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. Most recently, 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. As of December 31, 2025, there were 327,806 shares available for future issuance under the 2016 Fourth Amended Plan. On January 1, 2026, pursuant to the terms of the 2016 Fourth Amended Plan, an additional 1,865,256 shares were made available for issuance.

In September 2025, our board of directors adopted the 2025 Inducement Award Plan (the “Inducement Plan”). A total of 1,300,000 shares of our common stock were initially reserved for issuance under our Inducement Plan. Grants under the Inducement Plan can be granted to individuals who satisfy the standards for inducement grants under Nasdaq Listing Rule 5635(c)(4), including individuals who were not previously an employee or director of the Company or are following a bona fide period of non-employment, in each case as an inducement material to such individual’s agreement to enter into employment with the Company. As of December 31, 2025, there were 811,000 shares available for future issuance under the Inducement Plan.

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 non-employee directors typically vest immediately or over a period of one or three years. Non-employee 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, performance stock units and employee stock purchase plan shares. The amount of stock-based compensation expense recognized for the years ended December 31, 2025 and 2024 was as follows (in thousands):

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, 2025 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)	Aggregate Intrinsic Value(1) (in millions)
Balance at December 31, 2024	1,999,748	$	19.91	$	14.98	9.6	$	—
Granted	2,669,963	$	8.72	$	7.27
Exercised	(78,362)	$	9.88	$	8.49		$	0.6

Expired	(92)	$	18,691.20	$	7,524.87
Balance at December 31, 2025	4,591,257	$	13.20	$	10.46	8.5	$	39.9
Exercisable at December 31, 2025	953,658	$	27.68	$	20.11	6.5	$	7.7

(1) 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.

There were 1,026,613 options that vested during the year ended December 31, 2025, with a weighted average exercise price of $10.99 per share. The total grant date fair value of shares which vested during the years ended December 31, 2025 and 2024 was $9.6 million and $2.2 million, respectively.

The Company recognized stock-based compensation expense of $10.8 million and $4.5 million related to stock options with service-based vesting conditions for the years ended December 31, 2025 and 2024, respectively. At December 31, 2025, there was $25.1 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 2.8 years.

On February 26, 2026, as part of its annual stock option award, the Company granted options with service-based vesting conditions to purchase 1.3 million shares of common stock to its employees that vest over four years.

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, 2025 and 2024:


	Year Ended December 31,
Service-based options	2025			2024
Expected term of options (in years)	5.00	—	6.10	5.81	—	6.25
Expected stock price volatility	99.9%	—	113.1%	113.1%	—	116.9%
Risk-free interest rate	3.73%	—	4.45%	3.70%	—	4.26%
Expected annual dividend yield	0%			0%

•Expected term of options: The expected term represents the period of time that options are expected to be outstanding. Due to lack of sufficient historical exercise data, the Company estimates the expected term of its stock options with service-based vesting granted to employees and members of the board of directors using the simplified method, which is an 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%.

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. A summary of RSU activity for the year ended December 31, 2025 is as follows:


	RSUs Outstanding
	Number of shares	Weighted average grant date fair value
Balance at Unvested RSUs at December 31, 2024	632,100	$	9.88
Vested	(217,036)	9.88
Forfeited	(28,000)	9.88
Unvested RSUs at December 31, 2025	387,064	$	9.88

The RSUs, which were granted on August 13, 2024, vest annually over a three-year period beginning on March 28, 2025. Of the 217,036 RSUs vested during 2025, 55,017 were withheld on behalf of employees to satisfy RSU statutory tax withholding obligations. The Company recognized stock-based compensation expense of $2.3 million related to RSUs for the year ended December 31, 2025. At December 31, 2025, there was $2.4 million of total unrecognized compensation cost related to RSUs. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 1.2 years.

A PSU represents one equivalent share of our common stock to be issued after achievement of the performance goals specified in the grant. The Company estimates the fair value of our PSUs as of the grant date based upon the expected likelihood of achievement of the performance goals specified in the grant and the closing market price of our common stock on the date of grant. The Company recognizes stock-based compensation expense over the requisite service period, if it is probable that the performance goal will be achieved.

In August 2025, the Company granted PSUs to executives under the 2016 Fourth Amended Plan with a grant date fair value of $8.90 per unit (the “PSU Awards”). The PSU Awards include 492,500 shares that will be available to vest assuming 100% achievement of the performance metric, with a maximum of 738,750 shares available to vest assuming maximum achievement. The performance metric for the PSU Awards is based on the timing of data release and efficacy of the Company’s Phase 2 LOTUS trial, and the achieved units may range from 0% to 150% of the target number depending on the level of achievement against the specified performance metric. Upon successful achievement of the performance metric, the PSU Awards will vest on the third anniversary of the grant date. As of December 31, 2025, the Company has not recognized any compensation expense related to the PSU Awards as the Company does not yet consider achievement of the performance metric to be probable.

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, 2025, 533,159 shares remained available for issuance. On January 1, 2026, the number of shares available for issuance under the ESPP increased by 373,051.

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 $0.5 million for the year ended December 31, 2025 and $0.1 million for the year ended December 31, 2024.