Annual report [Section 13 and 15(d), not S-K Item 405]

Stock Based Compensation

v3.25.1
Stock Based Compensation
12 Months Ended
Dec. 31, 2024
Share-Based Payment Arrangement [Abstract]  
Stock-Based Compensation Stock-Based Compensation
 
2016 Equity Incentive Plan

In April 2016, our board of directors adopted the 2016 Equity Incentive Plan, which was approved by our stockholders in May 2016 and which was subsequently amended and restated in May 2018 and August 2019 with the approval of our board of directors and our stockholders. In June 2024, our board of directors approved a fourth amended and restated equity incentive plan, which was
subsequently approved by the Company’s stockholders in August 2024 (the “2016 Fourth Amended Plan”). During the term of the 2016 Fourth 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, 2034, by an amount equal to 5% of the total number of outstanding shares of common stock and Series C Preferred Stock (determined on an as-converted stock basis) plus all outstanding prefunded warrants to acquire shares of common stock (if any) as of December 31 of the preceding calendar year. Upon approval of the 2016 Fourth Amended Plan on August 13, 2024, the number of shares available for issuance increased by 3,508,804 shares. As of December 31, 2024, there were 1,301,050 shares available for future issuance under the 2016 Fourth Amended Plan. On January 1, 2025, pursuant to the terms of the 2016 Fourth Amended Plan, an additional 1,768,393 shares were made available for issuance.

Option grants expire after ten years. Employee options typically vest over 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 one 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, 2024 and 2023 was as follows (in thousands):
 
  Year Ended December 31,
  2024 2023
Research and development $ 2,402  $ 1,318 
General and administrative 3,450  2,157 
Total stock-based compensation $ 5,852  $ 3,475 
 
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. A summary of option activity for the year ended December 31, 2024 is as follows:
 
  Options Outstanding
  Number of shares Weighted average exercise price per share Weighted average grant date fair value per share Weighted average remaining contractual term
(in years)
Balance at December 31, 2023 7,211  $ 3,191.97  $ 1,930.00  8.3
Granted 1,993,100  $ 10.47  $ 9.04 
Forfeited (27) $ 323.13  $ 232.02 
Expired (535) $ 7,588.53  $ 3,731.46 
Balance at December 31, 2024 1,999,749  $ 19.91  $ 14.98  9.6
Exercisable at December 31, 2024 5,499  $ 3,202.54  $ 1,995.94  7.3
 
On August 13, 2024, as part of its annual stock option award, the Company granted (i) options with service-based vesting conditions to purchase 1.4 million shares of common stock to its employees that vest over four years and (ii) options with service-based vesting conditions to purchase 0.1 million shares of common stock to its non-employee directors that vest over three years. Additionally, in June and July 2024, the Company granted 0.2 million options to each of its newly appointed Chief Legal Officer and newly appointed Chief Medical Officer. The options were granted as inducement option grants pursuant to Nasdaq Listing Rule 5635(c)(4) and are subject to service-based vesting conditions.

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, 2024, the aggregate intrinsic value of options outstanding and the aggregate intrinsic value of options currently exercisable was zero. There were 2,518 options that vested during the year ended December 31, 2024, with a
weighted average exercise price of $1,217.35 per share. The total grant date fair value of shares which vested during the years ended December 31, 2024 and 2023 was $2.2 million and $3.4 million, respectively.

The Company recognized stock-based compensation expense of $4.5 million and $3.3 million related to stock options with service-based vesting conditions for the years ended December 31, 2024 and 2023, respectively. At December 31, 2024, there was $16.4 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 3.1 years.

On January 1, 2025, the Company granted its newly appointed Chief Strategy Officer options with service-based vesting conditions to purchase 150,000 shares of common stock with an exercise price of $7.43 as an inducement option grant pursuant to Nasdaq Listing Rule 5635(c)(4). Additionally, on January 28, 2025, as part of its annual stock option award, the Company granted options with service-based vesting conditions to purchase 1.5 million shares of common stock to its employees that vest over four years.

Stock-based compensation assumptions

The following table presents 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, 2024 and 2023:
  Year Ended December 31,
Service-based options 2024 2023
Expected term of options (in years) 5.81 6.25 5.00 6.25
Expected stock price volatility 113.1% 116.9% 89.8% 146.0%
Risk-free interest rate 3.70% 4.26% 3.43% 4.13%
Expected annual dividend yield 0% 0%

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.

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 stock 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 never 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 has granted RSUs that contain service-based vesting conditions. The Company measures the fair value of the RSUs using the stock price on the date of grant. The compensation cost for RSUs is recognized on a straight-line basis over the vesting period. There was no RSU activity for the year ended December 31, 2023. A summary of RSU activity for the year ended December 31, 2024 is as follows:
  RSUs Outstanding
  Number of shares Weighted average grant date fair value
Balance at Unvested RSUs at December 31, 2023 —  $ — 
Granted 632,100  9.88 
Unvested RSUs at December 31, 2024 632,100  $ 9.88 

The RSUs, which were granted on August 13, 2024, vest annually over a three-year period beginning on March 28, 2025. The Company recognized stock-based compensation expense of $1.3 million related to RSUs for the year ended December 31, 2024. At December 31, 2024, there was $5.0 million of total unrecognized compensation cost related to RSUs. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.2 years.

Employee Stock Purchase Plan

On April 5, 2016, the Company’s board of directors approved the 2016 Employee Stock Purchase Plan, which was approved by the Company’s stockholders and became effective on May 18, 2016 (the “Initial ESPP”). In June 2024, our board of directors approved an amended and restated employee stock purchase plan, which was subsequently approved by the Company’s stockholders in August 2024 (the “ESPP”).

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 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.

The Company initially reserved and authorized up to 174 shares of common stock for issuance under the Initial ESPP. Pursuant to 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 1% of the Company’s outstanding shares of common stock and Series C Preferred Stock (determined on an as-converted basis) plus all outstanding prefunded warrants to acquire shares of common stock (if any), as of December 31 of the preceding calendar year. As of December 31, 2024, 226,577 shares remained available for issuance. On January 1, 2025, the number of shares available for issuance under the ESPP increased by 353,679.

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 $0.1 million for the year ended December 31, 2024 and $0.2 million for the year ended December 31, 2023.