Avalo Therapeutics, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Avalo is a clinical-stage biotechnology company focused on therapies targeting the LIGHT-signaling network; it also sells Millipred. Financial amounts below are in U.S. dollars.
Financial performance and position
- Q3 revenue: $14.9 million, versus $1.4 million in Q3 2021. This included $14.5 million of upfront license revenue from the AVTX-007 agreement with Apollo; product revenue was $0.4 million, down from $1.4 million.
- Q3 results: Operating income was $4.1 million and net income was $3.2 million, compared with a $16.5 million operating loss and $17.4 million net loss in Q3 2021. The improvement primarily reflects the one-time Apollo license revenue. Q3 operating expenses were $10.9 million, down from $17.8 million; research and development (R&D) was $7.0 million and selling, general and administrative (SG&A) was $3.3 million.
- Nine-month results: Revenue was $17.2 million versus $5.2 million; net loss was $31.8 million versus $65.2 million. R&D expense decreased to $25.1 million from $48.3 million, including because the prior-year period included a $10.0 million AVTX-002 license fee. SG&A was $17.8 million versus $18.7 million. Interest expense was $3.2 million versus $1.2 million.
- Cash flow: Nine-month operating cash use was $22.8 million, compared with $53.8 million in 2021. Investing cash use was $0.1 million. Financing used $14.8 million, principally for the loan prepayment, compared with $106.7 million of financing inflows in 2021, which included equity and debt financings. Cash, cash equivalents and restricted cash declined $37.7 million to $17.2 million; cash and cash equivalents alone were $16.9 million.
- Balance sheet and debt: Total assets were $36.5 million and total liabilities were $38.6 million, leaving a $2.0 million stockholders’ deficit. Notes payable had a $19.1 million carrying value ($21.2 million gross, including the final payment fee), of which $2.6 million was current. Avalo prepaid $15.0 million in June, including $14.8 million applied to principal. The notes’ effective interest rate was 18.7% at quarter-end.
- Margins: The filing does not present a consolidated gross-margin measure. Product revenue was substantially smaller than the license revenue recognized in the quarter, so reported quarterly profitability was strongly affected by the Apollo upfront payment.
Material developments and outlook
- Avalo reported that AVTX-002’s Phase 2 PEAK trial in non-eosinophilic asthma remained on track for topline data in the first half of 2023. AVTX-803’s Phase 3 LADDER trial was also expected to produce pivotal data in the first half of 2023.
- AVTX-008, a BTLA agonist fusion protein, entered IND-enabling studies; Avalo targeted an IND submission in 2024. The company said it was narrowing its focus to dysregulated inflammation involving the LIGHT network.
- A first-quarter cost-reduction plan included winding down internal development of AVTX-006, pausing AVTX-802, and reducing headcount. Avalo reported $1.5 million of workforce termination expense, plus $0.4 million of related stock-based compensation. Separations of certain executives also generated $1.7 million of SG&A expense and $3.9 million of accelerated stock-compensation expense in the first quarter.
- Management stated that available cash was not expected to fund operations through the next anticipated milestones and that additional capital was needed. The filing says substantial doubt exists about Avalo’s ability to continue as a going concern within one year after issuance of the financial statements. Potential funding sources include financings, collaborations or licensing, asset sales, and grants; failure to secure funding could force spending cuts or delays, suspensions, or eliminations of programs.
- After quarter-end, on November 4, Avalo agreed to sell to ES Therapeutics, an Armistice affiliate, its future economic rights to payments for AVTX-007, AVTX-501 and AVTX-611 for $5.0 million, payable at closing. Closing was expected in November; the transaction’s accounting impact was to be assessed in Q4. The transaction was approved under the company’s related-party transaction policy.
Risks, contingencies, and unusual items
- Millipred product revenue declined; Avalo said potential disruption from the transition of commercial operations from Aytu to Avalo may have contributed and that it could not determine whether the effect would be temporary or permanent. Two customers accounted for all reported Q3 product revenue, approximately 65% and 35%.
- Avalo fully reserved a $1.0 million receivable due from Aytu in December 2024 because of Aytu’s disclosed liquidity concerns. A further approximately $0.8 million receivable was included in other receivables and contractually due in Q4 2022. Avalo also estimated up to $0.5 million of potential exposure under its guarantee of an Aytu obligation to Deerfield.
- The loan agreement includes restrictive covenants and default provisions; a default could accelerate substantial amounts due. Avalo reported no known covenant breach, material adverse change, or lender default notice as of the filing date. The notes are secured by substantially all assets other than specified exclusions.
- Potential future development, regulatory, sales-based milestone and royalty obligations under license and acquisition agreements remain contingent; the filing states that no liabilities were recognized for several milestones because they were not yet probable and reasonably estimable.
- A 1-for-12 reverse stock split took effect July 7, 2022; prior-period share and per-share figures were retroactively adjusted. Management reported disclosure controls were effective and no material change in internal control over financial reporting. The filing listed no legal proceedings and said risk factors had not changed materially from the 2021 Form 10-K.
Investor verification priorities
- Confirm the status and terms of the $5.0 million ES related-party transaction, including closing, cash receipt, and the relinquished future payment rights.
- Assess financing plans and cash runway against the stated going-concern substantial-doubt disclosure and the AVTX-002 and AVTX-803 milestones.
- Track trial progress, data timing, and any changes to development priorities or the AVTX-008 IND timeline.
- Review Millipred sales trends, customer concentration, the Aytu receivable collection, and potential guarantee exposure.
- Monitor debt amortization, interest costs, prepayment terms, and compliance with lender covenants.