# Avalo Therapeutics, Inc.: Form 10-Q for the period ended Jun 30, 2024

- Company: [Avalo Therapeutics, Inc.](/companies/avtx.md) (CIK 1534120)
- Form: 10-Q
- Filed: 2024-08-12
- Accepted by EDGAR: Aug 12, 2024, 07:03 ET
- Period: 2024-06-30
- Accession: 0001628280-24-036591
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1534120/000162828024036591/avtx-20240630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1534120/000162828024036591/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-04-01 to 2024-06-30 | $0 | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2024-01-01 to 2024-06-30 | $0 | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2024-04-01 to 2024-06-30 | $343.0k | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2024-01-01 to 2024-06-30 | $263.0k | us-gaap:CostOfGoodsAndServicesSold |
| Operating income | 3 months, 2024-04-01 to 2024-06-30 | −$9.6m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2024-01-01 to 2024-06-30 | −$42.3m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2024-04-01 to 2024-06-30 | $7.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2024-01-01 to 2024-06-30 | $14.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-04-01 to 2024-06-30 | $98.5m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2024-01-01 to 2024-06-30 | −$22.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-04-01 to 2024-06-30 | −$14.07 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2024-01-01 to 2024-06-30 | −$30.63 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-04-01 to 2024-06-30 | $4.21 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2024-01-01 to 2024-06-30 | −$24.11 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-04-01 to 2024-06-30 | 7,653,302 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2024-01-01 to 2024-06-30 | 4,402,640 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2024-01-01 to 2024-06-30 | −$22.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2024-06-30 | $93.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2024-06-30 | $95.9m | us-gaap:AssetsCurrent |
| Total assets | at 2024-06-30 | $108.3m | us-gaap:Assets |
| Current liabilities | at 2024-06-30 | $96.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2024-06-30 | $110.5m | us-gaap:Liabilities |
| Shareholders' equity | at 2024-06-30 | −$13.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 34,627 characters.

*This Quarterly Report on Form 10-Q and the information incorporated herein by reference contain forward-looking statements that involve a number of risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Forward-looking statements can be identified by the use of forward-looking words such as “projects,” “may,” “might,” “will,” “could,” “would,” “should,” “continue,” “seeks,” “aims,” “predicts,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “potential,” “pro forma” or other similar words (including their use in the negative), or by discussions of future matters such as: the future financial and operational outlook; the development of product candidates; and other statements that are not historical. Although our forward-looking statements reflect the good faith judgment of our management, these statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from results and outcomes discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those set out elsewhere in this Quarterly Report on Form 10-Q, particularly in Part II – Item 1A, “Risk Factors,” as well as in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 29, 2024, and in our other filings with the SEC. Statements made herein are as of the date of the filing of this Quarterly Report on Form 10-Q with the SEC and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim any obligation to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.*

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and related notes that appear in Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and related notes for the year ended December 31, 2023 appearing in our Annual Report on Form 10-K filed with the SEC on March 29, 2024.

### Overview

Avalo Therapeutics, Inc. (the “Company,” “Avalo” or “we”) is a clinical stage biotechnology company focused on the treatment of immune dysregulation. Avalo’s lead asset is AVTX-009, an anti-IL-1β monoclonal antibody (“mAb”), targeting inflammatory diseases. Avalo has two additional drug candidates which include quisovalimab (anti-LIGHT mAb) and AVTX-008 (BTLA agonist fusion protein).

Management’s primary evaluation of the success of the Company is the ability to progress its pipeline forward toward commercialization or opportunistically out-licensing rights to indications or geographies. We believe the ability to achieve the anticipated milestone as presented in the following chart represents our most immediate evaluation point as to the progress of our goal to move the pipeline forward.

### Recent Developments

In July 2024, Avalo announced that its Investigational New Drug (“IND”) for AVTX-009, an anti-IL-1β (mAb), for the treatment of hidradenitis suppurativa (“HS”) is now active, permitting the Company to commence its Phase 2 (“LOTUS”) clinical trial. Avalo expects to enroll its first patient in its Phase 2 LOTUS Trial, in the second half of 2024. The LOTUS Trial is a randomized, double-blind, placebo-controlled, parallel-group Phase 2 trial with two AVTX-009 dose regimens to evaluate the efficacy and safety of AVTX-009 in approximately 180 adults with moderate to severe HS. Avalo is the study sponsor and the current proposed trial locations include United States, Canada, France, Germany, Italy, Spain, Bulgaria, Czech Republic, Greece, Poland, Australia and Turkey. Subjects will be randomized (1:1:1) to receive either one of two doses of AVTX-009 or placebo. The primary efficacy endpoint is the proportion of subjects achieving Hidradenitis Suppurativa Clinical Response (HiSCR75) at Week 16.

On June 24, 2024, Avalo announced the appointment of Paul Varki as its Chief Legal Officer. Additionally, on July 16, 2024, Avalo announced the appointment of Mittie Doyle, MD, FACR as its Chief Medical Officer.

### Liquidity

Since inception, we have incurred significant operating and cash losses from operations. We have primarily funded our operations to date through sales of equity securities, out-licensing transactions and sales of assets.

For the six months ended June 30, 2024, Avalo generated a net loss of $22.8 million and negative cash flows from operations of $22.5 million. As of June 30, 2024, Avalo had $93.4 million in cash and cash equivalents. In the first quarter of 2024, the Company closed a private placement investment consisting of an initial upfront gross investment of $115.6 million (net proceeds were $108.1 million after deducting transaction costs) and potentially up to an additional $69.4 million of gross proceeds upon the exercise of warrants issued in the financing.

Based on our current operating plans, we expect that our existing cash and cash equivalents are sufficient to fund operations for at least twelve months from the filing date of this Quarterly Report on Form 10-Q and we expect current cash on hand to fund operations into 2027. The Company closely monitors its cash and cash equivalents and seeks to balance the level of cash and cash equivalents with our projected needs to allow us to withstand periods of uncertainty relative to the availability of funding on favorable terms. We may satisfy any future cash needs through sales of equity securities under the Company’s at-the-market program or other equity financings, out-licensing transactions, strategic alliances/collaborations, sale of programs, and/or mergers and acquisitions. There can be no assurance that any financing or business development initiatives can be realized by the Company, or if realized, what the terms may be. To the extent that we raise capital through the sale of equity, the ownership interest of our existing stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of our stockholders. Further, if the Company raises additional funds through collaborations, strategic alliances or licensing arrangements with third parties, the Company might have to relinquish valuable rights to its technologies, future revenue streams, research programs or product candidates.

### Our Strategy

Our strategy for increasing stockholder value includes:

- Advancing our pipeline of compounds through development and to regulatory approval;
- Developing the go-to-market strategy to quickly and effectively market, launch, and distribute each of our compounds that receive regulatory approval;
- Opportunistically out-licensing rights to indications or geographies; and
- Acquiring or licensing rights to targeted, complementary differentiated preclinical and clinical stage compounds.

There is no guarantee that our products will obtain regulatory approval by the United States Food and Drug Administration (the “FDA”) or comparable foreign regulatory authorities. The FDA approval process is complex, time-consuming, and expensive. It typically involves the following prior to submitting a new drug application (NDA) or biologics license application (BLA): preclinical laboratory and animal testing, submission of an IND application, and human clinical trials to establish safety and efficacy. Human clinical trials typically include: Phase 1 studies to evaluate the safety and tolerability of the drug, generally in normal, healthy volunteers; Phase 2 studies to evaluate safety and efficacy, as well as appropriate doses; these studies are typically conducted in patient volunteers who suffer from the particular disease condition that the drug is designed to treat; and Phase 3 studies to evaluate safety and efficacy of the product at specific doses in one or more larger pivotal trials. Upon submission of an NDA or BLA, the FDA reviews the application including potentially an FDA advisory committee review and inspects manufacturing facilities prior to FDA approval or rejection of the application. Even if a product receives FDA approval, the agency may impose post-approval requirements or withdraw approval if safety or efficacy issues arise. The processes for obtaining marketing approvals in foreign countries, along with subsequent compliance with applicable statutes and regulations, require the expenditure of substantial time and financial resources.

### Results of Operations

### Comparison of the Three Months Ended June 30, 2024 and 2023

#### Product Revenue, Net

There was no net product revenue for the three months ended June 30, 2024, compared to $0.6 million for the three months ended June 30, 2023. The decrease was driven by the planned expiration of our license and supply agreement for our only commercially marketed product, Millipred®, on September 30, 2023.

We do not expect gross product revenue for Millipred®, which the Company considered a non-core asset. However, the Company will continue to monitor estimates for commercial liabilities, such as sales returns. As additional information becomes available, the Company could recognize expense (or benefit) for differences between actuals or updated estimates to the reserves previously recognized.

#### Cost of Product Sales

Cost of product sales was $0.3 million for the three months ended June 30, 2024, compared to $0.7 million for the same period in 2023. The overall decrease was due to the expiration of Avalo’s license and supply agreement for Millipred® on September 30, 2023.

The amount recognized in the current period related to changes in the receivable reserve with Aytu BioScience, Inc. (“Aytu”), based upon the timing of reconciliations to the retention amount and the sales returns paid by Aytu on behalf of Avalo as stipulated in a transition services agreement.

The Company will continue to monitor estimates for commercial liabilities, such as sales returns, profit share with the supplier pursuant to the reconciliation process, and commercial activity with Aytu, who previously managed Millipred® commercial operations on our behalf for an interim period. As additional information becomes available, the Company could recognize expense (or a benefit) for differences between actuals or updated estimates to the reserves previously recognized, which could be recognized in cost of product sales.

#### Research and Development Expenses

The following table summarizes our research and development expenses for the three months ended June 30, 2024 and 2023 (in thousands):

|  | Three Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: |
| Nonclinical expenses | $195 | $211 |
| Clinical expenses | 1,579 | 1,697 |
| CMC expenses | 740 | 1,685 |
| Internal expenses: |  |  |
| Salaries, benefits and related costs | 1,810 | 679 |
| Stock-based compensation expense | 219 | 331 |
| Other | 58 | 55 |
|  | $4,601 | $4,658 |

Research and development expenses decreased $0.1 million for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. This decrease was mainly driven by a $0.9 million decrease in chemistry, manufacturing, and controls (“CMC”) expenses and a $0.1 million decrease in clinical expenses, partially offset by a $1.1 million increase in salaries, benefits and related costs.

CMC and clinical expenses decreased due to the quisovalimab PEAK trial concluding in June 2023 and the corresponding timing of raw material orders that did not repeat in the current period. These decreases were partially offset by expenses incurred in the current period related to the development of AVTX-009 in HS, including trial enabling activities such as preparation of the IND (which was active in early July 2024) and preparation to enroll the first patient in the LOTUS Trial, which we expect to occur in the second half of 2024. Avalo acquired the rights to develop AVTX-009 in March 2024.

Salaries, benefits and related costs increased compared to the three months ended June 30, 2023 due to increased non-equity incentive plan compensation expense incurred in the current period.

We expect future research and development expenses to increase in 2024 as a result of our development plans for AVTX-009, including planned commencement of the Phase 2 LOTUS Trial in the second half of 2024.

#### Acquired in-process research and development

In the first quarter of 2024, we acquired AVTX-009, through a merger with AlmataBio, Inc. (“AlmataBio”) and its wholly owned subsidiary (the “Almata Transaction”), resulting in us acquiring $27.6 million of in-process research and development (“IPR&D”), of which $0.1 million was recognized in the three months ended June 30, 2024. There was no acquired IPR&D for the three months ended June 30, 2023.

#### General and Administrative Expenses

The following table summarizes our general and administrative expenses for the three months ended June 30, 2024 and 2023 (in thousands):

|  | Three Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: |
| Salaries, benefits and related costs | $1,376 | $431 |
| Legal, consulting and other professional expenses | 2,421 | 1,071 |
| Stock-based compensation expense | 252 | 562 |
| Advertising and marketing expense | 21 | 7 |
| Other | 458 | 356 |
|  | $4,528 | $2,427 |

38

General and administrative expenses increased $2.1 million for the three months ended June 30, 2024 compared to the prior period. The increase was primarily driven by a $1.4 million increase in legal, consulting and other professional expenses for activities incurred related to the legal, accounting, and reporting requirements following the Almata Transaction and private placement investment, which closed in late March 2024. Additionally, salaries, benefits and related costs increased $0.9 million due to increased non-equity incentive plan compensation expense incurred in the current period.

While we expect the majority of operating expense increases will be focused on research and development activities to progress AVTX-009, we also expect moderate increases to general and administrative expenses to support the AVTX-009 program.

#### Other Income (Expense), Net

The following table summarizes our other income (expense), net for the three months ended June 30, 2024 and 2023 (in thousands):

|  | Three Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: |
| Change in fair value of warrant liability | 112,046 | — |
| Change in fair value of derivative liability | (5,040) | (40) |
| Interest income (expense), net | 1,039 | (996) |
|  | $108,045 | $(1,036) |

Other income, net increased $109.1 million for the three months ended June 30, 2024 compared to prior period. The increase was primarily driven by a $112.0 million gain recognized on the change of fair value of the warrant liability associated with the warrants issued in the March 2024 financing. The warrant liability fair value was $82.9 million as of June 30, 2024, as compared to $194.9 million as of March 31, 2024. The decrease in the fair value was mainly driven by the decrease in the closing stock price on the last trading day of the second quarter of 2024 of $12.47 per share compared to the closing stock price on the last trading day of the first quarter of 2024 of $21.75 per share. As of June 30, 2024, the Company estimated the expected term based on thirty-one days post-expected Dosing Date (as defined below), which also assumes that the Required Stockholder Approval (as defined below) will be obtained at its upcoming annual meeting of stockholders on August 13, 2024.

As the warrants are carried at fair value, future changes in fair value will be recognized in other income (expense), net at each reporting period until the warrants are either exercised or expired. Notably, subsequent increase or decreases to the stock price at each reporting period or increases or decreases to the expected term, are expected to drive increases or decreases, respectively, to the fair value of the warrant liability. If the stockholders approve the issuance of shares of common stock underlying the warrants (the “Required Stockholder Approval”), the warrants expire on the earlier of (i) the thirty-first day following the public announcement of the first patient dosed in a Phase 2 trial of AVTX-009 in HS (the “Dosing Date”), or (ii) the fifth anniversary of the date of issuance. If the Required Stockholder Approval has not been received by the Dosing Date, then the warrants expire on the earlier of (i) the thirty-first day following receipt of the Required Stockholder Approval or (ii) the fifth anniversary of the date of issuance. Refer to Note 6 – Fair Value Measurements of the unaudited condensed consolidated financial statements for more information.

The increase to other income, net was partially offset by a $5.0 million increase in fair value of the derivative liability (representing a loss on the change in fair value), driven by changes in assumptions utilized in the valuation of the AVTX-007 Milestone and Royalties (as defined in Note 6 to the unaudited condensed consolidated finance statements) due to updated publicly available information of the indication and status of trial activities pursued for the asset by Apollo AP43 Limited (“Apollo”). The main driver of this increase was a significant increase to the peak annual net sales forecast as a result of Apollo developing the asset in atopic dermatitis, which is a much larger market opportunity than adult-onset Still’s disease, the previous indication being pursued. Refer to Note 6 - Fair Value Measurements of the unaudited condensed consolidated financial statements for more information.

Finally, interest income increased by $2.0 million given the Company’s increased cash position compared to the prior period, paired with no interest expense incurred in the current period given the Company’s full payoff of its former loan in the prior year.

#### Income Tax Expense

The Company recognized minimal income tax expense for both the three months ended June 30, 2024 and 2023.

### Comparison of the Six Months Ended June 30, 2024 and 2023

#### Product Revenue, Net

There was no net product revenue for the six months ended June 30, 2024, compared to $1.1 million for the six months ended June 30, 2023. The decrease was driven by the planned expiration of our license and supply agreement for our only commercially marketed product, Millipred®, on September 30, 2023.

We do not expect future gross product revenue for Millipred®, which the Company considered a non-core asset. However, the Company will continue to monitor estimates for commercial liabilities, such as sales returns. As additional information becomes available, the Company could recognize expense (or benefit) for differences between actuals or updated estimates to the reserves previously recognized.

#### Cost of Product Sales

Cost of product sales were $0.3 million for the six months ended June 30, 2024, compared to $1.3 million for the same period in 2023. The overall decrease in cost of product sales during the period was related to the expiration of Avalo’s license and supply agreement for Millipred® on September 30, 2023.

The amount recognized in the current period related to changes in the receivable reserve with Aytu, based upon the timing of reconciliations to the retention amount and the sales returns paid by Aytu on behalf of Avalo pursuant to a transition services agreement.

The Company will continue to monitor estimates for commercial liabilities, such as sales returns, profit share with the supplier pursuant to the reconciliation process, and commercial activity with Aytu, who previously managed Millipred® commercial operations on our behalf for an interim period. As additional information becomes available, the Company could recognize expense (or a benefit) for differences between actuals or updated estimates to the reserves previously recognized, which could be recognized in cost of product sales.

#### Research and Development Expenses

The following table summarizes our research and development expenses for the six months ended June 30, 2024 and 2023 (in thousands):

|  | Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: |
| Nonclinical expenses | $347 | $575 |
| Clinical expenses | 1,641 | 4,472 |
| CMC expenses | 993 | 2,978 |
| Internal expenses: |  |  |
| Salaries, benefits and related costs | 3,134 | 1,873 |
| Stock-based compensation expense | 488 | 658 |
| Other | 113 | 111 |
|  | $6,716 | $10,667 |

Research and development expenses decreased $4.0 million for the six months ended June 30, 2024. This decrease was mainly driven by a $2.8 million decrease in clinical expenses and a $2.0 million decrease in CMC expenses. Clinical and CMC expenses decreased due to the quisovalimab PEAK trial concluding in June 2023 and the corresponding timing of raw material orders. These decreases were partially offset by increased expenses incurred in the second quarter of 2024 related to the development of AVTX-009 in HS including trial enabling activities such as preparation of the IND (which was active in early July 2024) and preparation to enroll the first patient in the LOTUS Trial, which we expect to occur in the second half of 2024. Avalo acquired the rights to develop AVTX-009 in March 2024.

These decreases were partially offset by a $1.3 million increase in salaries, benefits and related costs due to non-equity incentive plan compensation expense incurred in the current period.

We expect future research and development expenses to increase in 2024 as a result of our development plans for AVTX-009, including planned commencement of the Phase 2 LOTUS Trial in the second half of 2024.

#### Acquired in-process research and development

In the first quarter of 2024, we acquired AVTX-009 pursuant to the Almata Transaction, resulting in us acquiring $27.6 million of acquired IPR&D. The fair value of the IPR&D, substantially all of which is related to AVTX-009, was recognized as acquired IPR&D expense for the six months ended June 30, 2024 as there is no alternative future use. There was no acquired IPR&D for the six months ended June 30, 2023.

#### General and Administrative Expenses

The following table summarizes our general and administrative expenses for the six months ended June 30, 2024 and 2023 (in thousands):

|  | Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: |
| Salaries, benefits and related costs | $2,286 | $1,186 |
| Legal, consulting and other professional expenses | 3,996 | 2,253 |
| Stock-based compensation expense | 612 | 1,090 |
| Advertising and marketing expense | 28 | 20 |
| Other | 799 | 585 |
|  | $7,721 | $5,134 |

41

General and administrative expenses increased $2.6 million for the six months ended June 30, 2024 compared to the prior period. The increase was driven by a $1.7 million increase in legal, consulting and other professional expenses incurred related to the Almata Transaction and corresponding private placement investment. Additionally, salaries, benefits and related costs increased $1.1 million due primarily to non-equity incentive plan compensation expense incurred in the current period.

While we expect the majority of operating expense increases will be focused on research and development activities to progress AVTX-009, we also expect moderate increases to general and administrative expenses to support the AVTX-009 program.

#### Other Income (Expense), Net

The following table summarizes our other income (expense), net for the six months ended June 30, 2024 and 2023 (in thousands):

|  | Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: |
| Excess of initial warrant fair value over private placement proceeds | (79,276) | — |
| Change in fair value of warrant liability | 112,046 | — |
| Private placement transaction costs | (9,220) | — |
| Change in fair value of derivative liability | (5,160) | (220) |
| Interest income (expense), net | 1,138 | (1,945) |
| Other expense, net | — | (25) |
|  | $19,528 | $(2,190) |

Other income, net increased $21.7 million for the six months ended June 30, 2024 as compared to the prior period primarily driven by the impact of the warrant liability associated with the warrants issued in the March 2024 financing. For the six months ended June 30, 2024, we recognized a $79.3 million loss at issuance on the excess of initial warrant liability fair value ($194.9 million) over the private placement proceeds ($115.6 million). The loss was more than offset by a $112.0 million gain recognized on the change of fair value of the warrant liability from March 31, 2024 to June 30, 2024. The fair value of the warrant liability was estimated using a Black-Scholes option-pricing model and they key variable input driving the decrease in fair value as of June 30, 2024 compared to March 31, 2024 was the stock price movement ($12.47 as of the last trading day of the second quarter and $21.75 as of the last trading day of the first quarter). As of June 30, 2024, the Company estimated the expected term based on thirty-one days post-expected Dosing Date, which also assumes that the Required Stockholder Approval will be obtained at its upcoming annual meeting of stockholders on August 13, 2024.

As the warrants are carried at fair value, future changes in fair value will be recognized in other income (expense), net at each reporting period until the warrants are either exercised or expired. Notably, subsequent increase or decreases to the stock price at each reporting period or increases or decreases to the expected term, are expected to drive increases or decreases, respectively, to the fair value of the warrant liability. If the Required Stockholder Approval is obtained, the warrants expire on the earlier of (i) the thirty-first day following the Dosing Date, or (ii) the fifth anniversary of the date of issuance. If the Required Stockholder Approval has not been received by the Dosing Date, then the warrants expire on the earlier of (i) the thirty-first day following receipt of the Required Stockholder Approval or (ii) the fifth anniversary of the date of issuance. Refer to Note 6 – Fair Value Measurements of the unaudited condensed consolidated financial statements for more information.

The increase to other income, net was partially offset by the recognition of $9.2 million of private placement transaction costs, largely consisting of the placement agent fee of $7.0 million due on the transaction close date, and $1.7 million fee payable upon exercise of the warrants issued in the private placement investment.

Additionally, other income, net was partially offset by a $5.2 million increase in fair value of the derivative liability (representing a loss on the change in fair value) driven by changes in assumptions utilized in the valuation of the AVTX-007 Milestones and Royalties (as defined in Note 6 of the unaudited condensed consolidated financial statements) due to updated publicly available information of the indication and status of trial activities pursued for the asset by Apollo. The main driver of this increase was a significant increase to the peak annual net sales forecast as a result of Apollo developing the asset in atopic dermatitis, which is a much larger market opportunity than adult-onset Still’s disease, the previous indication being pursued. Refer to Note 6 - Fair Value Measurements of the unaudited condensed consolidated financial statements for more information.

Finally, interest income increased by $3.1 million given the Company’s increased cash position compared to the prior period, paired with no interest expense incurred in the current period given the Company’s full payoff of its former loan in the prior year.

#### Income Tax Expense

The Company recognized minimal income tax expense for both the six months ended June 30, 2024 and 2023.

### Liquidity and Capital Resources

### Uses of Liquidity

The Company uses cash to primarily fund the ongoing development of its research and development pipeline assets, mainly AVTX-009, and costs associated with its organizational infrastructure.

### Cash Flows

The following table summarizes our cash flows for the three months ended June 30, 2024 and 2023 (in thousands):

| Net cash (used in) provided by: | Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: |
| Operating activities | $(22,485) | $(21,078) |
| Investing activities | 356 | (133) |
| Financing activities | 108,140 | 14,346 |
| Net increase (decrease) in cash and cash equivalents | $86,011 | $(6,865) |

#### Net cash used in operating activities

Net cash used in operating activities was $22.5 million for the six months ended June 30, 2024 and consisted primarily of a net loss of $22.8 million and adjustments to reconcile net loss to net cash used in operating activities including the change in fair value of the warrant liability of $112.0 million, excess of initial warrant fair value over private placement investment proceeds of $79.3 million, acquired IPR&D of $27.6 million, $7.5 million milestone payment made to the former AlmataBio stockholders upon the closing of a private placement investment, change in fair value of the derivative liability of $5.2 million, transaction costs payable upon exercise of the warrants issued pursuant to the private placement investment of $1.7 million, and stock-based compensation of $1.1 million. Prepaid expense increased $1.6 million primarily due to advances paid for AVTX-009 contracts and the timing of insurance prepayments.

Net cash used in operating activities was $21.1 million for the six months ended June 30, 2023, and consisted primarily of a net loss of $18.1 million and non-cash adjustments to reconcile cash used in operating activities including stock-based compensation expense of $1.7 million. Additionally, changes in net liabilities decreased $5.8 million driven by decreases in accrued expenses and other liabilities and accounts payable of $5.6 million and $2.1 million, respectively, partially offset by a $1.9 million decrease in other receivables.

We expect future cash used in operating activities to increase in 2024 as a result of acquiring AVTX-009 in March 2024 and our associated development plans.

#### Net cash provided by (used in) investing activities

Net cash provided by investing activities for the six months ended June 30, 2024 consisted of the cash acquired as part of the Almata Transaction. Net cash used in investing activities was minimal for the six months ended June 30, 2023.

#### Net cash provided by financing activities

Net cash provided by financing activities for the six months ended June 30, 2024 consisted of gross proceeds of $115.6 million from the private placement investment that closed on March 28, 2024, partially offset by transaction costs paid related to the private placement investment of $7.5 million.

Net cash provided by financing activities for the six months ended June 30, 2023 consisted of net proceeds of $13.7 million from an underwritten public offering that closed in February 2023 and net proceeds of $6.5 million from the sale of common stock pursuant to the Company’s at-the-market program in the second quarter of 2023, partially offset by the $6.0 million principal prepayment under the Loan Agreement (as defined in Note 9 to the unaudited condensed consolidated financial statements).

The Company could receive up to an additional $69.4 million of gross proceeds upon the exercise of the warrants that were issued pursuant to the private placement investment that closed on March 28, 2024. The warrants are exercisable for approximately $5.80 per underlying share of common stock (or a number of shares of Series C Preferred Stock convertible into the number of shares of common stock the warrant is then exercisable into). If the Required Stockholder Approval is obtained, the warrants expire on the earlier of (i) the thirty-first day following the Dosing Date, or (ii) the fifth anniversary of the date of issuance. If the Required Stockholder Approval has not been received by the Dosing Date, then the warrants expire on the earlier of (i) the thirty-first day following receipt of the Required Stockholder Approval or (ii) the fifth anniversary of the date of issuance.

### Critical Accounting Policies, Estimates, and Assumptions

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, which have been prepared in accordance with GAAP. In preparing the financial statements in conformity with GAAP, the Company makes estimates and assumptions that have an impact on assets, liabilities, revenue and expenses reported. These estimates can also affect supplemental information disclosed by us, including information about contingencies, risk, and financial condition. In our unaudited condensed consolidated financial statements, estimates are used for, but not limited to, revenue recognition, cost of product sales, stock-based compensation, fair value measurements, the valuation of warrant liabilities, the valuation of derivative liabilities, cash flows used in management’s going concern assessment, income taxes, goodwill, and clinical trial accruals. The Company believes, given current facts and circumstances, that our estimates and assumptions are reasonable, adhere to GAAP and are consistently applied. Inherent in the nature of an estimate or assumption is the fact that actual results may differ from estimates, and estimates may vary as new facts and circumstances arise. Our most critical accounting estimates and assumptions are included in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on March 29, 2024 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2024 filed with the SEC on May 13, 2024 (as amended on July 11, 2024). There have been no significant changes to our critical accounting policies during the three months ended June 30, 2024.

### Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, as defined by applicable SEC rules and regulations.

## Controls and procedures

As filed, 1,800 characters.

### Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(b) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, our management, including our principal executive officer and our principal financial officer, conducted an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q of the effectiveness of the design and operation of our disclosure controls and procedures. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this Quarterly Report on Form 10-Q.

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

### Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 18,728 characters.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 29, 2024 (the “2023 10-K”), which could materially affect our business, financial condition, or future results. Our risk factors as of the date of this Quarterly Report on Form 10-Q have not changed materially from those described in the Form 10-K referenced above except as follows. These risks and those described in the Form 10-K referenced above, however, are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition, or future results of operations and the trading price of our common stock.

***If we are unable to obtain or maintain intellectual property rights, or if the scope of patent protection is not sufficiently broad, competitors could develop and commercialize products similar or identical to ours, and we might not be able to compete effectively in our market. Furthermore, certain of our composition of matter patents for AVTX-009 and AVTX-002 currently expire in 2026, 2027, or 2028.***

Our success depends in significant part on our and our licensors’, licensees’ or collaborators’ ability to establish, maintain and protect patents and other intellectual property rights and operate without infringing the intellectual property rights of others. We have filed numerous patent applications both in the United States and in foreign jurisdictions to obtain patent rights to inventions we have discovered. We have also licensed from third parties’ rights to patent portfolios.

The patent prosecution process is expensive and time‑consuming, and we and our current or future licensors, licensees or collaborators might not be able to prepare, file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we or our licensors, licensees or collaborators will fail to identify patentable aspects of inventions made in the course of development and commercialization activities before it is too late to obtain patent protection on them. Moreover, in some circumstances, we might not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the patents, covering technology that we license from or license to third parties and are reliant on our licensors, licensees or collaborators. Therefore, these patents and applications might not be prosecuted and enforced in a manner consistent with the best interests of our business. If our current or future licensors, licensees or collaborators fail to establish, maintain or protect such patents and other intellectual property rights, such rights may be reduced or eliminated. If our licensors, licensees or collaborators are not fully cooperative or disagree with us as to the prosecution, maintenance or enforcement of any patent rights, such patent rights could be compromised.

The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our and our current or future licensors’, licensees’ or collaborators’ patent rights are highly uncertain. Our and our licensors’, licensees’ or collaborators’ pending and future patent applications might not result in patents being issued which protect our technology or products, in whole or in part, or which effectively prevent others from commercializing competitive technologies and products. The patent examination process may require us or our licensors, licensees or collaborators to narrow the scope of the claims of our or our licensors’, licensees’ or collaborators’ pending and future patent applications, which may limit the scope of patent protection that may be obtained. Our and our licensors’, licensees’ or collaborators’ patent applications cannot be enforced against third parties practicing the technology claimed in such applications unless and until a patent issues from such applications, and then only to the extent the issued claims cover the technology.

Furthermore, given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, our owned and licensed patent portfolio might not provide us with sufficient rights to exclude others from commercializing products similar or identical to our products. We expect to seek extensions of patent terms where these are available in any countries where we are prosecuting patents. This includes in the United States under the Drug Price Competition and Patent Term Restoration Act of 1984, which permits a patent term extension of up to five years beyond the expiration of the patent. However, the applicable authorities, including the FDA in the United States, and any equivalent regulatory authority in other countries, might not agree with our assessment of whether such extensions are available, and may refuse to grant extensions to our patents, or may grant more limited extensions than we request.

Certain of our composition of matter patents for AVTX-009 and AVTX-002 currently expire in 2026, 2027, or 2028. If we are unable to obtain extensions to our patents or other means of regulatory exclusivity for our products, the expiration of patents might create opportunities for competitors to enter the market for our target indications, which could have a material negative impact on our financial results. Without patent protection, we are susceptible to competitors bringing similar products to market, obtaining FDA approval, and achieving regulatory exclusivity prior to us.

Both AVTX-009 and AVTX-002 are biologic products, which would allow the Company to receive biologics reference product exclusivity in both the United States (twelve years) and Europe (ten years) if and upon receiving marketing approval for the products. Once our composition of matter patents expire, we plan to rely on such exclusivity to protect our intellectual property, which has its associated risks. See the risk factor below titled “*As appropriate, we intend to seek all available periods of regulatory exclusivity for our product candidates. However, there is no guarantee that we will be granted these periods of regulatory exclusivity or that we will be able to maintain these periods of exclusivity”* for more information regarding the risks of relying on regulatory exclusivity.

***As appropriate, we intend to seek all available periods of regulatory exclusivity for our product candidates. However, there is no guarantee that we will be granted these periods of regulatory exclusivity or that we will be able to maintain these periods of exclusivity.***

The Biologics Price Competition and Innovation Act of 2009 (“BPCIA”) created an abbreviated pathway for the approval of biosimilar and interchangeable biological products. The regulatory pathway establishes legal authority for the FDA to review and approve biological products that are biosimilar to or interchangeable with an FDA-licensed reference biologic.

Under the BPCIA, a reference biological product is granted twelve years of exclusivity in the United States from the time of first licensure of the product (ten years of data and marketing exclusivity in Europe), and the FDA will not accept an application for a biosimilar or interchangeable product based on the reference biological product until four years after the date of first licensure of the reference product. In addition, the licensure of a biosimilar product may not be made effective by the FDA until twelve years from the date on which the reference product was first licensed. During this 12-year period of exclusivity, another company may still develop and receive approval for a competing version of the reference product if the FDA approves a full biologics license application for the competing product containing the sponsor’s own preclinical data and data from adequate and well-controlled clinical trials to demonstrate the safety, purity and potency of their product.

We believe that our current and any future product candidates we develop as biologic products should qualify for the twelve-year period of exclusivity in the United States (ten years in Europe). While we intend to apply for all periods of exclusivity that we may be eligible for, there is no guarantee that we will receive all such periods of exclusivity. Additionally, under certain circumstances, the FDA may revoke the period of exclusivity. As a result, there is no guarantee that we will be able to maintain a period of exclusivity, even if granted. Further, there is a risk that any exclusivity we receive is shortened due to Congressional action or otherwise, or that the FDA will not consider subject product candidates to be reference products for competing products, potentially creating the opportunity for biosimilar competition sooner than anticipated.

***Pursuant to the terms of the securities purchase agreement for the March 2024 financing, we are required to recommend that our stockholders approve the conversion of all outstanding shares of our Series C non-voting convertible preferred stock into shares of our common stock and the ability to issue shares of common stock upon the exercise of the Warrants. We cannot guarantee that our stockholders will approve this matter, and if they fail to do so, it might have an adverse impact on our operations and the value and liquidity of your investment might be impaired.***

Under the terms of the securities purchase agreement for the March 2024 financing, we agreed to use our best efforts to obtain the Required Stockholder Approval to allow (i) the conversion of all outstanding shares of Series C Preferred Stock issued in the AlmataBio Transaction and the March 2024 private placement and (ii) the ability of all Warrants issued in the March 2024 financing to be exercised for shares of common stock, as required by the Nasdaq listing rules, at a meeting of our stockholders and, if such approval is not obtained at that meeting, to seek to obtain such approval at a stockholders meeting to be held at least every 90 days thereafter until such approval is obtained. If the Required Stockholder Approval is not obtained at a meeting, the need to hold one or more additional meetings would be time consuming and costly. In addition, the failure to receive the Required Stockholder Approval could impair the public perception of our Company and our securities and could have an adverse impact on the liquidity and value of the Series C Preferred Stock and the Warrants, as well as on the value of our common stock.

***The Series C non-voting convertible preferred stock and the Warrants are not convertible or exercisable for shares of our common stock without the approval of our stockholders and therefore may not have any value.***

The Series C non-voting convertible preferred stock is convertible into shares of our common stock and the Warrants are exercisable for shares of our common stock only upon receipt of the Required Stockholder Approval. If we do not obtain the Required Stockholder Approval, then the Series C Preferred Stock will remain outstanding in accordance with its terms, the Warrants will remain outstanding and exercisable for shares of Series C Preferred Stock, and the AlmataBio Transaction milestone payments would only be payable in cash. If the Series C Preferred Stock cannot convert to shares of common stock, there may be less reason for the holders of the Warrants to exercise them as to our knowledge there currently is no market for the Series C Preferred Stock nor do we expect a robust market to develop. This would reduce the ability of the Company to benefit from the receipt of cash proceeds from the exercise of the Warrants.

***A substantial number of shares of our common stock may be sold upon the conversion of our Series C Preferred Stock, which could cause the price of our common stock to decline.***

If we receive the Required Stockholder Approval, the up to 34,325,423 shares of common stock issuable upon conversion of the Series C Preferred Stock and upon the exercise of the Warrants, subject to beneficial ownership limitations, will represent approximately 97% of the shares of common stock outstanding on August 5, 2024 on an as converted-basis. The sale of a substantial number of shares of our securities in the public market, or the perception that such sales may occur, could adversely affect the price of our common stock on the Nasdaq Capital Market. We cannot predict the effect, if any, that market sales of those shares of common stock or the availability of those shares of common stock for sale will have on the market price of our common stock.

In addition, in the future, we may also issue shares of our common stock in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could substantially increase our shares of common stock outstanding, which could adversely affect the price of our common stock on the Nasdaq Capital Market.

***If we are not able to comply with the applicable continued listing requirements or standards of The Nasdaq Stock Market, Nasdaq could delist our common stock.***

Our common stock is currently listed on The Nasdaq Stock Market. In order to maintain that listing, we must satisfy minimum financial and other continued listing requirements and standards, including those regarding director independence and independent committee requirements, minimum stockholders’ equity, a minimum closing bid price of $1.00 per share, and certain corporate governance requirements. There can be no assurances that we will be able to comply with the applicable listing standards. For example, on August 8, 2023, Nasdaq notified us that we failed the $1.00 minimum bid price requirement and the $35 million minimum Market Value of Listed Securities (“MVLS”) requirement. The Company affected a 1-for-240 reverse stock split on December 28, 2023, which has allowed its common stock to trade above $1.00 since December 29, 2023. On January 30, 2024, the Company received written notification from Nasdaq confirming that the Company had regained compliance with the Bid Price Rule. Nasdaq also notified the Company that it is subject to a mandatory panel monitor for a period of one year from January 30, 2024. If, within the one-year monitoring period, Nasdaq finds the Company again out of compliance with the Bid Price Rule, then notwithstanding Nasdaq Rule 5810(c)(2), the Company will not be permitted to provide Nasdaq with a plan of compliance with respect to that deficiency and Nasdaq will not be permitted to grant additional time for the Company to regain compliance with respect to that deficiency, nor will the Company be afforded an applicable cure or compliance period pursuant to Nasdaq Rule 5810(c)(3). Instead, Nasdaq will issue a Delist Determination Letter and the Company will have an opportunity to request a new hearing with the initial Nasdaq panel assigned to the Company for its recent noncompliance or newly convened hearings panel if the initial panel is unavailable. The Company will have the opportunity to respond to the hearings panel as provided by Nasdaq Rule 5815(d)(4)(C). If the Company fails to satisfy the Nasdaq panel, its securities would be delisted from Nasdaq. There can be no assurance that we will continue to maintain such requirement or remain in compliance with any other Nasdaq listing requirements.

Further, on May 20, 2024, we received a written notice from Nasdaq indicating that the Company no longer complies with the requirement under Nasdaq Listing Rule 5550(b)(1) to maintain a minimum of $2,500,000 in stockholders equity for continued listing on the Nasdaq Capital Market (the “Stockholders’ Equity Requirement) because the Company reported stockholders’ equity of negative $112.6 million in its Form 10-Q for the period ended March 31, 2024, and, as of the date of the written notice, the Company did not meet the alternatives of market value of listed securities or net income from continuing operations (together with the Stockholders’ Equity Requirement, the “Listing Rule”). In accordance with the Nasdaq Listing Rules, the Company submitted a plan to regain compliance (the “Plan of Compliance”) on July 1, 2024. On July 29, 2024, Nasdaq accepted the Company’s Plan of Compliance and granted the Company a 180-day extension (until November 18, 2024) to regain compliance with the Listing Rule. If the Company is unable to regain compliance within the extension period granted by the Staff, the Staff would be required to issue a delisting determination. There can be no assurance that the Company will evidence compliance with the Listing Rule by November 18, 2024.

In the event that our common stock is delisted from The Nasdaq Stock Market and is not eligible for quotation or listing on another market or exchange, trading of our common stock could be conducted only in the over‑the‑counter market or on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it could become more difficult to dispose of, or obtain accurate price quotations for, our common stock, and there would likely also be a reduction in our coverage by securities analysts and the news media, which could cause the price of our common stock to decline further. Also, it may be difficult for us to raise additional capital if we are not listed on an exchange.

A delisting would also likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you wish to do so. In the event of a delisting, we may take actions to restore our compliance with The Nasdaq Stock Market’s listing requirements, but we can provide no assurance that any such action taken by us would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping below The Nasdaq Stock Market minimum bid price requirement or prevent non‑compliance with The Nasdaq Stock Market’s listing.

Filed Aug 12, 2024.
Source: SEC EDGAR, the filing index for accession 0001628280-24-036591. Last ingested by Listed: Oct 29, 2026, 16:18 ET. No prices; not investment advice.