Capital Structure |
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Sep. 30, 2024 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Capital Structure | Capital Structure
Pursuant to the Company’s amended and restated certificate of incorporation, the Company is authorized to issue two classes of stock, common stock and preferred stock. At September 30, 2024, the total number of shares of capital stock the Company was authorized to issue was 205,000,000, of which 200,000,000 was common stock and 5,000,000 was preferred stock. All shares of common and preferred stock have a par value of $0.001 per share.
Almata Transaction
On March 27, 2024, the Company acquired AlmataBio in which the former AlmataBio stockholders received (i) 171,605 shares of the Company’s common stock and (ii) 2,412 shares of the Company’s Series C Preferred Stock. Upon Company stockholder approval, which was obtained on August 13, 2024 and subject to beneficial ownership limitations, 2,063 shares of the Series C Preferred Stock issued to the former AlmataBio stockholders automatically converted into 2,062,930 shares of common stock. Refer to Note 3 - Asset Acquisition for more information regarding the acquisition and refer to sub-header “Series C Preferred Stock” within the “March 2024 Financing” section below for more information regarding the Series C Preferred Stock.
March 2024 Financing
On March 28, 2024, the Company closed a private placement investment with institutional investors in which the investors received (i) 19,946 shares of non-voting convertible Series C Preferred Stock, and (ii) warrants to purchase up to an aggregate of 11,967,526 shares of Avalo’s common stock (or a number of shares of Series C Preferred Stock convertible into the number of shares of common stock the warrant is then exercisable into), resulting in upfront gross proceeds of $115.6 million. Net proceeds were $108.1 million after deducting transaction costs. Upon the closing of financing, the Company could receive up to an additional $69.4 million of gross proceeds upon the exercise of the warrants, which expire on November 8, 2024. Subsequent to September 30, 2024 and through November 6, 2024, the Company received gross proceeds of $58.1 million pursuant to the exercise of 10,026,847 warrants. Upon Company stockholder approval, which was obtained on August 13, 2024 and subject to beneficial ownership limitations, 6,585 shares of Series C Preferred Stock issued pursuant to the financing automatically converted into 6,585,314 shares of common stock.
Warrants on common stock or Series C Preferred Stock issued in March 2024 Financing
The warrants are exercisable via gross physical settlement for $5.796933 per underlying share of common stock (or a number of shares of Series C Preferred Stock convertible into the number of shares of common stock the warrant is then exercisable into). The warrants expire on November 8, 2024, which is the thirty-first day following the public announcement of the first patient dosed in a Phase 2 trial of AVTX-009 in hidradenitis suppurativa. The warrants include anti-dilution protection provisions.
The Company determined that the warrants do not satisfy the conditions to be accounted for as equity instruments. As the warrants do not meet the equity contract scope exception, the Company classified the warrants as a derivative liability upon issuance. The initial measurement of the warrant at fair value exceeded the proceeds received such that the difference between the initial fair value of the warrants and net upfront cash proceeds is recognized in the income statement as a loss. Subsequently, the warrants are carried at fair value with changes in fair value recognized in the Company’s unaudited condensed consolidated statements of operations and comprehensive income (loss) until either exercised or expired. The valuation of the warrants is considered under Level 3 of the fair value hierarchy due to the need to use assumptions in the valuation that are both significant to the fair value measurement and unobservable. See Note 6 - Fair Value Measurement for a description of the warrant’s valuation methodology.
No warrants were exercised for the nine months ended September 30, 2024. Subsequent to September 30, 2024 and through November 6, 2024, 10,026,847 warrants were exercised resulting in the issuance of 711,580 shares of common stock and 9,315.267 shares of Series C Preferred Stock. Each share of Series C Preferred Stock is convertible into 1,000 shares of common stock, subject to beneficial ownership limitations. Remaining unexercised warrants, if any, will expire on November 8, 2024.
Upon exercise of the warrants, the Company will pay an additional amount of transaction costs to a third-party financial institution, based on 2.5% gross proceeds received from the exercise. As the warrants are in the money as of September 30, 2024, the Company has recognized $1.7 million for transaction costs within other income (expense), net for the nine months ended September 30, 2024. Based on warrant exercises through November 6, 2024, the Company will pay approximately $1.5 million of transaction costs in the fourth quarter of 2024 and will monitor additional fees due for any subsequent exercises. The Company also incurred an additional $7.5 million of transaction costs related to the private placement investment which were expensed within other income (expense), net for the nine months ended September 30, 2024.
Series C Preferred Stock issued in the Almata Transaction and March 2024 Financing
As of September 30, 2024, the Company had 5,000,000 shares of Preferred Stock authorized, of which 34,326 have been designated as Series C Preferred Stock. Of the 22,358 shares of Series C Preferred Stock that were issued pursuant to the March 2024 Financing and the Almata Transaction, 8,648 shares of Series C Preferred Stock were converted into 8,648,244 shares of common stock on August 13, 2024 upon Company stockholder approval and subject to beneficial ownership limitations, leaving 13,710 shares of Series C Preferred Stock outstanding as of September 30, 2024. The Series C Preferred Stock has a par value of $0.001 per share. The Series C Preferred Stock has no voting rights, no liquidation preference, and are not redeemable. In the event of any liquidation, dissolution or winding up of the Company, holders of Series C Preferred Stock are entitled to be paid out of the assets with the Company legally available for distribution to its stockholders on an as-converted and pari-passu basis with common stock. The Series C Preferred Stock is subject to broad-based weighted average anti-dilution protection for certain issuances of common stock and securities convertible into common stock. The Series C Preferred Stock is entitled to receive dividends equal to and in the same form, and in the same manner, based on the then-current conversion ratio as dividends actually paid on shares of the common stock, when, as and if such dividends are paid on shares of the common stock.
The Series C Preferred Stock is contingently redeemable outside the control of the Company such that the Series C Preferred Stock is recognized outside of permanent equity. The $11.5 million carrying value of the 2,412 shares of Series C Preferred Stock issued to the former AlmataBio stockholders pursuant to the Almata Transaction was recognized outside of stockholders’ equity on the Company’s unaudited condensed consolidated balance sheet upon issuance. Following the automatic conversion of 2,063 of the shares of Series C Preferred Stock on August 13, 2024, the remaining 349 shares of Series C Preferred Stock held by the former AlmataBio stockholders, with a carrying value of $1.7 million, remains recognized outside of stockholders’ equity on the Company’s unaudited condensed consolidated balance sheet as of September 30, 2024. Upon converting to common stock, the corresponding carrying value of the shares of Series C Preferred Stock of $9.8 million, was classified as a component of permanent stockholders’ equity within additional paid-in capital in the Company’s unaudited condensed consolidated balance sheet as of September 30, 2024. No amounts were allocated to the Series C Preferred Stock issued pursuant to the March 2024 Financing because the initial fair value of the warrants exceeded gross proceeds received for the issuance of the private placement bundle that included both Series C Preferred Stock and warrants. The Series C Preferred Stock is not remeasured to redemption value until the shares are probable of becoming redeemable for cash. As of September 30, 2024, the Company expects to have sufficient authorized and unissued shares to settle the Series C Preferred Stock, and therefore it is not probable that the Series C Preferred Stock would be redeemable for cash as of the balance sheet date.
Series D and Series E Preferred Stock issued in the March 2024 Financing
As a condition to the March 2024 Financing, a single share of Series D Preferred Stock and a single Series E Preferred Stock were issued to two institutional investors that participated in the private placement. Both the Series D and the Series E Preferred Stock have a par value and liquidation preference of $0.001 per share. The Series D and Series E Preferred Stock do not have voting rights, are not entitled to dividends, and are not convertible into common stock. The holders of the Series D and Series E Preferred Stock have the option to require the Company to redeem their shares at a price equal to the par value at any time. The Company retains the right to redeem the Series D and Series E Preferred Stock at a price equal to the par value if the holder owns less than a certain threshold of the Company’s outstanding common stock. While the Series D and Series E Preferred Stock do not provide the holders with substantive economics, the Series D and Series E Preferred Stock were issued solely to allow for the institutional investors to appoint a director to the Company’s board of directors.
Common Stock Warrants
At September 30, 2024, the following common stock warrants were outstanding:
(1) The warrants are exercisable for shares of common stock or an equivalent amount (as converted to common stock) of Series C Preferred Stock.
(2) Subsequent to September 30, 2024 and through November 6, 2024, 10,026,847 warrants were exercised resulting in the issuance of 711,580 shares of common stock and 9,315.267 shares of Series C Preferred Stock. Each share of Series C Preferred Stock is convertible into 1,000 shares of common stock, subject to certain beneficial ownership limitations.
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