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, 2021

OR

☐ 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.)
975 Island Drive, Suite 201 Redwood City, California	94065
(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.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

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 July 30, 2021, the registrant had 53,996,459 shares of common stock outstanding.

ALLAKOS INC.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION
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	26
Item 4.	Controls and Procedures	26
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60
Item 3.	Defaults Upon Senior Securities	60
Item 4.	Mine Safety Disclosures	60
Item 5.	Other Information	60
Item 6.	Exhibits	61
Signatures		62

1

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited).

allakos inc.

balance sheets

(in thousands, except per share data)

	June 30,			December 31,
	2021			2020
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	203,956		$	207,177
Investments in marketable securities		355,739			451,820
Prepaid expenses and other current assets		16,363			10,270
Total current assets		576,058			669,267
Property and equipment, net		25,034			8,345
Operating lease right-of-use assets		37,736			39,731
Other long-term assets		16,119			2,275
Total assets	$	654,947		$	719,618
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	15,663		$	13,960
Accrued expenses and other current liabilities		18,335			8,490
Total current liabilities		33,998			22,450
Operating lease liabilities, net of current portion		49,963			42,773
Total liabilities		83,961			65,223
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, $0.001 par value per share; 20,000 shares    authorized as of June 30, 2021 and December 31, 2020;    no shares issued and outstanding as of June 30, 2021    and December 31, 2020		—			—
Common stock, $0.001 par value per share; 200,000 shares    authorized as of June 30, 2021 and December 31, 2020;    53,936 and 53,081 shares issued and outstanding as of    June 30, 2021 and December 31, 2020, respectively		53			53
Additional paid-in capital		1,026,632			997,298
Accumulated other comprehensive gain		32			8
Accumulated deficit		(455,731	)		(342,964	)
Total stockholders’ equity		570,986			654,395
Total liabilities and stockholders’ equity	$	654,947		$	719,618

See accompanying notes to unaudited interim financial statements

2

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,
	2021			2020			2021			2020
Operating expenses
Research and development	$	40,985		$	28,346		$	79,900		$	46,631
General and administrative		16,210			12,058			32,880			23,646
Total operating expenses		57,195			40,404			112,780			70,277
Loss from operations		(57,195	)		(40,404	)		(112,780	)		(70,277	)
Interest income		103			1,284			233			3,273
Other expense, net		(117	)		(172	)		(220	)		(112	)
Net loss		(57,209	)		(39,292	)		(112,767	)		(67,116	)
Unrealized gain (loss) on marketable securities		(56	)		(1,219	)		24			650
Comprehensive loss	$	(57,265	)	$	(40,511	)	$	(112,743	)	$	(66,466	)
Net loss per common share:
Basic and diluted	$	(1.07	)	$	(0.80	)	$	(2.11	)	$	(1.38	)
Weighted-average number of common shares outstanding:
Basic and diluted		53,669			48,816			53,429			48,753

See accompanying notes to unaudited interim financial statements

3

Allakos Inc.

Statements of STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

	Common Stock				Additional Paid-In Capital		Accumulated Other Comprehensive Gain			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 marketable securities		—		—		—		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 marketable securities		—		—		—		(56	)		—			(56	)
Net loss		—		—		—		—			(57,209	)		(57,209	)
Balance at June 30, 2021		53,936	$	53	$	1,026,632	$	32		$	(455,731	)	$	570,986

	Common Stock				Additional Paid-In Capital		Accumulated Other Comprehensive Gain			Accumulated Deficit			Total Stockholders’ Equity
	Shares		Amount
Balance at December 31, 2019		48,668	$	48	$	685,020	$	137		$	(189,484	)	$	495,721
Stock-based compensation expense		—		—		7,489		—			—			7,489
Issuance of common stock upon exercise of stock options		57		—		33		—			—			33
Issuance of common stock upon 2018 ESPP purchase		40		—		756		—			—			756
Unrealized gain on marketable securities		—		—		—		1,869			—			1,869
Net loss		—		—		—		—			(27,824	)		(27,824	)
Balance at March 31, 2020		48,765	$	48	$	693,298	$	2,006		$	(217,308	)	$	478,044
Stock-based compensation expense		—		—		7,762		—			—			7,762
Issuance of common stock upon exercise of stock options		148		1		1,707		—			—			1,708
Issuance of common stock upon 2018 ESPP purchase		—		—		—		—			—			—
Unrealized loss on marketable securities		—		—		—		(1,219	)		—			(1,219	)
Net loss		—		—		—		—			(39,292	)		(39,292	)
Balance at June 30, 2020		48,913	$	49	$	702,767	$	787		$	(256,600	)	$	447,003

See accompanying notes to unaudited interim financial statements

4

Allakos Inc.

Statements of Cash Flows

(in thousands)

(unaudited)

	Six Months Ended
	June 30,
	2021			2020
Cash flows from operating activities
Net loss	$	(112,767	)	$	(67,116	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		747			777
Stock-based compensation		23,751			15,251
Net amortization of premiums and discounts on marketable securities		1,211			966
Noncash lease expense		1,541			142
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		(4,072	)		13
Other long-term assets		(13,844	)		—
Accounts payable		(2,034	)		3,654
Accrued expenses and other current liabilities		7,952			2,627
Operating lease liabilities, net of current portion		1,474			—
Net cash used in operating activities		(96,041	)		(43,686	)
Cash flows from investing activities
Purchases of marketable securities		(215,461	)		(90,010	)
Proceeds from maturities of marketable securities		310,000			246,800
Purchases of property and equipment		(7,302	)		(70	)
Net cash provided by investing activities		87,237			156,720
Cash flows from financing activities
Proceeds from exercise of stock options		4,588			1,741
Proceeds from issuance of common stock under the 2018 ESPP		995			756
Net cash provided by financing activities		5,583			2,497
Net increase (decrease) in cash, cash equivalents and restricted cash		(3,221	)		115,531
Cash, cash equivalents and restricted cash, beginning of period		209,452			40,642
Cash, cash equivalents and restricted cash, end of period	$	206,231		$	156,173
Supplemental disclosures
Noncash investing and financing items:
Lessor funded lease incentives included in property and equipment	$	5,348		$	—
Property and equipment purchased, not yet paid	$	4,786		$	—

See accompanying notes to unaudited interim financial statements

5

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) 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 Redwood City, California.

Liquidity Matters

Since inception, the Company has incurred net losses and negative cash flows from operations. During the six months ended June 30, 2021, the Company incurred a net loss of $112.8 million and used $96.0 million of cash in operations. At June 30, 2021, the Company had an accumulated deficit of $455.7 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. The Company had $559.7 million of cash, cash equivalents and marketable securities at June 30, 2021. Management believes that this amount is sufficient to fund the Company’s operations for at least the next 12 months from the issuance date of these financial statements.

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, 2021, the statements of operations and comprehensive loss, statements of stockholders’ equity and statements of cash flows for the six months ended June 30, 2021 and 2020 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, 2021 and its results of operations and comprehensive loss for the three and six months ended June 30, 2021 and 2020 and its cash flows for the six months ended June 30, 2021 and 2020. 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, 2021 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, 2021.

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 deferred tax valuation allowances. 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 marketable securities. 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 clinical 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

6

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,
	2021		2020
Cash and cash equivalents	$	203,956	$	207,177
Restricted cash in other long-term assets, deposit for lease facility		2,275		2,275
Total cash, cash equivalents and restricted cash	$	206,231	$	209,452

	June 30,		December 31,
	2020		2019
Cash and cash equivalents	$	153,898	$	38,367
Restricted cash in other long-term assets, deposit for lease facility		2,275		2,275
Total cash, cash equivalents and restricted cash	$	156,173	$	40,642

Restricted cash at June 30, 2021 represents $2.3 million in deposits for the lease of the Company’s facilities in Redwood City, California and San Carlos, California. Both security deposits are in the form of letters of credit secured by restricted cash. Restricted cash amounts are included within other long-term assets on the Company’s balance sheets.

Marketable Securities

The Company invests in marketable securities, primarily securities issued by the United States government and its agencies. The Company’s marketable securities 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.

Operating Leases

Effective January 1, 2019, the Company accounts for its leases in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 842, “Leases” (“ASC 842”). As part of this transition, the Company elected a number of optional practical expedients made available under the ASC 842 transition guidance including (i) carrying forward the Company’s historical lease classifications, (ii) foregoing of re-evaluation of historical contracts using ASC 842’s definition of a lease, (iii) foregoing a re-assessment of initial direct costs related to leases that existed prior to adoption, (iv) combining lease and non-lease components for all classes of assets, and (v) recognizing lease expense for all contracts with an initial term of 12 months or less within the statements of operations and comprehensive loss on a straight-line basis over the requisite lease term.

Under ASC 842, the Company accounts for its leases by recording right-of-use assets and lease liabilities on the Company’s balance sheets. 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.

7

Prior to the Company’s adoption of ASC 842, the Company accounted for its leases in accordance with FASB ASC 840, Leases (“ASC 840”). Under ASC 840, rent expense is recorded on a straight-line basis over the term of the lease. Differences that exist between cash rent payments and the recognition of rent expense, such as those resulting from rent abatements or contractual escalations of future lease payments, are recorded as a deferred rent liability and recognized as adjustments to rental expense on a straight-line basis over the term of the lease. The current portion of the deferred rent liability is included within accrued expenses and other current liabilities on the Company’s balance sheets with remainder included within operating lease liabilities, net of current portion. Tenant improvement allowances received are recorded as lease incentive obligations included in accrued expenses and other current liabilities and operating lease liabilities, net of current portion on the Company’s balance sheets and amortized to rent expense over the term of the lease.

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 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. 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 and other long-term assets. 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 (deficit) 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, 2021 and 2020 are a result of unrealized gains and losses on the Company’s investments in marketable securities 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.

8

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,
	2021			2020			2021			2020
Numerator:
Net loss	$	(57,209	)	$	(39,292	)	$	(112,767	)	$	(67,116	)
Denominator:
Weighted-average shares of common stock outstanding,    basic and diluted		53,669			48,816			53,429			48,753
Net loss per share, basic and diluted	$	(1.07	)	$	(0.80	)	$	(2.11	)	$	(1.38	)

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,
	2021		2020
Options to purchase common stock		5,826		7,016
Unvested restricted stock units		1,021		584
Shares issuable under employee stock purchase plans		8		24
Total		6,855		7,624

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.

Impact of Recent Legislation

In March 2020, the Coronavirus Aid, Relief and Economic Security Act (“the CARES Act”) was signed into law. The CARES Act includes provisions relating to several aspects of corporate income taxes. The Company does not currently expect the CARES Act to have a material impact on its income tax positions; however, it will continue to monitor the provisions of the CARES Act in relation to its operations.

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, 2021
	Level 1		Level 2		Level 3		Total
Cash equivalents
Money market funds	$	201,695	$	—	$	—	$	201,695