 million. Financing used $14.78 million, principally for debt prepayment; cash, cash equivalents and restricted cash declined $43.37 million to $11.49 million.
- At June 30, cash and cash equivalents were $11.25 million; current assets were $15.02 million versus current liabilities of $15.40 million. Total liabilities were $38.18 million and stockholders’ equity was a deficit of $5.95 million. Notes payable had a carrying value of $18.71 million; the company prepaid $15.0 million in June, including $14.8 million of principal. The debt’s effective interest rate was 17.7%.
Material changes and developments
- The Board’s 2022 cost-reduction plan wound down internal development of AVTX-006 and paused AVTX-802 development; workforce reductions were completed in Q2. Management said it expected SG&A to remain below historical levels after the reductions and other savings measures.
- In May, Avalo dosed the first patient in the Phase 2 PEAK trial of AVTX-002 for non-eosinophilic asthma. After quarter-end, in July, it dosed the first patient in the Phase 3 LADDER trial of AVTX-803 for leukocyte adhesion deficiency type II.
- On July 29, Avalo licensed AVTX-007 to Apollo, which assumed responsibility for future development. In August, Avalo received approximately $15 million, comprising a $5 million upfront fee and approximately $10 million for transition and transfer activities. Avalo may also receive up to $74 million in development, regulatory and sales milestones, plus low-single-digit royalties.
- A 1-for-12 reverse stock split took effect July 7, 2022; Avalo reported regaining Nasdaq listing compliance on July 22. Share and per-share figures in the filing were retroactively adjusted.
Outlook, risks and contingencies
- Management stated that additional financing would be required to fund operations and execute its strategy within one year after the financial statements were issued. Continued losses, operating cash use and financing uncertainty raised substantial doubt about Avalo’s ability to continue as a going concern.
- Potential funding sources include equity or other financing, licensing or collaboration transactions, asset sales, and grants. Failure to secure funding could require spending reductions or delay, suspension, reduction or termination of development programs. Collaborations or licenses could require surrendering valuable rights.
- The loan agreement includes restrictions on additional debt and certain asset dispositions and transactions, as well as covenants and default provisions that could accelerate repayment. Avalo reported no known covenant breach, material adverse change or default notice as of the filing date.
- Aytu’s financial condition creates collection risk: Avalo reserved the $1.0 million receivable due in December 2024; approximately $0.9 million remained contractually due in Q4 2022. Avalo also guaranteed certain Aytu obligations to Deerfield, with two estimated remaining quarterly payments of $0.5 million each if Aytu fails to pay.
- Millipred revenue is concentrated: two customers represented 86% and 14% of Q2 product revenue. The Teva supply agreement expires September 30, 2023 and requires a 50% net-profit share, subject to a quarterly minimum payment.
- The company reported no material change in its risk factors from its 2021 Form 10-K and no legal proceedings. No specific revenue, earnings or cash-flow guidance was provided.
Investor verification priorities
- Assess cash runway and the timing, availability and terms of additional financing, including the impact of the subsequent Apollo proceeds.
- Verify the AVTX-002 and AVTX-803 clinical timelines, enrollment progress, data milestones and funding requirements.
- Track Millipred sales recovery and channel stability, customer concentration, Teva profit-share costs, and collection of the remaining Aytu receivable.
- Review debt repayment obligations, interest costs, lender covenant compliance and any additional prepayment plans.
- Confirm the accounting treatment and net proceeds of the Apollo transaction in subsequent filings, along with any impact on Avalo’s remaining AVTX-007 rights and obligations.