Allakos Inc. - Quarter Report: 2022 June (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to _________

Commission File Number: 001-38582

Allakos Inc.

(Exact Name of Registrant as Specified in its Charter)


Delaware	45-4798831
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
825 Industrial Road, Suite 500 San Carlos, California	94070
(Address of principal executive offices)	(Zip Code)

(650) 597-5002

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, par value $0.001	ALLK	The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 1, 2022, the registrant had 54,844,080 shares of common stock outstanding.

ALLAKOS INC.

Table of Contents


		Page
PART I.	FINANCIAL INFORMATION	2
Item 1.	Financial Statements (Unaudited)	2
	Balance Sheets	2
	Statements of Operations and Comprehensive Loss	3
	Statements of Stockholders’ Equity	4
	Statements of Cash Flows	5
	Notes to Unaudited Interim Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	27
PART II.	OTHER INFORMATION	29
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3.	Defaults Upon Senior Securities	31
Item 4.	Mine Safety Disclosures	31
Item 5.	Other Information	31
Item 6.	Exhibits	32
Signatures		33

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited).

allakos inc.

balance sheets

(in thousands, except per share data)


	June 30,			December 31,
	2022			2021
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	82,452		$	152,822
Investments		129,987			271,416
Prepaid expenses and other current assets		9,427			27,343
Total current assets		221,866			451,581
Property and equipment, net		41,300			43,100
Operating lease right-of-use assets		31,962			31,707
Other long-term assets		11,781			8,436
Total assets	$	306,909		$	534,824
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	9,865		$	13,692
Accrued expenses and other current liabilities		26,638			26,557
Total current liabilities		36,503			40,249
Operating lease liabilities, net of current portion		47,597			49,099
Total liabilities		84,100			89,348
Contingencies (Note 7)
Stockholders’ equity:
Preferred stock, $0.001 par value per share; 20,000 shares authorized as of June 30, 2022 and December 31, 2021; no shares issued and outstanding as of June 30, 2022 and December 31, 2021		—			—
Common stock, $0.001 par value per share; 200,000 shares authorized as of June 30, 2022 and December 31, 2021; 54,844 and 54,622 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively		54			54
Additional paid-in capital		1,081,965			1,058,399
Accumulated other comprehensive loss		(260	)		(153	)
Accumulated deficit		(858,950	)		(612,824	)
Total stockholders’ equity		222,809			445,476
Total liabilities and stockholders’ equity	$	306,909		$	534,824

See accompanying notes to unaudited interim financial statements

Allakos Inc.

Statements of Operations and Comprehensive Loss

(in thousands, except per share data)

(unaudited)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2022			2021			2022			2021
Operating expenses
Research and development	$	34,448		$	40,985		$	211,255		$	79,900
General and administrative		14,669			16,210			33,513			32,880
Total operating expenses		49,117			57,195			244,768			112,780
Loss from operations		(49,117	)		(57,195	)		(244,768	)		(112,780	)
Interest income		104			103			187			233
Other expense, net		(90	)		(117	)		(1,545	)		(220	)
Net loss		(49,103	)		(57,209	)		(246,126	)		(112,767	)
Unrealized gain (loss) on investments		209			(56	)		(107	)		24
Comprehensive loss	$	(48,894	)	$	(57,265	)	$	(246,233	)	$	(112,743	)
Net loss per common share:
Basic and diluted	$	(0.90	)	$	(1.07	)	$	(4.50	)	$	(2.11	)
Weighted-average number of common shares outstanding:
Basic and diluted		54,798			53,669			54,742			53,429

See accompanying notes to unaudited interim financial statements

Allakos Inc.

Statements of STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)


	Common Stock				Additional Paid-In Capital		Accumulated Other Comprehensive Gain (Loss)			Accumulated Deficit			Total Stockholders’ Equity
	Shares		Amount
Balance at December 31, 2021		54,622	$	54	$	1,058,399	$	(153	)	$	(612,824	)	$	445,476
Stock-based compensation expense		—		—		11,392		—			—			11,392
Issuance of common stock upon exercise of stock options		34		—		104		—			—			104
Issuance of common stock upon 2018 ESPP purchase		42		—		243		—			—			243
Issuance of common stock upon vesting of restricted stock units		63		—		—		—			—			—
Unrealized loss on investments		—		—		—		(316	)		—			(316	)
Net loss		—		—		—		—			(197,023	)		(197,023	)
Balance at March 31, 2022		54,761	$	54	$	1,070,138	$	(469	)	$	(809,847	)	$	259,876
Stock-based compensation expense		—		—		11,761		—			—			11,761
Issuance of common stock upon exercise of stock options		25		—		66		—			—			66
Issuance of common stock upon vesting of restricted stock units		58		—		—		—			—			—
Unrealized gain on investments		—		—		—		209			—			209
Net loss		—		—		—		—			(49,103	)		(49,103	)
Balance at June 30, 2022		54,844	$	54	$	1,081,965	$	(260	)	$	(858,950	)	$	222,809


	Common Stock				Additional Paid-In Capital		Accumulated Other Comprehensive Gain (Loss)			Accumulated Deficit			Total Stockholders’ Equity
	Shares		Amount
Balance at December 31, 2020		53,081	$	53	$	997,298	$	8		$	(342,964	)	$	654,395
Stock-based compensation expense		—		—		12,354		—			—			12,354
Issuance of common stock upon exercise of stock options		321		—		3,788		—			—			3,788
Issuance of common stock upon 2018 ESPP purchase		17		—		995		—			—			995
Issuance of common stock upon vesting of restricted stock units		38		—		—		—			—			—
Unrealized gain on investments		—		—		—		80			—			80
Net loss		—		—		—		—			(55,558	)		(55,558	)
Balance at March 31, 2021		53,457	$	53	$	1,014,435	$	88		$	(398,522	)	$	616,054
Stock-based compensation expense		—		—		11,397		—			—			11,397
Issuance of common stock upon exercise of stock options		443		—		800		—			—			800
Issuance of common stock upon vesting of restricted stock units		36		—		—		—			—			—
Unrealized loss on investments		—		—		—		(56	)		—			(56	)
Net loss		—		—		—		—			(57,209	)		(57,209	)
Balance at June 30, 2021		53,936		53		1,026,632		32			(455,731	)		570,986

See accompanying notes to unaudited interim financial statements

Allakos Inc.

Statements of Cash Flows

(in thousands)

(unaudited)


	Six Months Ended
	June 30,
	2022			2021
Cash flows from operating activities
Net loss	$	(246,126	)	$	(112,767	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		4,064			747
Stock-based compensation		23,153			23,751
Net amortization of premiums and discounts on investments		1,616			1,211
Noncash lease expense		961			1,541
Loss on disposal of property and equipment		28			—
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		17,621			(4,072	)
Other long-term assets		(4,148	)		(13,844	)
Accounts payable		(3,645	)		(2,034	)
Accrued expenses and other current liabilities		1,969			7,952
Operating lease liabilities, net of current portion		(2,550	)		1,474
Net cash used in operating activities		(207,057	)		(96,041	)
Cash flows from investing activities
Purchases of investments		(19,988	)		(215,461	)
Proceeds from sales of investments		19,989			—
Proceeds from maturities of investments		140,000			310,000
Proceeds from sale of property and equipment		1,169			—
Purchases of property and equipment		(5,699	)		(7,302	)
Net cash provided by investing activities		135,471			87,237
Cash flows from financing activities
Proceeds from exercise of stock options		170			4,588
Proceeds from issuance of common stock under the 2018 ESPP		243			995
Net cash provided by financing activities		413			5,583
Net increase (decrease) in cash, cash equivalents and restricted cash		(71,173	)		(3,221	)
Cash, cash equivalents and restricted cash, beginning of period		155,097			209,452
Cash, cash equivalents and restricted cash, end of period	$	83,924		$	206,231
Supplemental disclosures
Noncash investing and financing items:
Lessor-funded lease incentives included in property and equipment	$	—		$	5,348
Increase (decrease) in payables related to purchase of property and equipment	$	(2,238	)	$	4,786

See accompanying notes to unaudited interim financial statements

ALLAKOS INC.

NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS

1. Organization and Business

Allakos Inc. (“Allakos” or the “Company”) was incorporated in the state of Delaware in March 2012. Allakos is a clinical stage biopharmaceutical company focused on the development of lirentelimab (AK002) and AK006 for the treatment of eosinophil and mast cell related diseases. The Company’s primary activities to date have included establishing its facilities, recruiting personnel, conducting research and development of its product candidates and raising capital. The Company’s operations are located in San Carlos, California. The Company operates in one reportable segment.

Since inception, the Company has incurred net losses and negative cash flows from operations. During the six months ended June 30, 2022, the Company incurred a net loss of $246.1 million and used $207.1 million of cash in operations. At June 30, 2022, the Company had an accumulated deficit of $859.0 million and does not expect to experience positive cash flows from operating activities in the foreseeable future. The Company has financed its operations to date primarily through the sale of common stock. Management expects to incur additional operating losses in the future as the Company continues to further develop, seek regulatory approval for and, if approved, commence commercialization of its product candidates.

Due to the clinical study results released in December 2021, our Board of Directors approved in February 2022 plans to reduce our contractual commitments and a reorganization plan (the “Reorganization Plan”) to reduce operating costs and better align our workforce with the clinical development plans of our business. As part of this, the Company entered into a termination agreement (the “Termination Agreement”) with Lonza AG, Lonza Sales Ltd and Lonza Sales AG (collectively, “Lonza AG”) regarding all outstanding manufacturing service agreements in February 2022.

2. Summary of Significant Accounting Policies

Basis of Presentation

The unaudited interim financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes.

The interim balance sheet as of June 30, 2022, the statements of operations and comprehensive loss, statements of stockholders’ equity and statements of cash flows for the six months ended June 30, 2022 and 2021 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the audited annual financial statements and reflect, in the opinion of management, all adjustments of a normal and recurring nature that are necessary for the fair presentation of the Company’s financial position as of June 30, 2022 and its results of operations and comprehensive loss for the three and six months ended June 30, 2022 and 2021 and its cash flows for the six months ended June 30, 2022 and 2021. Certain information and note disclosures normally included in annual audited financial statements prepared in accordance with U.S. GAAP have been omitted. The financial data and the other financial information disclosed in these notes to the interim financial statements are also unaudited. The results of operations for any interim period are not necessarily indicative of the results to be expected for the entire year or for any other future annual or interim period. The balance sheet as of June 30, 2022 included herein was derived from the audited financial statements as of that date. These interim financial statements should be read in conjunction with the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission (the “SEC”) on March 1, 2022.

Use of Estimates

Management uses significant judgment when making estimates related to common stock valuation and related stock-based compensation expense, accrued research and development expense, and lease-related assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates under different assumptions or conditions, and those differences could be material to the financial position and results of operations.

Concentration of Credit Risk and Other Risks and Uncertainties

Financial instruments that potentially subject the Company to credit risk principally consist of cash, cash equivalents and investments. These financial instruments are held in accounts at a single financial institution that management believes possesses high credit quality. Amounts on deposit with this financial institution have and will continue to exceed federally-insured limits. The Company has not experienced any losses on its cash deposits. Additionally, the Company’s investment policy limits its investments to certain types of securities issued by or backed by the U.S. government and its agencies.

The Company is subject to a number of risks similar to that of other early stage biopharmaceutical companies, including, but not limited to, the need to obtain adequate additional funding, possible failure of current or future clinical trials, its reliance on third-parties

to conduct its clinical trials, the need to obtain regulatory and marketing approvals for its product candidates, competitive developments, the need to successfully commercialize and gain market acceptance of the Company’s product candidates, its right to develop and commercialize its product candidates pursuant to the terms and conditions of the licenses granted to the Company, protection of proprietary technology, the ability to make milestone, royalty or other payments due under licensing agreements, and the need to secure and maintain adequate manufacturing arrangements with third-parties. If the Company does not successfully commercialize or partner its product candidates, it will be unable to generate product revenue or achieve profitability.

Cash, Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments with original maturities of three months or less from the date of purchase to be cash equivalents.

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Company’s balance sheets and which, in aggregate, represent the amounts reported in the accompanying statements of cash flows (in thousands):


	June 30,		December 31,
	2022		2021
Cash and cash equivalents	$	82,452	$	152,822
Restricted cash in other long-term assets		1,472		2,275
Total	$	83,924	$	155,097


	June 30,		December 31,
	2021		2020
Cash and cash equivalents	$	203,956	$	207,177
Restricted cash in other long-term assets		2,275		2,275
Total	$	206,231	$	209,452

Restricted cash at June 30, 2022 represents $1.5 million in security deposits for the lease of the Company’s facility in San Carlos, California. The security deposit is in the form of a letter of credit secured by restricted cash.

Investments

The Company invests in marketable securities, primarily securities issued by the United States government and its agencies. The Company’s investments are considered available-for-sale and are classified as current assets even when the stated maturities of the underlying securities exceed one year from the date of the current balance sheet being reported. This classification reflects management’s ability and intent to utilize proceeds from the sale of such investments to fund ongoing operations. Unrealized gains and losses are excluded from earnings and are reported as a component of accumulated other comprehensive gain. The cost of securities sold is determined using the specific-identification method. Interest earned and adjustments for the amortization of premiums and discounts on investments are included in interest income, net, on the statements of operations and comprehensive loss. Realized gains and losses and declines in fair value judged to be other than temporary, if any, on investments in marketable securities are included in other expense, net, on the statements of operations and comprehensive loss.

Going Concern

Cash, cash equivalents and investments, excluding restricted cash, at June 30, 2022 totaled $212.4 million, compared to $424.2 million at December 31, 2021. Management believes that existing cash, cash equivalents and investments will be sufficient for the Company to continue as a going concern for at least 12 months from the issuance date of these unaudited interim financial statements. Management’s view regarding sufficiency of cash and liquidity is primarily based on the Company’s operating plans and financial forecast. Management’s estimates as to how long it expects the Company’s cash, cash equivalents and investments to continue to fund operations is based on assumptions that may prove to be wrong, and the Company could use its available capital resources sooner than it currently expects.

Factors that may affect the Company’s capital needs include, but are not limited to:

•

the number, scope, and timing of clinical indications and clinical trials the Company decides to pursue;

•

the scope and costs of manufacturing activities;

•

the extent to which the Company acquires or in-licenses other product candidates and technologies, if any;

•

the cost, timing and outcome of regulatory review of the Company’s product candidates;

•

the cost and timing of establishing sales and marketing capabilities for product candidates receiving marketing approval, if any;

•

the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;

•

the Company’s efforts to enhance operational systems and ability to attract, hire and retain qualified personnel, including personnel to support the development of the Company’s product candidates; and

•

the costs associated with being a public company.

The Company intends to raise additional capital to support its ongoing and future clinical development and business operations. To the extent the Company raises additional funds through the sale of equity or convertible debt securities, the issuance of such securities will result in dilution to stockholders. There can be no assurance that sufficient funding will be available on favorable terms, or at all. The Company’s ability to raise additional capital may be adversely impacted by potential worsening of global economic conditions and volatility of financial markets in the United States and worldwide. If adequate funds are not available, the Company may be required to obtain funds by entering into collaboration, licensing or debt agreements on potentially unfavorable terms. If the Company is unable to raise funds on favorable terms, or at all, it may have to reduce its operating expenses and potentially delay, reduce or terminate some or all of its clinical development efforts, which would have a material adverse effect on the Company’s business, financial condition and results of operations.

Operating Leases

The Company accounts for its leases in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 842, “Leases” (“ASC 842”). Right-of-use assets represent the Company’s right to use an underlying asset over the lease term and include any lease payments made prior to the lease commencement date and are reduced by lease incentives. Lease liabilities represent the present value of the total lease payments over the lease term, calculated using the Company’s incremental borrowing rate. In determining the Company’s incremental borrowing rate, consideration is given to the term of the lease and the Company’s credit risk. The Company recognizes options to extend a lease when it is reasonably certain that it will exercise such extension. The Company does not recognize options to terminate a lease when it is reasonably certain that it will not exercise such early termination options. Lease expense is recognized on a straight-line basis over the expected lease term.

Accrued Research and Development Expense

Service agreements with contract development and manufacturing organizations (“CDMOs”), clinical contract research organizations (“CROs”) and clinical investigative sites comprise a significant component of the Company’s research and development activities. External costs for these vendors are recognized as the services are incurred. The Company accrues for expenses resulting from obligations under agreements with its third-parties for which the timing of payments does not match the periods over which the materials or services are provided to the Company. Accruals are recorded based on estimates of services received and efforts expended pursuant to agreements established with CDMOs, clinical CROs, clinical investigative sites and other outside service providers. These estimates are typically based on contracted amounts applied to the proportion of work performed and determined through analysis with internal personnel and external service providers as to the progress or stage of completion of the services.

The Company makes judgements and estimates in determining the accrual balance in each reporting period. In the event advance payments are made to a CDMO, clinical CRO, clinical investigative site or other outside service provider, the payments are recorded within prepaid expenses and other current assets or other long-term assets, as appropriate, and subsequently recognized as research and development expense when the associated services have been performed. As actual costs become known, the Company adjusts its liabilities and assets. Inputs, such as the extent of services received and the duration of services to be performed, may vary from the Company’s estimates, which will result in adjustments to research and development expense in future periods. Changes in these estimates that result in material changes to the Company’s accruals could materially affect the Company’s results of operations. The Company’s historical estimates have not been materially different from actual amounts recorded.

Research and Development Expense

Research and development costs are expensed as incurred. Research and development costs include, among others, consulting costs, salaries, benefits, travel, stock-based compensation, laboratory supplies and other non-capital equipment utilized for in-house research, allocation of facilities and overhead costs and external costs paid to third-parties that conduct research and development activities on the Company’s behalf. Costs to terminate commitments with third-party suppliers performing research and development activities and amounts incurred in connection with license agreements, including milestone payments, are also included in research and development expense.

Advance payments for goods or services to be rendered in the future for use in research and development activities are deferred and included in prepaid expenses, and other current assets or other long-term assets, as appropriate. The deferred amounts are expensed as the related goods are delivered or the services are performed.

Comprehensive Loss

Comprehensive loss is defined as the change in stockholders’ equity during a period from transactions and other events and circumstances from non-owner sources. The differences between net loss and comprehensive loss for the three and six months ended June 30, 2022 and 2021 are a result of unrealized gains and losses on the Company’s investments included in current assets on the Company’s balance sheets.

Net Loss per Share

The Company calculates basic net loss per share by dividing the net loss attributable to common stockholders by the weighted-average shares of common stock outstanding during the period. The Company calculates diluted net loss per share after giving consideration to all potentially dilutive securities outstanding during the period using the treasury-stock and if-converted methods, except where the effect of including such securities would be anti-dilutive. Because the Company has reported net losses since inception, the effect from potentially dilutive securities would have been anti-dilutive and therefore has been excluded from the calculation of diluted net loss per share.

Basic and diluted net loss per share was calculated as follows (in thousands, except per share data):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2022			2021			2022			2021
Numerator:
Net loss	$	(49,103	)	$	(57,209	)	$	(246,126	)	$	(112,767	)
Denominator:
Weighted-average shares of common stock outstanding, basic and diluted		54,798			53,669			54,742			53,429
Net loss per share, basic and diluted	$	(0.90	)	$	(1.07	)	$	(4.50	)	$	(2.11	)

The following table sets forth the potentially dilutive securities that have been excluded from the calculation of diluted net loss per share due to their anti-dilutive effect for the periods indicated (in thousands):


	Six Months Ended
	June 30,
	2022		2021
Options to purchase common stock		5,543		5,826
Unvested restricted stock units		4,839		1,021
Unvested performance stock units		3,809		—
Shares issuable under employee stock purchase plans		67		8
Total		14,258		6,855

Recently Issued and Adopted Accounting Pronouncements

The Company has reviewed recently issued accounting pronouncements and concluded they are either not applicable to the business or that no material effect is expected on the Company’s financial statements as a result of future adoption.

3. Fair Value Measurements

The Company measures and reports certain financial instruments as assets and liabilities at fair value on a recurring basis. The Company’s financial assets measured at fair value on a recurring basis were as follows (in thousands):


	June 30, 2022
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	80,736	$	—	$	—	$	80,736
Total cash equivalents		80,736		—		—		80,736
Investments:
U.S. treasuries		129,987		—		—		129,987
Total investments		129,987		—		—		129,987
Total cash equivalents and investments	$	210,723	$	—	$	—	$	210,723


	December 31, 2021
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	150,781	$	—	$	—	$	150,781
Total cash equivalents		150,781		—		—		150,781
Investments:
U.S. treasuries		271,416		—		—		271,416
Total investments		271,416		—		—		271,416
Total cash equivalents and investments	$	422,197	$	—	$	—	$	422,197

The Company evaluates transfers between levels at the end of each reporting period. There were no transfers of assets or liabilities between levels during the three and six months ended June 30, 2022 and 2021.

4. Investments

All investments were considered available-for-sale at June 30, 2022. The amortized cost, gross unrealized holding gains or losses, and fair value of the Company’s investments by major security type at June 30, 2022 and December 31, 2021 are summarized in the table below (in thousands):


	June 30, 2022
	Amortized Cost Basis		Unrealized Gains		Unrealized Losses			Fair Value
Available-for-sale securities:
U.S. treasuries classified as investments	$	130,247	$	—	$	(260	)	$	129,987
Total available-for-sale securities	$	130,247	$	—	$	(260	)	$	129,987


	December 31, 2021
	Amortized Cost Basis		Unrealized Gains		Unrealized Losses			Fair Value
Available-for-sale securities:
U.S. treasuries classified as investments	$	271,570	$	2	$	(156	)	$	271,416
Total available-for-sale securities	$	271,570	$	2	$	(156	)	$	271,416

The amortized cost of available-for-sale securities is adjusted for amortization of premiums and accretion of discounts to maturity. As of June 30, 2022 and December 31, 2021, the aggregate fair value of securities held by the Company in an unrealized loss position for less than twelve months was $130.0 million and $241.4 million, respectively. These securities had remaining maturities of less than one year. The Company has the intent and ability to hold such securities until recovery and has determined that there has been no material change to their credit risk. As a result, the Company determined it did not hold any investments with a credit loss at June 30, 2022 and December 31, 2021.

There were no material realized gains or losses recognized on the sale or maturity of available-for-sale securities during the three and six months ended June 30, 2022 and 2021, and as a result, there were no material reclassifications out of accumulated other comprehensive gain (loss) for the same periods.

5. Balance Sheet Components and Supplemental Disclosures

Property and Equipment, Net

Property and equipment, net, consisted of the following (in thousands):


	June 30,			December 31,
	2022			2021
Laboratory equipment	$	6,092		$	4,676
Furniture and office equipment		3,947			1,947
Capitalized software		4,062			—
Leasehold improvements		32,458			4,581
Construction-in-progress		—			37,704
		46,559			48,908
Less accumulated depreciation		(5,259	)		(5,808	)
Property and equipment, net	$	41,300		$	43,100

Depreciation and amortization expense for the three months ended June 30, 2022 and 2021 was $1.9 million and $0.4 million, respectively. Depreciation and amortization expense for the six months ended June 30, 2022 and 2021 was $4.1 million and $0.7 million, respectively. Assets included within construction-in-progress primarily related to leasehold improvements and other equipment relating to our new San Carlos headquarters and were placed into service during the first quarter of 2022.

Other Long-Term Assets

Other long-term assets were $11.8 million and $8.4 million as of June 30, 2022 and December 31, 2021, respectively. Other long-term assets at June 30, 2022 and December 31, 2021 included $8.6 million and $5.9 million in advance payments to CDMOs for development and manufacturing services to be provided more than one year from now.

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):


	June 30,		December 31,
	2022		2021
Accrued contract research and development expense	$	16,411	$	16,215
Accrued compensation and benefits expense		4,643		3,172
Current portion of operating lease liabilities		4,145		2,316
Other current liabilities		1,439		4,854
Total	$	26,638	$	26,557

6. Leases

Operating Leases

The Company’s lease obligations primarily relate to leased office and laboratory space under noncancelable operating leases. In accordance with ASC 842, the Company has performed an evaluation of its other contracts with vendors and has determined that, except for the leases described below, none of its other contracts contain a material lease.

2018 Redwood City Lease

In January 2018, the Company entered into an operating lease agreement for approximately 25,000 square feet of office and laboratory space in Redwood City, California (the “2018 Redwood City Lease”). The contractual term of the 2018 Redwood City Lease was 10.75 years beginning from the substantial completion and delivery of the premises, which occurred in November 2018, and originally terminating in July 2029.

The 2018 Redwood City Lease included monthly base rent amounts escalating over the term of the lease. In addition, the lessor provided for a tenant improvement allowance (“TIA”) of up to $1.4 million, which was fully utilized. The TIA was recorded as leasehold improvements, with offsetting adjustments recorded to the associated operating lease right of use asset included on the Company’s balance sheets as of December 31, 2021.

In November 2021 the Company entered into a lease termination agreement (the “Lease Termination Agreement”) with respect to the 2018 Redwood City Lease. Pursuant to the Lease Termination Agreement, the 2018 Redwood City Lease was terminated effective April 30, 2022. The Company accounted for this change in lease term as a modification of the original lease. As a result of the modification, the operating right-of-use asset and lease liability were remeasured during the fourth quarter of 2021.

During the second quarter of 2022, the landlord paid $1.1 million in connection with the early termination and upon satisfaction of all remaining conditions including the delivery of certain equipment and other assets related to the building.

2019 San Carlos Lease

In December 2019, the Company entered into an additional operating lease agreement for approximately 98,000 square feet of office and laboratory space in San Carlos, California (the “2019 San Carlos Lease”). The contractual term of the 2019 San Carlos Lease is 10.25 years from August 2021 until October 2031. The 2019 San Carlos Lease provides rent abatements and includes a one-time option to extend the lease term for five years. This option to extend the lease term was not determined to be reasonably certain and therefore has not been included in the Company’s calculation of the associated operating lease liability under ASC 842.

The 2019 San Carlos Lease includes monthly base rent amounts escalating over the term of the lease. In addition, the lessor provided for a TIA of up to $14.7 million, which was fully utilized and are recorded in lease obligations.

The Company utilized its incremental borrowing rate to calculate the present value of the lease payments for the 2019 San Carlos Lease based on information available on November 1, 2020, the lease commencement date for accounting purposes, which was the date the Company was deemed to have obtained control of the premises. Calculation of the operating lease liability also included estimated future TIA reimbursements that had not yet been received as of the lease commencement date. TIA reimbursements received subsequent to lease commencement date are recorded as reductions to the operating lease liability.

Classification of Operating Leases

The 2018 Redwood City Lease and the 2019 San Carlos Lease required security deposits of $0.8 million and $1.5 million, respectively, which the Company satisfied by establishing letters of credit secured by restricted cash. Restricted cash related to the Company’s lease agreements are recorded in other long-term assets or other current assets on the Company’s balance sheets depending on the timing in which the security deposit is expected to be returned. During the second quarter of 2022 and in accordance with the lease termination, the restrictions associated with the $0.8 million security deposit for the 2018 Redwood City Lease was released and such funds were recorded as cash and cash equivalents as of June 30, 2022.

Classification of the Company’s operating lease liabilities included on the Company's balance sheets at June 30, 2022 and December 31, 2021 was as follows (in thousands):


	June 30,		December 31,
	2022		2021
Operating lease liabilities
Current portion included in accrued expenses and other current liabilities	$	4,145	$	2,316
Operating lease liabilities, net of current portion		47,597		49,099
Total operating lease liabilities	$	51,742	$	51,415

The components of lease costs included in operating expenses in the Company’s statements of operations and comprehensive loss were as follows (in thousands):


	Three Months Ended				Six Months Ended June 30,
	June 30,				June 30,
	2022		2021		2022		2021
Operating lease costs	$	1,471	$	1,675	$	2,925	$	3,409
Variable costs		1,005		152		1,688		239
Total lease costs	$	2,476	$	1,827	$	4,613	$	3,648

Variable costs included in the table above represent amounts the Company pays related to property taxes, insurance, maintenance and repair costs.

Cash paid for amounts included in the measurement of the Company’s operating lease liabilities and presented within cash used in operating activities in the statements of cash flows was $3.4 million and $0.6 million for the six months ended June 30, 2022 and 2021, respectively.

Cash received for amounts related to tenant improvement allowances from lessors was $1.0 million and $5.1 million for the six months ended June 30, 2022 and 2021, respectively.

Operating Lease Obligations

Future lease payments required under operating leases included on the Company’s balance sheet at June 30, 2022 are as follows (in thousands):


Fiscal Year Ending December 31,
2022 (remaining 6 months)	$	4,687
2023		7,061
2024		7,273
2025		7,492
2026		7,716
Thereafter		40,679
Total future lease payments		74,908
Less:
Present value adjustment		23,166
Present value of future lease incentives		—
Operating lease liabilities	$	51,742

Operating lease liabilities are based on the net present value of the remaining lease payments over the remaining lease term. In determining the present value of lease payments, the Company used its incremental borrowing rate based on the information available at the lease commencement date. As of June 30, 2022, the weighted-average remaining lease term of the Company’s leases was 9.2 years and the weighted-average discount rate used to determine the operating lease liabilities included on the balance sheet was 8.5%.

As of June 30, 2022, the Company was not party to any lease agreements containing material residual value guarantees or material restrictive covenants.

7. Contingencies

In-Licensing Agreements

The Company has entered into exclusive and non-exclusive, royalty bearing license agreements with third-parties for certain intellectual property. Under the terms of the license agreements, the Company is obligated to pay milestone payments upon the achievement of specified clinical, regulatory and commercial milestones. Research and development expense associated with the Company’s milestone payments are recognized when such milestone has been achieved. Actual amounts due under the license agreements will vary depending on factors including, but not limited to, the number of products developed and the Company’s ability to further develop and commercialize the licensed products. The Company is also subject to future royalty payments based on sales of the licensed products. In-licensing payments to third-parties for milestones are recognized as research and development expense in the period of achievement.

The Company did not recognize any milestone expense for the three and six months ended June 30, 2022 and 2021. As of June 30, 2022, the Company has not incurred any royalty liabilities related to its license agreements, as product sales have not yet commenced.

Exclusive License Agreement with The Johns Hopkins University

In December 2013, the Company entered into a license agreement with The Johns Hopkins University (“JHU”) for a worldwide exclusive license to develop, use, manufacture and commercialize covered product candidates including lirentelimab, which was amended in September 2016. Under the terms of the agreement, the Company has made upfront and milestone payments of $0.7 million through June 30, 2022 and may be required to make aggregate additional milestone payments of up to $1.8 million. The Company also issued 88,887 shares of common stock as consideration under the JHU license agreement. In addition to milestone payments, the

Company is also subject to low single-digit royalties to JHU based on future net sales of each licensed therapeutic product candidate by the Company and its affiliates and sublicensees, with up to a low six-digit dollar minimum annual royalty payment.

Non-exclusive License Agreement with BioWa Inc. and Lonza Sales AG

In October 2013, the Company entered into a tripartite agreement with BioWa Inc. (“BioWa”), and Lonza Sales AG (“Lonza Sales”), for the non-exclusive worldwide license to develop and commercialize product candidates including lirentelimab that are manufactured using a technology jointly developed and owned by BioWa and Lonza Sales. Under the terms of the agreement, the Company has made milestone payments of $3.4 million through June 30, 2022 and may be required to make aggregate additional milestone payments of up to $38.0 million. In addition to milestone payments, the Company is also subject to minimum annual commercial license fees of $40,000 per year to BioWa until such time as BioWa receives royalty payments, as well as low single-digit royalties to BioWa and to Lonza Sales. Royalties are based on future net sales by the Company and its affiliates and sublicensees.

Indemnification Agreements

The Company has entered into indemnification agreements with certain directors and officers that require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. To date, except for the litigation described in the Legal Contingencies section below, no such matters have arisen and the Company does not believe that the outcome of any claims under indemnification arrangements will have a material adverse effect on its financial positions, results of operations or cash flows. Accordingly, the Company has not recorded a liability related to such indemnifications at June 30, 2022.

Legal Contingencies

On March 10, 2020, a putative securities class action complaint captioned Kim v. Allakos et al., No. 20-cv-01720 (N.D. Cal.) was filed in the United States District Court for the Northern District of California against the Company, its Chief Executive Officer, Dr. Robert Alexander, and its former Chief Financial Officer, Mr. Leo Redmond. The complaint asserts claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and seeks damages based on alleged material misrepresentations and omissions concerning its Phase 2 clinical trials of lirentelimab. The proposed class period is August 5, 2019, through December 17, 2019, inclusive. On August 28, 2020, the plaintiff filed an amended complaint, adding as defendants Adam Tomasi, the Company’s President and Chief Operating Officer, and Henrik Rasmussen, the Company’s former Chief Medical Officer. On March 31, 2022, the Court granted the defendants’ motion to dismiss, with leave to amend. On April 29, 2022, the plaintiffs filed a second amended complaint which extended the proposed class period from December 17, 2019 to December 21, 2021 and added additional claims related to the Company’s Phase 3 ENIGMA clinical trial. On June 13, 2022, the defendants filed a motion to dismiss the second amended complaint. Given the early stage of this litigation matter, the Company cannot reasonably estimate a potential future loss or a range of potential future losses, if any.

8. Stock-Based Compensation

Total stock-based compensation expense recognized is as follows (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
Research and development	$	4,870	$	4,246	$	9,305	$	9,309
General and administrative		6,891		7,151		13,848		14,442
Total	$	11,761	$	11,397	$	23,153	$	23,751

No income tax benefits for stock-based compensation expense have been recognized for the three and six months ended June 30, 2022 and 2021 as a result of the Company’s full valuation allowance applied to net deferred tax assets and net operating loss carryforwards.

Equity Incentive Plans

In July 2018, the Board of Directors adopted the 2018 Equity Incentive Plan (the “2018 Plan”). The 2018 Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock units (“RSUs”), stock appreciation rights, performance units and performance shares. The number of shares of common stock that may be issued under the 2018 Plan will automatically increase on each January 1, beginning with the fiscal year ending December 31, 2019, equal to the least of (i) 5,000,000 shares, (ii) 5% of the outstanding shares of common stock as of the last day of the preceding fiscal year or (iii) such other amount as the

Board of Directors may determine. Stock options and RSUs granted under the 2018 Plan generally vest over four years and expire no more than 10 years from the date of grant.

Following the IPO and upon the effectiveness of the 2018 Plan, the Company’s 2012 Equity Incentive Plan, as amended, (the “2012 Plan”), terminated and no further awards will be granted thereunder. All outstanding awards under the 2012 Plan will continue to be governed by their existing terms. Any shares subject to awards granted under the 2012 Plan that, on or after the termination of the 2012 Plan, expire or terminate and shares previously issued pursuant to awards granted under the 2012 Plan that, on or after the termination of the 2012 Plan, are forfeited or repurchased by the Company will be transferred into the 2018 Plan. As of June 30, 2022, the maximum number of shares that may be added to the 2018 Plan pursuant to the preceding sentence is 3,248,256 shares.

Prior to its termination, the 2012 Plan provided for the grant of stock options, stock appreciation rights, restricted stock and restricted stock units to employees, directors and consultants. Stock options granted under the 2012 Plan generally vest over four years and expire no more than 10 years from the date of grant.

Stock Options

The following weighted-average assumptions were used to calculate the fair value of stock options granted during the periods indicated:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2022			2021			2022			2021
Risk-free interest rate		2.76	%		1.01	%		2.61	%		0.91	%
Expected volatility		73.61	%		70.03	%		73.48	%		69.84	%
Expected dividend yield		—			—			—			—
Expected term (in years)		5.66			6.08			5.73			6.07

The Company’s stock option activity during the six months ended June 30, 2022 is summarized as follows (number of shares in thousands):


				Weighted-
				Average
	Options			Exercise
	Outstanding			Price
Balance at December 31, 2021		5,530		$	21.51
Granted		826		$	3.53
Exercised		(59	)	$	2.89
Expired		(511	)	$	22.48
Forfeited		(243	)	$	64.47
Balance at June 30, 2022		5,543		$	17.06
Options exercisable		4,379		$	14.77
Options vested and expected to vest		5,519		$	17.02

During the three and six months ended June 30, 2022 and 2021, the Company did not grant any stock options with performance-based or market-based vesting conditions.

As of June 30, 2022, total unrecognized stock-based compensation expense relating to unvested stock options was $16.4 million. This amount is expected to be recognized over a weighted-average period of 2.5 years.

Restricted Stock Units (“RSUs”)

RSU activity under the 2018 Plan during the six months ended June 30, 2022 is summarized as follows (in thousands, except per share data):


				Weighted-
				Average
				Grant Date
	Shares			Fair Value
Balance at December 31, 2021		1,506		$	93.14
Granted		4,391		$	5.53
Vested		(121	)	$	102.95
Forfeited		(937	)	$	52.23
Balance at June 30, 2022		4,839		$	21.32

The weighted-average fair value of RSUs granted during the six months ended June 30, 2022 and 2021 was $5.53 and $107.32, respectively.

As of June 30, 2022, total unrecognized stock-based compensation expense relating to unvested RSUs was $91.5 million and the weighted-average remaining vesting period was 3.0 years.

Performance-based Restricted Stock Units (“PSUs”)

PSU activity under the 2018 Plan during the six months ended June 30, 2022 is summarized as follows (in thousands, except per share data):


				Weighted-
				Average
				Grant Date
	Shares			Fair Value
Balance at December 31, 2021		113		$	79.60
Granted		4,124		$	5.57
Forfeited		(428	)	$	5.58
Balance at June 30, 2022		3,809		$	7.77

As of June 30, 2022, total unrecognized stock-based compensation expense relating to unvested PSUs was $29.6 million and the weighted-average remaining vesting period was 1.5 years.

Employee Stock Purchase Plan

In July 2018, the Company’s Board of Directors and stockholders approved the 2018 Employee Stock Purchase Plan (the “2018 ESPP”). At inception, the 2018 ESPP had a maximum number of 500,000 shares of common stock available. The number of shares of common stock that may be issued under the 2018 ESPP shall automatically increase on each January 1, beginning with the fiscal year ending December 31, 2019, equal to the least of (i) 1,000,000 shares, (ii) 1% of the outstanding shares of common stock as of the last day of the immediately preceding fiscal year and (iii) such other amount determined by the 2018 ESPP administrator. Under the 2018 ESPP, employees may purchase shares of the Company’s common stock at a price per share equal to 85% of the lower of the fair market value of the common stock on the first trading day of the offering period or on the exercise date. The 2018 ESPP provides for consecutive, overlapping 24-month offering periods, each of which will include four 6-month purchase periods. The Company’s first offering period under the 2018 ESPP commenced on July 18, 2018. During three and six months ended June 30, 2022, stock-based compensation expense related to the 2018 ESPP was $0.3 million and $0.5 million, respectively. During the three and six months ended June 30, 2021, stock-based compensation expense related to the 2018 ESPP was $0.3 million and $0.5 million, respectively.

9. Defined Contribution Plans

In January 2018, the Company established a defined contribution plan under Section 401(k) of the Internal Revenue Code (the “401(k) plan”). The 401(k) plan covers all employees who meet defined minimum age and service requirements. Employee contributions are voluntary and are determined on an individual basis, limited to the maximum amount allowable under U.S. federal tax regulations. The Company makes matching contributions of up to 4% of the eligible employees’ compensation to the 401(k) plan. During the three and six months ended June 30, 2022, the Company made contributions to the 401(k) plan of $0.2 million and $0.7 million, respectively. During the three and six months ended June 30, 2021, the Company made contributions to the 401(k) plan of $0.2 million and $0.5 million, respectively.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. These statements generally relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The following discussion and analysis contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our actual results and the timing of events may differ materially from those discussed in our forward-looking statements as a result of various factors, including those discussed below and those discussed in the section entitled “Risk Factors” included in this Quarterly Report on Form 10-Q. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. Additional information concerning these and other risks and uncertainties is contained in our other periodic filings with the SEC.

Forward-looking statements include, but are not limited to, statements about:

•

risks related to the COVID-19 pandemic;

•

our plans and ability to manufacture, or have manufactured, sufficient quantities of lirentelimab for preclinical studies and to conduct clinical trials and to eventually commercialize the product, and our reliance on third parties in relation to the foregoing;

•

the impact that the adoption of new accounting pronouncements will have on our financial statements;

•

the ability of our clinical trials to demonstrate safety and efficacy of our product candidates, and other positive results;

•

the timing and focus of our future clinical trials, and the reporting of data from those trials;

•

our plans relating to commercializing lirentelimab, if approved, including the geographic areas of focus and sales strategy;

•

the size of the market opportunity for lirentelimab in each of the diseases we are targeting;

•

the number of diseases represented in the patient population enrolled in our clinical trials, and our ability to evaluate response to treatment of lirentelimab in diseases other than the primary indication in our clinical trials;

•

our estimates of the number of patients in the United States who suffer from the diseases we are targeting and the number of patients that will enroll in our clinical trials;

•

the beneficial characteristics, safety, efficacy and therapeutic effects of lirentelimab;

•

the timing or likelihood of regulatory filings and approvals, including our expectation to seek special designations, such as orphan drug designation, for lirentelimab or our other product candidates for various diseases;

•

our ability to obtain and maintain regulatory approval of lirentelimab or our other product candidates;

•

our plans relating to the further development of lirentelimab and our other product candidates;

•

existing regulations and regulatory developments in the United States and other jurisdictions;

•

our plans and ability to obtain or protect intellectual property rights, including extensions of existing patent terms where available;

•

our continued reliance on third-parties to conduct additional clinical trials of lirentelimab and our other product candidates;

•

the need to hire additional personnel and our ability to attract and retain such personnel;

•

the accuracy of our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;

•

our financial performance;

•

the sufficiency of our existing cash, cash equivalents and investments to fund our future operating expenses and capital expenditure requirements; and

•

our anticipated uses of our existing cash, cash equivalents and investments.

These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including, but not limited to, those described in “Risk Factors”. In some cases, you can identify these statements by terms such as “anticipate,” “believe,”

“could,” “estimate,” “expects,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative of those terms, and similar expressions that convey uncertainty of future events or outcomes. These forward-looking statements reflect our beliefs and views with respect to future events and are based on estimates and assumptions as of the date of this Quarterly Report on Form 10-Q and are subject to risks and uncertainties. We discuss many of these risks in greater detail in the section entitled “Risk Factors” included in Part II, Item 1A and elsewhere in this Report. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We qualify all of the forward-looking statements in this Quarterly Report on Form 10-Q by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We are a clinical stage biotechnology company developing therapeutics which target immunomodulatory receptors present on immune effector cells involved in allergy, inflammatory and proliferative diseases. Our most advanced antibodies are lirentelimab (AK002) and AK006. Lirentelimab targets Siglec-8, an inhibitory receptor expressed selectively on eosinophils and mast cells. Lirentelimab has been studied in a number of human clinical studies and has shown the ability to deplete eosinophils inhibit mast cell activation, and improve patient reported symptoms. We are developing lirentelimab for the treatment of eosinophilic gastritis (“EG”) /eosinophilic duodenitis (“EoD”), eosinophilic esophagitis (“EoE”), atopic dermatitis, chronic spontaneous urticaria and potentially additional indications. AK006 targets Siglec-6, an inhibitory receptor selectively expressed on mast cells. AK006 appears to have the potential to provide deeper mast cell inhibition than lirentelimab and, in addition to its inhibitory activity, reduce mast cell numbers. We plan to begin human studies with AK006 in the first half of 2023.

Lirentelimab selectively targets both mast cells and eosinophils, two types of white blood cells that are widely distributed in the body and play a central role in the inflammatory response. Inappropriately activated mast cells and eosinophils have been identified as key drivers in a number of severe diseases affecting the gastrointestinal tract, eyes, skin, lungs and other organs. To date, we have completed a randomized, double-blind, placebo-controlled Phase 2 study (ENIGMA 1) and Phase 3 study (ENIGMA 2) of lirentelimab in patients with EG and/or EoD, a Phase 2/3 study in patients with EoE (KRYPTOS), as well as proof of concept studies in chronic spontaneous urticaria, severe allergic conjunctivitis, and indolent systemic mastocytosis. Lirentelimab has received orphan disease status for EG, EoD, and EoE from the U.S. Food and Drug Administration (the “FDA”).

The Phase 2 EG and/or EoD study with lirentelimab (ENIGMA 1) met all prespecified primary and secondary endpoints when compared to placebo and results were published in The New England Journal of Medicine. More recently, the ENIGMA 2 study met the histologic co-primary endpoint but failed to meet the symptomatic co-primary endpoint when compared to placebo in the fourth quarter of 2021. Similarly, the KRYPTOS study met the histologic co-primary endpoint but failed to meet the symptomatic co-primary endpoint when compared to placebo. After conducting post-hoc analyses, we believe that the trials missed their symptomatic co-primary endpoints due to the inclusion of mild patients and/or patients who had not failed standard of care. Although post-hoc analyses cannot be used to establish efficacy, these analyses can be helpful in generating hypothesis for future clinical studies. Based on these analyses, we believe that lirentelimab may have potential to treat the more severe EG/EoD and EoE patient populations. As a result, and pending agreement with the FDA on trial design and our ability to appropriately fund these studies, we plan to conduct additional studies with lirentelimab.

Beyond EoE, EG and EoD, additional lirentelimab clinical testing is ongoing or planned. Allakos initiated a randomized, double-blind, placebo controlled Phase 2 clinical trial of subcutaneous (SC) lirentelimab in adult patients with moderate-to-severe atopic dermatitis. We also announced plans to initiate a randomized, double-blind, placebo-controlled trials of SC lirentelimab in patients with chronic spontaneous urticaria in the third quarter of 2022. Both diseases are complex, chronic inflammatory skin diseases believed to be driven by activated eosinophils and mast cells.

Since our inception in 2012, we have devoted substantially all of our resources and efforts towards the research and development of our product candidates. Our lead product candidate, lirentelimab, a monoclonal antibody targeting Siglec-8, entered clinical trials in 2016. In addition to activities conducted internally at our facilities, we have utilized significant financial resources to engage contractors, consultants and other third parties to conduct various preclinical and clinical development activities on our behalf.

To date, we have not had any products approved for sale and have not generated any revenue nor been profitable. Further, we do not expect to generate revenue from product sales until such time, if ever, that we are able to successfully complete the development and obtain marketing approval for one of our product candidates. We will continue to require additional capital to develop our product candidates and fund operations for the foreseeable future. We have incurred significant operating losses to date and expect to incur

significant operating losses for the foreseeable future. Our net losses were $246.1 million and $112.8 million for the six months ended June 30, 2022 and 2021, respectively. As of June 30, 2022, we had an accumulated deficit of $859.0 million.

In February 2022, we began implementing a reorganization plan (the “Reorganization Plan”) to reduce operating costs, contractual commitments and better align our workforce with the clinical development plans of our business. As a result, we entered into a termination agreement (the “Termination Agreement”) with Lonza AG, Lonza Sales Ltd and Lonza Sales AG (collectively, “Lonza AG”) regarding all outstanding manufacturing service agreements and reduced our workforce by approximately 35%. While this will result in increased near-term costs, primarily in the first and second quarters of 2022, we believe that the Reorganization Plan will reduce our overall spending in subsequent quarters subject to periodic fluctuations caused by the timing of ongoing manufacturing development efforts.

As of June 30, 2022, we had cash, cash equivalents and investments of $212.4 million, which we believe will be sufficient to fund our planned operations for at least the next 12 months from the issuance of our financial statements.

Vendor Termination Agreement

Approximately $231.2 million of the $284.8 million total noncancellable purchase obligations as of December 31, 2021 related to various manufacturing services agreements with Lonza AG or affiliates (such agreements, the “MSAs”). On February 14, 2022 (the “Effective Date”), we entered into the Termination Agreement with Lonza AG regarding all outstanding MSAs. Lonza AG will continue to provide certain services to us, including completion of cGMP batches already underway and other services to assist with the transition post-termination. The Termination Agreement provides that we shall pay 126 million Swiss Francs, approximately $137 million (the “Termination Amount”) to Lonza AG, as a result of such termination. In accordance with the terms of the Termination, we paid 95% of the Termination Amount (approximately $130 million) during the first quarter of 2022. The remaining 5% (approximately $7 million) is to be paid within 30 days of the release of the remaining cGMP batches expected to occur around the middle of 2022. The Termination Agreement contains mutual releases by all parties thereto, for all claims known and unknown, relating and arising out of, or connected with, the MSAs and the subject matter(s) thereof, subject to certain exceptions.

As the agreement was terminated on February 14, 2022, we recognized the costs associated with the Termination Agreement during the first quarter of 2022 in accordance with ASC 420 except for approximately $6.0 million attributed to services remaining to be rendered by Lonza AG and therefore to be expensed in future periods as the services are performed.

In addition, Lonza AG held or had placed orders for raw materials to be used in the course of services Lonza AG was providing us. Pursuant to the Termination Agreement, the cost of such raw materials was included in the Termination Amount. We have been working on repurposing those items by using at alternative locations, reselling or otherwise returning to the extent possible. The raw materials were expensed as they were intended for research and development purposes. Any proceeds from any refund or sale of raw materials will be recognized as a benefit to Research and Development Expenses in the quarter in which the sale or refund occurs.

Reorganization Plan

Under the Reorganization Plan, we reduced our workforce by approximately 35%. Impacted employees received notice that their positions will be eliminated on February 16, 2022. At the time of departure, impacted employees were eligible to receive severance benefits and we funded COBRA premiums, contingent upon an impacted employee’s execution (and non-revocation) of a customary separation agreement, which includes a general release of claims against us.

In connection with the Reorganization Plan, we recognized restructuring charges of approximately $5.2 million during the first quarter of 2022, related to severance payments and other employee-related separation costs. We may also incur additional costs not currently contemplated due to events that may occur as a result of, or that are associated with, the reduction in workforce.

In addition, the Board determined that it was in the best interests of us and our stockholders to put in place arrangements designed to provide that we will have the continued dedication and commitment of those employees, including executives, determined to be key to the planned go-forward operations. The Board approved, and management implemented, a retention program for employees remaining which includes cash retention bonuses totaling $3.1 million for certain retained employees and grants of RSUs totaling 8.2 million awards in aggregate to all employees. Half of these RSUs are time-based RSUs with four-year vesting and half are performance-based with full vesting occurring only if we achieve all primary endpoints in any of its Phase 2/3 clinical studies other than the Phase 3 Eosinophilic Duodenitis study expected to readout data in Q3 2022. The cash retention bonuses are required to be repaid in full if the employee leaves prior to December 31, 2023. As a result, these cash retention bonuses are being amortized over the requisite service period, with $0.4 million and $0.5 million in expense recorded during the three and six months ended June 30, 2022.

Components of Operating Results

Revenue

We have not generated any revenue from product sales or otherwise, and do not expect to generate any revenue for at least the next several years.

Operating Expenses

We classify operating expenses into two categories: (i) research and development and (ii) general and administrative.

Research and Development Expenses

Research and development expenses represent the following costs incurred by us for the discovery, development and manufacturing of our product candidates:

•

consultant and personnel-related costs including consulting fees, employee salaries and benefits, travel and stock-based compensation expense;

•

costs incurred under service agreements with contract research organizations (“CROs”) that conduct nonclinical research and development activities on our behalf;

•

costs incurred under service agreements with clinical CROs and clinical investigative sites to conduct our clinical studies;

•

costs incurred under service agreements with contract development and manufacturing organizations (“CDMOs”) for the manufacture and fill finish of our product candidates, as well as any costs required to cancel any related purchase obligations;

•

costs related to in-house research and development activities conducted at our facilities including laboratory supplies, non-capital laboratory equipment and depreciation of capital laboratory equipment and leasehold improvements;

•

costs incurred under exclusive and non-exclusive license agreements with third-parties; and

•

allocated facility and other costs including the rent and maintenance of our facilities, insurance premiums, depreciation of shared-use leasehold improvements and general office supplies.

We expense research and development costs as incurred. We recognize costs for certain development activities, such as clinical trials, based on an evaluation of the progress to completion of specific tasks using data such as clinical site activations, patient enrollment or information provided to us by our clinical CROs and clinical investigative sites, along with analysis by our in-house clinical operations personnel. Advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized as prepaid expenses, even when there is no alternative future use for the research and development. The capitalized amounts are expensed as the related goods are delivered or the services are performed.

Prior to the regulatory approval of our product candidates, we recognize expenses incurred with our CDMOs for the manufacture of product candidates that could potentially be available to support future commercial sales, if approved, in the period in which they have occurred. To date, we have not yet capitalized any costs to inventory as we are unable to determine if these costs will provide a future economic benefit, given the unapproved nature of our product candidates.

The successful development of our product candidates is highly uncertain. Accordingly, it is difficult to estimate the nature, timing and extent of costs necessary to complete the remainder of the development of our product candidates. We are also unable to predict when, if ever, we will be able to generate revenue from our product candidates. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty surrounding:

•

demonstrating sufficient safety and tolerability profiles of product candidates;

•

successful enrollment and completion of clinical trials;

•

requisite clearance and approvals from applicable regulatory authorities;

•

establishing and maintaining commercial manufacturing capabilities with CDMOs;

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obtaining and maintaining protection of intellectual property; and

•

commercializing product candidates, if and when approved, alone or in collaboration with third-parties.

A change pertaining to any of these variables would significantly impact the timing and extent of costs incurred with respect to the development and commercialization of our product candidates.

External costs incurred from CDMOs, clinical CROs and clinical investigative sites have comprised a significant portion of our research and development expenses since inception. We track these costs on a program-by-program basis following the advancement of a product candidate into clinical development. Consulting and personnel-related costs, laboratory supplies and non-capital equipment utilized in the conduct of in-house research, in-licensing fees and general overhead, are not tracked on a program-by-program basis, nor are they allocated, as they commonly benefit multiple projects, including those still in our pipeline.

We anticipate that our research and development expenses will fluctuate from quarter-to-quarter in the future, primarily driven by the timing of costs associated with the manufacturing of our lead product candidate, lirentelimab, as we refine the frequency and increase the scale of our manufacturing batches, including raw material costs. Additionally, we expect costs to fluctuate from quarter-to-quarter associated with our ongoing and future early, mid and late-stage clinical trials for various indications.

General and Administrative Expenses

General and administrative expenses consist of fees paid to consultants, salaries, benefits and other personnel-related costs, including stock-based compensation, for our personnel in executive, finance, accounting and other administrative functions, legal costs, fees paid for accounting and tax services, costs associated with pre-commercialization activities and facility costs not otherwise included in research and development expenses. Legal costs include general corporate and patent legal fees and related costs.

We anticipate that our general and administrative expenses will fluctuate from quarter-to-quarter in the future to support our continued research and development activities, as well as progress on our preliminary commercial development activities, including costs related to personnel, outside consultants, attorneys and accountants, stock-based compensation, among others. Additionally, we expect to incur costs associated with continuing to operate as a public company, including expenses related to maintaining compliance with the rules and regulations of the SEC, and those of any national securities exchange on which our securities are traded, additional insurance premiums, investor relations activities and other ancillary administrative and professional services.

Interest Income

Interest income primarily consists of interest and investment income earned on our cash, cash equivalents and investments included on the balance sheets.

Other Expense, Net

Other expense, net, primarily consists of amounts realized from gains and losses related to fluctuations in foreign currencies.

In-Licensing Agreements

We have entered into a number of exclusive and nonexclusive, royalty bearing license agreements with third-parties for certain intellectual property. Under the terms of the license agreements described below, we are obligated to pay milestone payments upon the achievement of specified clinical, regulatory and commercial milestones. Research and development expense associated with our milestone payments are recognized when such milestone has been achieved. Actual amounts due under the license agreements vary depending on factors including, but not limited to, the number of product candidates we develop and our ability to successfully develop and commercialize our product candidates covered under the respective agreements. In addition to milestone payments, we are also subject to future royalty payments based on sales of our product candidates covered under the agreements, as well as certain minimum annual royalty and commercial reservation fees. Because the achievement of milestones and the timing and extent of future royalties is not probable, these contingent amounts have not been included on our balance sheets or as part of Contractual Obligations and Commitments discussion below.

We did not incur any milestone expense for the three and six months ended June 30, 2022 and 2021. As of June 30, 2022, we have not incurred any royalty liabilities related to our license agreements, as product sales have not yet commenced.

Exclusive License Agreement with The Johns Hopkins University

In December 2013, we entered into a license agreement with JHU for a worldwide exclusive license to develop, use, manufacture and commercialize covered product candidates including lirentelimab, which was amended in September 2016. Under the terms of the agreement, we have made upfront and milestone payments of $0.7 million through June 30, 2022. We may be required to make aggregate additional milestone payments of up to $1.8 million. We also issued 88,887 shares of common stock as consideration under the JHU

license agreement. In addition to milestone payments, we are also subject to low single-digit royalties to JHU based on future net sales of each licensed therapeutic product candidate by us and our affiliates and sublicensees, with up to a low six-digit dollar minimum annual royalty payment.

Non-exclusive License Agreement with BioWa Inc. and Lonza Sales AG

In October 2013, we entered into a tripartite agreement with BioWa and Lonza Sales for the non-exclusive worldwide license to develop and commercialize product candidates including lirentelimab that are manufactured using a technology jointly developed and owned by BioWa and Lonza Sales. Under the terms of the agreement, we have made milestone payments of $3.4 million through June 30, 2022 and we may be required to make aggregate additional milestone payments of up to $38.0 million. In addition to milestone payments, we are also subject to minimum annual commercial license fees of $40,000 per year to BioWa until such time as BioWa receives royalty payments, as well as low single-digit royalties to BioWa and to Lonza Sales. Royalties are based on future net sales by us and our affiliates and sublicensees.

Critical Accounting Policies and Use of Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts and experience. During the three and six months ended June 30, 2022, there were no other changes to our critical accounting policies and estimates as disclosed in our 2021 Annual Report on Form 10-K.

Recent Accounting Pronouncements

See Note 2 to our unaudited financial statements for recently issued accounting pronouncements, including the respective effective dates of adoption and effects on our results of operations and financial condition.

Results of Operations

Comparison of the Three Months Ended June 30, 2022 and 2021

The following table summarizes our results of operations for the periods indicated (in thousands):


	Three Months Ended June 30,
	2022			2021
Operating expenses
Research and development	$	34,448		$	40,985
General and administrative		14,669			16,210
Total operating expenses		49,117			57,195
Loss from operations		(49,117	)		(57,195	)
Interest income		104			103
Other expense, net		(90	)		(117	)
Net loss		(49,103	)		(57,209	)
Unrealized gain (loss) on investments		209			(56	)
Comprehensive loss	$	(48,894	)	$	(57,265	)

Research and Development Expenses

Research and development expenses were $34.4 million for the three months ended June 30, 2022 compared to $41.0 million for the three months ended June 30, 2021, a decrease of $6.6 million. The period-over-period decrease in research and development expenses was primarily due to a $9.9 million decrease in contract research and development and clinical costs primarily relating to lirentelimab (AK002). This was offset by increases of $3.1 million of equipment and overhead related costs primarily due to the new corporate facility and $0.2 million in professional services and other research and development expenses.

General and Administrative Expenses

General and administrative expenses were $14.7 million for the three months ended June 30, 2022 compared to $16.2 million for the three months ended June 30, 2021, an decrease of $1.5 million. The period-over-period decrease in general and administrative expenses was primarily due to decreases of $0.6 million in equipment and overhead related costs, $0.4 million in personnel-related costs and $0.5 million in other general and administrative expenses.

Interest Income

Interest income was $0.1 million for each of the three months ended June 30, 2022 and 2021.

Other Expense, Net

Other expense, net was $0.1 million for each of the three months ended June 30, 2022 and 2021.

Net Loss

Net loss was $49.1 million for the three months ended June 30, 2022 compared to net loss of $57.2 million for the three months ended June 30, 2021. Total stock-based compensation, depreciation and amortization expense for the three months ended June 30, 2022 and 2021 was $13.7 million and $11.8 million, respectively.

Comparison of the six months ended June 30, 2022 and 2021

The following table summarizes our results of operations for the periods indicated (in thousands):


	Six Months Ended June 30,
	2022			2021
Operating expenses
Research and development	$	211,255		$	79,900
General and administrative		33,513			32,880
Total operating expenses		244,768			112,780
Loss from operations		(244,768	)		(112,780	)
Interest income		187			233
Other expense, net		(1,545	)		(220	)
Net loss		(246,126	)		(112,767	)
Unrealized gain (loss) on investments		(107	)		24
Comprehensive loss	$	(246,233	)	$	(112,743	)

Research and Development Expenses

Research and development expenses were $211.3 million for the six months ended June 30, 2022 compared to $79.9 million for the six months ended June 30, 2021, an increase of $131.4 million. The first quarter of 2022 includes $4.6 million of costs as a result of the Reorganization Plan. Additionally, the period-over-period increase in research and development expenses included $133.9 million related to the Lonza AG Termination Agreement and an additional $6.2 million in overhead and lab related costs primarily due to the new corporate facility. This was offset by a decrease of $11.0 million of contract research and development and clinical costs primarily relating to lirentelimab (AK002) after excluding the costs associated with the Lonza AG Termination Agreement, a decrease of $0.4 million in personnel-related costs after excluding the costs relating to the Reorganization Plan and a decrease of $1.9 million in professional services and other research and development expenses.

General and Administrative Expenses

General and administrative expenses were $33.5 million for the six months ended June 30, 2022 compared to $32.9 million for the six months ended June 30, 2021, an increase of $0.6 million. The period-over-period increase in general and administrative expenses was primarily due to $4.3 million related to costs as a result of the Reorganization Plan incurred in the first quarter of 2022. This was offset by decreases of $1.5 million in other personnel-related costs, $1.1 million in equipment and overhead expenses and $1.1 million in marketing and other general and administrative expenses.

Interest Income

Interest income was $0.2 million for each of the six months ended June 30, 2022 and 2021.

Other Expense, Net

Other expense, net was $1.5 million for the six months ended June 30, 2022 compared to other expense, net of $0.2 million for the six months ended June 30, 2021. The fluctuation was primarily attributed to foreign currency charges associated with payments made under the Termination Agreement with Lonza AG was recognized during the six months ended June 30, 2022.

Net Loss

Net loss was $246.1 million for the six months ended June 30, 2022 compared to net loss of $112.8 million for the six months ended June 30, 2021. Total stock-based compensation, depreciation and amortization expense for the six months ended June 30, 2022 and 2021 was $27.2 million and $24.5 million, respectively.

Liquidity and Capital Resources

Sources of Liquidity

As of June 30, 2022, we had cash, cash equivalents and investments of $212.4 million. Based on our existing business plan, we believe that our current cash, cash equivalents and investments will be sufficient to fund our anticipated level of operations through at least the next 12 months from the issuance of our financial statements.

We are a clinical stage biotechnology company with a limited operating history. As a result of our significant research and development expenditures, we have generated net losses since our inception. We have financed our operations primarily through equity offerings.

July 2018 Initial Public Offering

On July 23, 2018, we completed an IPO, selling 8,203,332 shares of common stock at $18.00 per share (the “July 2018 IPO”). Proceeds from our July 2018 IPO, net of underwriting discounts and commissions, were $137.3 million. Concurrently with our July 2018 IPO, we completed a private placement of 250,000 shares of common stock at $18.00 per share to an existing stockholder. Proceeds from this private placement were $4.5 million.

In connection with the completion of the July 2018 IPO, all then outstanding shares of convertible preferred stock converted into 30,971,627 shares of common stock.

August 2019 Follow-On Offering

On August 9, 2019, we closed an underwritten public offering (the “August 2019 Offering”) under our shelf registration statement on Form S-3 (File No. 333-233018) pursuant to which we sold an aggregate of 5,227,272 shares of our common stock at a public offering price of $77.00 per share. We received aggregate net proceeds of $377.5 million, after deducting the underwriting discounts and commissions and offering expenses.

November 2020 Follow-On Offering

On November 2, 2020, we closed an underwritten public offering (the “November 2020 Offering”) under our shelf registration statement on Form S-3 (File No. 333-233018) pursuant to which we sold an aggregate of 3,506,098 shares of our common stock at a public offering price of $82.00 per share. We received aggregate net proceeds of $271.7 million, after deducting the underwriting discounts and commissions.

Summary Cash Flows

Comparison of the six months ended June 30, 2022 and 2021

The following table summarizes the primary sources and uses of our cash, cash equivalents, and restricted cash for the periods indicated (in thousands):


	Six Months Ended June 30,
	2022			2021
Net cash used in operating activities	$	(207,057	)	$	(96,041	)
Net cash provided by investing activities		135,471			87,237
Net cash provided by financing activities		413			5,583
Net increase in cash, cash equivalents and restricted cash	$	(71,173	)	$	(3,221	)

Cash Used in Operating Activities

Net cash used in operating activities was $207.1 million for the six months ended June 30, 2022, which was primarily attributable to our net loss of $246.1 million adjusted for net noncash charges of $29.8 million and net changes in operating assets and liabilities of $9.2 million. Noncash charges included approximately $23.2 million in stock-based compensation expense, $4.1 million in depreciation and amortization expense, $1.6 million in amortization of premiums and discounts on investments and $1.0 million in noncash lease expense.

Net cash used in operating activities was $96.0 million for the six months ended June 30, 2021, which was primarily attributable to our net loss of $112.8 million adjusted for net noncash charges of $27.3 million and net changes in operating assets and liabilities of $10.5 million. Noncash charges included approximately $23.8 million in stock-based compensation expense, $1.5 million in noncash lease expense, $1.2 million in amortization of premiums and discounts on investments and $0.8 million in depreciation and amortization expense.

Cash Provided by Investing Activities

Net cash provided by investing activities was $135.5 million for the six months ended June 30, 2022, which consisted of $140.0 million in proceeds from maturities of investments, $20.0 million in proceeds from sales of investments and $1.2 million in proceeds

from the sale of property and equipment, partially offset by $20.0 million for the purchases of investments and $5.7 million for the purchases of property and equipment.

Net cash provided by investing activities was $87.2 million for the six months ended June 30, 2021, which consisted of $310.0 million in proceeds from maturities of investments, partially offset by $215.5 million for the purchases of investments and $7.3 million for the purchases of property and equipment.

Cash Provided by Financing Activities

Net cash provided by financing activities was $0.4 million for the six months ended June 30, 2022 primarily related to proceeds received from employees for the exercise of stock options and the purchase of common stock through the 2018 ESPP.

Net cash provided by financing activities was $5.6 million for the six months ended June 30, 2021 primarily related to proceeds of $4.6 million received from employees for the exercise of stock options and $1.0 million received from employees for the purchase of common stock through the 2018 ESPP.

Funding Requirements

As of June 30, 2022, we had cash, cash equivalents and investments, excluding restricted cash, of $212.4 million, which we believe will be sufficient to fund our planned operations for at least the next 12 months from the issuance date of our unaudited interim financial statements included elsewhere in this Quarterly Report on Form 10-Q. We will continue to require additional capital to develop our product candidates and fund operations for the foreseeable future. We intend to seek to raise funding from time to time through private or public equity or debt financings, or other sources such as strategic collaborations. Adequate additional funding may not be available to us on acceptable terms or at all. Our failure to raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue our business strategies.

The timing and amount of our capital expenditures will depend on many factors, including:

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the number, scope, and timing of clinical indications and clinical trials we decide to pursue;

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the scope and costs of manufacturing activities;

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the extent to which we acquire or in-license other product candidates and technologies, if any;

•

the cost, timing and outcome of regulatory review of our product candidates;

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the cost and timing of establishing sales and marketing capabilities for product candidates receiving marketing approval, if any;

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the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;

•

our efforts to enhance operational systems and our ability to attract, hire and retain qualified personnel, including personnel to support the development of our product candidates; and

•

the costs associated with being a public company.

If we are unable to raise additional funds when needed, we may be required to delay, reduce or terminate some or all of our development efforts. We may also be required to sell or license to others rights to our product candidates in certain territories or indications that we would prefer to develop and commercialize ourselves.

The issuance of additional equity securities may cause our stockholders to experience dilution. Future equity or debt financings may contain terms that are not favorable to us or our stockholders including debt instruments imposing covenants that restrict our operations and limit our ability to incur liens, issue additional debt, pay dividends, repurchase our common stock, make certain investments or engage in certain merger, consolidation, licensing or asset sale transactions.

Contractual Obligations and Commitments

Our contractual obligations and commitments relate primarily to our operating leases and non-cancelable purchase obligations under agreements with various research and development organizations and suppliers in the ordinary course of business.

In the normal course of business, we enter into contracts with clinical CROs, clinical investigative sites and other counterparties assisting with our preclinical studies and clinical trials. Such contracts are generally cancellable, with varying provisions regarding termination. In the event of a contract being terminated, we would only be obligated for services received as of the effective date of the

termination, along with cancellation fees, as applicable. Additionally, we have entered into agreements with certain vendors for the provision of goods and services, which includes development and manufacturing services with CDMOs. These agreements may include certain provisions for purchase obligations and termination obligations that could require payment for the cancellation of committed purchase obligations or for early termination of the agreements. The amounts of the cancellation or termination payments may vary and are based on the timing of the cancellation or termination and the specific terms of the agreements. We expect to enter into additional collaborative research, contract research, clinical and commercial manufacturing, and supplier agreements in the future, which may require significant upfront payments and long-term commitments of capital resources. Additionally, see Note 6, Leases, and Note 7, Contingencies, to our unaudited interim financial statements for further information relating to lease commitments, indemnification obligations and other commitments.

Off-Balance Sheet Arrangements

Since our inception, we have not entered into any off-balance sheet arrangements as defined in the rules and regulations of the SEC.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Sensitivity

We are exposed to market risk related to changes in interest rates. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments, including cash equivalents, are in money market funds that invest in U.S. Treasury obligations. The primary objective of our investment activities is to preserve capital to fund our operations. We also seek to maximize income from our investments without assuming significant risk. Due to the short-term maturities and low credit risk profile of our balances held in money market funds, a hypothetical 10% change in interest rates would not have a material effect on the fair market value of our cash equivalents and investments.

Foreign Currency Sensitivity

Our primary operations are transacted in U.S. Dollars, however, certain service agreements with third parties are denominated in currencies other than the U.S. Dollar, primarily the British Pound and Euro. As such, we are subject to foreign exchange risk and therefore, fluctuations in the value of the U.S. Dollar against the British Pound and Euro may impact the amounts reported for expenses and obligations incurred under such agreements. We do not currently engage in any hedging activity to reduce our potential exposure to currency fluctuations, although we may choose to do so in the future. Excluding the portion of the Termination Amount paid during the six months ended June 30, 2022, a hypothetical 10% change in foreign exchange rates during any of the periods presented would not have had a material impact on our financial condition or results of operations.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. As of June 30, 2022, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures were effective at a reasonable assurance level.

Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

As a result of COVID-19, including the related stay-at-home and shelter-in-place orders mandated by state and local governments in which we operate, most of our employees, including those responsible for financial reporting, have or continue to work remotely a significant amount of time. As part of our Company’s transition to a hybrid/remote workforce, we took precautionary actions to re-evaluate our financial reporting process to provide assurance that we could report our financial results accurately and timely. We will continue to monitor and assess new potential impacts of COVID-19 on the design and operating effectiveness of our internal controls going forward.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

Information on our legal proceedings is set forth in Note 7 to the Unaudited Interim Financial Statements included under Part I, Item 1.

Item 1A. Risk Factors.

Except as set forth below, our risk factors have not materially changed from those previously disclosed in Part 1, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021.

We have incurred significant net losses since inception and we expect to continue to incur significant net losses for the foreseeable future.

We have incurred net losses in each reporting period since our inception, have not generated any revenue to date and have financed our operations principally through the sale and issuance of common stock and preferred stock. Our net losses were $269.9 million for the year ended December 31, 2021 and $246.1 million for the six months ended June 30, 2022. As of June 30, 2022, we had an accumulated deficit of $859.0 million. We have devoted substantially all of our resources and efforts to research and development. Our lead compound, lirentelimab, is in clinical development, and our other product candidates are in preclinical development. As a result, we expect that it will be several years, if ever, before we generate revenue from product sales. Even if we succeed in receiving marketing approval for and commercializing one or more of our product candidates, we expect that we will continue to incur substantial research and development and other expenses in order to develop and market additional potential products.

We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. The net losses we incur may fluctuate significantly from quarter-to-quarter such that a period-to-period comparison of our results of operations may not be a good indication of our future performance. The size of our future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenue. Our prior losses and expected future losses have had and will continue to have an adverse effect on our working capital and our ability to achieve and maintain profitability.

We will require substantial additional capital to finance our operations. If we are unable to raise such capital when needed, or on acceptable terms, we may be forced to delay, reduce and/or eliminate one or more of our research and drug development programs or future commercialization efforts.

Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is a very time-consuming, expensive and uncertain process that takes years to complete. We expect our expenses to increase in connection with our ongoing activities, particularly as we conduct clinical trials of, and seek marketing approval for, lirentelimab and our other product candidates. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to drug sales, marketing, manufacturing and distribution. We have also incurred and expect to continue to incur significant costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in order to maintain our continuing operations. If we are unable to raise capital when needed or on acceptable terms, we may need to reevaluate our operating plan and may be forced to delay, reduce and/or eliminate one or more of our research and drug development programs or future commercialization efforts.

As of June 30, 2022, we had $212.4 million in cash, cash equivalents and investments. We believe that our existing cash, cash equivalents and investments will enable us to fund our operating expenses and capital expenditure requirements through at least the next 12 months. Our estimate as to how long we expect our existing cash, cash equivalents and investments to continue to fund our operations is based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Changing circumstances, some of which may be beyond our control, could cause us to consume capital significantly faster than we currently anticipate, and we may need to seek additional funds sooner than planned.

We plan to use our existing cash, cash equivalents and investments to fund our development of lirentelimab and for other research and development activities, working capital and other general corporate purposes. This may include additional research, hiring additional personnel, capital expenditures and the costs of operating as a public company. Advancing the development of lirentelimab and any other product candidates will require a significant amount of capital. Our existing cash, cash equivalents and investments will not be sufficient to fund all of the actions that are necessary to complete the development of lirentelimab or any of our other product candidates. We will be required to obtain further funding through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources, which may dilute our stockholders or restrict our operating activities. We do not have any committed external source of funds. Adequate additional financing may not be available to us on acceptable terms, or at all. Additionally, our ability to raise additional capital may be adversely impacted by potential worsening of global economic conditions and volatility of financial

markets in the United States and worldwide. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.

We are currently and may in the future be subject to securities litigation, which is expensive and could divert management attention.

The market price of our common stock may be volatile and, in the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We are currently and may in the future be the target of this type of litigation. For example, on March 10, 2020, a putative securities class action complaint captioned Kim v. Allakos et al., No. 20-cv-01720 (N.D. Cal.) was filed in the United States District Court for the Northern District of California against us, our Chief Executive Officer, Dr. Robert Alexander, and our former Chief Financial Officer, Mr. Leo Redmond. The complaint asserts claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and seeks damages based on alleged material misrepresentations and omissions concerning our Phase 2 clinical trials of lirentelimab. The proposed class period is August 5, 2019, through December 17, 2019, inclusive. This or other securities litigation against us could result in substantial costs and divert our management's attention from other business concerns, which could seriously harm our business. On March 31, 2022, the Court granted the defendants’ motion to dismiss, with leave to amend. On April 29, 2022, the plaintiffs filed a second amended complaint which extended the proposed class period from December 17, 2019 to December 21, 2021 and added additional claims related to our Phase 3 ENIGMA clinical trial. On June 13, 2022, the defendants filed a motion to dismiss the second amended complaint. This or other securities litigation against us could result in substantial costs and divert our management's attention from other business concerns, which could seriously harm our business.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Not applicable

Item 3. Defaults Upon Senior Securities.

Not applicable

Item 4. Mine Safety Disclosures.

Not applicable

Item 5. Other Information.

None

Item 6. Exhibits.

EXHIBIT INDEX


		Incorporated by Reference
Exhibit Number	Description	Form	File No.	Number	Filing Date
3.1	Amended and Restated Certificate of Incorporation of the Registrant.	8-K	001-38582	3.1	7/24/2018

3.2	Amended and Restated Bylaws of the Registrant.	8-K	001-38582	3.2	7/24/2018

10.1*#	Master Services Agreement, dated November 1, 2020, by and among Fujifilm Diosynth Biotechnologies UK Limited, Fujifilm Diosynth Biotechnologies Texas, LLC, Fujifilm Diosynth Biotechnologies U.S.A., Inc. and Biogen (Denmark) Manufacturing APS – a Fujifilm Diosynth Biotechnologies Group Company.

10.2	Separation Agreement, dated April 17, 2022, by and between Mark Asbury and Allakos Inc.	8-K	001-38582	10.1	4/20/2022

31.1*	Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*	Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS	Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH	Inline XBRL Taxonomy Extension Schema Document

101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document

104	The cover page for the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, has been formatted in Inline XBRL.

* Filed herewith.

** Furnished herewith.

# Portions of the exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K. A copy of any omitted portions will be furnished to the SEC upon request.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	Allakos Inc.

Date: August 4, 2022	By:	/s/ Robert Alexander
		Robert Alexander, Ph.D.
		Chief Executive Officer and Director (Principal Executive Officer)

Date: August 4, 2022	By:	/s/ H. Baird Radford, III
		H. Baird Radford, III
		Chief Financial Officer (Principal Financial and Accounting Officer)