Avalyn Pharma Inc., or the Company or Avalyn, is a clinical-stage biopharmaceutical company developing inhaled medicines to treat rare respiratory diseases, including progressive pulmonary fibrosis, idiopathic pulmonary fibrosis, and other interstitial lung diseases. The Company was incorporated in the state of Delaware on May 27, 2011, and has its headquarters in Boston, Massachusetts.

As used in these consolidated financial statements, unless the context otherwise requires, references to the “Company” or “Avalyn,” refer to Avalyn Pharma Inc. and its wholly owned subsidiary, Avalyn Pharma Pty. Ltd.

Risks and Uncertainties

The Company is subject to the risks and challenges associated with other biopharmaceutical companies at a similar stage of development, including dependence on key individuals, successful development of its products and services, dependence on key vendors, compliance with government regulations, protection of proprietary technology, competition from substitute products and services and larger companies which have greater financial resources, technical management, and the ability to secure adequate financing to support future growth. There can be no assurance that any future products or services can be developed or manufactured at an acceptable cost and with appropriate performance characteristics, or that such products or services will be successfully marketed, if at all. These factors could have a material adverse effect on the Company’s future operating results, financial position and cash flow.

Existing or future products developed by the Company will require approvals or clearances from the U.S. Food and Drug Administration or the FDA, or other similar international regulatory agencies prior to commercial sales. If the Company were denied or delayed in receiving such approvals or clearances, it would have a material adverse effect on the Company.

Reverse Stock Split

The Company’s Board approved a 1-for-19.2417 reverse stock split of its issued and outstanding common stock, which also resulted in a proportional adjustment to the conversion price for each series of its preferred stock, and to the exercise prices and number of outstanding stock options, and warrants, which became effective on April 22, 2026. Accordingly, all shares of common stock, stock options, warrants, and per share information presented in the accompanying financial statements and notes thereto have been retroactively adjusted, where applicable, to reflect the reverse stock split. The per share par value and authorized number of both common and preferred shares were not adjusted as a result of the split.

Initial Public Offering

On May 1, 2026, the Company completed its initial public offering, or IPO, in which the Company sold an aggregate of 19,166,667 shares of its common stock at a public offering price of $18.00 per share, which included 2,500,000 shares of its common stock sold to the underwriters pursuant to the full exercise of their option to purchase additional shares, resulting in aggregate net proceeds of approximately $316.1 million, after deducting underwriter discounts, commissions and other offering expenses. Immediately prior to the closing of the IPO, the Company's outstanding redeemable convertible preferred stock automatically converted into 23,918,194 shares of common stock. Following the closing of the IPO, no shares of redeemable convertible preferred stock were outstanding. In connection with the closing of the IPO, the Company's certificate of incorporation was amended and restated to authorize 700,000,000 shares of common stock, par value $0.001 per share, including 500,000,000 shares of voting common stock and 200,000,000 shares of non-voting common stock; to eliminate all references to the previously-existing series of preferred stock, and authorize 10,000,000 shares of preferred stock, par value $0.001 per share.

Going Concern

The Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the consolidated financial statements are issued.

Since its inception, the Company has funded its operations with proceeds from convertible notes, its IPO, and with proceeds from the issuance of Series A, Series B, Series C-1, Series C-2 and Series D preferred stock. The Company has incurred net losses, and utilized cash, cash equivalents, and marketable securities in operations since inception, has an accumulated deficit as of March 31, 2026 of $292.2 million, and expects to incur future additional losses. As of March 31, 2026, the Company had cash, cash equivalents, and marketable securities of $123.1 million.

The Company has determined that its existing cash, cash equivalents, and marketable securities, together with the additional proceeds received from the IPO, will be sufficient to fund the Company’s operating expenses and capital expenditures requirements for at least 12 months from the issuance date of these consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Unaudited Interim Financial Information

The accompanying condensed consolidated balance sheet as of March 31, 2026, and the condensed consolidated statements of comprehensive loss, consolidated statements of changes in redeemable convertible preferred stock and stockholders' deficit, and consolidated statements of cash flows for the three months ended March 31, 2026 and 2025, are unaudited. The condensed consolidated interim financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments necessary for the fair presentation of the Company’s financial position as of March 31, 2026, and the results of its operations and its cash flows for the three months ended March 31, 2026 and 2025. The financial data and other information disclosed in these notes related to the three months ended March 31, 2026 and 2025, are also unaudited. The results for the three months ended March 31, 2026 are not necessarily indicative of results to be expected for the year ending December 31, 2026, or for any other subsequent period.

There have been no significant changes from the significant accounting policies and estimates disclosed in Note 2 of the “Notes to Consolidated Financial Statements” in the audited consolidated financial statements for the year ended December 31, 2025 and notes thereto, included in the Company’s registration statement on Form S-1.

As of March 31, 2026 and December 31, 2025, all marketable securities held by the Company had remaining contractual maturities of one year or less.

The Company has determined that there were no material changes in the credit risk, therefore, no impairment was recognized on its debt securities.

As of March 31, 2026 and December 31, 2025, the Company had cash equivalents consisting of money market accounts classified as Level 1 financial assets, as these assets are valued using quoted market prices in active markets without any valuation adjustments. The Company classifies its investments in U.S. Treasury securities (Treasury bills, Treasury notes, and Treasury bonds), commercial paper, and corporate debt securities as Level 2 instruments. The Company estimates the fair value of these marketable securities by taking into consideration valuations obtained from third-party pricing sources. These pricing sources utilize standard industry valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly to estimate fair value. These inputs include market pricing based on real time trade data for the same or similar securities, issuer credit spreads, benchmark yields, and other observable inputs.

During the periods ended March 31, 2026 and December 31, 2025, there were no transfers or reclassifications between fair value measurement levels of financial assets or liabilities.

Total depreciation expense for the three months ended March 31, 2026 and 2025 was $63 thousand and $10 thousand, respectively.

Leases

In September 2025, the Company entered into a non-cancelable operating sublease in Boston, Massachusetts, or the Boston Sublease, to rent out 8,774 square feet of office space and relocated its headquarters to Boston in September 2025. The lease commenced on September 2, 2025, at which time the Company recognized a right-of-use, or ROU, asset and corresponding lease liability of $1.7 million. The lease term is 41 months with rental payments beginning four months after the lease commencement. In addition to base rent, the Company will reimburse the landlord for certain operating expenses under the terms of the lease. The Company has the option to extend the lease one time for an additional 3-year period, subject to the terms therein; however, the exercise of the option to extend the lease term was not determined to be reasonably certain, and the Company will therefore recognize lease expense through the expiration of the initial lease term ending in January 2029.

Lease liabilities are measured by calculating the present value of remaining lease payments under the lease arrangement. Since the rates implicit in our leases are not readily determinable, the Company uses estimated incremental borrowing rates in determining the discount rate used to calculate the present value of remaining lease payments. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow, on a collateralized basis, an amount equal to the lease payments over a similar term equal to the lease term in a similar economic environment. The incremental borrowing rate is based on the information available at commencement date. As the Company has no recent external borrowings, the incremental borrowing is a hypothetical rate based on our understanding of what our credit rating would be and adjusted to reflect a collateralized borrowing.

During the three months ended March 31, 2026 and 2025, the Company incurred total operating lease expenses of $146 thousand and zero, respectively. The Company incurred an immaterial amount of expense related to variable lease costs during the three months ended March 31, 2026 and no expense related to variable lease costs during three months ended March 31, 2025.

Cash paid for amounts included in the measurement of operating lease liabilities for the three months ended March 31, 2026 and 2025 were $102 thousand and zero, respectively.

During the periods presented, the Company did not recognize any impairment losses on its ROU assets.

Legal Proceedings

From time to time, the Company is subject to various claims that arise in the ordinary course of business. Management believes that any liability of the Company that may arise out of or with respect to these matters will not materially adversely affect the financial position, results of operations, or cash flows of the Company.

The Company amended and restated its Certificate of Incorporation in April 2025, in order to, among other things, (i) increase the total authorized shares of common stock to 575,000,000, (ii) increase the total authorized shares of preferred stock to 462,178,988 shares, (iii) designate 51,213,004 shares of the authorized preferred stock as “Series A Preferred Stock,” designate 25,210,789 shares of the authorized preferred stock as “Series B Preferred Stock,” designate 239,092,424 shares of the authorized preferred stock as “Series C-1 Preferred Stock,” designate 20,316,359 shares of the authorized preferred stock as “Series C-2 Preferred Stock,” and designate 126,346,412 shares of the authorized preferred stock as “Series D Preferred Stock,” and (iv) the addition of a special mandatory conversion provision as described below.

In April 2025, certain investors voluntarily converted shares of Series A and Series C-2 preferred stock into common stock. Pursuant to the voluntary conversion terms of the associated preferred stock agreements, the investors received one (1) share of common stock for every one (1) share of preferred stock converted. As a result of the voluntary conversion, 17,891,429 shares of preferred stock were converted into 17,891,429 shares of common stock. As these investors converted on a one-to-one basis, pursuant to the original terms of the associated preferred stock agreements, the common stock issued is recognized at an amount equal to the net carrying amount of the preferred stock, as such, no gain or loss was recognized upon conversion.

Also, in April 2025, the Company entered into the Series D Preferred Stock Purchase Agreement with multiple investors, pursuant to which it agreed to issue up to 126,346,412 shares of Series D Preferred Stock at a price of $0.7963 per share, for aggregate gross proceeds of $100.4 million, or the Series D Financing. The Company incurred $0.6 million of issuance costs in connection with the Series D Financing.

In the event that any existing holder of shares of preferred stock did not participate in the Series D Financing by purchasing such holder’s pro rata share, the portion of the shares of preferred stock held by such holder were mandatorily converted into shares of common stock. Upon such conversion, five (5) shares of preferred stock were converted into one (1) share of common stock. Upon the closing of the Series D Financing, 1,564,162 shares of Series A and Series B preferred stock were mandatorily converted into 312,824 shares of common stock.

The Company determined that the mandatory preferred stock conversion was an extinguishment of the preferred stock through issuance of common stock. As such, the Company has recorded the difference of $1.6 million between the fair value of the common stock issued and the carrying value of the extinguished preferred stock to additional paid-in capital, or APIC. The amount recognized in APIC was not included as a deemed contribution within basic loss per share given the transaction resulted in a transfer of value between preferred shareholder groups.

In connection with the issuance of the Series D Preferred Stock, the requisite holders of the Series A Preferred Stock and Series B Preferred Stock waived the application of their anti-dilution provisions with respect to such issuance and any common stock issued upon conversion. Accordingly, the issuance of the Series D Preferred Stock did not result in any adjustment to the conversion prices of the Series A and Series B Preferred Stock.

The following is a summary of terms for the preferred stock:

Voting

Each share of preferred stock has voting rights equal to an equivalent number of shares of common stock into which it is convertible and votes together as one class with the common stock, except as below:

The holders of record of the shares of Series A preferred stock and Series B preferred stock, voting together as a single separate class, are entitled to elect three directors of the Company.

The holders of record of the shares of Series C preferred stock, exclusively and as a single separate class, are entitled to elect two directors of the Company.

The holders of record of the shares of Series D preferred stock, exclusively and as a single separate class, are entitled to elect one director of the Company.

Dividends

The holders of preferred stock are entitled to receive, when, as and if declared by the Board, out of funds legally available, noncumulative dividends prior and in preference to any dividends paid on the common stock, at the rate of 8% per annum for each share of preferred stock at the original issue price, as adjusted for stock splits, stock dividends, combinations, or other similar recapitalizations. To date, no dividends have been declared or paid on the Company’s preferred stock.

Liquidation Preference

In the event of any voluntary or involuntary liquidation, dissolution, or winding up of the corporation, or upon the occurrence of a Deemed Liquidation Event (defined below), the holders of preferred stock are entitled to be paid out of the assets of the Company available for distribution to its stockholders before any payment is made to holders of common stock, an amount per share equal to the issuance price of $1.00 with respect to the Series A, $1.4159 for Series B, $0.7323 for Series C-1, and $0.5859 for Series C-2, and $0.7963 per share for Series D, plus any dividends declared but unpaid. If upon any such liquidation, dissolution, or winding-up of the Company, the assets of the Company available for distribution to its stockholders is insufficient to pay the preferred stockholders the full amount they are entitled, the holders of preferred stock shall share ratably in any distribution of the assets available for distribution in proportion to the respective amounts which would otherwise be entitled to receive. After the payment of all preferential amounts required to be paid to holders of shares of preferred stock, the remaining assets available for distribution shall be distributed among the holders of shares of preferred stock and common stock, pro rata based on the number of common stock (on an as converted basis) held by each such holder.

Unless the holders of a majority in voting power of the then outstanding shares of preferred stock elect otherwise, a Deemed Liquidation Event shall include a merger or consolidation (other than one in which stockholders of the Company own a majority by voting power of the outstanding shares of the surviving or acquiring corporation) or sale, lease, transfer, exclusive license or other disposition of all or substantially all of the Company’s assets.

Redemption

The preferred stock does not contain any mandatory redemption features and the preferred stock is not currently redeemable. In accordance with ASC Topic 480, Distinguishing Liabilities from Equity, or ASC 480, preferred stock issued with redemption provisions that are outside of the control of the Company, including a deemed liquidation event, is required to be presented outside of stockholders’ deficit on the face of the consolidated balance sheet. The Company’s preferred stock contains redemption provisions that require it to be presented outside of stockholders’ deficit in temporary equity. The Company did not accrete the carrying values of the preferred stock to the redemption values since a Deemed Liquidation Event was not considered probable during the three months ended March 31, 2026 and 2025. Subsequent adjustments of the carrying values to the ultimate redemption values will be made only when it becomes probable that such a Deemed Liquidation Event will occur.

Conversion

Each share of preferred stock is convertible at the option of the holder, at any time and from time to time, and without the payment of additional consideration by the holder, into shares of common stock as is determined by dividing the original purchase issue price of preferred stock by the conversion price in effect at the time of conversion. The conversion price per share shall be $19.24 with respect to the Series A, $27.24 for Series B, $14.09 for Series C-1, and $11.27 for Series C-2, and $15.32 for Series D, as defined by the Company’s certificate of incorporation, as amended. As of March 31, 2026, the conversion ratio for preferred stock was one-to-one basis.

All outstanding shares of preferred stock shall automatically be converted into shares of common stock on a one-to-one basis, at the then-effective conversion rate upon either (a) the closing of the sale of shares of common stock to the public at a price at least equal to $45.99 per share in a firm-commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, resulting in at least $50 million of net proceeds to the Company or (b) the date and time, or the occurrence of an event specified by vote or written consent of (i) the holders of a majority of the outstanding shares of preferred stock voting together as a single separate class and on as-converted to common stock basis and (ii) the holders of a majority of the outstanding shares of Series C and Series D preferred stock voting together as a single separate class and on as-converted to common stock basis.

All shares of Preferred Stock automatically converted into shares of common stock on a 1-to-19.2417 basis in connection with the Company's IPO completed in May 2026 (see Note 1).

The Company’s certificate of incorporation, as amended and restated, authorizes the Company to issue 585,000,000 shares of common stock, par value $0.001, as of March 31, 2026. The holders of common stock are entitled to one vote for each share of common stock held.