Avalo Therapeutics, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Avalo is a clinical-stage biotechnology company focused on immunology, immuno-oncology and rare genetic diseases. In August, it changed its name from Cerecor Inc. to Avalo Therapeutics, Inc. and consolidated certain subsidiaries. Its principal product revenue is from Millipred.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $1.35m | $1.11m | $5.18m | $5.20m |
| Operating expenses | $17.81m | $14.39m | $69.35m | $61.71m |
| Net loss | $17.40m | $13.46m | $65.18m | $47.86m |
| Net loss per common share | $0.17 | $0.17 | $0.67 | $0.68 |
- Nine-month product revenue was $4.55m, down from $5.20m; the company also recorded $0.63m of license revenue from out-licensing AVTX-301 and assigning AVTX-406 rights.
- Research and development expense rose to $48.33m for the first nine months, from $19.56m. It included a $10.0m upfront AVTX-002 license fee and reflected higher clinical, manufacturing, preclinical and staffing costs. The prior-year period included $25.55m of acquired in-process R&D expense from the Aevi transaction.
- Q3 cost of product sales was $0.91m versus $0.08m. Beginning July 1, Avalo must pay Teva 50% of Millipred net profit, subject to a $0.5m quarterly minimum. Management expects product costs to remain higher than historical levels.
- Cash and cash equivalents were $71.51m at September 30, 2021, versus $18.92m at December 31, 2020. Total current assets were $77.01m and current liabilities were $19.04m.
- Cash used in operations was $53.79m for the nine months, compared with $26.16m in 2020. Investing activities used $0.10m; financing provided $106.69m. Cash, cash equivalents and restricted cash increased by $52.79m to $71.90m.
- Notes payable had a $36.05m gross balance, including the final payment fee, and a $32.48m carrying value after unamortized discounts and issuance costs. The $35m venture debt facility was fully drawn. The effective interest rate was 13.5%; interest-only payments extend for 24 months, followed by amortization. The notes mature in 2025.
- Stockholders’ equity was $40.31m; accumulated deficit was $242.97m. Common shares outstanding were 112.32m at September 30.
Material changes and management commentary
- Q3 revenue increased year over year, while nine-month revenue was slightly lower. Q3 net loss widened by $3.94m; the nine-month loss widened by $17.32m, primarily amid increased pipeline investment and new debt interest expense.
- Financing during 2021 generated approximately $105m net from equity and debt: a January offering, the venture debt facility, a September offering and ATM sales. September’s public offering raised $29.0m net; August ATM sales raised $5.3m net.
- Avalo reported progress in its pipeline, including AVTX-002 trial data and Fast Track designation for its COVID-19 ARDS program, completion of the first AVTX-007 Phase 1b cohort in multiple myeloma, and Fast Track designation for AVTX-803. The filing describes anticipated R&D milestones but provides no quantitative financial guidance.
- Management expects R&D and general and administrative costs to remain above historical levels as the pipeline advances; it also expects higher operating cash use and interest expense. Amortization expense is expected to decrease as certain assets become fully amortized.
Outlook, risks and unusual items
- Going concern: Despite $71.5m of cash and recent financings, management stated that Avalo will need additional financing to fund operations and execute its strategy for at least one year after the financial statements were issued. It concluded that substantial doubt exists about the company’s ability to continue as a going concern. If further funding is unavailable, Avalo may cut, delay or discontinue R&D programs or liquidate assets.
- Potential funding sources include additional dilutive or non-dilutive financing, grants, collaborations, licensing or asset sales. Licensing or collaboration could require surrendering valuable rights. Debt covenants restrict certain additional indebtedness, asset dispositions and business combinations without lender consent; default could permit acceleration. Avalo reported no known covenant breach or default notice as of the filing date.
- AVTX-002 carries up to $112.5m of development and regulatory milestones, up to $75m of sales milestones, mid-teen royalties and sublicensing payment obligations. Other licensed programs also carry potential milestone and royalty obligations; these are generally recognized when probable and estimable.
- Avalo guaranteed certain Aytu obligations related to the divested pediatric portfolio; the estimated maximum potential future payment was $3.0m based on Aytu’s latest reported figures. Avalo also retained exposure to certain legacy product returns, which may continue through Q2 2022. The filing says expected credit loss on the guarantee was de minimis at September 30.
- Millipred distribution operations transferred from Aytu to Avalo during Q3. Avalo deferred receipt of $2.0m from Aytu, due in installments in December 2022 and December 2024.
- In November 2021, after quarter-end, Avalo entered a cooperation agreement with significant stockholder Armistice providing for board appointments and director departures, among other governance changes. The filing also reports related-party transactions involving Armistice affiliates and participation by significant holders in equity offerings.
Important facts for investors to verify
- Whether available cash, future financings and other planned funding sources are sufficient to address the stated going-concern uncertainty and the company’s cash burn.
- Pipeline milestones, trial progress, regulatory designations and the funding required to advance candidates; the filing provides no firm financial outlook.
- Debt terms, covenant compliance, interest and amortization obligations, and the company’s capacity to meet potential milestone and royalty commitments.
- Millipred sales, the impact of the Teva profit share and minimum payment, distributor transition, customer concentration, and collection of the deferred Aytu amount.
- The terms and governance implications of the Armistice cooperation agreement, including accelerated compensation and option treatment for departing directors.