Avalo Therapeutics, Inc.

Previous wording

The Company’s Phase 2 LOTUS trial in HS, is a randomized, double-blind, placebo-controlled, parallel-group Phase 2 trial with two AVTX-009 dose regimens to evaluate the efficacy, safety and tolerability of AVTX-009 in approximately 222 adults with moderate to severe HS. Subjects will be randomized (1:1:1) to receive either one of two doses of AVTX-009 or placebo. The primary efficacy endpoint is the proportion of subjects achieving Hidradenitis Suppurativa Clinical Response (HiSCR75) at Week 16. Avalo is the study sponsor and the current trial locations include the United States, Canada, France, Germany, Italy, Spain, Bulgaria, Czech Republic, Greece, Poland, Australia, Turkey, and Slovakia.

Current wording

The Company’s Phase 2 LOTUS trial in HS, is a randomized, double-blind, placebo-controlled, parallel-group Phase 2 trial with two AVTX-009 dose regimens to evaluate the efficacy, safety and tolerability of AVTX-009 in approximately 250 adults with moderate to severe HS. Subjects were randomized (1:1:1) to receive either one of two doses of AVTX-009 or placebo. The primary efficacy endpoint is the proportion of subjects achieving Hidradenitis Suppurativa Clinical Response (HiSCR75) at Week 16. Avalo is the study sponsor and the current trial locations include the United States, Canada, France, Germany, Italy, Spain, Bulgaria, Czech Republic, Greece, Poland, Australia, Turkey, and Slovakia.

Previous wording

For the six months ended June 30, 2025, Avalo generated net loss of $33.9 million and negative cash flows from operations of $20.8 million. As of June 30, 2025, Avalo had $113.3 million in cash and cash equivalents and short-term investments.

Current wording

For the nine months ended September 30, 2025, Avalo generated a net loss of $64.5 million and negative cash flows from operations of $37.2 million. As of September 30, 2025, Avalo had $111.6 million in cash and cash equivalents and short-term investments.

Previous wording

We recognized no cost of product sales for the three months ended June 30, 2025 and $0.3 million for the three months ended June 30, 2024, which related to an updated estimate for a commercial liability related to past sales of the Millipred® product. The Company ceased selling Millipred®in September 2023.

Current wording

We recognized no cost of product sales for the three months ended September 30, 2025 and a benefit of $0.7 million for the three months ended September 30, 2024, which related to the change in an estimate of commercial liabilities related to the Millipred® product. The Company ceased selling Millipred®in September 2023.

Previous wording

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

Current wording

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

Previous wording

Research and development expenses increased $9.5 million for the three months ended June 30, 2025 compared to the three months ended June 30, 2024. This increase was mainly driven by a $5.6 million increase in clinical expenses, $2.5 million increase in chemistry, manufacturing, and controls (“CMC”) expenses, and $0.9 million increase in stock-based compensation expense.

Current wording

Research and development expenses increased $4.1 million for the three months ended September 30, 2025 compared to the three months ended September 30, 2024. This increase was mainly driven by a $2.2 million increase in clinical expenses, $0.9 million increase in salaries, benefits and related costs, and $0.6 million in chemistry, manufacturing, and controls (“CMC”) expenses.

Previous wording

Clinical expenses increased due to the ongoing activities related to the Phase 2 LOTUS trial in HS incurred in the second quarter of 2025, including screenings and enrollment costs and patient trial costs, compared to limited expenses for trial enabling activities in the second quarter of 2024. CMC expenses increased due to raw materials purchases and drug manufacturing activities to support the trial, compared to limited drug stability studies in the prior year period.

Current wording

Clinical expenses increased due to the ongoing activities related to the Phase 2 LOTUS trial in HS incurred in the third quarter of 2025, including patient trial costs and clinical trial work performed by our contract research organization (“CRO”), compared to limited expenses for trial initiation activities in the third quarter of 2024. CMC expenses increased due to continued drug manufacturing activities to support the trial, compared to raw materials purchases in the prior year period.

Previous wording

Stock-based compensation increased $0.9 million compared to the three months ended June 30, 2024 due to option and restricted stock unit grants made in the second half of 2024 and first quarter of 2025, including the annual employee grants in August 2024 and January 2025, as well as headcount additions.

Current wording

Salaries, benefits and related costs increased $0.9 million compared to the three months ended September 30, 2024 due primarily to headcount additions during the current year. Stock-based compensation expense increased $0.4 million related to option and restricted stock unit grants made in the second half of 2024 and in 2025, including the annual employee grants in August 2024 and January 2025, as well as headcount additions throughout 2025.

Previous wording

General and administrative expenses increased $0.7 million for the three months ended June 30, 2025 compared to the prior year period. The increase was driven by a $1.4 million increase in stock-based compensation expense due to option and restricted stock unit grants made in the second half of 2024 and first quarter of 2025, including the annual employee grants in August 2024 and January 2025, as well as headcount additions. The increase was partially offset by a decrease of $0.8 million in legal, consulting and other professional expenses due to higher expenses incurred in the prior year period related to the AlmataBio Transaction and private placement investment, which closed in March 2024.

Current wording

General and administrative expenses increased $1.3 million for the three months ended September 30, 2025 compared to the prior year period. The increase was driven by a $0.9 million increase in stock-based compensation expense due to option and restricted stock unit grants made in the second half of 2024 and in 2025, including the annual employee grants in August 2024 and January 2025, as well as headcount additions throughout 2025. Salaries, benefits and related costs increased $0.3 million compared to the prior year period due to headcount additions.

Previous wording

Although we expect most of the increase in operating expenses in 2025 to be attributable to increased research and development activities to progress AVTX-009, we also expect moderate increases to general and administrative expenses for the remainder of 2025 as compared to the comparable period in 2024 to support the AVTX-009 program. General and administrative expenses beyond mid-2026 are difficult to predict given they will be highly dependent on the outcome of the Phase 2 LOTUS trial in HS, for which we expect to release topline data in mid-2026.

Current wording

Although we expect most of the increase in operating expenses in 2025 to be attributable to increased research and development activities to progress AVTX-009, we also expect moderate increases to general and administrative expenses for the remainder of 2025 as compared to the comparable period in 2024, related to supporting the AVTX-009 program. General and administrative expenses beyond mid-2026 are difficult to predict given they will be highly dependent on the outcome of the Phase 2 LOTUS trial in HS.

Previous wording

Other expense, net was $1.4 million for the three months ended June 30, 2025 compared to other income net, of $108.0 million for the three months ended June 30, 2024. The $109.5 million change was primarily driven by the accounting impact of the warrant liability associated with the warrants issued in the March 2024 financing that were subsequently exercised in the fourth quarter of 2024. Refer to Note 6 - Fair Value Measurements of the unaudited condensed consolidated financial statements for more information.

Current wording

Other expense, net was $11.4 million for the three months ended September 30, 2025 compared to other income, net of $35.9 million for the prior year period. The $47.3 million change was primarily driven by (i) the accounting impact of the warrant liability associated with the warrants issued in the March 2024 financing that were subsequently exercised in the fourth quarter of 2024, and (ii) the change in the fair value of the derivative liability in the current period driven by changes in assumptions related to the AVTX-007 Milestones and Royalties (as defined in Note 6 to the unaudited condensed consolidated financial statements). Refer to Note 6 - Fair Value Measurements of the unaudited condensed consolidated financial statements for more information.

Previous wording

We recognized no cost of product sales for the six months ended June 30, 2025 compared to $0.3 million for the same period in 2024, which related to the change in an estimate of commercial liabilities related to the Millipred®product.

Current wording

We recognized no cost of product sales for the nine months ended September 30, 2025 compared to a benefit of $0.5 million for the same period in 2024, which related to the change in an estimate of commercial liabilities related to the Millipred®product. The Company ceased selling Millipred®in September 2023.

Previous wording

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

Current wording

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

Previous wording

The following table summarizes our research and development expenses for the six months ended June 30, 2025 and 2024 (in thousands):

Current wording

The following table summarizes our research and development expenses for the nine months ended September 30, 2025 and 2024 (in thousands):

Previous wording

Research and development expenses increased $16.5 million for the six months ended June 30, 2025. The increase was driven by increases in clinical and CMC expenses of $9.4 million and $4.3 million, respectively. Clinical expenses increased due to progress in the current year for the Phase 2 LOTUS trial in HS including site activations, screenings and enrollment costs, and patient trial costs as compared to trial enabling activities incurred in the first half of 2024. CMC expenses increased due to raw material purchases and drug manufacturing activities to support the trial.

Current wording

Research and development expenses increased $20.6 million for the nine months ended September 30, 2025. The increase was driven by increases in clinical and CMC expenses of $11.6 million and $4.8 million, respectively. Clinical expenses increased due to progress in the current year for the Phase 2 LOTUS trial in HS, including site activations, patient trial costs and clinical trial work performed by our CRO, as compared to trial enabling and activation activities incurred in the prior year period. CMC expenses increased due to raw material purchases and drug manufacturing activities to support the trial during the current year.

Previous wording

Stock-based compensation increased $1.9 million compared to the six months ended June 30, 2024 due to option and restricted stock unit grants made during the second half of 2024 and the first half of 2025, including the annual employee grants in August 2024 and January 2025, as well as headcount additions.

Current wording

Stock-based compensation increased $2.4 million compared to the nine months ended September 30, 2024 due to option and restricted stock unit grants made during the second half of 2024 and in 2025, including the annual employee grants in August 2024 and January 2025, as well as headcount additions. Salaries, benefits and related costs increased $1.8 million compared to the nine months ended September 30, 2024 primarily due to headcount additions.

Previous wording

In the first quarter of 2024, we acquired AVTX-009 through the AlmataBio Transaction, resulting in us acquiring $27.6 million of IPR&D in the six months ended June 30, 2024. There was no acquired IPR&D for the six months ended June 30, 2025.

Current wording

In the first quarter of 2024, we acquired AVTX-009 through the AlmataBio Transaction (as defined in Note 3 to the unaudited condensed consolidated financial statements), resulting in us acquiring $27.6 million of in-process research and development (“IPR&D”) in the nine months ended September 30, 2024. There was no acquired IPR&D for the nine months ended September 30, 2025.

Previous wording

The following table summarizes our general and administrative expenses for the six months ended June 30, 2025 and 2024 (in thousands):

Current wording

The following table summarizes our general and administrative expenses for the nine months ended September 30, 2025 and 2024 (in thousands):

Previous wording

General and administrative expenses increased $3.1 million for the six months ended June 30, 2025 compared to the prior year period. The increase was driven primarily by a $2.9 million increase in stock-based compensation expense due to option and restricted stock unit grants made during the second half of 2024 and first half of 2025, including the annual grants in August 2024 and January 2025.

Current wording

General and administrative expenses increased $4.4 million for the nine months ended September 30, 2025 compared to the prior year period. The increase was driven primarily by a $3.8 million increase in stock-based compensation expense due to option and restricted stock unit grants made during the second half of 2024 and in 2025, including the annual grants in August 2024 and January 2025 as well as new hire grants. Salaries, benefits and related costs increased $1.1 million compared to the nine months ended September 30, 2024 due to headcount additions.

Previous wording

Although we expect most of the increase in operating expenses in 2025 to be attributable to increased research and development activities to progress AVTX-009, we also expect moderate increases to general and administrative expenses for the remainder of 2025 as compared to the comparable period in 2024 to support the AVTX-009 program. General and administrative expenses beyond mid-2026 are difficult to predict given they will be highly dependent on the outcome of the Phase 2 LOTUS trial in HS, for which we expect to release topline data in mid-2026.

Current wording

Although we expect most of the increase in operating expenses in 2025 to be attributable to increased research and development activities to progress AVTX-009, we also expect moderate increases to general and administrative expenses for the remainder of 2025, as compared to the comparable period in 2024, related to supporting the AVTX-009 program. General and administrative expenses beyond mid-2026 are difficult to predict given they will be highly dependent on the outcome of the Phase 2 LOTUS trial in HS.

Previous wording

The following table summarizes our other income, net for the six months ended June 30, 2025 and 2024 (in thousands):

Current wording

The following table summarizes our other (expense) income, net for the nine months ended September 30, 2025 and 2024 (in thousands):

Previous wording

Other income, net decreased $19.4 million for the six months ended June 30, 2025 as compared to the prior year period primarily driven by the accounting impact in the prior period of the warrant liability associated with the warrants issued in the March 2024 financing that were subsequently exercised in the fourth quarter of 2024. Refer to Note 6 - Fair Value Measurements of the unaudited condensed and consolidated financial statements for more information. Further, the Company incurred $9.2 million of private placement transaction costs in the prior year period that did not repeat in the current period, largely consisting of the placement agent fee of $7.0 million, and $1.7 million fee payable upon exercise of the warrants issued in the private placement investment.

Current wording

Other expense, net was $11.3 million for the nine months ended September 30, 2025 compared to other income, net of $55.4 million for the prior year period. The $66.7 million change was primarily driven by (i) the accounting impact in the prior period of the warrant liability associated with the warrants issued in the March 2024 financing that were subsequently exercised in the fourth quarter of 2024, and (ii) the change in the fair value of the derivative liability in the current period driven by changes in assumptions related to the AVTX-007 Milestones and Royalties (as defined in Note 6 to the unaudited condensed consolidated financial statements). Refer to Note 6 - Fair Value Measurements of the unaudited condensed and consolidated financial statements for more information. Further, the Company incurred $9.2 million of private placement transaction costs in the prior year period that did not repeat in the current period, largely consisting of the placement agent fee of $7.0 million, and $1.7 million fee payable upon exercise of the warrants issued in the private placement investment.

Previous wording

The Company recognized minimal income tax expense for both the six months ended June 30, 2025 and 2024.

Current wording

The Company recognized minimal income tax expense for both the nine months ended September 30, 2025 and 2024.

Previous wording

The Company primarily uses cash to fund the ongoing development of AVTX-009 and costs associated with its organizational infrastructure. As of June 30, 2025, Avalo had $113.3 million in cash and cash equivalents and short-term investments.

Current wording

The Company primarily uses cash to fund the ongoing development of AVTX-009 and costs associated with its organizational infrastructure. As of September 30, 2025, Avalo had $111.6 million in cash and cash equivalents and short-term investments.

Previous wording

The following table summarizes our cash flows for the six months ended June 30, 2025 and 2024 (in thousands):

Current wording

The following table summarizes our cash flows for the nine months ended September 30, 2025 and 2024 (in thousands):

Previous wording

Net cash used in operating activities was $20.8 million for the six months ended June 30, 2025 and consisted primarily of net loss of $33.9 million, partially offset by net non-cash charges of $8.3 million and changes in our operating assets and liabilities of $4.7 million. The non-cash charges consisted primarily of stock-based compensation of $6.0 million and a $2.2 million change in the change in the fair value of the derivative liability. Changes in our operating assets and liabilities consisted primarily of a $2.4 million decrease in prepaid expenses and other current assets due to our ongoing clinical work and a $2.1 million increase in accounts payable primarily due to continued activity related to the LOTUS trial and the timing of vendor invoices.

Current wording

Net cash used in operating activities was $37.2 million for the nine months ended September 30, 2025 and consisted primarily of net loss of $64.5 million, partially offset by net non-cash charges of $23.7 million and changes in our operating assets and liabilities of $3.7 million. The non-cash charges consisted primarily of a $14.7 million change in the fair value of the derivative liability and stock-based compensation of $9.1 million. Changes in our operating assets and liabilities consisted primarily of a $2.2 million decrease in prepaid expenses and other current assets due to our ongoing clinical work and a $1.3 million increase in accrued expenses and other liabilities primarily due to continued activity related to the LOTUS trial and the timing of vendor invoices.

Previous wording

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

Current wording

Net cash used in operating activities was $34.0 million for the nine months ended September 30, 2024 and consisted primarily of net income of $0.2 million and adjustments to reconcile net income to net cash used in operating activities including the change in fair value of the warrant liability of $148.1 million, excess of initial warrant fair value over private placement investment proceeds of $79.3 million, acquired IPR&D of $27.6 million, $7.5 million milestone payment made to the former AlmataBio stockholders upon the closing of a private placement investment, change in fair value of the derivative liability of $6.3 million and stock-based compensation of $2.9 million. Prepaid expense increased $2.4 million primarily due to advances paid for AVTX-009 contracts and the timing of insurance prepayments. Accrued expenses and other liabilities increased $2.1 million primarily related to non-equity incentive compensation and increased research and development and general and administrative activities to support the development of AVTX-009.

Previous wording

Net cash used in investing activities consisted of $70.9 million of purchases of available-for-sale investments for the six months ended June 30, 2025.

Current wording

Net cash used in investing activities for the nine months ended September 30, 2025 consisted of $94.6 million of purchases of available-for-sale investments, partially offset by $10.5 million of proceeds from maturities of available-for-sale investments.

Previous wording

Net cash provided by investing activities for the six months ended June 30, 2024 consisted of the cash acquired as part of the AlmataBio Transaction.

Current wording

Net cash provided by investing activities for the nine months ended September 30, 2024 consisted of the cash acquired as part of the AlmataBio Transaction.

Previous wording

Net cash used in financing activities for the six months ended June 30, 2025 consisted primarily of the cash paid to tax authorities related to withholding shares to satisfy RSU vesting withholding obligations on behalf of employees.

Current wording

Net cash provided by financing activities for the nine months ended September 30, 2025 consisted of net proceeds of $14.4 million from the sales of shares under our “at-the-market” sales agreement, partially offset by $0.5 million in cash paid to tax authorities related to withholding shares to satisfy RSU vesting withholding obligations on behalf of employees.

Previous wording

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

Current wording

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

Previous wording

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, clinical trial accruals and research and development costs, stock-based compensation, fair value measurements, the valuation of derivative liabilities, revenue recognition, cost of product sales and cash flows used in management’s going concern assessment. 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, 2024 filed with the SEC on March 20, 2025. Except as described in Note 2 - Basis of Presentation and Significant Accounting Policies, there have been no significant changes to our critical accounting policies during the six months ended June 30, 2025.

Current wording

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, clinical trial accruals and research and development costs, stock-based compensation, fair value measurements, the valuation of derivative liabilities, revenue recognition, cost of product sales and cash flows used in management’s going concern assessment. 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, 2024 filed with the SEC on March 20, 2025. Except as described in Note 2 - Basis of Presentation and Significant Accounting Policies, there have been no significant changes to our critical accounting policies during the nine months ended September 30, 2025.