Avalo Therapeutics, Inc. — Q1 2022 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three months ended March 31, 2022. Avalo is a clinical-stage biotechnology company focused on immunology and rare genetic diseases. Its reported product revenue primarily comes from Millipred; its longer-term business depends on developing and commercializing pipeline candidates.
Financial performance and position
- Revenue: $1.17 million, up from $0.47 million in Q1 2021. Millipred accounted for substantially all product revenue; two customers represented approximately 75% and 25% of quarterly revenue.
- Product economics: Cost of product sales was $0.72 million, versus $0.08 million. Implied product gross profit was approximately $0.45 million (39% margin), compared with $0.40 million (84%) a year earlier. The company attributed higher costs mainly to the Millipred supplier’s 50% net-profit share, subject to a $0.5 million quarterly minimum.
- Operating results: Operating expenses were $22.03 million, down from $31.05 million; operating loss was $20.85 million, versus $30.58 million. Net loss was $22.05 million, or $0.20 per share, compared with $30.68 million, or $0.32 per share.
- Cash flow: Operating cash use was $16.07 million, versus $18.32 million. Investing cash flow was zero and there was no financing cash flow in Q1 2022. Cash, cash equivalents and restricted cash totaled $38.80 million at quarter-end, including $38.47 million of cash and cash equivalents.
- Liquidity and equity: Current assets were $43.66 million and current liabilities were $17.89 million. Stockholders’ equity fell to $6.34 million from $23.08 million at year-end, largely reflecting the quarterly loss.
- Debt: Notes payable had a $33.18 million carrying value ($36.05 million gross, including the final payment fee). The venture debt bears interest at 6.25% plus prime, with a 13.7% effective rate reported at quarter-end, and maturities in 2025. Interest expense was $1.17 million.
Material changes versus Q1 2021
- Research and development expense decreased to $9.58 million from $25.21 million. The comparison period included a $10.0 million AVTX-002 license fee; lower clinical and manufacturing costs also contributed.
- General and administrative expense rose to $9.76 million from $4.91 million, and sales and marketing expense rose to $1.93 million from $0.44 million. Increases included severance and accelerated or modified equity awards related to executive departures and workforce reductions.
- Q1 2022 included $3.1 million of severance expense and $4.3 million of non-cash stock-based compensation expense associated with separations. Total stock-based compensation was $5.31 million, versus $1.45 million.
- Interest expense increased from net interest income of $0.02 million in Q1 2021, reflecting the 2021 venture debt financing. The 2021 quarter also included $37.7 million of net public-offering proceeds; Q1 2022 had no financing proceeds.
Outlook, risks and unusual items
- Going concern: Management concluded that substantial doubt exists about Avalo’s ability to continue as a going concern within one year after issuance of the financial statements. The company expects continued losses and says additional financing is required to fund operations and execute its strategy. Potential sources include financings, grants, collaborations or licensing, and sales or licensing of non-core assets. Failure to obtain funding could require spending reductions or delays, suspension, or elimination of programs.
- Pipeline and cost actions: Avalo initiated a Phase 2 trial of AVTX-002 for non-eosinophilic asthma and a pivotal study of AVTX-803 for LAD-II; top-line and pivotal data, respectively, were expected in Q4 2022. Under its cost-reduction plan, it was winding down internal AVTX-006 development and pausing AVTX-802 development; AVTX-007 development in multiple myeloma was also being wound down. Management expected lower salary-related and other expenses beginning in Q2 2022.
- Financing constraints: Venture debt is secured by substantially all assets other than specified excluded collateral and includes restrictive covenants. Default could accelerate amounts due. As of the filing, the company reported no known covenant breach, material adverse change, or lender notice of default.
- Other exposures: Avalo guarantees certain Aytu obligations to Deerfield, with estimated maximum potential future payments of $3.0 million. The filing reports no legal proceedings and no material change to previously disclosed risk factors.
Important facts for investors to verify
- How much financing Avalo can secure, on what terms, and whether it can address the disclosed going-concern doubt without materially diluting shareholders or surrendering valuable rights.
- Actual cash burn and remaining liquidity relative to clinical-trial plans, including whether management’s expected Q2 cost reductions were realized.
- Timing and results of the AVTX-002 and AVTX-803 studies, and the strategic or funding implications of pausing or winding down other programs.
- Millipred sales, customer concentration, the Teva profit-share and minimum payment, and collection of the remaining approximately $2.0 million receivable from Aytu.
- Debt covenant compliance, interest costs, repayment terms, and any developments concerning the Aytu guarantee or other contingent obligations.