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

- Company: [Avalo Therapeutics, Inc.](/companies/avtx.md) (CIK 1534120)
- Form: 10-Q
- Filed: 2024-11-07
- Accepted by EDGAR: Nov 7, 2024, 07:04 ET
- Period: 2024-09-30
- Accession: 0001628280-24-045965
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1534120/000162828024045965/avtx-20240930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1534120/000162828024045965/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-07-01 to 2024-09-30 | $249.0k | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2024-01-01 to 2024-09-30 | $249.0k | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2024-07-01 to 2024-09-30 | −$714.0k | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2024-01-01 to 2024-09-30 | −$453.0k | us-gaap:CostOfGoodsAndServicesSold |
| Operating income | 3 months, 2024-07-01 to 2024-09-30 | −$12.9m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2024-01-01 to 2024-09-30 | −$55.2m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2024-07-01 to 2024-09-30 | −$14.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2024-01-01 to 2024-09-30 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-07-01 to 2024-09-30 | $23.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2024-01-01 to 2024-09-30 | $210.0k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-07-01 to 2024-09-30 | −$2.83 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2024-01-01 to 2024-09-30 | −$22.63 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-07-01 to 2024-09-30 | $0.98 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2024-01-01 to 2024-09-30 | $0.01 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-07-01 to 2024-09-30 | 10,784,037 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2024-01-01 to 2024-09-30 | 6,540,963 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2024-01-01 to 2024-09-30 | −$34.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2024-09-30 | $81.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2024-09-30 | $86.1m | us-gaap:AssetsCurrent |
| Total assets | at 2024-09-30 | $98.5m | us-gaap:Assets |
| Current liabilities | at 2024-09-30 | $60.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2024-09-30 | $75.7m | us-gaap:Liabilities |
| Shareholders' equity | at 2024-09-30 | $21.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 31,397 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 in our Quarterly Report on Form 10-Q, Part II – Item 1A, “Risk Factors,” filed with the Securities and Exchange Commission, or SEC, on August 12, 2024, as well as in our Annual Report on Form 10-K filed with the 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 October 2024, Avalo announced that its first patient had been dosed in the Company’s Phase 2 (“LOTUS”) trial of AVTX-009, an anti-IL-1β (mAb), in hidradenitis suppurativa (“HS”). 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. 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. Avalo is the study sponsor and the current proposed trial locations include the United States, Canada, France, Germany, Italy, Spain, Bulgaria, Czech Republic, Greece, Poland, Australia and Turkey.

Subsequent to September 30, 2024 and through November 6, 2024, Avalo received $58.1 million in additional proceeds from the exercise of the warrants issued in the private placement financing that closed in March 2024.

### 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 nine months ended September 30, 2024, Avalo generated net income of $0.2 million and negative cash flows from operations of $34.0 million. As of September 30, 2024, Avalo had $81.9 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 up to an additional $69.4 million of gross proceeds upon the exercise of 11,967,526 warrants issued in the financing, which expire on November 8, 2024. Subsequent to September 30, 2024 and through November 6, 2024, the Company received gross proceeds of $58.1 million from the exercise of the warrants issued in the private placement.

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 at least 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 typically inspects manufacturing facilities and clinical study sites 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 September 30, 2024 and 2023

#### Product Revenue, Net

The Company’s license and supply agreement for Millipred®, an oral prednisolone indicated across a wide variety of inflammatory conditions expired, as planned, on September 30, 2023. The Company continues 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. As such, the Company recognized minimal revenue for both the three months ended September 30, 2024 and 2023 and we expect minimal to no revenue going forward.

#### Cost of Product Sales

We recognized a benefit of $0.7 million to cost of product sales for the three months ended September 30, 2024, compared to $0.2 million for the same period in 2023. The benefit recognized in the current period was mainly driven by the reversal of a $1.0 million reserve against the receivable due from Aytu BioScience, Inc. (“Aytu”) in December 2024 given that Avalo expects the receivable to be collectible as of September 30, 2024, partially offset by additional royalty on the profit share as a result of a change in estimate for commercial liabilities. The cost of product sales incurred in the prior period was driven by units sold.

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. 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 September 30, 2024 and 2023 (in thousands):

|  | Three Months Ended September 30, 2024 | 2023 |
| --- | ---: | ---: |
| Nonclinical expenses | $154 | $269 |
| Clinical expenses | 5,078 | 915 |
| CMC expenses | 1,978 | (1,191) |
| Internal expenses: |  |  |
| Salaries, benefits and related costs | 1,511 | 826 |
| Stock-based compensation expense | 761 | 371 |
| Other | 56 | 59 |
|  | $9,538 | $1,249 |

Research and development expenses increased $8.3 million for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. This increase was mainly driven by a $4.2 million increase in clinical expenses and a $3.2 million increase in chemistry, manufacturing, and controls (“CMC”) expenses.

Clinical expenses increased due to LOTUS Trial initiation activities, which culminated with the dosing of the first patient in early October 2024. Additionally, CMC expenses increased as a result of raw material purchases for an upcoming manufacturing run for AVTX-009 compared to a reversal of CMC expense in the prior year due to a reduced cancellation fee on a cancelled manufacturing run of AVTX-002.

Salaries, benefits and related costs increased $0.7 million compared to the three months ended September 30, 2023 due to increased non-equity incentive plan compensation expense and headcount additions.

We expect future research and development expenses to increase as a result of our development plans for AVTX-009, including the execution of the Phase 2 LOTUS Trial which commenced in October 2024.

#### General and Administrative Expenses

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

|  | Three Months Ended September 30, 2024 | 2023 |
| --- | ---: | ---: |
| Salaries, benefits and related costs | $1,171 | $582 |
| Legal, consulting and other professional expenses | 1,603 | 1,146 |
| Stock-based compensation expense | 1,086 | 582 |
| Other | 426 | 180 |
|  | $4,286 | $2,490 |

General and administrative expenses increased $1.8 million for the three months ended September 30, 2024 compared to the prior period. The increase was driven by a $0.6 million increase in salaries benefits and related costs due to increased non-equity incentive plan compensation expense and headcount additions, as well as a $0.5 million increase to stock compensation expense due to option and restricted stock unit grants during the period, including the annual grant in August 2024. In addition, legal, consulting and other professional expenses increased by $0.5 million for reporting, compliance and transition work incurred following the Almata Transaction and March 2024 private placement financing, as well as increased consulting services to support market research.

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 September 30, 2024 and 2023 (in thousands):

|  | Three Months Ended September 30, 2024 | 2023 |
| --- | ---: | ---: |
| Change in fair value of warrant liability | 36,025 | — |
| Change in fair value of derivative liability | (1,100) | 100 |
| Interest income (expense), net | 964 | (1,553) |
| Other expense, net | (5) | (17) |
|  | $35,884 | $(1,470) |

Other income, net increased $37.4 million for the three months ended September 30, 2024 compared to the prior period. The increase was primarily driven by a $36.0 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 $46.8 million as of September 30, 2024, as compared to $82.9 million as of June 30, 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 third quarter of 2024 of $9.50 per share compared to the closing stock price on the last trading day of the second quarter of 2024 of $12.47 per share, paired with a shorter term as the warrants approach expiration on November 8, 2024. Avalo expects no warrant liability as of December 31, 2024 following the exercise and/or expiration of the warrants during the fourth quarter of 2024. Refer to Note 6 - Fair Value Measurements of the unaudited condensed and consolidated financial statements for more information.

Interest income increased by $2.5 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.

Finally, the increase to other income, net was partially offset by a $1.1 million increase in fair value of the derivative liability (representing a loss on the change in fair value), primarily driven by the passage of time and declines in market credit spreads and risk-free rates. Refer to Note 6 - Fair Value Measurements of the unaudited condensed consolidated financial statements for more information.

#### Income Tax Expense

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

### Comparison of the Nine Months Ended September 30, 2024 and 2023

#### Product Revenue, Net

The Company’s license and supply agreement for Millipred® expired, as planned, on September 30, 2023. The Company continues 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. For the nine months ended September 30, 2024, the Company recognized minimal net product revenue of $0.2 million compared to $1.4 million for the nine months ended September 30, 2023 for sales of Millipred® during the period. We do not expect future gross product revenue for Millipred®.

#### Cost of Product Sales

We recognized a benefit of $0.5 million to cost of product sales for the nine months ended September 30, 2024, compared to $1.5 million for the same period in 2023. The benefit recognized in the current period was mainly driven by the reversal of a reserve against the receivable due from Aytu in December 2024 given that Avalo expects the receivable to be collectible as of September 30, 2024, partially offset by an additional royalty on the profit share due as a result of a change in estimate for commercial liabilities. The cost of product sales in the prior period was driven by units sold.

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 nine months ended September 30, 2024 and 2023 (in thousands):

|  | Nine Months Ended September 30, 2024 | 2023 |
| --- | ---: | ---: |
| Nonclinical expenses | $501 | $844 |
| Clinical expenses | 6,719 | 5,388 |
| CMC expenses | 2,971 | 1,787 |
| Internal expenses: |  |  |
| Salaries, benefits and related costs | 4,644 | 2,699 |
| Stock-based compensation expense | 1,250 | 1,028 |
| Other | 169 | 171 |
|  | $16,254 | $11,917 |

Research and development expenses increased $4.3 million for the nine months ended September 30, 2024. The increase was driven a $1.9 million increase in salaries, benefits and related costs due primarily to increased non-equity incentive plan compensation expense incurred in the current period and increases in clinical and CMC expenses by $1.3 million and $1.2 million, respectively. Clinical expenses increased due to LOTUS Trial initiation activities including preparation of the investigational new drug application, which was active in early July 2024, and trial start-up activities, which culminated with the first patient being dosed in October 2024. CMC expenses increased as a result of raw material purchases for an upcoming manufacturing run for AVTX-009. These increases were partially offset by development and manufacturing activity ongoing in the prior year for quisovalimab that did not repeat in the current year given the PEAK trial concluded in June 2023.

We expect future research and development expenses to increase as a result of our development plans for AVTX-009, including the execution of the Phase 2 LOTUS Trial which commenced in October 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 nine months ended September 30, 2024 as there is no alternative future use. There was no acquired IPR&D for the nine months ended September 30, 2023.

#### General and Administrative Expenses

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

|  | Nine Months Ended September 30, 2024 | 2023 |
| --- | ---: | ---: |
| Salaries, benefits and related costs | $3,457 | $1,768 |
| Legal, consulting and other professional expenses | 5,601 | 3,399 |
| Stock-based compensation expense | 1,698 | 1,673 |
| Other | 1,252 | 784 |
|  | $12,008 | $7,624 |

General and administrative expenses increased $4.4 million for the nine months ended September 30, 2024 compared to the prior period. The increase was driven by a $2.2 million increase in legal, consulting and other professional expenses incurred for accounting and reporting work incurred as well as increased consulting services following the Almata Transaction and March 2024 private placement financing. Additionally, salaries, benefits and related costs increased $1.7 million primarily 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 nine months ended September 30, 2024 and 2023 (in thousands):

|  | Nine Months Ended September 30, 2024 | 2023 |
| --- | ---: | ---: |
| Excess of initial warrant fair value over private placement proceeds | (79,276) | — |
| Change in fair value of warrant liability | 148,071 | — |
| Private placement transaction costs | (9,220) | — |
| Change in fair value of derivative liability | (6,260) | (120) |
| Interest income (expense), net | 2,101 | (3,498) |
| Other expense, net | (5) | (42) |
|  | $55,411 | $(3,660) |

Other income, net increased $59.1 million for the nine months ended September 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 nine months ended September 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 $148.1 million gain recognized on the change of fair value of the warrant liability from March 31, 2024 to September 30, 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 third quarter of $9.50 per share compared to the closing stock price on the last trading day of the first quarter of $21.75 per share, paired with a shorter term as the warrants approach expiration on November 8, 2024. Avalo expects no warrant liability as of December 31, 2024 following the exercise and/or expiration of the warrants during the fourth quarter of 2024. Refer to Note 6 - Fair Value Measurements of the unaudited condensed and consolidated financial statements for more information.

The increase to other income, net was partially offset by $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 in March 2024, 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 $6.3 million increase in fair value of the derivative liability (representing a loss on the change in fair value) driven primarily 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 $5.6 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 nine months ended September 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 nine months ended September 30, 2024 and 2023 (in thousands):

| Net cash (used in) provided by: | Nine Months Ended September 30, 2024 | 2023 |
| --- | ---: | ---: |
| Operating activities | $(34,012) | $(27,914) |
| Investing activities | 356 | (133) |
| Financing activities | 108,140 | 25,041 |
| Net increase (decrease) in cash and cash equivalents | $74,484 | $(3,006) |

#### Net cash used in operating activities

Net cash used in operating activities was $34.0 million for the nine months ended September 30, 2024 and consisted primarily of net income of $0.2 million and adjustments to reconcile net income to net cash used in operating activities including the change in fair value of the warrant liability of $148.1 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 $6.3 million and stock-based compensation of $2.9 million. Prepaid expense increased $2.4 million primarily due to advances paid for AVTX-009 contracts and the timing of insurance prepayments. Accrued expenses and other liabilities increased $2.1 million primarily related to non-equity incentive compensation and increased research and development and general and administrative activities to support the development of AVTX-009.

Net cash used in operating activities was $27.9 million for the nine months ended September 30, 2023 and consisted primarily of a net loss of $23.4 million and non-cash adjustments to reconcile cash used in operating activities including stock-based compensation expense of $2.7 million and accretion of the debt discount of $1.8 million. Accrued expenses and other current liabilities and accounts payable decreased $8.1 million and $2.1 million, respectively, from December 31, 2022.

We expect future cash used in operating activities, excluding the milestone payment made to the former AlmataBio stockholders, to increase in future periods as a result of our development plans for AVTX-009, including the execution of the Phase 2 LOTUS Trial which commenced in October 2024.

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

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

#### Net cash provided by financing activities

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

Subsequent to September 30, 2024 and through November 6, 2024, Avalo received $58.1 million in additional proceeds from the exercise of the warrants issued in the private placement financing that closed in March 2024 and could receive up to $11.3 million upon the exercise of the remaining warrants prior to expiry on November 8, 2024.

Net cash provided by financing activities for the nine months ended September 30, 2023 consisted of net proceeds of $32.5 million from the sale of common stock pursuant to the Company’s at-the-market program and net proceeds of $13.7 million from an underwritten public offering that closed in February 2023, partially offset by debt principal payments of $21.2 million. In September of 2023, the Company repaid all outstanding principal, inclusive of the final payment fee, and interest under its loan agreement.

### 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 the 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 September 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, 1,064 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”) and the Quarterly Report on Form 10-Q for the quarter ended June 30, 2024, filed with the SEC on August 12, 2024 (the “Q2 2024 10-Q”), 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 2023 10-K and Q2 2024 10-Q referenced above. The risks described in the 2023 10-K and Q2 2024 10-Q 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.

Filed Nov 7, 2024.
Source: SEC EDGAR, the filing index for accession 0001628280-24-045965. Last ingested by Listed: Oct 29, 2026, 16:18 ET. No prices; not investment advice.