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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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☑
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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for the quarterly period ended September 30, 2022
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER: 001-37590
AVALO THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State of incorporation)
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45-0705648
(I.R.S. Employer Identification No.)
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540 Gaither Road, Suite 400
Rockville, Maryland 20850
(Address of principal executive offices)
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(410) 522-8707
(Registrant’s telephone number,
including area code)
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Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class |
Trading Symbol |
Name of each exchange on which registered |
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Common Stock, $0.001 par value
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AVTX |
Nasdaq Capital Market
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Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past
90 days. Yes ☑
No ☐
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit such
files). Yes ☑
No ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in
Rule 12b‑2 of the Exchange Act.
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Large accelerated filer
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Accelerated filer ☐ |
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Non-accelerated filer ☑
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Smaller reporting company ☑
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Emerging growth company ☐
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If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b‑2 of the Exchange
Act). Yes ☐
No ☑
As of November 3, 2022, the registrant had 9,414,104 shares of
common stock outstanding.
AVALO THERAPEUTICS, INC.
FORM 10-Q
For the Quarter Ended September 30, 2022
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
AVALO THERAPEUTICS, INC. and SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share and per share data)
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|
|
|
|
|
|
September 30, 2022 |
|
December 31, 2021 |
|
|
|
|
|
|
Assets |
|
|
|
|
|
Current assets: |
|
|
|
|
|
Cash and cash equivalents |
|
$ |
16,943 |
|
|
$ |
54,585 |
|
|
Accounts receivable, net |
|
— |
|
|
1,060 |
|
|
Other receivables |
|
1,314 |
|
|
3,739 |
|
|
Inventory, net |
|
22 |
|
|
38 |
|
|
Prepaid expenses and other current assets |
|
1,118 |
|
|
2,372 |
|
|
Restricted cash, current portion |
|
53 |
|
|
51 |
|
|
Total current assets |
|
19,450 |
|
|
61,845 |
|
|
Property and equipment, net |
|
2,507 |
|
|
2,695 |
|
|
Other long-term asset |
|
— |
|
|
1,000 |
|
|
Intangible assets, net |
|
— |
|
|
38 |
|
|
Goodwill |
|
14,409 |
|
|
14,409 |
|
|
Restricted cash, net of current portion |
|
181 |
|
|
227 |
|
|
Total assets |
|
$ |
36,547 |
|
|
$ |
80,214 |
|
|
Liabilities and stockholders’ (deficit) equity |
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
Accounts payable |
|
$ |
1,447 |
|
|
$ |
3,369 |
|
|
Deferred revenue |
|
442 |
|
|
— |
|
|
Accrued expenses and other current liabilities |
|
13,696 |
|
|
16,519 |
|
|
Notes payable, current |
|
2,564 |
|
|
— |
|
|
Total current liabilities |
|
18,149 |
|
|
19,888 |
|
|
Notes payable, non-current |
|
16,502 |
|
|
32,833 |
|
|
Royalty obligation |
|
2,000 |
|
|
2,000 |
|
|
Deferred tax liability, net |
|
133 |
|
|
113 |
|
|
Other long-term liabilities |
|
1,791 |
|
|
2,298 |
|
|
Total liabilities |
|
38,575 |
|
|
57,132 |
|
|
Stockholders’ (deficit) equity: |
|
|
|
|
|
Common stock—$0.001 par value; 200,000,000 shares authorized at
September 30, 2022 and December 31, 2021; 9,414,104 and 9,399,517
shares issued and outstanding at September 30, 2022 and December
31, 2021, respectively1
|
|
9 |
|
|
9 |
|
|
|
|
|
|
|
Additional paid-in capital1
|
|
291,975 |
|
|
285,239 |
|
|
Accumulated deficit |
|
(294,012) |
|
|
(262,166) |
|
|
Total stockholders’ (deficit) equity |
|
(2,028) |
|
|
23,082 |
|
|
Total liabilities and stockholders’ (deficit) equity |
|
$ |
36,547 |
|
|
$ |
80,214 |
|
1
Amounts for prior periods presented have been retroactively
adjusted to reflect the 1-for-12 reverse stock split effected on
July 7, 2022. See Note 1 for details.
See accompanying notes to the unaudited condensed consolidated
financial statements.
AVALO THERAPEUTICS, INC. and SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive
Loss (Unaudited)
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
|
September 30, |
|
September 30, |
|
|
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
Product revenue, net |
|
$ |
432 |
|
|
$ |
1,350 |
|
|
$ |
2,638 |
|
|
$ |
4,554 |
|
|
License revenue |
|
14,517 |
|
|
— |
|
|
14,517 |
|
|
625 |
|
|
Total revenues, net |
|
14,949 |
|
|
1,350 |
|
|
17,155 |
|
|
5,179 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
Cost of product sales |
|
528 |
|
|
908 |
|
|
2,814 |
|
|
1,067 |
|
|
Research and development |
|
7,042 |
|
|
10,551 |
|
|
25,136 |
|
|
48,325 |
|
|
Selling, general and administrative |
|
3,284 |
|
|
5,926 |
|
|
17,752 |
|
|
18,677 |
|
|
Amortization expense |
|
— |
|
|
428 |
|
|
38 |
|
|
1,281 |
|
|
Total operating expenses |
|
10,854 |
|
|
17,813 |
|
|
45,740 |
|
|
69,350 |
|
|
|
|
4,095 |
|
|
(16,463) |
|
|
(28,585) |
|
|
(64,171) |
|
|
Other expense: |
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
(898) |
|
|
(985) |
|
|
(3,221) |
|
|
(1,207) |
|
|
Other expense, net |
|
— |
|
|
(15) |
|
|
(20) |
|
|
(20) |
|
|
Total other expense, net from continuing operations |
|
(898) |
|
|
(1,000) |
|
|
(3,241) |
|
|
(1,227) |
|
|
Income (loss) from continuing operations before taxes |
|
3,197 |
|
|
(17,463) |
|
|
(31,826) |
|
|
(65,398) |
|
|
Income tax expense (benefit) |
|
5 |
|
|
8 |
|
|
20 |
|
|
(180) |
|
|
Income (loss) from continuing operations |
|
$ |
3,192 |
|
|
$ |
(17,471) |
|
|
$ |
(31,846) |
|
|
$ |
(65,218) |
|
|
Income from discontinued operations |
|
— |
|
|
76 |
|
|
— |
|
|
38 |
|
|
Net income (loss) |
|
$ |
3,192 |
|
|
$ |
(17,395) |
|
|
$ |
(31,846) |
|
|
$ |
(65,180) |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share of common stock, basic and
diluted1:
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.34 |
|
|
$ |
(2.09) |
|
|
$ |
(3.39) |
|
|
$ |
(8.02) |
|
|
Discontinued operations |
|
0.00 |
|
|
0.01 |
|
|
0.00 |
|
|
0.00 |
|
|
Net income (loss) per share of common stock, basic and
diluted |
|
$ |
0.34 |
|
|
$ |
(2.08) |
|
|
$ |
(3.39) |
|
|
$ |
(8.02) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share of preferred stock, basic and
diluted1:
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
|
|
|
|
|
|
$ |
(3.34) |
|
|
Discontinued operations |
|
|
|
|
|
|
|
0.00 |
|
|
Net loss per share of preferred stock, basic and
diluted |
|
|
|
|
|
|
|
$ |
(3.34) |
|
1
Amounts for prior periods presented have been retroactively
adjusted to reflect the 1-for-12 reverse stock split effected on
July 7, 2022. See Note 1 for details.
See accompanying notes to the unaudited condensed consolidated
financial statements.
AVALO THERAPEUTICS, INC. and SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders’
(Deficit) Equity (Unaudited)
(In thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
|
Additional paid-in |
|
Accumulated |
Total stockholders’ |
|
|
Shares1
|
|
Amount1
|
|
|
|
|
|
capital1
|
|
deficit |
|
deficit |
|
Three Months Ended September 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2022 |
9,405,724 |
|
|
$ |
9 |
|
|
|
|
|
|
$ |
291,244 |
|
|
$ |
(297,204) |
|
|
$ |
(5,951) |
|
|
Impact of reverse stock split fractional share round-up |
8,380 |
|
|
— |
|
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
Stock-based compensation |
— |
|
|
— |
|
|
|
|
|
|
731 |
|
|
— |
|
|
731 |
|
|
Net income |
— |
|
|
— |
|
|
|
|
|
|
— |
|
|
3,192 |
|
|
3,192 |
|
|
Balance, September 30, 2022 |
9,414,104 |
|
|
$ |
9 |
|
|
|
|
|
|
$ |
291,975 |
|
|
$ |
(294,012) |
|
|
$ |
(2,028) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
|
Additional paid-in |
|
Accumulated |
Total stockholders’ |
|
|
Shares1
|
|
Amount1
|
|
|
|
|
|
capital1
|
|
deficit |
|
deficit |
|
Nine Months Ended September 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2021 |
9,399,517 |
|
|
$ |
9 |
|
|
|
|
|
|
$ |
285,239 |
|
|
$ |
(262,166) |
|
|
$ |
23,082 |
|
|
Restricted stock units vested during period |
938 |
|
|
— |
|
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
Shares purchased through employee stock purchase plan |
5,269 |
|
|
— |
|
|
|
|
|
|
25 |
|
|
— |
|
|
25 |
|
|
Impact of reverse stock split fractional share round-up |
8,380 |
|
|
— |
|
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
Stock-based compensation |
— |
|
|
— |
|
|
|
|
|
|
6,711 |
|
|
— |
|
|
6,711 |
|
|
Net loss |
— |
|
|
— |
|
|
|
|
|
|
— |
|
|
(31,846) |
|
|
(31,846) |
|
|
Balance, September 30, 2022 |
9,414,104 |
|
|
$ |
9 |
|
|
|
|
|
|
$ |
291,975 |
|
|
$ |
(294,012) |
|
|
$ |
(2,028) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
|
Additional paid-in |
|
Accumulated |
Total stockholders’ |
|
|
Shares1
|
|
Amount1
|
|
|
|
|
|
capital1
|
|
deficit |
|
equity |
|
Three Months Ended September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2021 |
8,000,746 |
|
|
$ |
8 |
|
|
|
|
|
|
$ |
247,155 |
|
|
$ |
(225,575) |
|
|
$ |
21,588 |
|
|
Issuance of common stock in underwritten public offering,
net |
1,192,407 |
|
|
1 |
|
|
|
|
|
|
29,045 |
|
|
— |
|
|
29,046 |
|
|
Issuance of common stock pursuant to ATM Program, net |
166,667 |
|
|
— |
|
|
|
|
|
|
5,312 |
|
|
— |
|
|
5,312 |
|
|
Stock-based compensation |
— |
|
|
— |
|
|
|
|
|
|
1,758 |
|
|
— |
|
|
1,758 |
|
|
Net loss |
— |
|
|
— |
|
|
|
|
|
|
— |
|
|
(17,395) |
|
|
(17,395) |
|
|
Balance, September 30, 2021 |
9,359,820 |
|
|
$ |
9 |
|
|
|
|
|
|
$ |
283,270 |
|
|
$ |
(242,970) |
|
|
$ |
40,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
Preferred Stock |
|
Additional paid-in |
|
Accumulated |
Total stockholders’ |
|
|
Shares1
|
|
Amount1
|
|
Shares |
|
Amount |
|
capital1
|
|
deficit |
|
equity |
|
Nine Months Ended September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2020 |
6,250,344 |
|
|
$ |
6 |
|
|
1,257,143 |
|
|
$ |
1 |
|
|
$ |
202,345 |
|
|
$ |
(177,790) |
|
|
$ |
24,562 |
|
|
Issuance of shares of common stock and pre-funded warrants in
underwritten public offering, net |
1,164,323 |
|
|
1 |
|
|
— |
|
|
— |
|
|
37,652 |
|
|
— |
|
|
37,653 |
|
|
Issuance of common stock in underwritten public offering,
net |
1,192,407 |
|
|
1 |
|
|
— |
|
|
— |
|
|
29,045 |
|
|
— |
|
|
29,046 |
|
|
Issuance of common stock pursuant to ATM Program, net |
166,667 |
|
|
— |
|
|
— |
|
|
— |
|
|
5,312 |
|
|
— |
|
|
5,312 |
|
|
Issuance of equity classified warrants related to venture loan and
security agreement |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
861 |
|
|
— |
|
|
861 |
|
|
Exercise of stock options |
48,385 |
|
|
— |
|
|
— |
|
|
— |
|
|
1,568 |
|
|
— |
|
|
1,568 |
|
|
Conversion of preferred stock to common stock |
523,810 |
|
|
1 |
|
|
(1,257,143) |
|
|
(1) |
|
|
— |
|
|
— |
|
|
— |
|
|
Shares purchased through employee stock purchase plan |
7,391 |
|
|
— |
|
|
— |
|
|
— |
|
|
207 |
|
|
— |
|
|
207 |
|
|
Restricted stock units vested during period |
6,493 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Stock-based compensation |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
6,280 |
|
|
— |
|
|
6,280 |
|
|
Net loss |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(65,180) |
|
|
(65,180) |
|
|
Balance, September 30, 2021 |
9,359,820 |
|
|
$ |
9 |
|
|
— |
|
|
$ |
— |
|
|
$ |
283,270 |
|
|
$ |
(242,970) |
|
|
$ |
40,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
Amounts for prior periods presented have been retroactively
adjusted to reflect the 1-for-12 reverse stock split effected on
July 7, 2022. See Note 1 for details.
See accompanying notes to the unaudited condensed consolidated
financial statements.
AVALO THERAPEUTICS, INC. and SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2022 |
|
2021 |
|
Operating activities |
|
|
|
|
|
Net loss |
|
$ |
(31,846) |
|
|
$ |
(65,180) |
|
|
Adjustments to reconcile net loss used in operating
activities: |
|
|
|
|
|
Depreciation and amortization |
|
131 |
|
|
1,362 |
|
|
Stock-based compensation |
|
6,711 |
|
|
6,280 |
|
|
Accretion of debt discount |
|
1,040 |
|
|
445 |
|
|
Allowance for other long-term asset |
|
1,000 |
|
|
— |
|
|
Deferred taxes |
|
20 |
|
|
40 |
|
|
Changes in assets and liabilities: |
|
|
|
|
|
Accounts receivable, net |
|
1,060 |
|
|
742 |
|
|
Other receivables |
|
2,425 |
|
|
(269) |
|
|
Other long-term asset |
|
— |
|
|
(2,000) |
|
|
Inventory, net |
|
16 |
|
|
(13) |
|
|
Prepaid expenses and other assets |
|
1,254 |
|
|
1,252 |
|
|
|
|
|
|
|
Accounts payable |
|
(1,922) |
|
|
994 |
|
|
|
|
|
|
|
Deferred revenue |
|
442 |
|
|
|
|
Accrued expenses and other liabilities |
|
(3,144) |
|
|
2,604 |
|
|
Lease liability, net |
|
2 |
|
|
(50) |
|
|
Net cash used in operating activities |
|
(22,811) |
|
|
(53,793) |
|
|
Investing activities |
|
|
|
|
|
Purchase of property and equipment |
|
(95) |
|
|
(102) |
|
|
Net cash used in investing activities |
|
(95) |
|
|
(102) |
|
|
Financing activities |
|
|
|
|
|
Proceeds from issuance of common stock and pre-funded warrants in
underwritten public offering, net |
|
— |
|
|
37,653 |
|
|
Proceeds from Notes and warrants, net of debt issuance costs
paid |
|
— |
|
|
32,900 |
|
|
Prepayment on Notes |
|
(14,806) |
|
|
— |
|
|
Proceeds from issuance of common stock in underwritten public
offering, net |
|
— |
|
|
29,046 |
|
|
Proceeds from common stock pursuant to ATM Program, net |
|
— |
|
|
5,312 |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
— |
|
|
1,568 |
|
|
Proceeds from issuance of common stock under employee stock
purchase plan |
|
25 |
|
|
207 |
|
|
Net cash (used in) provided by financing activities |
|
(14,781) |
|
|
106,686 |
|
|
(Decrease) increase in cash, cash equivalents and restricted
cash |
|
(37,687) |
|
|
52,791 |
|
|
Cash, cash equivalents, and restricted cash at beginning of
period |
|
54,864 |
|
|
19,106 |
|
|
Cash, cash equivalents, and restricted cash at end of
period |
|
$ |
17,177 |
|
|
$ |
71,897 |
|
|
Supplemental disclosures of cash flow information |
|
|
|
|
|
Cash paid for interest |
|
$ |
2,256 |
|
|
$ |
796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a reconciliation of cash, cash
equivalents and restricted cash reported within the condensed
consolidated balance sheets that sum to the total of the same such
amounts shown in the condensed consolidated statements of cash
flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
2022 |
|
2021 |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
16,943 |
|
|
$ |
71,506 |
|
|
Restricted cash, current |
|
53 |
|
|
164 |
|
|
Restricted cash, non-current |
|
181 |
|
|
227 |
|
|
Total cash, cash equivalents and restricted cash |
|
$ |
17,177 |
|
|
71,897 |
|
See accompanying notes to the unaudited condensed consolidated
financial statements.
AVALO THERAPEUTICS, INC. and SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial
Statements
1. Business
Avalo Therapeutics, Inc. (the “Company” or “Avalo” or “we”) is a
clinical stage biotechnology company focused on the treatment of
immune dysregulation by developing therapies that target the LIGHT
network.
LIGHT (Lymphotoxin-like,
exhibits
Inducible
expression, and competes with HSV
Glycoprotein
D for
Herpesvirus
Entry Mediator (“HVEM”), a receptor expressed by
T
lymphocytes; also referred to as TNFSF14) is an immunoregulatory
cytokine. LIGHT and its signaling receptors, HVEM (TNFRSF14), and
lymphotoxin β receptor (TNFRSF3), form an immune regulatory network
with two co-receptors of herpesvirus entry mediator, checkpoint
inhibitor B and T Lymphocyte Attenuator (“BTLA”), and CD160
(collectively, the “LIGHT-signaling network” or the “LIGHT
network”). Accumulating evidence points to the dysregulation of the
LIGHT network as a disease-driving mechanism in autoimmune and
inflammatory reactions in barrier organs. Therefore, we believe
reducing LIGHT levels can moderate immune dysregulation in many
acute and chronic inflammatory disorders.
Avalo was incorporated in Delaware and commenced operation in 2011,
and completed its initial public offering in October
2015.
On July 7, 2022, Avalo effected a 1-for-12 reverse stock split. The
Company retroactively applied the reverse stock split to share and
per share amounts for periods prior to July 7, 2022, including
the unaudited condensed consolidated financial statements for the
nine months ended September 30, 2022, three and nine months ended
September 30, 2021, and the year ended December 31, 2021.
Additionally, pursuant to their terms, a proportionate adjustment
was made to the per share exercise price and number of shares
issuable under all of the Company’s outstanding options and
warrants, and the number of shares authorized for issuance pursuant
to the Company’s equity incentive plans have been reduced
proportionately. Avalo retroactively applied such adjustments in
the notes to the unaudited condensed consolidated financial
statements for periods presented prior to July 7, 2022,
including the nine months ended September 30, 2022, three and
nine months ended September 30, 2021, and the year ended December
31, 2021. The reverse stock split did not reduce the number of
authorized shares of common and preferred stock and did not alter
the par value.
Liquidity
In order to meet its cash flow needs, the Company applies a
disciplined decision-making methodology as it evaluates the optimal
allocation of the Company’s resources between investing in the
Company’s existing pipeline assets and acquisitions or in-licensing
of new assets. As of September 30, 2022, Avalo had $16.9
million in cash and cash equivalents. For the nine months ended
September 30, 2022, Avalo generated a net loss of $31.8
million and negative cash flows from operations of $22.8 million.
As of September 30, 2022, Avalo had an accumulated deficit of
$294.0 million.
In the second quarter of 2022, as collectively agreed upon with the
Lenders (as defined below), the Company made a partial prepayment
of $15.0 million ($14.8 million of which was applied to
principal) on the notes (the “Notes) issued under its venture loan
and security agreement (the “Loan Agreement”) with Horizon
Technology Finance Corporation (“Horizon”) and Powerscourt
Investments XXV, LP (“Powerscourt”, and together with Horizon, the
“Lenders”). Avalo intends to consider additional prepayments prior
to principal loan amounts coming due, if collectively agreed upon
with the Lenders. As of September 30, 2022, the carrying value
of the Notes (as defined in Note 9) was $19.1 million.
The accompanying unaudited condensed consolidated financial
statements have been prepared assuming the Company will continue as
a going concern; however, losses are expected to continue as the
Company continues to invest in its research and development
pipeline assets. The Company will require additional financing to
fund its operations and to continue to execute its business
strategy within one year after the date the unaudited condensed
consolidated financial statements included herein were issued. We
anticipate that the cash and cash equivalents as of
September 30, 2022 will not be sufficient for us to fund our
product candidates through their next anticipated milestones, which
include topline data from the AVTX-002 Phase 2 PEAK trial and
pivotal data from the AVTX-803 LADDER trial, both expected in the
first half of 2023. We will need to raise additional capital to
reach these milestones. These conditions raise substantial doubt
about the Company’s ability to continue as a going
concern.
To mitigate these conditions and to meet the Company’s capital
requirements, management plans to use its current cash on hand
along with some combination of the following: (i) dilutive and/or
non-dilutive financings, (ii) out-licensing or strategic
alliances/collaborations of its current pipeline assets, (iii)
out-licensing or sale of its non-core assets, and (iv) federal
and/or private grants. 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. Subject to
limited exceptions, the Loan Agreement prohibits the Company from
incurring certain additional indebtedness, making certain asset
dispositions, and entering into certain mergers, acquisitions or
other business combination transactions without the prior consent
of the
Lenders. Additionally, the Loan Agreement contains certain
covenants and certain other specified events that could result in
an event of default, which if not cured or waived, could result in
the immediate acceleration of all or a substantial portion of the
outstanding Notes. As of the filing date of this Quarterly Report
on Form 10-Q, the Company was not aware of any breach of covenants
or occurrence of material adverse change, nor had it received any
notice of event of default from the Lenders (refer to Note 9 of the
condensed unaudited consolidated financial statements for more
information).
If the Company requires but is unable to obtain additional funding,
the Company may be forced to make reductions in spending, delay,
suspend, reduce or eliminate some or all of its planned research
and development programs, or liquidate assets where possible. Due
to the uncertainty regarding future financing and other potential
options to raise additional funds, management has concluded that
substantial doubt exists with respect to the Company’s ability to
continue as a going concern within one year after the date that the
financial statements in this Quarterly Report on Form 10-Q were
issued.
Over the long term, the Company’s ultimate ability to achieve and
maintain profitability will depend on, among other things, the
development, regulatory approval, and commercialization of its
pipeline assets, and the potential receipt and sale of any priority
review vouchers it receives.
2. Basis of Presentation and Significant Accounting
Policies
Basis of Presentation
The Company’s unaudited condensed consolidated financial statements
have been prepared in accordance with U.S. generally accepted
accounting principles (“GAAP”). Any reference in these notes to
applicable guidance is meant to refer to the authoritative GAAP as
found in the Accounting Standards Codification (“ASC”) and
Accounting Standards Updates (“ASU”) of the Financial Accounting
Standards Board (“FASB”).
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all adjustments,
consisting of normal recurring adjustments, which are necessary to
present fairly the Company’s financial position, results of
operations, and cash flows. The condensed consolidated balance
sheet at December 31, 2021 has been derived from audited
financial statements at that date. The interim results of
operations are not necessarily indicative of the results that may
occur for the full fiscal year. Certain information and footnote
disclosure normally included in the financial statements prepared
in accordance with GAAP have been condensed or omitted pursuant to
instructions, rules, and regulations prescribed by the United
States Securities and Exchange Commission (“SEC”).
The Company believes that the disclosures provided herein are
adequate to make the information presented not misleading when
these unaudited condensed consolidated financial statements are
read in conjunction with the December 31, 2021 audited
consolidated financial statements.
In the second quarter of 2022, the Company concluded that it would
include sales and marketing expenses within the selling, general
and administrative line in the Company’s condensed consolidated
statement of operations. The Company reclassified $0.7 million
and $2.0 million from sales and marketing expense to selling,
general and administrative expense for the three and nine months
ended September 30, 2021, respectively, to conform with the current
period presentation.
Unless otherwise indicated, all amounts in the following tables are
in thousands except share and per share amounts.
Significant Accounting Policies
During the nine months ended September 30, 2022, there were no
significant changes to the Company’s summary of significant
accounting policies contained in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2021, as filed with
the SEC on March 2, 2022.
3. Revenue
In July 2022, Avalo entered into a license agreement with Apollo
AP43 Limited, a wholly owned subsidiary of Apollo Therapeutics
Group Limited (collectively, “Apollo”) pursuant to which the
Company
granted Apollo a worldwide, exclusive license to research, develop,
manufacture and commercialize AVTX-007, an anti-IL-18 monoclonal
antibody (the “Apollo License Agreement”). Pursuant to the Apollo
License Agreement, the Company received an upfront payment of
$14.5 million, which was recognized as license revenue for the
three and nine months ended
September 30, 2022.
The Company generates substantially all of its product revenue from
sales of Millipred®,
an oral prednisolone indicated across a wide variety of
inflammatory conditions, which is considered a prescription drug.
The Company sells its prescription drug in the United States
primarily through wholesale distributors. Wholesale distributors
account for substantially all of the Company’s net product revenues
and trade receivables. For the three months ended
September 30, 2022, the Company’s two largest customers
accounted for approximately 65% and 35%, respectively, of the
Company’s total net product revenues. For the nine months ended
September 30, 2022, the Company’s two largest customers
accounted for approximately 72% and 28%, respectively, of the
Company’s total net product revenues. Net revenue from sales of
prescription drugs was $0.4 million and $1.4 million for the three
months ended September 30, 2022 and 2021, respectively, and
$2.6 million and $4.6 million for the nine months ended
September 30, 2022 and 2021, respectively. As of
September 30, 2022, deferred revenue was $0.4 million due to
the receipt of payment from wholesale distributors related to
product that had not yet been sold to the customer.
The Company has a license and supply agreement for the
Millipred®
product with a wholly owned subsidiary of Teva Pharmaceutical
Industries Ltd. (“Teva”), which expires on September 30, 2023.
Beginning July 1, 2021, Avalo was required to pay Teva fifty
percent of the net profit of the Millipred®
product following each calendar quarter, subject to a
$0.5 million quarterly minimum payment unless total net profit
is below a specified threshold. For the three and nine months ended
September 30, 2022, the Company recognized $0.4 million
and $1.4 million, respectively, in cost of product sales
related to the royalty. Dr. Sol Barer served as the Chairman of the
Company’s board of directors until June 2021 and currently serves
as the Chairman of Teva’s board of directors.
Aytu BioScience, Inc. (“Aytu”), to which the Company sold its
rights, title, and interests in assets relating to certain
commercialized products in 2019 (the “Aytu Transaction”), managed
Millipred®
commercial operations until August 31, 2021 pursuant to transition
service agreements, which included managing the third-party
logistics provider and providing accounting reporting services.
Aytu collected cash on behalf of Avalo for revenue generated by
sales of Millipred®
from the second quarter of 2020 through the third quarter of 2021
and is obligated to transfer cash generated by such sales to Avalo.
In the third quarter of 2021, Avalo finalized its trade and
distribution channel to allow it to control the third-party
distribution and began managing Millipred®
commercial operations at that time. The current transition services
agreement allows Aytu to withhold cash of $2.0 million until
September 30, 2022 and $1.0 million until December 2024. The
Company received $2.2 million from Aytu in first quarter of
2022. As of September 30, 2022, the total receivable balance
was approximately $1.8 million. As disclosed in its Annual
Report on Form 10-K for the year ended June 30, 2022 (filed
September 27, 2022), Aytu concluded that substantial doubt exists
with respect to their ability to continue as a going concern within
one year after the date that the financial statements were issued,
or until September 2023. As such, the Company fully reserved for
the $1.0 million due in December 2024 and recognized the
related expense in cost of product sales for the nine months ended
September 30, 2022. The remaining $0.8 million is
included within other receivables and is contractually owed in the
fourth quarter of 2022.
4. Net (Loss) Income Per Share
The Company computes earnings per share (“EPS”) using the two-class
method. The two-class method of computing EPS is an earnings
allocation formula that determines EPS for common stock and any
participating securities according to dividends declared and
participation rights in undistributed earnings.
The Company had only common stock outstanding during the three and
nine months ended September 30, 2022 and three months ended
September 30, 2021. The Company had two classes of stock
outstanding during the nine months ended September 30, 2021; common
stock and preferred stock. The preferred stock outstanding during
the prior period converted to shares of common stock on an
approximately 1-for-0.42 ratio (ratio adjusted for the reverse
stock split) and had the same rights, preferences and privileges as
the Company’s common stock other than it held no voting rights. In
April 2021, Armistice Capital, LLC (“Armistice”), which is a
significant stockholder of the Company and whose chief investment
officer, Steven Boyd, and managing director, Keith Maher, served on
Avalo’s Board until August 8, 2022, converted the then outstanding
1,257,143 shares of convertible preferred stock into 523,810 shares
of Avalo’s common stock. Under the two-class method, the
convertible preferred stock was considered a separate class of
stock until the time it was converted to common shares for EPS
purposes. Therefore, basic and diluted EPS is provided below for
common stock for the three and nine months ended September 30,
2022 and three months ended September 30, 2021, and both
common stock and preferred stock for the nine months ended
September 30, 2021.
EPS for common stock and EPS for preferred stock is computed by
dividing the sum of distributed earnings and undistributed earnings
for each class of stock by the weighted average number of shares
outstanding for each class of stock for the period. In applying the
two-class method, undistributed earnings are allocated to common
stock and preferred stock based on the weighted average shares
outstanding during the period, which assumed the convertible
preferred stock had been converted to common stock. The weighted
average number of common shares outstanding as of
September 30, 2022 and 2021 include the weighted average
effect of the pre-funded warrants issued in connection with the
underwritten public offering that closed in January 2021, the
exercise of which requires nominal consideration for the delivery
of the shares of common stock (refer to Note 10 for more
information).
Diluted net (loss) income per share includes the potential dilutive
effect of common stock equivalents as if such securities were
converted or exercised during the period, when the effect is
dilutive. Common stock equivalents include: (i) outstanding stock
options and restricted stock units, which are included under the
“treasury stock method” when dilutive; and (ii) common stock to be
issued upon the exercise of outstanding warrants, which are
included under the “treasury stock method” when dilutive. Because
the impact of these items is generally anti-dilutive during periods
of net loss, there is no difference between basic and diluted loss
per common share for periods with net losses. In periods of net
loss, losses are allocated to the participating security only if
the security has not only the right to participate in earnings, but
also a contractual obligation to share in the Company’s
losses.
The following tables set forth the computation of basic and diluted
net (loss) income per share of common stock for the three and nine
months ended September 30, 2022 and three months ended
September 30, 2021, and common stock and preferred stock for
the nine months ended September 30, 2021 (in thousands, except
share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, 2022 |
|
|
Common stock |
|
|
|
|
|
|
Basic income per share: |
|
|
|
|
|
Net income |
|
$ |
3,192 |
|
|
|
|
Weighted average shares |
|
9,413,466 |
|
|
|
|
Basic net income per share |
|
$ |
0.34 |
|
|
|
|
|
|
|
|
|
|
Diluted income per share: |
|
|
|
|
|
Net income |
|
$ |
3,192 |
|
|
|
|
Weighted average shares - basic |
|
9,413,466 |
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
Potentially dilutive shares |
|
166 |
|
|
|
|
Weighted average shares - diluted |
|
9,413,632 |
|
|
|
|
Diluted net income per share |
|
$ |
0.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, 2022 |
|
|
Common stock |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(31,846) |
|
|
|
|
|
|
|
|
|
Weighted average shares |
|
9,404,679 |
|
|
|
|
Basic and diluted net loss per share |
|
$ |
(3.39) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, 2021 |
|
|
Common stock |
|
|
|
|
|
Continuing Operations |
|
Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of undistributed net (loss) income |
|
$ |
(17,471) |
|
|
$ |
76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares |
|
8,374,200 |
|
|
8,374,200 |
|
|
|
|
|
|
Basic and diluted net (loss) income per share |
|
$ |
(2.09) |
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, 2021 |
|
|
Common stock |
|
Preferred stock |
|
|
|
Continuing Operations |
|
Discontinued Operations |
|
Continuing Operations |
|
Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
Allocation of undistributed net (loss) income |
|
$ |
(63,602) |
|
|
$ |
37 |
|
|
$ |
(1,616) |
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares |
|
7,927,152 |
|
|
7,927,152 |
|
|
483,517 |
|
|
483,517 |
|
|
Basic and diluted net (loss) income per share |
|
$ |
(8.02) |
|
|
$ |
0.00 |
|
|
$ |
(3.34) |
|
|
$ |
0.00 |
|
The following outstanding securities have been excluded from the
computation of diluted weighted shares outstanding for the three
and nine months ended September 30, 2022 and 2021, as they
could have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three and Nine Months Ended |
|
|
September 30, |
|
|
|
2022 |
|
2021 |
|
Stock options |
|
1,260,906 |
|
1,122,785 |
|
Warrants on common stock1
|
|
366,990 |
|
367,186 |
|
Restricted Stock Units |
|
— |
|
6,493 |
1
The weighted average number of common shares outstanding as of
September 30, 2021 included the weighted average effect of the
139,747 pre-funded warrants issued in connection with the
underwritten public offering that closed in January 2021 because
the exercise of such warrants requires only nominal consideration
($0.012 per share exercise price for each pre-funded warrant).
During 2021, the holder exercised 25,740 of the pre-funded
warrants. As of September 30, 2022, the weighted average
number of common shares outstanding included the weighted average
effect of the remaining 114,007 pre-funded warrants outstanding.
These pre-funded warrants are not included in the table
above.
5. Fair Value Measurements
ASC No. 820,
Fair Value Measurements and Disclosures
(“ASC 820”), defines fair value as the price that would be received
to sell an asset, or paid to transfer a liability, in the principal
or most advantageous market in an orderly transaction between
market participants on the measurement date. The fair value
standard also establishes a three‑level hierarchy, which requires
an entity to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. The valuation
hierarchy is based upon the transparency of inputs to the valuation
of an asset or liability on the measurement date. The three levels
are defined as follows:
•Level 1—inputs
to the valuation methodology are quoted prices (unadjusted) for an
identical asset or liability in an active market.
•Level 2—inputs
to the valuation methodology include quoted prices for a similar
asset or liability in an active market or model‑derived valuations
in which all significant inputs are observable for substantially
the full term of the asset or liability.
•Level 3—inputs
to the valuation methodology are unobservable and significant to
the fair value measurement of the asset or liability.
The following table presents, for each of the fair value hierarchy
levels required under ASC 820, the Company’s assets and liabilities
that are measured at fair value on a recurring basis (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 |
|
|
|
Fair Value Measurements Using |
|
|
|
Quoted prices in |
|
Significant other |
|
Significant |
|
|
|
active markets for |
|
observable |
|
unobservable |
|
|
|
identical assets |
|
inputs |
|
inputs |
|
|
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Assets |
|
|
|
|
|
|
|
Investments in money market funds* |
|
$ |
16,079 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021 |
|
|
|
Fair Value Measurements Using |
|
|
|
Quoted prices in |
|
Significant other |
|
Significant |
|
|
|
active markets for |
|
observable |
|
unobservable |
|
|
|
identical assets |
|
inputs |
|
inputs |
|
|
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Assets |
|
|
|
|
|
|
|
Investments in money market funds* |
|
$ |
54,010 |
|
|
$ |
— |
|
|
$ |
— |
|
*Investments in money market funds are reflected in cash and cash
equivalents on the accompanying condensed consolidated balance
sheets.
As of September 30, 2022 and December 31, 2021, the
Company’s financial instruments included cash and cash equivalents,
restricted cash, accounts receivable, other receivables, prepaid
and other current assets, accounts payable, accrued expenses and
other current liabilities, and long-term debt. The carrying amounts
reported in the accompanying condensed consolidated financial
statements for cash and cash equivalents, restricted cash, accounts
receivable, other receivables, prepaid and other current assets,
accounts payable, and accrued expenses and other current
liabilities approximate their respective fair values because of the
short-term nature of these accounts. The estimated fair value of
the Company’s debt approximates its carrying value as of
September 30, 2022 and is in Level Two of the fair value
hierarchy (refer to Note 9 for more information).
No changes in valuation techniques or inputs occurred during the
nine months ended September 30, 2022 and 2021. No transfers of
assets between Level 1 and Level 2 of the fair value measurement
hierarchy occurred during the nine months ended September 30,
2022 and 2021.
6. Leases
The Company currently occupies two leased properties, both of which
serve as administrative office space. The Company determined that
both of these leases are operating leases based on the lease
classification test performed at lease commencement.
The annual base rent for the Company’s office located in Rockville,
Maryland is $0.2 million, subject to annual 2.5% increases over the
term of the lease. The applicable lease provided for a rent
abatement for a period of 12 months following the Company’s date of
occupancy. The lease has an initial term of 10 years from the date
the Company made its first annual fixed rent payment, which
occurred in January 2020. The Company has the option to extend the
lease two times, each for a period of five years, and may
terminate the lease as of the sixth anniversary of the first annual
fixed rent payment, upon the payment of a termination
fee.
The initial annual base rent for the Company’s office located in
Chesterbrook, Pennsylvania is $0.2 million and the annual
operating expenses are approximately $0.1 million. The annual
base rent is subject to periodic increases of approximately 2.4%
over the term of the lease. The lease provided for a rent abatement
period of three months following lease commencement. The lease has
an initial term of 5.25 years from the lease commencement on
December 1, 2021.
The weighted average remaining term of the operating leases at
September 30, 2022 was 5.8 years.
Supplemental balance sheet information related to the leased
properties include (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
September 30, 2022 |
|
December 31, 2021 |
|
Property and equipment, net |
|
$ |
1,813 |
|
|
$ |
2,001 |
|
|
|
|
|
|
|
|
Accrued expenses and other current
liabilities |
|
$ |
526 |
|
|
$ |
485 |
|
|
Other long-term liabilities |
|
1,791 |
|
|
2,018 |
|
|
Total operating lease liabilities |
|
$ |
2,317 |
|
|
$ |
2,503 |
|
The operating lease right-of-use (ROU) assets are included in
property and equipment, net and the lease liabilities are included
in accrued expenses and other current liabilities and other
long-term liabilities in our condensed consolidated balance sheets.
The Company utilized a weighted average discount rate of 9.2% to
determine the present value of the lease payments.
The components of lease expense for the three and nine months ended
September 30, 2022 and 2021 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Operating lease cost* |
|
$ |
134 |
|
|
$ |
97 |
|
|
$ |
373 |
|
|
$ |
287 |
|
*Includes short-term leases, which are immaterial.
The following table shows a maturity analysis of the operating
lease liabilities as of September 30, 2022 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undiscounted Cash Flows |
|
October 1, 2022 through December 31, 2022 |
|
$ |
130 |
|
|
2023 |
|
528 |
|
|
2024 |
|
537 |
|
|
2025 |
|
547 |
|
|
2026 |
|
557 |
|
|
2027 |
|
258 |
|
|
Thereafter |
|
426 |
|
|
Total lease payments |
|
$ |
2,983 |
|
|
Less implied interest |
|
(666) |
|
|
Total |
|
$ |
2,317 |
|
7. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities as of
September 30, 2022 and December 31, 2021 consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
September 30, 2022 |
|
December 31, 2021 |
|
Research and development |
|
$ |
7,094 |
|
|
$ |
8,221 |
|
|
Compensation and benefits |
|
2,972 |
|
|
4,310 |
|
|
Selling, general and administrative |
|
903 |
|
|
1,386 |
|
|
Commercial operations |
|
1,798 |
|
|
1,733 |
|
|
Royalty payment |
|
399 |
|
|
375 |
|
|
Lease liability, current |
|
526 |
|
|
485 |
|
|
Other |
|
4 |
|
|
9 |
|
|
Total accrued expenses and other current liabilities |
|
$ |
13,696 |
|
|
$ |
16,519 |
|
8. Cost Reduction Plan
In the first quarter of 2022, the Board approved a cost reduction
plan to enable the Company to execute its strategy of prioritizing
the development of its most promising programs (the “Plan”). As
part of the Plan, the Company announced plans to wind down internal
development efforts of AVTX-006 and pause development efforts of
AVTX-802. Accordingly, a reduction in workforce plan was approved
to reduce headcount and related expenses. The reduction in
workforce plan, which was considered a one-time termination
benefit, was completed in the second quarter of 2022.
The one-time termination benefits mainly relate to severance
payments to separated employees. As a result, the Company
recognized $1.5 million of expense during the first quarter of
2022, of which $0.7 million was recognized in research and
development expense, and $0.8 million was recognized in
selling, general and administrative expense.
Of the $1.5 million initial liability recognized in the first
quarter of 2022, $1.2 million was paid in the nine months
ended September 30, 2022. The remaining severance liability
will be paid over the next
two to six months as dictated in each
separation
agreement. Additionally, $0.4 million of stock-based
compensation expense was recognized in the first quarter of 2022
related to the Plan, which was mainly related to accelerated
vesting of certain separated employees’ stock options.
In addition, previously and separately, during the first quarter of
2022, the Company separated certain section 16 executive officers.
Each of the former executives are entitled to the benefits provided
in their respective separation agreements, which include severance
payments to be paid over
twelve to eighteen months. As a result, the Company
recognized $1.7 million expense for the nine months ended
September 30, 2022 within selling, general and administrative
expenses. Additionally, the Company accelerated the vesting of
certain outstanding stock options and extended the exercisability
periods, which resulted in $3.9 million of compensation cost
recognized in first quarter of 2022. Refer to Note 11 for
information regarding stock compensation expense related to
separations entered into in the first quarter of 2022.
9. Notes Payable
On June 4, 2021, the Company entered into the $35.0 million
Loan Agreement with the Lenders. In accordance with the Loan
Agreement, $20.0 million was funded on the closing date (the
“Initial Note”), with the remaining $15.0 million fundable
upon the Company achieving certain predetermined milestones, which
the Company met in the third quarter of 2021. On July 30, 2021,
after achieving a predetermined milestone, the Company borrowed an
additional $10.0 million, which was evidenced by a second note
payable (the “Second Note”). On September 29, 2021, after achieving
a second predetermined milestone, the Company borrowed the
remaining $5.0 million, which was evidenced by a third note
payable (the “Third Note”, and collectively with the Initial and
Second Notes, the “Notes”).
In June 2022, the Company, as collectively agreed upon with the
Lenders, prepaid $15.0 million to the Lenders, of which
$14.8 million was applied to principal and the remainder
applied to accrued interest. As of September 30, 2022, the
outstanding notes payable balance was $21.2 million, inclusive
of the final payment fee. Avalo intends to consider additional
prepayments prior to principal loan amounts coming due, if
collectively agreed upon with the Lenders.
Each advance under the Loan Agreement will mature 42 months from
the first day of the month following the funding of the advance.
Each advance accrues interest at a per annum rate of interest equal
to 6.25% plus the prime rate, as reported in the Wall Street
Journal (subject to a floor of 3.25%). The Loan Agreement provides
for interest-only payments for each advance for the first 18
months, however the interest-only period was extended to 24 months
as a result of the Company satisfying the Interest Only Extension
Milestone (as defined in the Loan Agreement) in the third quarter
of 2021. Thereafter, amortization payments will be payable in
monthly installments of principal and interest through each
advance’s maturity date. Upon ten business days’ prior written
notice, the Company may prepay all of the outstanding advances by
paying the entire principal balance and all accrued and unpaid
interest, subject to prepayment charges of up to 3% of the then
outstanding principal balance. Upon the earlier of (i) payment in
full of the principal balance, (ii) an event of default, or (iii)
the maturity date, the Company will pay an additional final payment
of 3% of the principal loan amount to the Lenders.
Each advance of the loan is secured by a lien on substantially all
of the assets of the Company, other than Intellectual Property and
Excluded Collateral (in each case as defined in the Loan
Agreement), and contains customary covenants and representations,
including a financial reporting covenant and limitations on
dividends, indebtedness, collateral, investments, distributions,
transfers, mergers or acquisitions, taxes, corporate changes,
deposit accounts, and subsidiaries.
The events of default under the Loan Agreement include, but are not
limited to, failing to make a payment, breach of covenant, or
occurrence of a material adverse change. If an event of default
occurs, the Lenders are entitled to accelerate the loan amounts due
or take other enforcement actions. The accelerated payment
obligations would include the outstanding principal balance
(inclusive of the 3% final payment fee), a prepayment charge on the
outstanding principal balance of up to 3%, and any accrued and
unpaid interest. As of the filing date of this Quarterly Report on
Form 10-Q, the Company was not aware of any breach of covenants,
occurrence of a material adverse change, nor had it received any
notice of event of default from the Lenders.
On June 4, 2021, pursuant to the Loan Agreement, the Company issued
warrants to the Lenders to purchase 33,656 shares of the Company’s
common stock with an exercise price of $31.20 per share (the
“Warrants”). The Warrants are exercisable for ten years from the
date of issuance. The Lenders may exercise the Warrants either by
(a) cash or check or (b) through a net issuance conversion. The
Warrants, which met equity classification, were recognized as a
component of permanent stockholders’ equity within additional
paid-in-capital and were recorded at the issuance date using a
relative fair value allocation method. The Company valued the
Warrants at issuance, which resulted in a discount on the debt, and
allocated the proceeds from the loan proportionately to the Notes
and to the Warrants, of which $0.9 million was allocated to
the Warrants.
In the second quarter of 2021, the Company incurred
$2.1 million in debt issuance costs, including legal fees in
connection with the Loan Agreement, fees paid directly to the
Lenders, and other direct costs. All fees, warrants, and costs paid
to the Lenders and all direct costs incurred by the Company are
recognized as a debt discount and are amortized to interest expense
using the effective interest method over the term of the loan. The
$1.1 million final payment fee is included in the contractual
cash flows and is accreted to interest expense using the effective
interest method over the term of the loan.
The effective interest rate of the Notes, including the accretion
of the final payment, was 18.7% as of September 30,
2022.
Balance sheet information related to the note payable for the Notes
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
|
|
September 30, 2022 |
|
December 31, 2021 |
|
Maturity |
|
Initial Note |
|
12,139 |
|
|
20,600 |
|
|
January 2025 |
|
Second Note |
|
6,070 |
|
|
10,300 |
|
|
February 2025 |
|
Third Note |
|
3,035 |
|
|
5,150 |
|
|
April 2025 |
|
Notes payable, gross1
|
|
21,244 |
|
|
36,050 |
|
|
|
|
Less: Unamortized debt discount and issuance costs |
|
2,178 |
|
|
3,217 |
|
|
|
|
Carrying value of notes payable |
|
19,066 |
|
|
32,833 |
|
|
|
|
Less: Current portion |
|
2,564 |
|
|
— |
|
|
|
|
Carrying value of notes payable, non-current |
|
16,502 |
|
|
32,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
Balance includes $1.1 million final payment fee for the Notes,
which represents 3% of the original principal loan
amount.
As of September 30, 2022, the estimated future principal
payments due on the Notes were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2022 |
|
2022 |
|
$ |
— |
|
|
2023 |
|
5,930 |
|
|
2024 |
|
13,463 |
|
|
2025 |
|
1,851 |
|
|
Total principal payments1
|
|
$ |
21,244 |
|
1
Balance includes $1.1 million final payment fee, which
represents 3% of the original principal loan amount.
10. Capital Structure
Pursuant to the Company’s amended and restated certificate of
incorporation, the Company is authorized to issue two classes of
stock, common stock and preferred stock. At September 30,
2022, the total number of shares of capital stock the Company was
authorized to issue was 205,000,000 of which 200,000,000 was common
stock and 5,000,000 was
preferred stock. All shares of common and
preferred stock have a par value of $0.001 per share.
Common Stock
2021 Financings
Q3 2021 Equity Financing
On September 17, 2021, the Company closed an underwritten public
offering of approximately 1.2 million shares of its common stock
for net proceeds of $29.0 million. Armistice participated in
the offering by purchasing approximately 0.5 million shares of
common stock, on the same terms as all other investors. Certain
affiliates of Nantahala Capital Management LLC (collectively,
“Nantahala”), which beneficially owned greater than 5% of the
Company’s outstanding common stock at the time of the offering,
participated in the offering on the same terms as all other
investors.
At-the-Market Offering Program
In July 2021, the Company entered into an “at-the-market” sales
agreement with Cantor Fitzgerald & Co. and RBC Capital Markets,
LLC (together, the “Agents”), pursuant to which the Company may
sell from time to time, shares of its common stock having an
aggregate offering price of up to $50.0 million through the
Agents. In August 2021, the Company sold approximately
0.2 million shares of common stock under the ATM Program for
net proceeds of approximately $5.2 million.
Q2 2021 Debt Financing Agreement
As part of the Loan Agreement entered into in the second quarter of
2021, on June 4, 2021, the Company issued Warrants to Horizon and
Powerscourt to purchase 33,656 shares of the Company’s common stock
with an exercise price of $31.20 per share. The Warrants are
exercisable for ten years from the date of issuance. Refer to Note
9 for additional information.
Q1 2021 Financing
In January 2021, the Company closed an underwritten public offering
of approximately 1.2 million shares of its common stock and 139,747
pre-funded warrants for net proceeds of $37.7 million.
Armistice participated in the offering by purchasing approximately
0.2 million shares of common stock, on the same terms as all other
investors. Nantahala participated in the offering by purchasing
approximately 0.1 million shares of common stock, on the same terms
as all other investors.
Nantahala also purchased the pre-funded warrants to purchase up to
an aggregate of 139,747 shares of common stock at a purchase price
of $31.188, which represents the per share public offering price
for the common stock less the $0.012 per share exercise price for
each pre-funded warrant. During 2021, the holder exercised 25,740
of the pre-funded warrants. As of September 30, 2022, 114,007
pre-funded warrants were outstanding.
Common Stock Warrants
At September 30, 2022, the following common stock warrants
were outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of common shares |
|
Exercise price |
|
Expiration |
|
underlying warrants |
|
per share |
|
date |
|
333,334 |
|
$ |
150.00 |
|
|
June 2024 |
|
114,007 |
|
$ |
0.012 |
|
|
— |
|
33,656 |
|
$ |
31.20 |
|
|
June 2031 |
|
480,997 |
|
|
|
|
11. Stock-Based Compensation
2016 Equity Incentive Plan
In April 2016, our board of directors adopted the 2016 Equity
Incentive Plan, which was approved by our stockholders in May 2016
and which was subsequently amended and restated in May 2018 and
August 2019 with the approval of our board of directors and our
stockholders (the “2016 Third Amended Plan”). During the term of
the 2016 Third Amended Plan, the share reserve will automatically
increase on the first trading day in January of each calendar year
ending on (and including) January 1, 2026, by an amount equal to 4%
of the total number of outstanding shares of common stock of the
Company on the last trading day in December of the prior calendar
year. On January 1, 2022, pursuant to the terms of the 2016 Third
Amended and Restated Plan, an additional 375,981 shares were made
available for issuance. As of September 30, 2022, there were
361,892 shares available for future issuance under the 2016 Third
Amended Plan. In October 2022, the Company granted 225,000 options
to its employees that vest on the first anniversary of the grant
date.
Option grants expire after ten years. Employee options typically
vest over four years. Employees typically receive a new hire option
grant, as well as an annual grant in the first or second quarter of
each year. In addition, in the first quarter of 2022, employees
were also granted options that vest on the first anniversary of the
grant date. Options granted to directors typically vest either
immediately or over a period of
one or three years. Directors may elect to receive stock
options in lieu of board compensation, which vest immediately. For
stock options granted to employees and non-employee directors, the
estimated grant date fair market value of the Company’s stock-based
awards is amortized ratably over the individuals’ service periods,
which is the period in which the awards vest. Stock-based
compensation expense includes expense related to stock options,
restricted stock units and employee stock purchase plan shares. The
amount of stock-based compensation expense recognized for the three
and nine months ended September 30, 2022 and 2021 was as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Research and development |
|
$ |
279 |
|
|
$ |
480 |
|
|
$ |
931 |
|
|
$ |
1,244 |
|
|
Selling, general and administrative |
|
452 |
|
|
1,278 |
|
|
5,780 |
|
|
5,036 |
|
|
Total stock-based compensation |
|
$ |
731 |
|
|
$ |
1,758 |
|
|
$ |
6,711 |
|
|
$ |
6,280 |
|
As a result of separation agreements that the Company entered into
in the first quarter of 2022 and in accordance with the terms of
the pre-existing employment agreements, the Company accelerated the
vesting of certain separated employees’ stock options and modified
certain awards to extend the exercisability periods. As a result,
the Company recognized $4.3 million of compensation cost in
the first quarter of 2022, all of which was recognized in selling,
general and administrative expense. There was no additional expense
related to the modifications in the three months ended
September 30, 2022.
Stock options with service-based vesting conditions
The Company has granted options that contain service-based vesting
conditions. The compensation cost for these options is recognized
on a straight-line basis over the vesting periods. A summary of
option activity for the nine months ended September 30, 2022 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
|
Number of shares |
|
Weighted average exercise price per share |
|
Weighted average grant date fair value per share |
|
Weighted average remaining contractual term (in years) |
|
Balance at December 31, 2021 |
|
1,054,277 |
|
|
$ |
44.26 |
|
|
$ |
27.45 |
|
|
8.1 |
|
Granted |
|
447,022 |
|
|
$ |
9.19 |
|
|
$ |
6.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
(262,852) |
|
|
$ |
30.14 |
|
|
$ |
20.14 |
|
|
|
|
Expired |
|
(60,876) |
|
|
$ |
53.48 |
|
|
$ |
35.76 |
|
|
|
|
Balance at September 30, 2022 |
|
1,177,571 |
|
|
$ |
33.62 |
|
|
$ |
20.72 |
|
|
6.4 |
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2022 |
|
713,994 |
|
|
$ |
44.28 |
|
|
$ |
26.55 |
|
|
4.7 |
In March 2022, the Company granted 0.3 million options with
service-based vesting conditions to its employees as part of its
annual stock option award that vest over four years. In March 2022,
the Company granted 0.1 million options to its employees that
vest on the first anniversary of the grant date. As a result of the
reduction of workforce plan, 0.1 million options were
forfeited in the first quarter of 2022, and 0.2 million
options were forfeited as a result of other terminations during the
nine months ended September 30, 2022. In October 2022, the
Company granted 0.2 million options to its employees that vest on
the first anniversary of the grant date.
The aggregate intrinsic value of stock options is calculated as the
difference between the exercise price of the stock options and the
fair value of the Company’s common stock for those stock options
that had exercise prices lower than the fair value of the Company’s
common stock. As of September 30, 2022, the aggregate
intrinsic value of options outstanding was zero. There were
349,405 options that vested during the nine months ended
September 30, 2022 with a weighted average exercise price
of $39.76 per share, which included the acceleration of
vesting of certain options in accordance with the separation
agreements entered into in the first quarter of 2022. The total
grant date fair value of shares which vested during the nine months
ended September 30, 2022 was $9.0 million.
The Company recognized stock-based compensation expense of $0.7
million and $6.6 million related to stock options with
service-based vesting conditions for the three and nine months
ended September 30, 2022, respectively. At September 30,
2022, there was $4.8 million of total unrecognized compensation
cost related to unvested service-based vesting condition awards.
The unrecognized compensation cost is expected to be recognized
over a weighted-average period of 2.2 years.
Stock-based compensation assumptions
The following table shows the assumptions used to compute
stock-based compensation expense for stock options with
service-based vesting conditions granted under the Black-Scholes
valuation model for the nine months ended September 30,
2022:
|
|
|
|
|
|
|
|
|
|
Service-based options |
|
|
|
Expected term of option (in years) |
|
5 - 6.25
|
|
Expected stock price volatility |
|
84.0% - 93.5%
|
|
Risk-free interest rate |
|
1.50% - 4.06%
|
|
Expected annual dividend yield |
|
0% |
|
|
Stock options with market-based vesting conditions
As of September 30, 2022, there were 0.1 million exercisable
stock options that contained market-based vesting conditions (that
had been previously satisfied). The options have a weighted average
share price per share of $39.53 and a weighted average remaining
contractual term of 1.7 years. There were no stock options with
market-based vesting conditions granted, exercised, or forfeited
for the nine months ended September 30, 2022.
Restricted Stock Units
The Company measures the fair value of the restricted stock units
using the stock price on the date of the grant. The restricted
shares typically vest annually over a four-year period beginning on
the first anniversary of the award. As of September 30, 2022,
there were no unvested restricted stock units outstanding. During
the nine months ended September 30, 2022, 937 restricted stock
units vested and had a weighted average grant date fair value of
$54.00 per unit.
Employee Stock Purchase Plan
On April 5, 2016, the Company’s board of directors approved the
2016 Employee Stock Purchase Plan (the “ESPP”). The ESPP was
approved by the Company’s stockholders and became effective on May
18, 2016 (the “ESPP Effective Date”).
Under the ESPP, eligible employees can purchase common stock
through accumulated payroll deductions at such times as are
established by the administrator. The ESPP is administered by the
compensation committee of the Company’s board of directors. Under
the ESPP, eligible employees may purchase stock at 85% of the lower
of the fair market value of a share of the Company’s common stock
(i) on the first day of an offering period or (ii) on the purchase
date. Eligible employees may contribute up to 15% of their earnings
during the offering period. The Company’s board of directors may
establish a maximum number of shares of the Company’s common stock
that may be purchased by any participant, or all participants in
the aggregate, during each offering or offering period. Under the
ESPP, a participant may not accrue rights to purchase more than
$25,000 of the fair market value of the Company’s common stock for
each calendar year in which such right is outstanding.
The Company initially reserved and authorized up to 41,667 shares
of common stock for issuance under the ESPP. On January 1 of each
calendar year, the aggregate number of shares that may be issued
under the ESPP automatically increases by a number equal to the
lesser of (i) 1% of the total number of shares of the Company’s
capital stock outstanding on December 31 of the preceding calendar
year, and (ii) 41,667 shares of the Company’s common stock, or
(iii) a number of shares of the Company’s common stock as
determined by the Company’s board of directors or compensation
committee. The number of shares were increased by 41,667 on January
1, 2022. As of September 30, 2022, 181,028 shares remained
available for issuance.
In accordance with the guidance in ASC 718-50,
Employee Share Purchase Plans,
the ability to purchase shares of the Company’s common stock at the
lower of the offering date price or the purchase date price
represents an option and, therefore, the ESPP is a compensatory
plan under this guidance. Accordingly, stock-based compensation
expense is determined based on the option’s grant-date fair value
and is recognized over the requisite service period of the option.
The Company used the Black-Scholes valuation model and recognized
stock-based compensation expense of $33,000 and $117,000 for the
three and nine months ended September 30, 2022,
respectively.
12. Income Taxes
The Company recognized minimal income tax expense for the three and
nine months ended September 30, 2022 and the three months
ended September 30, 2021 due to the significant valuation
allowance against the Company’s deferred tax assets and the current
and prior period losses. The Company recognized an income tax
benefit of $0.2 million for the nine months ended September
30, 2021 due to the receipt of its refund claim related to the tax
year 2017. The tax benefit recognized for the nine months ended
September 30, 2020 was a result of a tax law change signed into law
as part of the Coronavirus Aid, Relief and Economic Security Act
(“CARES Act”), which allowed the Company to carry back certain
losses for taxes paid in fiscal year 2017 and thus resulted in a
refund claim. The 2021 income tax benefit was a result of the
updated estimate of interest receivable and abatement of penalties
on the refund claim, as the final refund payment was received from
the Internal Revenue Service in the second quarter of
2021.
13. Commitments and Contingencies
Litigation
Litigation - General
The Company may become party to various contractual disputes,
litigation, and potential claims arising in the ordinary course of
business. The Company currently does not believe that the
resolution of such matters will have a material adverse effect on
its financial position or results of operations except as otherwise
disclosed in this report.
Deerfield Guarantee
As consideration of the sale of the rights to the Company’s rights,
title and interest in assets relating to certain
commercialized products to Aytu in 2019,
Aytu
assumed our financial obligations to Deerfield CSF, LLC
(“Deerfield”), which currently includes the remaining contingent
consideration of future royalties on the divested products. In
conjunction with the closing of the transaction in 2019, the
Company entered into an agreement, which guarantees the payment of
the assumed liabilities to Deerfield (the “Guarantee”).
Aytu publicly reported that it had entered into a Waiver, Release
and Consent in June 2021,
pursuant to which it paid a portion of the contingent consideration
early and agreed to pay the remaining fixed obligations of
$3.0 million in six equal quarterly payments of
$0.5 million commencing September 30, 2021. As reported in
Aytu’s Annual Report on Form 10-K for the year ended June 30, 2022,
the fixed payment arrangement was $1.0 million.
Avalo is required to make a payment under the Guarantee upon demand
by Deerfield if all or any part of the fixed payments are not paid
by Aytu when due or upon breach of a covenant. In accordance with
the Waiver, Release and Consent, as of September 30, 2022, the
Company estimates Aytu has one quarterly payment of
$0.5 million remaining, which represents
Avalo’s estimated maximum potential future payments under the
Guarantee. The Company concluded that the expected credit loss of
the Guarantee was de minimis as of September 30, 2022, based
on considerations of Aytu’s ability to meet its current financial
commitments including recent financings, cash position, operating
cash flows and trends.
Karbinal Royalty Make-Whole Provision
In 2018, in connection with the acquisition of certain
commercialized products, the Company entered into a supply and
distribution agreement (the “Karbinal Agreement”) with TRIS Pharma
Inc. (“TRIS”). As part of the Karbinal Agreement, the Company had
an annual minimum sales commitment, which is based on a commercial
year that spans from August 1 through July 31,
of 70,000 units through 2025. The Company was required to
pay TRIS a royalty make whole payment (“Make-Whole Payments”)
of $30 for each unit under the 70,000 units
annual minimum sales commitment through 2025.
As a part of the Aytu transaction, the Company assigned all payment
obligations, including the Make-Whole Payments, under the Karbinal
Agreement (collectively, the “TRIS Obligations”) to
Aytu. However, under the original license agreement, the
Company could ultimately be liable for the TRIS Obligations to the
extent Aytu fails to make the required payments. The future
Make-Whole Payments to be made by Aytu are unknown as the amount
owed to TRIS is dependent on the number of units sold.
Possible Future Milestone Payments for In-Licensed
Compounds
General
The Company is a party to license and development agreements with
various third parties, which contain future payment obligations
such as royalties and milestone payments (discussed further below).
The Company recognizes a liability (and related expense) for each
milestone if and when such milestone is probable and can be
reasonably estimated. As typical in the biotechnology industry,
each milestone has its own unique risks that the Company evaluates
when determining the probability of achieving each milestone and
the probability of success evolves over time as the programs
progress and additional information is obtained. The Company
considers numerous factors when evaluating whether a given
milestone is probable including (but not limited to) the regulatory
pathway, development plan, ability to dedicate sufficient funding
to reach a given milestone and the probability of
success.
AVTX-002 KKC License Agreement
On March 25, 2021, the Company entered into a license agreement
with Kyowa Kirin Co., Ltd. (“KKC”) for exclusive worldwide rights
to develop, manufacture and commercialize AVTX-002, KKC’s
first-in-class fully human anti-LIGHT (TNFSF14) monoclonal antibody
for all indications (the “KKC License Agreement”). The KKC License
Agreement replaced the Amended and Restated Clinical Development
and Option Agreement between the Company and KKC dated May 28,
2020.
Under the KKC License Agreement, the Company paid KKC an upfront
license fee equal to $10.0 million. The Company is also
required to pay KKC up to $112.5 million based on the
achievement of specified development and regulatory
milestones.
Upon commercialization, the Company is required to pay KKC
sales-based milestones aggregating up to $75.0 million tied to
the achievement of annual net sales targets.
Additionally, the Company is required to pay KKC royalties during a
country-by-country royalty term equal to a mid-teen percentage of
annual net sales. The Company is required to pay KKC a double-digit
percentage (less than 30%) of the payments that the Company
receives from sublicensing of its rights under the KKC License
Agreement, subject to certain exclusions. Avalo is responsible for
the development and commercialization of AVTX-002 in all
indications worldwide (other than the option in the KKC License
Agreement that, upon exercise by KKC, allows KKC to develop,
manufacture and commercialize AVTX-002 in Japan).
No expense related to the KKC License Agreement was recognized in
the nine months ended September 30, 2022. The Company
recognized the upfront license fee of $10.0 million within
research and development expenses in the nine months ended
September 30, 2021. There has been no cumulative expense recognized
as of September 30, 2022 related to the milestones under this
license agreement. The Company will continue to monitor the
milestones at each reporting period.
AVTX-006 Astellas License Agreement
The Company has an exclusive license agreement with OSI
Pharmaceuticals, LLC, an indirect wholly owned subsidiary of
Astellas Pharma, Inc. (“Astellas”), for the worldwide development
and commercialization of the novel, second generation mTORC1/2
inhibitor (AVTX-006). Under the terms of the license agreement,
there was an upfront license fee of $0.5 million. The Company
is required to pay Astellas up to $5.5 million based on the
achievement of specified development and regulatory milestones. The
Company is also required to pay Astellas a tiered mid-to-high
single digit percentage of the payments that Avalo receives from
sublicensing of its rights under the Astellas license agreement,
subject to certain exclusions. Upon commercialization, the Company
is required to pay Astellas royalties during a country-by-country
royalty term equal to a tiered mid-to-high single digit percentage
of annual net sales. Avalo is fully responsible for the development
and commercialization of the program.
No expense related to this license agreement was recognized in the
nine months ended September 30, 2022.
There has been $0.5 million of cumulative expense recognized
as of September 30, 2022 related to the milestones under this
license agreement, which was recognized in the nine months ended
September 30, 2021. The Company will continue to monitor the
remaining milestones at each reporting period.
AVTX-008 Sanford Burnham Prebys License Agreement
On June 22, 2021, the Company entered into an Exclusive Patent
License Agreement with Sanford Burnham Prebys Medical Discovery
Institute (the “Sanford Burnham Prebys License Agreement”) under
which the Company obtained an exclusive license to a portfolio of
issued patents and patent applications covering an immune
checkpoint program (AVTX-008).
Under the terms of the agreement, the Company incurred an upfront
license fee of $0.4 million, as well as patent costs of
$0.5 million. The Company is required to pay Sanford Burnham
Prebys up to $24.2 million based on achievement of specified
development and regulatory milestones. Upon commercialization, the
Company is required to pay Sanford Burnham Prebys sales-based
milestone payments aggregating up to $50.0 million tied to
annual net sales targets.
Additionally, the Company is required to pay Sanford Burnham Prebys
royalties during a country-by-country royalty term equal to a
low-to-mid single digit percentage of annual net sales. The Company
is also required to pay Sanford Burnham Prebys a tiered low-double
digit percentage
of the payments that Avalo receives from sublicensing of its rights
under the Sanford Burnham Prebys License Agreement, subject to
certain exclusions. Avalo is fully responsible for the development
and commercialization of the program.
No expense related to the Sanford Burnham Prebys License Agreement
was recognized in the nine months ended September 30, 2022.
The Company recognized the upfront license fee of $0.4 million
within research and development expenses and the upfront patent
expense of $0.5 million within selling, general and
administrative expenses in the nine months ended September 30,
2021. There has been no cumulative expense recognized as of
September 30, 2022 related to the milestones under the Sanford
Burnham Prebys License Agreement. The Company will continue to
monitor the milestones at each reporting period.
Possible Future Milestone Proceeds for Out-Licensed
Compounds
AVTX-301 Out-License
On May 28, 2021, the Company out-licensed its rights in respect of
its non-core asset, AVTX-301, to Alto Neuroscience, Inc. (“Alto”).
The Company initially in-licensed the compound from an affiliate of
Merck & Co., Inc. (“Merck”) in 2013.
Under the out-license agreement, the Company received a mid-six
digit upfront payment from Alto. The Company is also eligible to
receive up to $18.6 million based on the achievement of
specified development, regulatory and commercial sale milestones
(net of the payments due to Merck pursuant to the original license
agreement, which Alto is responsible for). Additionally, the
Company is entitled to a less than single digit percentage royalty
based on annual net sales. Alto is fully responsible for the
development and commercialization of the program.
Avalo recognized the upfront fee as license revenue in the nine
months ended September 30, 2021. The Company has not recognized any
milestones as of September 30, 2022.
AVTX-406 License Assignment
On June 9, 2021, the Company assigned its rights, title, interest,
and obligations under an in-license covering its non-core asset,
AVTX-406, to ES Therapeutics, LLC (“ES”), an affiliate of
Armistice. The transaction with ES was approved in accordance with
Avalo’s related party transaction policy. The Company initially
in-licensed the compound from Merck in 2013.
Under the assignment agreement, the Company received a low-six
digit upfront payment from ES. The Company is also eligible to
receive up to $6.0 million based on the achievement of
specified development and regulatory milestones. Upon
commercialization, the Company is eligible to receive sales-based
milestone payments aggregating up to $20.0 million tied to
annual net sales targets. ES is fully responsible for the
development and commercialization of the program. Avalo is no
longer responsible for future milestones or royalties under the
original license with Merck.
Avalo recognized the upfront fee as license revenue in the nine
months ended September 30, 2021. The Company has not recognized any
milestones as of September 30, 2022.
Acquisition Related and Related Party Contingent
Liabilities
Aevi Merger Possible Future Milestone Payments
In the first quarter of 2020, the Company consummated its merger
with Aevi Genomic Medicine Inc. (“Aevi”), in which Avalo acquired
the rights to AVTX-002, AVTX-006 and AVTX-007 (the “Merger” or the
“Aevi Merger”). A portion of the consideration for the Aevi Merger
included two future contingent development milestones worth up to
an additional $6.5 million, payable in either shares of Avalo’s
common stock or cash, at the election of Avalo.
The first milestone was the enrollment of a patient in a Phase 2
study related to AVTX-002 (for treatment of pediatric onset Crohn’s
disease), AVTX-006 (for treatment of any indication) or AVTX-007
(for treatment of any indication) prior to February 3, 2022, which
would have resulted in a milestone payment of $2.0 million. The
Company did not meet the first milestone prior to February 3, 2022.
Therefore, no contingent consideration related to this milestone
was recognized as of September 30, 2022 and no future
contingent consideration will be recognized.
The second milestone is the receipt of NDA approval for either
AVTX-006 or AVTX-007 from the FDA on or prior to February 3, 2025.
If this milestone is met, the Company is required to make a
milestone payment of $4.5 million. The contingent consideration
related to the second development milestone will be recognized if
and when such milestone is probable and can be reasonably
estimated. No contingent consideration related to the development
milestone has been recognized as of September 30, 2022. The
Company will continue to monitor the second development milestone
at each reporting period.
AVTX-006 Royalty Agreement with Certain Related
Parties
In July 2019, Aevi entered into a royalty agreement, and
liabilities thereunder were assumed by the Company upon closing the
Aevi Merger in February 2020. The royalty agreement provided
certain Aevi investors, including LeoGroup Private Investment
Access, LLC on behalf of Garry Neil, the Company’s Chief Executive
Officer, and Mike Cola, the Company’s former Chief Executive
Officer (collectively, the “Investors”), a royalty stream, in
exchange for a one-time aggregate payment of $2.0 million (the
“Royalty Agreement”). Pursuant to the Royalty Agreement, the
Investors will be entitled collectively to an aggregate amount
equal to a low-single digit percentage of the aggregate net sales
of the Company’s second generation mTORC1/2 inhibitor, AVTX-006. At
any time beginning three years after the date of the first public
launch of AVTX-006, Avalo may exercise, at its sole discretion, a
buyout option that terminates any further obligations under the
Royalty Agreement in exchange for a payment to the Investors of an
aggregate of 75% of the net present value of the royalty payments.
A majority of the independent members of the board of directors and
the audit committee of Aevi approved the Royalty
Agreement.
Avalo assumed this Royalty Agreement upon closing of the Aevi
Merger and it is recorded as a royalty obligation within the
Company's accompanying condensed consolidated balance sheet as of
September 30, 2022. Because there is a significant related
party relationship between the Company and the Investors, the
Company has treated its obligation to make royalty payments under
the Royalty Agreement as an implicit obligation to repay the funds
advanced by the Investors. As the Company makes royalty payments in
accordance with the Royalty Agreement, it will reduce the liability
balance. At the time that such royalty payments become probable and
estimable, and if such amounts exceed the liability balance, the
Company will impute interest accordingly on a prospective basis
based on such estimates, which will result in a corresponding
increase in the liability balance.
Ichorion Asset Acquisition Possible Future Milestone
Payments
In September 2018, the Company acquired Ichorion Therapeutics, Inc.
including acquiring three compounds for inherited metabolic
disorders known as CDGs (AVTX-801, AVTX-802 and AVTX-803) and one
other preclinical compound. Consideration for the transaction
included shares of Avalo common stock and three future contingent
development milestones for the acquired compounds worth up to an
additional $15.0 million, payable in either shares of Avalo’s
common stock or cash, at the election of Avalo.
The first and second milestones were marketing approval of the
first and second product, respectively, by the FDA on or prior to
December 31, 2021, which would have resulted in milestone payments
of $6.0 million and $5.0 million, respectively. The
Company did not meet the first or second milestone as of December
31, 2021. As a result, no contingent consideration related to these
milestones was recognized as of September 30, 2022 and no
future contingent consideration will be recognized.
The third milestone is the marketing approval of a protide molecule
by the FDA on or prior to December 31, 2023. If this milestone is
met, the Company is required to make a milestone payment of
$4.0 million. The contingent consideration related to the
third development milestone will be recognized if and when such
milestone is probable and can be reasonably estimated. No
contingent consideration related to the third development milestone
has been recognized as of September 30, 2022. The Company will
continue to monitor the third development milestone at each
reporting period.
14. Subsequent Events
On November 4, 2022, Avalo entered into an agreement to sell its
economic rights to future payments for previously out-licensed
assets including AVTX-007, AVTX-501, and AVTX-611 to ES
Therapeutics, LLC (“ES”), an affiliate of Armistice, in exchange
for $5.0 million, payable upon closing (the “ES Transaction”).
The ES Transaction is expected to close in November 2022. The ES
Transaction was approved in accordance with Avalo’s related party
transaction policy. The Company will evaluate the accounting impact
of the transaction in the fourth quarter of 2022.
Upon closing of the ES Transaction, the Company will no longer be
entitled to receive the possible future milestones and royalties
related to AVTX-007, AVTX-501 and AVTX-611, as discussed further
below:
AVTX-007
On July 29, 2022, Avalo entered into a license agreement with
Apollo pursuant to which the Company granted Apollo a worldwide,
exclusive license to research, develop, manufacture and
commercialize AVTX-007. Upon closing of the ES Transaction, the
future economic rights to milestones and royalties for AVTX-007
under the Apollo License Agreement will be transferred to
ES.
The program was originally licensed to Avalo from MedImmune
Limited, a subsidiary of AstraZeneca plc (“MedImmune”), and such
license was transferred to Apollo. Avalo is not responsible for
future milestone or royalties under the original license with
MedImmune.
AVTX-501
In 2017, Avalo sold its worldwide rights to AVTX-501 to Janssen
Pharmaceuticals, Inc. Upon closing of the ES Transaction, the
future economic rights to milestones for AVTX-501 will be
transferred to ES.
The Company had initially in-licensed the compound from Eli Lilly
Company (“Lilly”). Avalo is not responsible for future milestones
or royalties under the original license with Lilly.
AVTX-611
In 2019, Avalo assigned its rights, title, interest and obligations
under an in-license covering its non-core asset, AVTX-611, to ES.
Upon closing of the ES Transaction, Avalo will waive all rights,
including payments due to the Company from ES, under the original
license agreement.
Avalo initially in-licensed the compound from Lilly. Avalo is not
responsible for future milestones or royalties under the original
license with Lilly.
Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
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 below and
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 2, 2022, 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, 2021 appearing in our Annual Report on Form 10-K
filed with the SEC on March 2, 2022.
Overview
Avalo Therapeutics, Inc. (the “Company” or “Avalo” or “we”) is a
clinical stage biotechnology company focused on the treatment of
immune dysregulation by developing therapies that target the LIGHT
network.
LIGHT (Lymphotoxin-like,
exhibits
Inducible
expression, and competes with HSV
Glycoprotein
D for
Herpesvirus
Entry Mediator (“HVEM”), a receptor expressed by
T
lymphocytes; also referred to as TNFSF14) is an immunoregulatory
cytokine. LIGHT and its signaling receptors, HVEM (TNFRSF14), and
lymphotoxin β receptor (TNFRSF3), form an immune regulatory network
with two co-receptors of herpesvirus entry mediator, checkpoint
inhibitor B and T Lymphocyte Attenuator (“BTLA”), and CD160
(collectively, the “LIGHT-signaling network” or the “LIGHT
network”). Accumulating evidence points to the dysregulation of the
LIGHT network as a disease-driving mechanism in autoimmune and
inflammatory reactions in barrier organs. Therefore, we believe
reducing LIGHT levels can moderate immune dysregulation in many
acute and chronic inflammatory disorders.
Management’s primary evaluation of the success of the Company is
the ability to progress its pipeline assets forward towards
commercialization or opportunistically out-licensing rights to
indications or geographies. This success depends not only on the
operational execution of the programs, but also the ability to
secure sufficient funding to support the programs. We believe the
ability to achieve the anticipated milestones represents our most
immediate evaluation points. The following chart summarizes key
information about our clinical-stage pipeline and anticipated
research & development milestones:
Recent Developments
In the third quarter of 2022, we were focused on progressing our
pipeline programs forward to meaningful data readouts, notably
AVTX-002 for the treatment of non-eosinophilic asthma (“NEA”). We
remain on track to deliver topline data in the first half of 2023
from our Phase 2 PEAK (A Phase 2, Randomized, Double-Blind,
Placebo-Controlled, Parallel Group Study to Evaluate the Safety and
Efficacy of AVTX-002 for the treatment of Poorly Controlled
Non-Eosinophilic Asthma K) trial.
In August 2022, we narrowed our focus to dysregulated inflammation
specifically as it relates to the LIGHT-signaling network. LIGHT
(TNFSF14) has emerged as an important modulator of critical innate
and adaptive immune responses. LIGHT and its signaling receptors,
herpesvirus entry mediator (TNFRSF14), and lymphotoxin β receptor,
form an immune regulatory network with two co-receptors of
herpesvirus entry mediator, checkpoint inhibitor BTLA, and CD160.
There is increasing evidence that the dysregulation of the
LIGHT-signaling network is a disease-driving mechanism in
autoimmune and inflammatory reactions in barrier organs, including
COVID-19 acute respiratory distress syndrome and inflammatory bowel
diseases. We have two drug candidates that modulate the
LIGHT-signaling network, AVTX-002, an anti-LIGHT monoclonal
antibody (“mAb”) in Phase 2, and AVTX-008, a BTLA agonist fusion
protein in lead optimization.
In August 2022, we announced that AVTX-008, which we in-licensed in
2021 from Sanford Burnham Prebys Medical Discovery Institute as a
portfolio of patents covering an immune checkpoint program, is a
BTLA agonist fusion protein. We also announced that AVTX-008 has
now entered IND-enabling studies. We added AVTX-008 to our product
development pipeline milestone chart as a result of reaching the
IND-enabling phase and our recent change in focus to the
LIGHT-signaling network. We are targeting IND submission in
2024.
We are proceeding with the AVTX-803 LADDER (A Phase 3, Randomized,
Double-Blind, Two-Period, Crossover, Withdrawal Study to Assess the
Efficacy and Safety of AVTX-803 in Subjects with Leukocyte Adhesion
Deficiency Type II (LADD) (ER)) trial and remain on track to
deliver pivotal data in the first half of 2023. We will continue to
consider strategic alternatives for AVTX-803, as well as AVTX-801
and AVTX-802.
On November 4, 2022, Avalo entered into an agreement to sell its
economic rights to future payments for previously out-licensed
assets including AVTX-007, AVTX-501, and AVTX-611 to ES
Therapeutics, LLC (“ES”), an affiliate of Armistice, in exchange
for $5.0 million payable upon closing (the “ES Transaction”).
The ES Transaction is expected to close in November 2022. The ES
Transaction was approved in accordance with Avalo’s related party
transaction policy. Refer to Note 14 of the condensed consolidated
financial statements for additional information.
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.
Results of Operations
Comparison of the Three Months Ended September 30, 2022 and
2021
Product Revenue, Net
Net product revenue was $0.4 million for the three months ended
September 30, 2022, compared to $1.4 million for the three
months ended September 30, 2021. The decrease was mainly
attributable to a decrease in units sold, which may have been
caused by disruptions to the sales channel as a result of the
transition of commercial operations from Aytu BioScience, Inc.
(“Aytu”) to Avalo in the second half of 2021. The Company is
uncertain whether these potential disruptions will be temporary or
have a permanent impact on future sales.
License Revenue
In the third quarter of 2022, Avalo granted a worldwide, exclusive
license to Apollo Therapeutics Group Limited (“Apollo”) to
research, develop, manufacture and commercialize AVTX-007, Avalo’s
anti-IL-18 mAb. The Company recognized $14.5 million of license
revenue for the three months ended September 30, 2022 related
to the receipt of upfront fees pursuant to the
license.
Cost of Product Sales
Cost of product sales were $0.5 million for the three months ended
September 30, 2022, compared to $0.9 million for the same
period in 2021. The decrease was mainly attributable to a decrease
in units sold, as discussed above.
Research and Development Expenses
The following table summarizes our research and development
expenses for the three months ended September 30, 2022 and 2021 (in
thousands):
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Three Months Ended September 30, |
|
|
|
2022 |
|
2021 |
|
Preclinical expenses |
|
$ |
479 |
|
|
$ |
1,485 |
|
|
Clinical expenses |
|
3,003 |
|
|
2,658 |
|
|
CMC expenses |
|
1,687 |
|
|
3,366 |
|
|
|
|
|
|
|
Internal expenses: |
|
|
|
|
|
Salaries, benefits and related costs |
|
1,533 |
|
|
2,499 |
|
|
Stock-based compensation expense |
|
279 |
|
|
480 |
|
|
Other |
|
61 |
|
|
63 |
|
|
|
|
$ |
7,042 |
|
|
$ |
10,551 |
|
Research and development expenses decreased $3.5 million for
the three months ended September 30, 2022, compared to the same
period in 2021.
Notably, chemistry, manufacturing, and controls (“CMC”) and
preclinical expenses decreased $1.7 million and
$1.0 million, respectively. CMC expenses decreased largely due
to the increased manufacturing activities to support clinical
development in the third quarter of 2021 that did not repeat in the
third quarter of 2022. Preclinical expenses decreased due to
non-clinical activities and biomarker studies in the third quarter
of 2021 that did not repeat in the third quarter of 2022. Clinical
expenses increased $0.3 million, which was driven by increased
clinical trial activities for the AVTX-002 PEAK study partially
offset by fewer clinical trials overall in the current period as a
result of the out-license of AVTX-007 and de-prioritization of
certain programs in 2022.
Additionally, salaries, benefits and related costs decreased
$1.0 million due to the reduction in headcount implemented in
the first quarter of 2022 and cost savings
initiatives.
Selling, General and Administrative Expenses
The following table summarizes our selling, general and
administrative expenses for the three months ended September 30,
2022 and 2021 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2022 |
|
2021 |
|
|
|
|
|
|
Salaries, benefits and related costs |
|
$ |
839 |
|
|
$ |
1,434 |
|
|
Legal, consulting and other professional expenses |
|
1,687 |
|
|
2,425 |
|
|
Stock-based compensation expense |
|
452 |
|
|
1,279 |
|
|
Advertising and marketing expense |
|
6 |
|
|
482 |
|
|
Other |
|
300 |
|
|
306 |
|
|
|
|
$ |
3,284 |
|
|
$ |
5,926 |
|
Selling, general and administrative expenses decreased
$2.6 million for the three months ended September 30,
2022 compared to the same period in 2021 due to decreased headcount
and cost savings initiatives. Notably, non-cash stock-based
compensation expense and salaries, benefits, and related costs
decreased $0.8 million and $0.6 million, respectively, as a
result of decreased headcount. Legal, consulting and other
professional expenses decreased $0.7 million due to reduced
recruiting, information technology services and legal expenses as a
result of cost savings initiatives.
We expect selling, general and administrative expenses to continue
to decrease as compared to historical periods prior to the
reduction in headcount and other cost savings initiatives
implemented in the first quarter of 2022.
Amortization Expense
The following table summarizes our amortization expense for the
three months ended September 30, 2022 and 2021 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2022 |
|
2021 |
|
|
|
|
|
|
Amortization of intangible assets |
|
$ |
— |
|
|
$ |
428 |
|
Avalo’s acquired assembled workforce and acquired product marketing
rights were fully amortized in the first quarter of 2022 and fourth
quarter of 2021, respectively, thus driving the $0.4 million
decrease as compared to the prior period. We expect amortization
expense to decrease as compared to historical prior periods given
the intangible assets are fully amortized.
Other Expense, Net
The following table summarizes our other expense, net for the three
months ended September 30, 2022 and 2021 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2022 |
|
2021 |
|
|
|
|
|
|
Other expense, net |
|
— |
|
|
(15) |
|
|
Interest expense, net |
|
(898) |
|
|
(985) |
|
|
|
|
$ |
(898) |
|
|
$ |
(1,000) |
|
Other expense, net was mainly comprised of interest expense related
to the venture loan and security agreement for the three months
ended September 30, 2022. In June 2022, the Company made a
partial prepayment of $15.0 million under the venture loan and
security agreement, of which $14.8 million was applied to
principal, which drove the $0.1 million decrease in interest
expense compared to the prior period.
We expect interest expense to decrease as compared to prior periods
as a result of the lower outstanding principal
balance.
Income Tax Expense
The following table summarizes our income tax expense for the three
months ended September 30, 2022 and 2021 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2022 |
|
2021 |
|
|
|
|
|
|
Income tax expense |
|
$ |
5 |
|
|
$ |
8 |
|
The Company recognized minimal income tax expense for both the
three months ended September 30, 2022 and 2021.
Comparison of the Nine Months Ended September 30, 2022 and
2021
Product Revenue, Net
Net product revenue was $2.6 million for the nine months ended
September 30, 2022, compared to $4.6 million for the nine
months ended September 30, 2021. The decrease was mainly
attributable to a decrease in units sold, which may have been
caused by disruptions to the sales channel as a result of the
transition of commercial operations from Aytu to Avalo in the
second half of 2021. The Company is uncertain whether these
potential disruptions will be temporary or have a permanent impact
on future sales.
License Revenue
Avalo recognized $14.5 million of license revenue for the nine
months ended September 30, 2022 compared to $0.6 million of
license revenue for the prior period. The license revenue
recognized in the current period related to receipt of upfront fees
pursuant to the out-license of AVTX-007 to Apollo. The license
revenue in the prior period related to upfront fees received
pursuant to the out-license and assignment of the rights to its
non-core neurology pipeline assets, AVTX-301 and AVTX-406,
respectively.
Cost of Product Sales
Cost of product sales were $2.8 million for the nine months ended
September 30, 2022, compared to $1.1 million for the same
period in 2021. In the second quarter of 2022, we fully reserved
the $1.0 million receivable due from Aytu in December 2024
pursuant to the transition service agreement, given Aytu disclosed
in their Quarterly Report on Form 10-Q for the quarter ended March
31, 2022 that substantial doubt existed with respect to their
ability to continue as a going concern within one year after the
date the financial statements were issued, or May 2023. We
recognized the expense in the cost of product sales for the nine
months ended September 30, 2022. Aytu most recently disclosed
in their Annual Report on Form 10-K for the year ended June 30,
2022, that it does not have sufficient cash to cover its cash needs
for the following twelve months following the filing of its Annual
Report on Form 10-K, or until September 2023.
The remainder of the increase from the prior period was mainly
driven by the fifty percent net profit share with the supplier,
which began on July 1, 2021.
Research and Development Expenses
The following table summarizes our research and development
expenses for the nine months ended September 30, 2022 and 2021
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2022 |
|
2021 |
|
Preclinical expenses |
|
$ |
2,047 |
|
|
$ |
5,829 |
|
|
Clinical expenses |
|
9,037 |
|
|
10,558 |
|
|
CMC expenses |
|
6,800 |
|
|
13,005 |
|
|
License and milestone expenses |
|
— |
|
|
10,900 |
|
|
Internal expenses: |
|
|
|
|
|
Salaries, benefits and related costs |
|
6,093 |
|
|
6,595 |
|
|
Stock-based compensation expense |
|
931 |
|
|
1,244 |
|
|
Other |
|
228 |
|
|
194 |
|
|
|
|
$ |
25,136 |
|
|
$ |
48,325 |
|
Research and development expenses decreased $23.2 million for
the nine months ended September 30, 2022 compared to the same
period in 2021. In the first quarter of 2021, the Company
recognized a $10.0 million upfront license fee related to the
expanded indication license agreement for AVTX-002 with Kyowa Kirin
Co., Ltd. (“KKC”), which did not repeat in the current
period.
The remaining $13.2 million decrease was primarily driven by a
decrease in CMC, preclinical and clinical expenses. CMC expenses
decreased $6.2 million due to the timing of raw material
purchases and increased manufacturing activities in the prior
period that did not repeat in the nine months ended September 30,
2022. Preclinical expenses decreased $3.8 million primarily
due to non-clinical activities and biomarker studies in the in the
prior period that did not repeat in the nine months ended September
30, 2022. Clinical expenses decreased $1.5 million due to
fewer clinical trials ongoing in the current period as a result of
certain programs being paused or wound down in 2022 and the
out-license of AVTX-007. However, these decreases were partially
offset by increased clinical activities related to the AVTX-002
PEAK study.
Salaries, benefits and related costs decreased $0.5 million
compared to the same period in 2021. The decrease was primarily
driven by decreased headcount and cost savings initiatives
implemented in 2022.
Selling, General and Administrative Expenses
The following table summarizes our selling, general and
administrative expenses for the nine months ended
September 30, 2022 and 2021 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2022 |
|
2021 |
|
|
|
|
|
|
Salaries, benefits and related costs |
|
$ |
5,435 |
|
|
$ |
3,842 |
|
|
Legal, consulting and other professional expenses |
|
5,484 |
|
|
7,703 |
|
|
Stock-based compensation expense |
|
5,780 |
|
|
5,036 |
|
|
Advertising and marketing expense |
|
64 |
|
|
1,044 |
|
|
Other |
|
989 |
|
|
1,052 |
|
|
|
|
$ |
17,752 |
|
|
$ |
18,677 |
|
Selling, general and administrative expenses decreased
$0.9 million for the nine months ended September 30, 2022
compared to the same period in 2021. The decrease was primarily
driven by a $2.2 million decrease in legal, consulting and
other professional expenses and a $1.0 million decrease in
advertising and marketing expenses. These decreases were driven by
reduced recruiting, information technology services, legal and
consulting expenses as a result of cost savings
initiatives.
Salaries, benefits and related costs and stock-based compensation
expense increased $1.6 million and $0.7 million, respectively, as a
result of severance expense and modifications of separated
employee’s stock options recognized in the nine months ended
September 30, 2022. Such increases were partially offset by overall
decreased headcount in the current period.
We expect selling, general and administrative expenses to continue
to decrease as compared to historical periods prior to the
reduction in headcount and other cost savings initiatives
implemented in the first quarter of 2022.
Amortization Expense
The following table summarizes our amortization expense for the
nine months ended September 30, 2022 and 2021 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2022 |
|
2021 |
|
|
|
|
|
|
Amortization of intangible assets |
|
$ |
38 |
|
|
$ |
1,281 |
|
Avalo’s acquired assembled workforce and acquired product marketing
rights were fully amortized in the first quarter of 2022 and fourth
quarter of 2021, respectively, thus driving the $1.2 million
decrease as compared to the prior period. We expect amortization
expense to decrease as compared to historical periods given the
intangible assets are fully amortized.
Other Expense, Net
The following table summarizes our other expense, net for the nine
months ended September 30, 2022 and 2021 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2022 |
|
2021 |
|
|
|
|
|
|
Other expense, net |
|
(20) |
|
|
(20) |
|
|
Interest expense, net |
|
(3,221) |
|
|
(1,207) |
|
|
|
|
$ |
(3,241) |
|
|
$ |
(1,227) |
|
Other expense, net was comprised of interest expense related to the
venture loan and security agreement for the nine months ended
September 30, 2022 and 2021. Avalo entered into the loan
agreement in June 2021 and therefore only recognized a partial
period of interest expense in the prior period, which drove the
increase for the nine months ended September 30,
2022.
In June 2022, the Company made a partial prepayment of
$15.0 million under the venture loan and security agreement,
of which $14.8 million was applied to principal. Therefore, we
expect interest expense to decrease as compared to prior
periods.
Income Tax Expense (Benefit)
The following table summarizes our income tax expense for the nine
months ended September 30, 2022 and 2021 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2022 |
|
2021 |
|
|
|
|
|
|
Income tax expense (benefit) |
|
$ |
20 |
|
|
$ |
(180) |
|
The Company recognized minimal income tax expense for the nine
months ended September 30, 2022 compared to an income tax
benefit of $0.2 million for the nine months ended September
30, 2021. The income tax benefit in the prior period was a result
of the updated estimate of interest receivable and abatement of
penalties on the refund claim, as the final refund payment was
received from the Internal Revenue Service in the second quarter of
2021.
Liquidity and Capital Resources
In order to meet its cash flow needs, the Company applies a
disciplined decision-making methodology as it evaluates the optimal
allocation of the Company’s resources between investing in the
Company’s existing pipeline assets and acquisitions or in-licensing
of new assets. As of September 30, 2022, Avalo had $16.9
million in cash and cash equivalents. For the nine months ended
September 30, 2022, Avalo generated a net loss of $31.8
million and negative cash flows from operations of $22.8 million.
As of September 30, 2022, Avalo had an accumulated deficit of
$294.0 million.
In the second quarter of 2022, as collectively agreed upon with the
Lenders (as defined below), the Company made a partial prepayment
of $15.0 million ($14.8 million of which was applied to
principal) on notes (the “Notes”) issued under its venture loan and
security agreement (the “Loan Agreement”) with Horizon Technology
Finance Corporation (“Horizon”) and Powerscourt Investments XXV, LP
(“Powerscourt”, and together with Horizon, the “Lenders”). Avalo
intends to consider additional prepayments prior to principal loan
amounts coming due, if collectively agreed upon with the Lenders.
As of September 30, 2022, the carrying value of the Notes (as
defined in Note 9) was $19.1 million.
The accompanying unaudited condensed consolidated financial
statements have been prepared assuming the Company will continue as
a going concern; however, losses are expected to continue as the
Company continues to invest in its research and development
pipeline assets. The Company will require additional financing to
fund its operations and to continue to execute its business
strategy within one year after the date the unaudited condensed
consolidated financial statements included herein were issued. We
anticipate that the cash and cash equivalents as of
September 30, 2022 will not be sufficient for us to fund our
product candidates through their next anticipated milestones, which
include topline data from the AVTX-002 Phase 2 PEAK trial and
pivotal data from the AVTX-803 LADDER trial, both expected in the
first half of 2023. We will need to raise additional capital to
reach these milestones. These conditions raise substantial doubt
about the Company’s ability to continue as a going
concern.
To mitigate these conditions and to meet the Company’s capital
requirements, management plans to use its current cash on hand
along with some combination of the following: (i) dilutive and/or
non-dilutive financings, (ii) out-licensing or strategic
alliances/collaborations of its current pipeline assets, (iii)
out-licensing or sale of its non-core assets, and (iv) federal
and/or private grants. 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. Subject to
limited exceptions, the Loan Agreement prohibits the Company from
incurring certain additional indebtedness, making certain asset
dispositions, and entering into certain mergers, acquisitions or
other business combination transactions without the prior consent
of the Lenders. Additionally, the Loan Agreement contains certain
covenants and certain
other specified events that could result in an event of default,
which if not cured or waived, could result in the immediate
acceleration of all or a substantial portion of the outstanding
Notes. As of the filing date of this Quarterly Report on Form 10-Q,
the Company was not aware of any breach of covenants or occurrence
of material adverse change, nor had it received any notice of event
of default from the Lenders (refer to Note 9 of the condensed
unaudited consolidated financial statements for more
information).
If the Company requires but is unable to obtain additional funding,
the Company may be forced to make reductions in spending, delay,
suspend, reduce or eliminate some or all of its planned research
and development programs, or liquidate assets where possible. Due
to the uncertainty regarding future financing and other potential
options to raise additional funds, management has concluded that
substantial doubt exists with respect to the Company’s ability to
continue as a going concern within one year after the date that the
financial statements in this Quarterly Report on Form 10-Q were
issued.
Over the long term, the Company’s ultimate ability to achieve and
maintain profitability will depend on, among other things, the
development, regulatory approval, and commercialization of its
pipeline assets, and the potential receipt and sale of any priority
review vouchers it receives.
Uses of Liquidity
The Company uses cash to primarily fund the ongoing development of
our research and development pipeline assets and costs associated
with its organizational infrastructure.
Cash Flows
The following table summarizes our cash flows for the nine months
ended September 30, 2022 and 2021 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2022 |
|
2021 |
|
|
|
|
|
|
Net cash (used in) provided by: |
|
|
|
|
|
Operating activities |
|
$ |
(22,811) |
|
|
$ |
(53,793) |
|
|
Investing activities |
|
(95) |
|
|
(102) |
|
|
Financing activities |
|
(14,781) |
|
|
106,686 |
|
|
Net (decrease) increase in cash and cash equivalents |
|
$ |
(37,687) |
|
|
$ |
52,791 |
|
Net cash used in operating activities
Net cash used in operating activities was $22.8 million for the
nine months ended September 30, 2022, and consisted primarily of a
net loss of $31.8 million and non-cash adjustments to reconcile net
loss to net cash used in operating activities including stock-based
compensation of $6.7 million and the full $1.0 million
reserve on the Aytu receivable due December 2024. Additionally,
changes in net assets increased by $0.1 million.
Net cash used in operating activities was $53.8 million for
the nine months ended September 30, 2021, consisting of a net loss
of $65.2 million. The decrease was partially offset by
non-cash stock-based compensation of $6.3 million.
Additionally, changes in net liabilities increased
$3.5 million, mainly driven by a $2.6 million increase in
accrued expenses. In April 2021, the Company paid the
$10.0 million upfront license fee related to the expanded
indication license agreement for AVTX-002 with KKC.
Net cash used in investing activities
Net cash used in investing activities, which primarily consisted of
purchases of property and equipment, was minimal for the nine
months ended September 30, 2022 and September 30,
2021.
Net
cash used in financing activities
Net cash used in financing activities for the nine months ended
September 30, 2022 consisted of the principal portion of the
$15.0 million partial prepayment the Company made in the
second quarter of 2022 under its the Loan Agreement.
Net cash provided by financing activities was $106.7 million
for the nine months ended September 30, 2021 and consisted
primarily of net proceeds of $104.9 million from equity and
debt financings. Specifically, the Company received net proceeds
of
$37.7 million from an underwritten public offering closed in
January 2021, net proceeds of $32.9 million as part of the
Loan Agreement entered into in the second quarter of 2021, and net
proceeds of $29.0 million from an underwritten public offering
that closed in September 2021.
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, cash flows used in management’s going concern
assessment, income taxes, goodwill, and other intangible assets 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, 2021 filed with the SEC
on March 2, 2022. There have been no material changes to our
critical accounting policies during the nine months ended
September 30, 2022.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined by
applicable SEC rules and regulations.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.
Interest Rate Risk
As a smaller reporting company, we are not required to provide the
information required by this Item.
Item 4. Controls and Procedures.
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.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 1A. Risk Factors.
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, 2021, filed with the
SEC on March 2, 2022, 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.
The risks described in the Form 10-K referenced above 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 also may materially adversely affect our business,
financial condition, or future results of operations and the
trading price of our common stock.
Item 5. Other Information.
On November 4, 2022, the Company entered into a Purchase Agreement
(the “Purchase Agreement”) with ES Therapeutics, LLC (“ES”),
pursuant to which the Company will (i) sell to ES all of the
Company’s (a) rights to any milestone payments, under the Asset
Purchase Agreement, dated August 14, 2017, by and between the
Company and Janssen Pharmaceuticals, Inc. (relating to AVTX-501),
and (b) any future milestone and royalty payments under the License
Agreement, dated July 29, 2022, by and between Apollo AP43 Limited
and the Company (relating to AVTX-007), and (ii) waive all rights,
including all payments due to the Company from ES, under the
Assignment of License Agreement, dated August 8, 2019 (relating to
AVTX-611), by and among the Company, ES and Armistice Capital
Master Fund Ltd (“Armistice”). ES is required to pay the Company
$5.0 million for all such rights and the waiver upon closing
of the transaction. The sale is expected to close in November
2022.
The Purchase Agreement contains customary representations and
warranties and covenants of the Company and ES, including
indemnification of ES by the Company up to the amount of the
purchase price.
ES is an affiliate of Armistice. Armistice is a significant
stockholder of the Company and whose chief investment officer,
Steven Boyd, and managing director, Keith Maher, served on the
Company’s board of directors until August 8, 2022. The Company’s
board of directors approved the transaction in accordance with its
related party transaction policy.
The foregoing description of the Purchase Agreement does not
purport to be complete and is qualified in its entirety by
reference to the full text of the Purchase Agreement, a copy of
which is filed as Exhibit 10.3 to this Quarterly
Report.
Item 6. Exhibits.
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Exhibit
Number |
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Description of Exhibit |
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10.1*+ |
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10.2 |
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10.3*+ |
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31.1+ |
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31.2+ |
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32.1+† |
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101 |
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Interactive data files pursuant to Rule 405 of Regulation S-T: (i)
Condensed Consolidated Balance Sheets (Unaudited) as of September
30, 2022 and December 31, 2021; (ii) Condensed Consolidated
Statements of Operations (Unaudited) for the Three and Nine Months
Ended September 30, 2022 and 2021; (iii) Condensed Consolidated
Statements of Cash Flows (Unaudited) for the Nine Months Ended
September 30, 2022 and 2021; (iv) Condensed Consolidated Statements
of Changes in Stockholders’ (Deficit) Equity (Unaudited) for the
Three and Nine Months Ended September 30, 2022 and 2021; and (v)
Notes to Unaudited Financial Statements.
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104 |
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Cover Page Interactive Data File, formatted in XBRL (included in
Exhibit 101).
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* Certain confidential portions and/or the schedules and
attachments to this exhibit have been omitted from this filing
pursuant to Item 601(a)(5) or 601(b)(10), as applicable, of
Regulation S-K. The Company will furnish copies of the unredacted
exhibit to the SEC upon request.
+ Filed herewith.
† This certification is being furnished solely to accompany this
Quarterly Report on Form 10-Q pursuant to 18 U.S.C. Section 1350,
and is not being filed for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, and is not to be incorporated by
reference into any filing of the registrant, whether made before or
after the date hereof, regardless of any general incorporation
language in such filing.
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SIGNATURES |
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Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly
authorized.
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Avalo Therapeutics, Inc. |
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Date: November 7, 2022 |
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/s/ Christopher Sullivan |
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Christopher Sullivan |
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Chief Financial Officer |
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(on behalf of the registrant and as the registrant’s principal
financial officer) |
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