Stock Based Compensation |
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| Stock-Based Compensation | Stock-Based Compensation 2016 Equity Incentive Plan
On April 5, 2016, the Company’s board of directors adopted the 2016 Equity Incentive Plan (the “2016 Plan”) as the successor to the 2015 Omnibus Plan (the “2015 Plan”). The 2016 Plan was approved by the Company’s stockholders and became effective on May 18, 2016 (the “2016 Plan Effective Date”). Upon the 2016 Plan Effective Date, the 2016 Plan reserved and authorized up to 600,000 additional shares of common stock for issuance, as well as 464,476 unallocated shares remaining available for grant of new awards under the 2015 Plan. An Amended and Restated 2016 Equity Incentive Plan was approved by the Company's stockholders in May 2018, which increased the share reserve by an additional 1.4 million shares. A Second Amended and Restated 2016 Equity Incentive
Plan was approved by the Company's stockholders in August 2019, which increased the share reserve by an additional 850,000 shares. A Third Amended and Restated Equity Incentive Plan (the “2016 Third Amended Plan”) was approved by the Company's stockholders in June 2020 which increased the share reserve by an additional 2,014,400 shares. During the term of the 2016 Third Amended Plan, the share reserve will automatically increase on the first trading day in January of each calendar year ending on (and including) January 1, 2026, by an amount equal to 4% of the total number of outstanding shares of common stock of the Company on the last trading day in December of the prior calendar year. As of December 31, 2021, there were 1,570,867 shares available for future issuance under the 2016 Third Amended Plan. On January 1, 2022, pursuant to the terms of the 2016 Third Amended Plan an additional 4,511,768 shares were made available for issuance.
Option grants expire after ten years. Employee options typically vest over or four years. Employees typically receive a new hire option grant, as well as an annual grant in the first or second quarter of each year. Options granted to directors typically vest immediately or over a period of or three years. Directors may elect to receive stock options in lieu of board compensation, which vest immediately. For stock options granted to employees and non-employee directors, the estimated grant date fair market value of the Company’s stock-based awards is amortized ratably over the individuals’ service periods, which is the period in which the awards vest. Stock-based compensation expense includes expense related to stock options, restricted stock units and employee stock purchase plan shares. The amount of stock-based compensation expense recognized for the years ended December 31, 2021 and 2020 was as follows (in thousands):
In June 2021, the Company’s former Chairman of the Board resigned from the Board. The Company and the former Chairman subsequently entered into an agreement for him to serve as a strategic advisor to the Board and the Company, including serving on the Company’s Scientific Advisory Board, for a period of at least one year. As consideration for these services, the Company modified his outstanding stock option awards to allow them to continue to vest during the term during which he serves as an advisor. Additionally, the outstanding options were amended to extend the exercisability period. As a result of the modification, in the second quarter of 2021, the Company recognized $1.4 million of compensation cost within general and administrative expenses, $1 million of which related to options with market-based vesting conditions (which were fully vested prior to the modification) and $0.4 million of which related to options with service-based vesting conditions. At December 31, 2021, there was $0.1 million of unrecognized compensation cost related to the modification of service-based options that will be recognized over a weighted-average period of 0.5 years.
Stock options with service-based vesting conditions
The Company has granted stock options that contain service-based vesting conditions. The compensation cost for these options is recognized on a straight-line basis over the vesting periods. The following table summarizes the Company's service-based option activity for the year ended December 31, 2021:
In March 2021, the Company granted its then newly appointed Chief Financial Officer options with service-based vesting conditions to purchase 0.5 million shares of common stock as an inducement option grant, pursuant to NASDAQ Listing Rule 5635(c)(4). In January 2021, the Company granted 2.7 million options with service-based vesting conditions to its employees as part of its annual stock option award. Additionally, throughout 2021, the Company granted options with service-based vesting conditions to new employees who started with the Company during the year.
Our former Chief Executive Officer, who was separated from the Company in February 2022, entered into an amended employment agreement in March 2020 in which his base salary in cash was reduced to an annual rate of $35,568 (the “Reduction”), which represents the minimum exempt annual salary. In consideration for the Reduction, on a quarterly basis, the Company granted stock options, which vested immediately, for the purchase of a number of shares of the Company’s common stock with a total value (based on the Black-Scholes valuation methodology) based on a pro rata total annual value of the foregone salary (the “Salary Option”). If the closing stock price per share was below $2.07 on the grant date, then the Salary Option was not granted and instead the former CEO receives compensation in cash for the given quarter. For the year ended December 31, 2021, the foregone cash salary, and therefore the fair value granted in stock options, was $464,432.
The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those stock options that had exercise prices lower than the fair value of the Company’s common stock. As of December 31, 2021, the aggregate intrinsic value of options outstanding was $0.2 million. The aggregate intrinsic value of options currently exercisable as of December 31, 2021 was $0.2 million. The aggregate intrinsic value of options exercised for the years ended December 31, 2021 and 2020 was $0.5 million and $0.1 million, respectively. There were 3,147,750 options that vested during the year ended December 31, 2021 with a weighted average exercise price of $3.60 per share. The total grant date fair value of shares which vested during the year ended December 31, 2021 and 2020 was $7 million and $3.3 million, respectively.
The Company recognized stock-based compensation expense of $6.8 million related to stock options with service-based vesting conditions for the year ended December 31, 2021. At December 31, 2021, there was $13.6 million of total unrecognized compensation cost related to unvested service-based vesting conditions awards. This unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.6 years.
Stock options with market-based vesting conditions
The Company granted stock options that contained market-based vesting conditions. As of December 31, 2021, all market-based vesting conditions had been satisfied. The following table summarizes the Company's market-based option activity for the year ended December 31, 2021 (in thousands, except for share amounts):
(1) The aggregate intrinsic value in the above table represents the total pre-tax amount that a participant would receive if the option had been exercised on the last day of the respective fiscal period. Options with a market value less than its exercise value are not included in the intrinsic value amount.
The Company recognized stock-based compensation expense of $1.1 million related to stock options with market-based vesting conditions for the year ended December 31, 2021.
Stock-based compensation assumptions
The following table shows the assumptions used to compute stock-based compensation expense for stock options with service-based vesting conditions granted under the Black-Scholes valuation model for the years ended December 31, 2021 and 2020 and the
assumptions used to compute stock-based compensation expense for market-based stock option grants under a Monte Carlo simulation for the year ended December 31, 2020:
The valuation assumptions were determined as follows:
•Expected term of options: Due to lack of sufficient historical data, the Company estimates the expected life of its stock options with service-based vesting granted to employees and members of the board of directors as the arithmetic average of the vesting term and the original contractual term of the option for service-based options.
•Expected stock price volatility: The Company estimated the expected volatility based on a blend of Avalo's actual historical volatility of its stock price and the historical volatility of other similar publicly-traded biotechnology companies. The Company calculated the historical volatility of the selected companies by using weekly closing prices over a period of the expected term of the associated award. The companies were selected based on their risk profiles, enterprise value, position within the industry, and historical share price information sufficient to meet the expected term of the associated award. A decrease in the selected volatility would decrease the fair value of the underlying instrument.
•Risk‑free interest rate: The Company bases the risk‑free interest rate on the interest rate payable on U.S. Treasury securities in effect at the time of grant for a period that is commensurate with the assumed expected option term.
•Expected annual dividend yield: The Company estimated the expected dividend yield based on consideration of its historical dividend experience and future dividend expectations. The Company has not historically declared or paid dividends to stockholders. Moreover, it does not intend to pay dividends in the future, but instead expects to retain any earnings to invest in the continued growth of the business. Accordingly, the Company assumed an expected dividend yield of 0%.
Restricted Stock Units
The Company measures the fair value of the restricted stock units using the stock price on the date of the grant. The restricted shares typically vest annually over a four-year period beginning on the first anniversary of the award. The following table summarizes the Company's RSU activity for the year ended December 31, 2021:
Employee Stock Purchase Plan
On April 5, 2016, the Company’s board of directors approved the ESPP. The ESPP was approved by the Company’s stockholders and became effective on May 18, 2016 (the “ESPP Effective Date”).
Under the ESPP, eligible employees can purchase common stock through accumulated payroll deductions at such times as are established by the administrator. The ESPP is administered by the compensation committee of the Company’s board of directors. Under the ESPP, eligible employees may purchase stock at 85% of the lower of the fair market value of a share of the Company’s common stock (i) on the first day of an offering period or (ii) on the purchase date. Eligible employees may contribute up to 15% of their earnings during the offering period. The Company’s board of directors may establish a maximum number of shares of the Company’s common stock that may be purchased by any participant, or all participants in the aggregate, during each offering or offering period. Under the ESPP, a participant may not accrue rights to purchase more than $25,000 of the fair market value of the Company’s common stock for each calendar year in which such right is outstanding.
Upon the ESPP Effective Date, the Company reserved and authorized up to 500,000 shares of common stock for issuance under the ESPP. On January 1 of each calendar year, the aggregate number of shares that may be issued under the ESPP automatically increases by a number equal to the lesser of (i) 1% of the total number of shares of the Company’s capital stock outstanding on December 31 of the preceding calendar year, and (ii) 500,000 shares of the Company’s common stock, or (iii) a number of shares of the Company’s common stock as determined by the Company’s board of directors or compensation committee. As of December 31, 2021, 1,735,611 shares remained available for issuance. On January 1, 2022, the number of shares available for issuance under the ESPP increased by 500,000.
In accordance with the guidance in ASC 718-50, Employee Share Purchase Plans, the ability to purchase shares of the Company’s common stock at the lower of the offering date price or the purchase date price represents an option and, therefore, the ESPP is a compensatory plan under this guidance. Accordingly, stock-based compensation expense is determined based on the option’s grant-date fair value and is recognized over the requisite service period of the option. The Company used the Black-Scholes valuation model and recognized stock-based compensation expense of $0.3 million for the years ended December 31, 2021 and December 31, 2020.
Subsequent Equity Grants
On January 4, 2022, the Company granted its newly appointed Chief Commercial Officer, Stephen Smolinski, options to purchase 0.4 million shares of common stock at an exercise price of $1.70 per share as an inducement option grant, pursuant to NASDAQ Listing Rule 5635(c)(4). The options will vest over four years, with one-quarter of such options vesting on the first anniversary of the grant date and the remaining three-quarters of the options vesting in equal monthly installments over the following 36 months, in each case, subject to continued employment with the Company through the applicable vesting date.
In the first quarter of 2022, pursuant to Dr. Neil’s letter agreement in connection with his promotion to CEO, the Company will grant a stock option to Dr. Garry Neil to purchase 1 million shares of the Company’s common stock. Additionally, in the first quarter of 2022, pursuant to Mr. Sullivan’s letter agreement in connection with his promotion to CFO, the Company will grant a stock option to Mr. Christopher Sullivan to purchase 400,000 shares of the Company’s common stock. The stock options will vest over four years, with one-quarter of such options vesting on the first anniversary of the grant date and the remaining three-quarters of the options vesting in equal monthly installments over the following 36 months, in each case, subject to continued employment with the Company through the applicable vesting date.
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