Avalo Therapeutics, Inc.

Previous wording

Our focus in 2025 is continuing to execute operationally on the development of AVTX-009, most notably the progression of the LOTUS trial.

Current wording

Our focus in 2025 is continuing to execute operationally on the development of AVTX-009, most notably the progression of the Phase 2 (“LOTUS”) trial of AVTX-009, an anti-IL-1 β(mAb), in HS. We expect to release topline results from this trial in mid-2026.

Previous wording

The Company’s Phase 2 (“LOTUS”) trial of AVTX-009, an anti-IL-1β (mAb), in hidradenitis suppurativa (“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 180 adults with moderate to severe HS. Subjects will be randomized (1:1:1) to receive either one of two doses of AVTX-009 or placebo. The primary efficacy endpoint is the proportion of subjects achieving Hidradenitis Suppurativa Clinical Response (HiSCR75) at Week 16. Avalo is the study sponsor and the current proposed trial locations include the United States, Canada, France, Germany, Italy, Spain, Bulgaria, Czech Republic, Greece, Poland, Australia and Turkey.

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 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.

Previous wording

For the three months ended March 31, 2025, Avalo generated a net loss of $13.1 million and negative cash flows from operations of $9.5 million. As of March 31, 2025, Avalo had $125.0 million in cash and cash equivalents.

Current 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.

Previous wording

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

Current wording

Based on our current operating plans, we expect that our existing cash and cash equivalents and short-term investments are sufficient to fund operations for at least twelve months from the filing date of this Quarterly Report on Form 10-Q and we expect to fund operations into 2028. The Company closely monitors its cash and cash equivalents and short-term investments and seeks to balance the level of cash and cash equivalents with our projected needs to allow us to withstand periods of uncertainty relative to the availability of funding on favorable terms. We may satisfy any future cash needs through sales of equity securities under the Company’s at-the-market program or other equity financings, out-licensing transactions, strategic alliances/collaborations, sale of programs, and/or mergers and acquisitions. There can be no assurance that any financing or business development initiatives can be realized by the Company, or if realized, what the terms may be. To the extent that we raise capital through the sale of equity, the ownership interest of our existing stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of our stockholders. Further, if the Company raises additional funds through collaborations, strategic alliances or licensing arrangements with third parties, the Company might have to relinquish valuable rights to its technologies, future revenue streams, research programs or product candidates.

Previous wording

•Advancing our pipeline through development to regulatory approval. Most notably and in the near term, completing our Phase 2 LOTUS trial in hidradenitis suppurativa, preparing for the next stage of development for that indication and considering further indication expansion for AVTX-009;

Current wording

•Advancing our pipeline through development to regulatory approval. Most notably and in the near term, completing our Phase 2 LOTUS trial in HS, preparing for the next stage of development for that indication and considering further indication expansion for AVTX-009;

Previous wording

Research and development expenses increased $7.0 million for the three months ended March 31, 2025 compared to the three months ended March 31, 2024. This increase was mainly driven by a $3.8 million increase in clinical expenses, $1.7 million increase in chemistry, manufacturing, and controls (“CMC”) expenses, and $1.0 million increase in stock-based compensation expense.

Current 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.

Previous wording

Stock-based compensation increased $1.0 million compared to the three months ended March 31, 2024 due to option and restricted stock unit grants made during the period, including the annual employee grants in August 2024 and January 2025, as well as headcount additions.

Current 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.

Previous wording

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

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 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.

Previous wording

The following table summarizes our other income (expense), net for the three months ended March 31, 2025 and 2024 (in thousands):

Current wording

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

Previous wording

We recognized no cost of product sales for the three months ended March 31, 2025, compared to minimal activity for the same period in 2024.

Current 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.

Previous wording

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

Current 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.

Previous wording

General and administrative expenses increased $2.4 million for the three months ended March 31, 2025 compared to the prior period. The increase was driven by a $1.6 million increase in stock-based compensation expense due to option and restricted stock unit grants made during the period, including the annual grants in August 2024 and January 2025, as well as headcount additions.

Current 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.

Previous wording

Other income, net increased $90.0 million for the three months ended March 31, 2025 compared to the prior period. The increase was primarily due to the excess of the warrant fair value over proceeds received from the March 2024 private placement financing that occurred during the three months ended March 31, 2024. The warrants did not meet the equity contract scope exception and therefore were classified as a liability upon issuance. The initial measurement of the warrant liability of $194.9 million exceeded the proceeds received of the private placement investment of $115.6 million, which resulted in a $79.3 million loss recognized in other expense, net. The warrants were fully exercised in the fourth quarter of 2024. Refer to Note 6 - Fair Value Measurements of the unaudited condensed consolidated financial statements for more information. Similarly, in the first quarter of 2024, we recognized $9.2 million of private placement transaction cost associated with the March 2024 financing that did not repeat in the current period. Finally, interest income increased from the prior period driven by the increased cash balance in the current year compared to the prior year.

Current 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.

Previous wording

The Company primarily uses cash to fund the ongoing development of our research and development pipeline assets, mainly AVTX-009, and costs associated with its organizational infrastructure. As of March 31, 2025, Avalo had $125.0 million in cash and cash equivalents.

Current 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.

Previous wording

The following table summarizes our cash flows for the three months ended March 31, 2025 and 2024 (in thousands):

Current wording

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

Previous wording

Net cash used in operating activities was $6.2 million for the three months ended March 31, 2024 and consisted primarily of a net loss of $121.3 million and adjustments to reconcile net loss to net cash used in operating activities including the excess of warrant fair value over private placement investment proceeds of $79.3 million, acquired IPR&D of $27.5 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 $0.6 million. Accrued expenses and other liabilities increased primarily due to the $1.7 million transaction costs payable upon exercise of the warrants issued pursuant to the private placement.

Current 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.

Previous wording

Net cash provided by investing activities

Current wording

Net cash used in (provided by) investing activities

Previous wording

Net cash used in investing activities was for the three months ended March 31, 2024 consisted of the cash acquired as part of the AlmataBio Transaction.

Current 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.

Previous wording

Net cash provided by financing activities for the three months ended March 31, 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 $7.0 million.

Current 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.

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, revenue recognition, cost of product sales, stock-based compensation, fair value measurements, the valuation of derivative liabilities, cash flows used in management’s going concern assessment, income taxes, goodwill, and clinical trial accruals. The Company believes, given current facts and circumstances, that our estimates and assumptions are reasonable, adhere to GAAP and are consistently applied. Inherent in the nature of an estimate or assumption is the fact that actual results may differ from estimates, and estimates may vary as new facts and circumstances arise. Our most critical accounting estimates and assumptions are included in our Annual Report on Form 10-K for the year ended December 31, 2024 filed with the SEC on March 20, 2025. There have been no significant changes to our critical accounting policies during the three months ended March 31, 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 six months ended June 30, 2025.