avtx-20230331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q


☑			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended March 31, 2023
OR
☐			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)


Delaware (State of incorporation)			45-0705648 (I.R.S. Employer Identification No.)
540 Gaither Road, Suite 400 Rockville, Maryland 20850 (Address of principal executive offices)			(410) 522-8707 (Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.001 par value	AVTX	Nasdaq Capital Market

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.


Large accelerated filer ☐						Accelerated filer ☐
Non-accelerated filer ☑						Smaller reporting company ☑
Emerging growth company ☐

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 May 1, 2023, the registrant had 13,200,535 shares of common stock outstanding.

AVALO THERAPEUTICS, INC.

FORM 10-Q

For the Quarter Ended March 31, 2023

TABLE OF CONTENTS

Page

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets as of March 3 1 , 202 3 (Unaudited) and December 31, 202 2

Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) for the Three Months Ended March 3 1 , 202 3 and 20 2 2

Condensed Consolidated Statements of Changes in Stockholders’ (Deficit) Equity (Unaudited) for the Three Months Ended March 3 1 , 202 3 and 202 2

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 3 1 , 202 3 and 202 2

Notes to Unaudited Condensed Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

AVALO THERAPEUTICS, INC. and SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)


	March 31, 2023		December 31, 2022
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	16,687	$	13,172
Other receivables	857		1,919
Inventory, net	19		20
Prepaid expenses and other current assets	1,627		1,290
Restricted cash, current portion	63		15
Total current assets	19,253		16,416
Property and equipment, net	2,442		2,411
Goodwill	14,409		14,409
Restricted cash, net of current portion	131		131
Total assets	$	36,235	$	33,367
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable	$	5,565	$	2,882
Deferred revenue	111		88
Accrued expenses and other current liabilities	8,273		13,214
Notes payable, current	9,296		5,930
Total current liabilities	23,245		22,114
Notes payable, non-current	10,470		13,486
Royalty obligation	2,000		2,000
Deferred tax liability, net	148		141
Derivative liability	5,010		4,830
Other long-term liabilities	1,629		1,711
Total liabilities	42,502		44,282
Stockholders’ deficit:
Common stock—$0.001 par value; 200,000,000 shares authorized at March 31, 2023 and December 31, 2022; 13,200,535 and 9,430,535 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively	13		9

Additional paid-in capital	307,499		292,900
Accumulated deficit	(313,779)		(303,824)
Total stockholders’ deficit	(6,267)		(10,915)
Total liabilities and stockholders’ deficit	$	36,235	$	33,367

See accompanying notes to the unaudited condensed consolidated financial statements.

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AVALO THERAPEUTICS, INC. and SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)

(In thousands, except per share data)


	Three Months Ended
	March 31,
	2023		2022
Revenues:
Product revenue, net	$	475	$	1,173

Total revenues, net	475		1,173

Operating expenses:
Cost of product sales	551		720
Research and development	6,008		9,584
Selling, general and administrative	2,708		11,684
Amortization expense	—		38
Total operating expenses	9,267		22,026
	(8,792)		(20,853)
Other expense:
Interest expense, net	(949)		(1,169)
Change in fair value of derivative liability	(180)		—
Other expense, net	(26)		(20)
Total other expense, net	(1,155)		(1,189)
Loss before taxes	(9,947)		(22,042)
Income tax expense	8		9
Net loss and comprehensive loss	$	(9,955)	$	(22,051)
Net loss per share of common stock, basic and diluted1	$	(0.85)	$	(2.35)

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 2 for details.

See accompanying notes to the unaudited condensed consolidated financial statements.

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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’
	Shares	Amount			capital		deficit		deficit
Three Months Ended March 31, 2023
Balance, December 31, 2022	9,430,535	$	9		$	292,900	$	(303,824)	$	(10,915)
Issuance of shares of common stock and warrants in underwritten public offering, net	3,770,000	4			13,744		—		13,748
Stock-based compensation	—	—			855		—		855
Net loss	—	—			—		(9,955)		(9,955)
Balance, March 31, 2023	13,200,535	$	13		$	307,499	$	(313,779)	$	(6,267)


	Common stock			Additional paid-in	Accumulated		Total stockholders’
	Shares1	Amount1			capital1		deficit		equity
Three Months Ended March 31, 2022
Balance, December 31, 2021	9,399,518	$	9		$	285,239	$	(262,166)	$	23,082
Stock-based compensation	—	—			5,312		—		5,312
Net loss	—	—			—		(22,051)		(22,051)
Balance, March 31, 2022	9,399,518	$	9		$	290,551	$	(284,217)	$	6,343

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 2 for details.

See accompanying notes to the unaudited condensed consolidated financial statements.

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AVALO THERAPEUTICS, INC. and SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Amounts in thousands)


	Three Months Ended March 31,
	2023		2022
Operating activities
Net loss	$	(9,955)	$	(22,051)
Adjustments to reconcile net loss used in operating activities:
Depreciation and amortization	33		67
Stock-based compensation	855		5,312
Accretion of debt discount	350		350
Deferred taxes	8		9
Change in fair value of derivative liability	180		—
Changes in assets and liabilities:
Accounts receivable, net	—		123
Other receivables	1,062		2,294

Inventory, net	1		13
Prepaid expenses and other assets	(337)		(310)

Accounts payable	2,683		388

Deferred revenue	22		—
Accrued expenses and other liabilities	(4,941)		(2,287)
Lease liability, net	(13)		25
Net cash used in operating activities	(10,052)		(16,067)
Investing activities
Leasehold improvements	(158)		—
Disposal of property and equipment	25		—
Net cash used in investing activities	(133)		—
Financing activities



Proceeds from issuance of common stock and warrants in underwritten public offering, net	13,748		—





Net cash provided by financing activities	13,748		—
Increase (decrease) in cash, cash equivalents and restricted cash	3,563		(16,067)
Cash, cash equivalents, and restricted cash at beginning of period	13,318		54,863
Cash, cash equivalents, and restricted cash at end of period	$	16,881	$	38,796
Supplemental disclosures of cash flow information
Cash paid for interest	$	704	$	831

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):


	March 31,
	2023		2022

Cash and cash equivalents	$	16,687	$	38,469
Restricted cash, current	63		100
Restricted cash, non-current	131		227
Total cash, cash equivalents and restricted cash	$	16,881	38,796

See accompanying notes to the unaudited condensed consolidated financial statements.

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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.

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 March 31, 2023, Avalo had $16.7 million in cash and cash equivalents. For the three months ended March 31, 2023, Avalo generated a net loss of $10.0 million and negative cash flows from operations of $10.1 million. As of March 31, 2023, Avalo had an accumulated deficit of $313.8 million. As of March 31, 2023, the future principal payments under the Company’s Loan Agreement (as defined in Note 9) were $21.2 million, $5.9 million of which are due in 2023 (beginning in the third quarter).

On February 7, 2023, the Company closed an underwritten public offering of 3,770,000 shares of its common stock and warrants to purchase up to an aggregate 3,770,000 shares of common stock, resulting in net proceeds of approximately $13.7 million, after deducting the underwriting discounts and commissions and offering expenses paid by us. The warrants were immediately exercisable at an exercise price of $5.00 per share and are exercisable for one year from the issuance date.

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. 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) financings, (ii) out-licensing, strategic alliances/collaborations or sale of our pipeline assets, and (iii) 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 (as defined in Note 9) 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, including a material adverse change in the business, 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. If the AVTX-002 PEAK trial, for which we expect topline data in the second quarter of 2023, does not have a positive data readout, it may result in a material adverse change in the business. 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 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.

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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, 2022 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, 2022 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 $1.9 million from sales and marketing expense to selling, general and administrative expense for the three months ended March 31, 2022 to conform with the current period presentation.

On July 7, 2022, Avalo effected a 1-for-12 reverse stock split of the outstanding shares of the Company’s common stock. The Company retroactively applied the reverse stock split to common share and per share amounts for periods prior to July 7, 2022, including the unaudited condensed consolidated financial statements for the three months ended March 31, 2022. 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 three months ended March 31, 2022. The reverse stock split did not reduce the number of authorized shares of common and preferred stock and did not alter the par value.

Unless otherwise indicated, all amounts in the following tables are in thousands except share and per share amounts.

Accounting Pronouncements Adopted in 2023

In January 2017, the FASB issued ASU No. 2017-04 Intangibles - Goodwill and Other Topics (Topic 350): Simplifying the Test for Goodwill Impairment. This guidance eliminates the requirement to calculate the implied fair value of goodwill of a reporting unit to measure a goodwill impairment charge. Instead, a company will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. This new standard was adopted effective January 1, 2023 and will be applied upon any recognition of any future goodwill impairment charge. This ASU has not had a material impact on our financial statements.

Significant Accounting Policies

During the three months ended March 31, 2023, 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, 2022, as filed with the SEC on March 29, 2023.

3. Revenue

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Avalo generates 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 March 31, 2023, the Company’s two largest customers accounted for approximately 53% and 47%, respectively, of the Company’s total net product revenues. Net revenue from sales of prescription drugs was $0.5 million and $1.2 million for the three months ended March 31, 2023 and 2022, respectively.

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. Avalo is 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, which commenced on July 1, 2021.

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 transition services agreement allowed Aytu to withhold cash of $2.0 million until September 30, 2022, and allows withholding of $1.0 million until December 2024.

As of March 31, 2023, the total receivable balance, which represents revenue generated by sales of Millipred® during the time Aytu was managing its commercial operations partially offset by minimal operational liabilities Aytu paid on our behalf, was estimated to be approximately $1.4 million, $0.4 million of which was currently due pursuant to the transition services agreement. Avalo received $0.2 million in the second quarter of 2023. In the second quarter of 2022, Avalo fully reserved the $1.0 million due in December 2024 as a result of Aytu’s conclusion within its Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, that substantial doubt existed with respect to its ability to continue as a going concern within one year after the date of financial statements were issued. This conclusion has remained unchanged within Aytu’s most recent publicly disclosed financial statements. We will continue to re-assess collectability each reporting period.

4. Net Loss Per Share

Basic and diluted EPS is provided below for common stock for the three months ended March 31, 2023 and March 31, 2022.

EPS for common stock is computed by dividing the sum of distributed earnings and undistributed earnings by the weighted average number of shares outstanding for the period. The weighted average number of common shares outstanding as of March 31, 2023 and 2022 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.

Diluted net loss 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 per share of common stock for the three months ended March 31, 2023 and March 31, 2022 (in thousands, except share and per share amounts):


	Three Months Ended
	March 31, 2023
Net loss	$	(9,955)
Weighted average shares	11,722,764
Basic and diluted net loss per share	$	(0.85)

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	Three Months Ended
	March 31, 2022
Net loss	$	(22,051)
Weighted average shares	9,399,518
Basic and diluted net loss per share	$	(2.35)

The following outstanding securities have been excluded from the computation of diluted weighted shares outstanding for the three months ended March 31, 2023 and 2022, as they could have been anti-dilutive:


	Three Months Ended
	March 31,
	2023	2022
Stock options	1,460,346	1,424,004
Warrants on common stock1	4,136,990	367,187
Restricted Stock Units	—	938

1 The weighted average number of common shares outstanding as of March 31, 2023 and 2022 included the weighted average effect of the 114,007 pre-funded warrants outstanding because the exercise of such warrants requires only nominal consideration ($0.012 per share exercise price for each pre-funded warrant). Therefore, 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):


	March 31, 2023
	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*	$	15,684	$	—	$	—
Liabilities
Derivative liability	$	—	$	—	$	5,010

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	December 31, 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*	$	12,133	$	—	$	—
Liabilities
Derivative liability	$	—	$	—	$	4,830

*Investments in money market funds are reflected in cash and cash equivalents on the accompanying condensed consolidated balance sheets.

As of March 31, 2023 and December 31, 2022, 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, derivative liability 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 March 31, 2023 and is in Level Two of the fair value hierarchy (refer to Note 9 for more information).

Level 3 Valuation

The table presented below is a summary of changes in the fair value of the Company’s Level 3 valuation for the derivative liability for the three months ended March 31, 2023:


	Derivative liability
Balance at December 31, 2022	$	4,830
Change in fair value of derivative liability	180
Balance at March 31, 2023	$	5,010

In the fourth quarter of 2022, Avalo sold its economic rights to future milestone and royalty payments for previously out-licensed assets AVTX-501, AVTX-007, and AVTX-611 to ES Therapeutics, LLC (“ES”), an affiliate of Armistice, in exchange for $5.0 million (the “ES Transaction”). Armistice 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. The ES Transaction was approved in accordance with Avalo’s related party transaction policy.

The economic rights sold include (a) rights to a milestone payment of $20.0 million upon the filing and acceptance of an NDA for AVTX-501 pursuant to an agreement with Janssen Pharmaceutics, Inc., (the “AVTX-501 Milestone”) and (b) rights to any future milestone payments and royalties relating to AVTX-007 under a license agreement with Apollo AP43 Limited, including up to $6.25 million of development milestones, up to $67.5 million in sales-based milestones, and royalty payments of a low single digit percentage of annual net sales (which percentage increases to another low single digit percentage if annual net sales exceed a specified threshold) (the “AVTX-007 Milestones and Royalties”). In addition, Avalo waived all its rights to AVTX-611 sales-based payments of up to $20.0 million that were payable by ES.

The exchange of the economic rights of the AVTX-501 Milestone and AVTX-007 Milestones and Royalties for cash meets the definition of a derivative instrument. The fair value of the derivative liability is determined using a combination of a scenario-based method and an option pricing method (implemented using a Monte Carlo simulation). The significant inputs including probabilities of success, expected timing, and forecasted sales as well as market-based inputs for volatility, risk-adjusted discount rates and allowance for counterparty credit risk are unobservable and based on the best information available to Avalo. Certain information used in the valuation is inherently limited in nature and could differ from Janssen and Apollo’s internal estimates.

The fair value of the derivative liability as of the transaction date was approximately $4.8 million, of which $3.5 million was attributable to the AVTX-501 Milestone and $1.3 million was attributable to the AVX-007 Milestones and Royalties.

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Subsequent to the transaction date, at each reporting period, the derivative liability is remeasured at fair value. As of March 31, 2023, the fair value of the derivative liability was $5.0 million, of which $3.8 million was attributable to the AVTX-501 Milestone and $1.3 million was attributable to the AVTX-007 Milestones and Royalties. The $0.2 million change in fair value was recognized in other expense, net in the accompanying condensed consolidated statements of operations and comprehensive loss.

The fair value of the AVTX-501 Milestone was primarily driven by an approximate 2

SEC Form 10-Q filed by Avalo Therapeutics Inc.