Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and related notes and other financial information included elsewhere in this Quarterly Report and our audited consolidated financial statements for the years ended December 31, 2025 and 2024, and related notes included in our final prospectus for our initial public offering, or the IPO, filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, or the Securities Act, on April 30, 2026, or the IPO Prospectus. References to the "Company," "Avalyn," "Avalyn Pharma" "we," "our," "us," or similar terms refer to Avalyn Pharma Inc. and its wholly owned subsidiaries, or either or all of them as the context may require. This discussion and analysis and other parts of this Quarterly Report contain forward-looking statements based upon our current plans and expectations that involve risks, uncertainties and assumptions, such as statements regarding our plans, strategies, objectives, expectations, intentions, and beliefs. The historical results are not necessarily indicative of results that may be expected in the future. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" and elsewhere in this Quarterly Report. You should carefully read the "Risk Factors" section of this Quarterly Report to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see "Special Note Regarding Forward-Looking Statements." Our historical results are not necessarily indicative of the results that may be expected for any period in the future.

Overview

We are a clinical-stage biopharmaceutical company on a mission to revolutionize the current treatment landscape for rare respiratory diseases, including progressive pulmonary fibrosis, or PPF, idiopathic pulmonary fibrosis, or IPF, and other interstitial lung diseases, or ILDs.

Our lead product candidate, AP01 (inhaled pirfenidone), is an optimized inhaled formulation of pirfenidone currently being evaluated in MIST, a global Phase 2b clinical trial in patients with PPF. AP01 has indicated encouraging tolerability and clinical activity in the ATLAS Phase 1b trial in patients with IPF and ongoing, multi-year SAIL open-label extension study in IPF and PPF patients, with long-term data supporting the potential to preserve lung function while improving tolerability relative to historical oral pirfenidone data. MIST is a randomized, double-blind, placebo-controlled trial evaluating two doses of AP01 in patients with PPF. This 52-week trial is designed to assess safety and efficacy of AP01, with a primary endpoint of change in lung function measured by forced vital capacity, or FVC. The study overenrolled, with a total of 398 patients randomized 2:1:2 into three treatment cohorts. Topline clinical data are anticipated in the second half of 2027.

Our second product candidate, AP02 (inhaled nintedanib), is an optimized inhaled formulation of nintedanib. We have completed a Phase 1 single-ascending dose, or SAD, trial in healthy volunteers and patients with IPF and a Phase 1 SAD and multiple-ascending dose, or MAD, trial in healthy volunteers. Results from these studies were published in September 2026 in Respiratory Research. AP02 is currently being evaluated in AURA, a global Phase 2 clinical trial in patients with IPF. Enrollment for the AURA trial was initiated in the first quarter of 2026 and is currently ongoing. AURA is a randomized, double-blind study evaluating two doses of AP02 dosed twice daily in patients with IPF. The 12-week study, which is designed to enroll 160 patients, will assess safety and efficacy as measured by FVC. Topline data are anticipated in late 2027.

We are also advancing AP03, an inhaled fixed-dose combination of pirfenidone and nintedanib, designed to deliver multiple antifibrotic mechanisms through a single lung-targeted platform, and have initiated a Phase 1 study of AP03 in healthy volunteers. The study has been cleared to proceed in Australia following Human Research Ethics Committee (HREC) and institutional approval, and notification to the Therapeutic Goods Administration under the Clinical Trial Notification (CTN) pathway. Results from the study are anticipated in the second half of 2027.

Since our inception in 2011, we have incurred significant operating losses and have not generated any revenue. On May 1, 2026, we completed our IPO, pursuant to which we issued and sold 19,166,667 shares of common stock, which included 2,500,000 shares of common stock sold pursuant to the underwriters' exercise of their option to purchase additional shares. The aggregate net proceeds received by us from the IPO were approximately $316.6 million, after deducting underwriter discounts and commissions, as well as offering costs of $4.2 million. To date, we have funded our operations primarily with aggregate gross proceeds of $733.8 million from the sale and issuance of our common stock, preferred stock, and convertible notes, as well as from borrowing $15.0 million under our Term Loan, as defined above.

Due to our significant research, development, and manufacturing expenditures related to our clinical trials, we have accumulated substantial losses and negative cash flows since our inception, including net losses of $29.7 million and $23.6 million for the three

months ended September 30, 2026 and 2025, respectively, and net losses of $85.5 million and $61.3 million for the nine months ended September 30, 2026 and 2025, respectively. As of September 30, 2026, we had an accumulated deficit of $350.8 million.

We expect our expenses and operating losses will increase substantially as we:

In addition, we have several clinical development, regulatory, and commercial milestones, as well as royalty payment obligations under the PARI License Agreement, as described below, and other agreements. Our net losses may fluctuate significantly from quarter to quarter and year to year, depending on the timing of our ongoing and planned clinical trials and our expenditures on other research and development activities.

We do not have any products approved for sale and have not generated any revenue from product sales. We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for one or more of our current and any future product candidates, which we expect will take a number of years or may never occur. As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of equity offerings, debt financings or other capital sources, potentially including collaborations, licenses, or other strategic arrangements. See the section titled "-Liquidity and Capital Resources." We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements when needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates, or grant third-party rights to develop and market our product candidates even if we would otherwise prefer to develop and market such product candidates ourselves.

Due to the numerous risks and uncertainties associated with drug development, we are unable to accurately predict the timing or amount of increased expenses or the timing of when, or if, we will be able to achieve or maintain profitability. Even if we generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

As of September 30, 2026, we had cash, cash equivalents, and marketable securities of $386.6 million. We believe, based on our current operating plans, that our cash, cash equivalents and investments in marketable securities will enable us to fund our operating expenses and capital expenditures into 2029. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See the sections titled "-Liquidity and Capital Resources" and "Risk Factors-Risks Related to Our Financial Condition and Need for Additional Capital" included elsewhere in this Quarterly Report.

Material Agreement

Below is a summary of the key terms for our material agreement.

PARI License Agreement

In April 2017, we entered into a license agreement, or the PARI License Agreement, with PARI Pharma GmbH, or PARI. Pursuant to the PARI License Agreement, PARI granted us an exclusive, sublicensable license to use its nebulizer devices for the development and commercialization of certain inhalant drug products as outlined in the PARI License Agreement. PARI additionally granted us a non-exclusive, sublicensable license to use certain proprietary accessories owned or controlled by PARI with the nebulizer devices for development of the drug products, as well as a non-sublicensable, exclusive sublicense to use certain Novartis patent rights which PARI licensed from Novartis for use with the nebulizer devices. PARI also granted us certain options to expand the licenses granted which would separately require amendments to the PARI License Agreement.

As consideration for the PARI License Agreement, we paid a non-refundable up-front initial payment of four hundred thousand EUR ($0.4 million). To date, we have met one developmental milestone, for which the payment of five hundred thousand EUR ($0.6 million) was expensed to research and development when the milestone was met. There were no regulatory milestones achieved during the year ended December 31, 2025, nor the nine months ended September 30, 2026.

Components of Results of Operations

Operating Expenses

Our operating expenses consist of (i) research and development expenses and (ii) general and administrative expenses.

Research and Development Expenses

Research and development expenses consist primarily of costs associated with the nonclinical and clinical development of our current and potential future product candidates. Our research and development expenses include direct costs specifically attributable to our programs including external expenses incurred under arrangements with third parties, such as contract research organizations, or CROs, contract manufacturing organizations, or CMOs, consultants and our scientific advisors, and manufacturing expenditures, including costs for laboratory supplies, research materials and reagents, as well as indirect costs that are not directly attributable to a specific program such as:

We recognize research and development costs in the periods in which they are incurred. Most of our research and development expenses have been related to identifying and developing our product candidates. Typically, external expenses are recognized based on an evaluation of the progress to completion of specific tasks using information provided to us by our service providers as of each reporting date. Advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses, which are expensed as the related goods are delivered or the services are performed, or when it is no longer expected that the goods will be delivered, or the services rendered. Significant judgments and estimates are made in determining the accrued, or prepaid expense balances at the end of any reporting period.

External costs represent a significant portion of our research and development expenses, which we track on a program-by-program basis following the nomination of a product candidate. Our internal research and development expenses consist primarily of personnel-related expenses, including stock-based compensation expenses and allocated expenses. We do not track our internal research and development expenses on a program-by-program basis as they relate to costs that are deployed across multiple programs.

Product candidates in later stages of development generally have higher development costs than those in earlier stages resulting from larger and more complex clinical trials, manufacturing scale-up and an increase in research and development headcount to oversee these activities. As a result, management expects that our research and development expenses will increase substantially over the next several years as we potentially advance our product candidates into later-stages of development.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel-related costs, including salaries, payroll tax, bonuses, benefits, and stock-based compensation charges for those individuals in executive, legal, finance, human resources, information technology, and other administrative functions. Other significant costs include professional service fees, including legal fees relating to intellectual property and corporate matters, and auditing, accounting, tax, and consulting services, as well as facilities and depreciation expense, and other general and administrative expenses that are allocated. We recognize general and administrative expenses in the periods in which they are incurred.

We anticipate that our general and administrative expenses will increase as we operate as a public company, which will require increased personnel costs, including salaries, benefits and stock-based compensation expenses, costs related to maintaining and protecting our intellectual property rights for our product candidates, expanded infrastructure, and higher legal, consulting and accounting services associated with maintaining compliance with the listing requirements of the Nasdaq Stock Market LLC and rules and regulations promulgated under the Exchange Act, investor relations costs and director and officer insurance premiums associated with being a public company.

Interest Income

Interest income consists primarily of interest earned and the amortization or accretion of discounts or premiums on our cash equivalents and investments in marketable securities.

Interest Expense

Interest expense consists of interest paid on our Term Loan, as well as non-cash interest expense for amortization of our debt discounts.

Other Income (Expense)

Other expense consists of realized and unrealized foreign currency gains and losses.

Income Taxes

Since our inception, we have not recorded any income tax benefits or expenses for the net losses we have incurred in each period or for our earned research and development tax credits, as we believe, based upon the weight of available evidence, that it is more likely than not that all of our net operating loss carryforwards, or NOLs, and tax credits will not be realized. As of December 31, 2025, we had NOLs for federal and state income tax purposes of $190.3 million and $13.4 million, respectively. Of this amount, $9.9 million of the NOLs begin to expire in 2031, and the remainder are indefinite lived. The net state operating loss carryforwards will begin to expire in 2043. These loss carryforwards are available to reduce future federal taxable income, if any. As of December 31, 2025 and September 30, 2026, we have recorded a full valuation allowance against our net deferred tax assets.

Results of Operations

Comparison of the Three Months Ended September 30, 2026 and 2025

The following table summarizes our results of operations (in thousands):

Research and Development Expenses

The following table summarizes our research and development expenses (in thousands):

Research and development expenses increased by $3.4 million to $25.5 million for the three months ended September 30, 2026, from $22.1 million for the three months ended September 30, 2025. The increase in research and development expenses was primarily attributable to:

General and Administrative Expenses

The following table summarizes our general and administrative expenses (in thousands):

General and administrative expenses increased by $4.4 million to $7.6 million for the three months ended September 30, 2026, from $3.2 million for the three months ended September 30, 2025. The increase in general and administrative expenses was primarily attributable to:

Comparison of the Nine Months Ended September 30, 2026 and 2025

The following table summarizes our results of operations (in thousands):

Research and Development Expenses

The following table summarizes our research and development expenses (in thousands):

Research and development expenses increased by $17.8 million to $73.1 million for the nine months ended September 30, 2026, from $55.3 million for the nine months ended September 30, 2025. The increase in research and development expenses was primarily attributable to:

General and Administrative Expenses

The following table summarizes our general and administrative expenses (in thousands):

General and administrative expenses increased by $8.7 million to $19.2 million for the nine months ended September 30, 2026, from $10.5 million for the nine months ended September 30, 2025. The increase in general and administrative expenses was primarily attributable to:

Other Income

Other income increased by $1.7 million and $2.3 million for the three and nine months ended September 30, 2026, respectively, to $3.4 million from $1.7 million and $6.8 million from $4.5 million, respectively. The increase was primarily driven by interest income earned on the proceeds from the IPO, partially offset by the impact of lower federal funds rates.

Liquidity and Capital Resources

Sources of Liquidity

Since our inception, we have not generated any revenue from product sales and have incurred significant operating losses and negative cash flows from operations. We expect to continue to incur significant expenses and operating losses for the foreseeable future as we advance the clinical development of our product candidates and any future product candidates. Further, we expect to continue to incur costs with operating as a public company. As such, we expect our research and development and general and administrative costs will continue to increase significantly.

To date, we have funded our operations primarily from proceeds from the sale of preferred stock, convertible notes, and common stock as a result of our IPO, as well as through proceeds received from our Term Loan. As of September 30, 2026, we had $386.6 million in cash, cash equivalents, and marketable securities. In February 2026, we entered into the LSA and the Term Loan, with the Lender for

the issuance of a term loan facility with an aggregate principal amount of up to $30.0 million. The interest rate on amounts borrowed will be equal to the greater of the prime rate then in effect, or 5.00%. The maturity date for the Term Loan is June 30, 2030. To date, $15.0 million has been borrowed under the Term Loan. In connection with the LSA, we issued warrants to the Lender to purchase 22,500 shares of our common stock. On May 1, 2026, we completed our IPO, pursuant to which we issued and sold 19,166,667 shares of common stock, resulting in net proceeds of approximately $316.6 million. To date, we have received aggregate gross proceeds of $733.8 million from the sale and issuance of our common stock, preferred stock, and convertible notes.

Future Funding Requirements

Due to the inherently unpredictable nature of nonclinical and clinical development and given the early stage of our programs and product candidates, we cannot reasonably estimate the costs we will incur and the timelines that will be required to complete development of, obtain marketing approval for, and commercialize our products, if and when approved. For the same reasons, we are also unable to predict when, if ever, we will generate revenue from product sales or whether, or when, if ever, we may achieve profitability. Clinical and nonclinical development timelines, the probability of success, and development costs can differ materially from expectations. In addition, we cannot forecast which products, if approved, may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements. We will need to raise substantial additional capital in the future.

Based upon our current operating plans, we believe that our existing cash, cash equivalents and investments in marketable securities, including the net proceeds from our IPO, will be sufficient to fund our operations into 2029. Our primary uses of capital are to fund research and development activities, compensation and related expenses, and general overhead costs. We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance our current and future product candidates through discovery, nonclinical studies, and clinical trials.

Our future funding requirements will depend largely on:

We have no committed sources of capital other than the $30.0 million under the Term Loan, $15.0 million of which has been drawn and up to $15.0 million remains available. Until such time, if ever, as we can generate substantial product revenue to support our cost structure, we expect to finance our cash needs through equity offerings, debt financings, or other capital sources, potentially including collaborations, licenses, or other strategic arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders. In addition, debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends. If we raise additional funds through a

strategic agreement, we may have to grant rights to develop and market our current and future product candidates even if we would otherwise prefer to develop and market such product candidates ourselves. Our failure to raise capital or enter into such other arrangements when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies.

If we are unable to raise additional funds, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts. See "Risk Factors-We will need substantial additional funding. We may be unable to raise capital on acceptable terms, if at all, and, as a result, we may be required to delay, reduce, or eliminate our product development programs or commercialization efforts."

Cash Flows

The following table sets forth a summary of the net cash flow activity (in thousands):

Operating Activities

For the nine months ended September 30, 2026, net cash used in operating activities was $82.2 million, which was primarily due to our net loss of $85.5 million and changes in our operating assets and liabilities of $3.1 million, offset by $6.3 million of non-cash charges related to stock-based compensation, depreciation, non-cash operating lease expense, and accretion of premiums on marketable securities.

For the nine months ended September 30, 2025, net cash used in operating activities was $57.3 million, which was primarily due to our net loss of $61.3 million, offset by changes in our operating assets and liabilities of $3.3 million and $0.7 million of non-cash charges related to stock-based compensation, depreciation, non-cash operating lease expense, and accretion of premiums on marketable securities.

Investing Activities

Net cash used in investing activities was $155.5 million for the nine months ended September 30, 2026, which was primarily driven by purchases of marketable securities and property and equipment of $241.0 million and $0.7 million, respectively, offset by sales and maturities of marketable securities of $86.2 million.

Net cash used in investing activities was $38.9 million for the nine months ended September 30, 2025, which was primarily driven by purchases of marketable securities and property and equipment of $109.3 million and $0.1 million, respectively, offset by maturities of marketable securities of $70.5 million.

Financing Activities

Net cash provided by financing activities was $330.8 million for the nine months ended September 30, 2026, which was primarily related to net proceeds of $316.6 million from the sale of common stock in the IPO and $14.8 million drawdown of the term loan facility, net of debt issuance costs, partially offset by $0.6 million of withholding tax payments in connection with the exercise of employee stock options.

Net cash provided by financing activities was $99.8 million for the nine months ended September 30, 2025, which was primarily related to the issuance of Series D convertible preferred stock of $99.8 million.

Contractual Obligations and Commitments

Other than as discussed below, there have been no material changes to the contractual obligations and commitments described under Management's Discussion and Analysis of Financial Condition and Results of Operations from our IPO Prospectus.

Term Loan

In February 2026, we entered into the Term Loan with Banc of California. $15.0 million has been borrowed under the Term Loan and the additional $15.0 million is available for drawdown through December 31, 2027. For more information on our Term Loan, refer to Note 13, Term Loan, in our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report.

Leases

In September 2025, the Company relocated its headquarters to Boston, Massachusetts and entered into the Boston Sublease. Total fixed payments in connection with the Boston Sublease are $1.9 million over the term of the agreement ending in January 2029. In June 2026, we amended the Boston Sublease to expand the subleased premises, resulting in additional fixed payment obligations of $0.9 million over the remaining term of the agreement. This includes our share of facility operating expenses, real-estate taxes, but excludes our share of property management fees that are reimbursable to the sublandlord under the sublease.

Material Agreements

Our agreements with certain third parties to license intellectual property include potential milestone fees, sublicense fees, and royalty fees. The milestone fees are dependent upon the development of our drug products using the intellectual property licensed under the arrangements and contingent upon the achievement of development or regulatory approval milestones, as well as commercial milestones. These potential obligations are contingent upon the occurrence of future events and the timing and likelihood of such potential obligations are not known with certainty. For further information regarding these agreements, please see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Overview-Material Agreement."

Critical Accounting Estimates

The preparation of these financial statements in accordance with U.S. GAAP requires us to make judgments and estimates that affect the reported amounts of assets, liabilities and expenses, as well as related disclosures during the reported periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience, known trends and events, and various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. For a description of critical accounting estimates used in the preparation of our consolidated financial statements, refer to our registration statement on Form S-1 for the year ended December 31, 2025. There have been no material changes to our critical accounting estimates.

Recently Issued Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our audited consolidated financial statements and unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report.

Emerging Growth Company and Smaller Reporting Company Status

We are an "emerging growth company," as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. We may take advantage of these exemptions until we are no longer an emerging growth company. Section 107 of the JOBS Act provides that an "emerging growth company" can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. We have elected to use the extended transition period for complying with new or revised accounting standards and as a result of this election, our consolidated financial statements may not be comparable to companies that comply with public company effective dates.

We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of our IPO, (b) in which we have total annual gross revenue of at least $1.235 billion or (c) in which we are deemed to be a "large accelerated filer" under the rules of the SEC, which means, among other things, the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the last business day of our most recently completed second fiscal quarter and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

We are also a "smaller reporting company" as defined in the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies for so long as either (i) our voting and non-voting common stock held by non-affiliates is less than $250.0 million measured on the last business day of our second fiscal quarter, or (ii) our annual revenue is less than $100.0 million during the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter.