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Home›Spontaneous financing›ALLAKOS INC. Management report and analysis of the financial situation and operating results. (Form 10-K)

ALLAKOS INC. Management report and analysis of the financial situation and operating results. (Form 10-K)

By Roy George
March 2, 2022
9
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You should read the following discussion and analysis of our financial condition
and results of operations together with our financial statements and the other
financial information appearing elsewhere in this Annual Report on Form 10-K.
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 Annual Report on Form
10-K. 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 regarding:

•

risks related to the COVID-19 pandemic;

•

our plans and ability to manufacture, or cause to be manufactured, sufficient quantities of lirentelimab for preclinical studies and to conduct clinical trials and eventual commercialization of the product, and our dependence on third parties with respect to the foregoing ;

•

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

•

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

•

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

•

our plans for the commercialization of lrentelimab, if approved, including targeted geographies 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 assess the response to lirentelimab treatment in diseases other than the primary indication of 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 for lirentelimab or our other product candidates;

•

our plans for further development of lirentelimab and our other product candidates;

•

existing regulations and regulatory changes United States and other jurisdictions;

•

our plans and ability to obtain or secure intellectual property rights, including term extensions of existing patents, if any;

•

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 revenues, capital requirements and additional funding requirements;

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•
our financial performance;

•

the sufficiency of our existing cash, cash equivalents and marketable securities to fund our future operating expenses and capital expenditures; and

•

our intended uses of our cash, cash equivalents and investments in existing marketable securities.

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 Annual Report on Form 10-K 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 I, 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 Annual Report on Form 10-K 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.

Our discussion and analysis below are focused on our financial results and
liquidity and capital resources for the years ended December 31, 2021 and 2020,
including year-over-year comparisons of our financial performance and condition
for these years. Discussion and analysis of the year ended December 31, 2019
specifically, as well as the year-over-year comparison of our financial
performance and condition for the years ended December 31, 2020 and 2019, are
located in Part II, Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations in our Annual Report on Form 10-K for the
year ended December 31, 2020, filed with the SEC on March 1, 2021.

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/eosinophilic duodenitis, eosinophilic esophagitis, 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. Our
initial focus is on eosinophilic gastrointestinal diseases which include
eosinophilic esophagitis ("EoE"), eosinophilic gastritis ("EG") as well as
eosinophilic duodenitis ("EoD") which has also been referred to as eosinophilic
gastroenteritis. In addition, lirentelimab is being tested in atopic dermatitis
and chronic spontaneous urticaria and has the potential to treat a number of
other severe diseases. To date, lirentelimab completed a randomized,
double-blind, placebo-controlled Phase 2 study (ENIGMA 1) and Phase 3 study
(ENIGMA 2) 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").

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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. Additionally,
patients in the ENIGMA 1 study with co-morbid EoE showed histologic and
symptomatic improvement when treated with lirentelimab compared to placebo. More
recently, topline data from Phase 3 ENIGMA 2 and Phase 2/3 KRYPTOS studies of
lirentelimab were announced in the fourth quarter of 2021. The ENIGMA 2 study
met the histologic co-primary endpoint but missed the symptomatic co-primary
endpoint when compared to placebo. Similarly, the KRYPTOS study met the
histologic co-primary endpoint but missed the symptomatic co-primary endpoint
when compared to placebo. Upon full analysis, 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. In the more severe
populations, clear signs of efficacy were observed in both EG/EoD and EoE
patients. Based on these findings, we plan to conduct additional studies with
lirentelimab in these indications after discussions with the FDA

Despite the knowledge that mast cells and eosinophils drive many pathological
conditions, there are no approved therapies that selectively target both mast
cells and eosinophils. Lirentelimab binds to Siglec-8, an inhibitory receptor
found on mast cells and eosinophils, which represents a novel mechanism to
selectively inhibit or deplete these important immune cells and thereby
potentially resolve inflammation. We believe lirentelimab is the only Siglec-8
targeting antibody currently in clinical development.

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 $269.9 million
and $153.5 million for the years ended December 31, 2021 and 2020, respectively.
As of December 31, 2021, we had an accumulated deficit of $612.8 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 the Termination Agreement with Lonza 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. Refer to Note 12 "Subsequent Events" of our
financial statements for additional information.

As of December 31, 2021, we had cash, cash equivalents and marketable securities
of $424.2 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.

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 the
Company's 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

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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 year ended December 31, 2021. We
incurred $3.4 million of milestone expense for the year ended December 31, 2020
related to development milestones associated with the first patient dosed in our
Phase 3 study with lirentelimab. Milestone payments are not creditable against
royalties. As of December 31, 2021, 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 December 31, 2021 and 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 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. Under the terms of the
agreement, we have made milestone payments of $3.4 million through December 31,
2021 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. Royalties are based on future net sales by us and our
affiliates and sublicensees.

Results of Operations

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

                                                          Year Ended December 31,
                                                     2021           2020          2019
Operating expenses
Research and development                          $  196,328     $  105,533     $  61,858
General and administrative                            75,147         51,524        29,560
Total operating expenses                             271,475        157,057        91,418
Loss from operations                                (271,475 )     (157,057 )     (91,418 )
Interest income                                          377          4,313         6,201
Other income (expense), net                            1,238           (736 )        (155 )
Net loss                                            (269,860 )     (153,480 )     (85,372 )
Unrealized gain (loss) on marketable securities         (161 )         (129 )         152
Comprehensive loss                                $ (270,021 )   $ (153,609 )   $ (85,220 )


Comparison of the years ended December 31, 2021 and 2020

Research and development costs

Research and development expenses consist primarily of discovery, development
and manufacturing of our non-commercial products, clinical trial costs
(including payments to contract research organizations, or "CROs"), salaries and
other personnel costs, preclinical study fees, research supply costs, facility
and equipment costs and allocations of facilities and other overhead costs.
Amounts incurred in connection with license agreements, including milestone
payments, are also included in research and development expense.

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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:

•

demonstrate sufficient safety and tolerability profiles for product candidates;

•

successful enrollment and completion of clinical trials;

•

required authorizations and approvals from applicable regulatory authorities;

•

establish and maintain commercial manufacturing capabilities with CDMOs;

•

obtain and maintain intellectual property protection; and

•

commercialize product candidates, if approved, alone or in conjunction with third parties.

A change in any of these variables would have a material impact on the timing and magnitude of costs incurred in developing and commercializing 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.

The following table summarizes our research and development expenditures for the periods indicated (in thousands):

                                                         Year Ended 

the 31st of December,

                                                    2021           2020     

2019

Lirentelimab contract research and development
costs                                            $  117,621     $   55,322     $   30,806
Consulting and personnel-related costs               60,974         37,560  

23,967

Other unallocated research and development
costs                                                17,733         12,651          7,085
Total                                            $  196,328     $  105,533     $   61,858




Research and development expenses were $196.3 million for the year ended
December 31, 2021 compared to $105.5 million for the year ended December 31,
2020, an increase of $90.8 million. The period-over-period increase in research
and development expenses is primarily driven by an additional $62.3 million of
lirentelimab contract research and development costs as a result of increased
spending to support the manufacturing of lirentelimab and additional clinical
trials costs, $23.4 million of consulting and personnel-related costs primarily
associated with increased headcount and includes $8.3 million of increased
stock-based compensation expense, and $5.1 million increase in other unallocated
research and development costs primarily related to increased facilities and
overhead costs.

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We anticipate that our research and development expenses will increase
significantly during the first and second quarters of 2022 due to the
Termination Agreement with Lonza as well as employment severance and retention
related costs associated with the Reorganization Plan. We believe that the
Reorganization Plan will reduce our overall spending, excluding stock-based
compensation, in subsequent quarters subject to periodic fluctuations caused by
the timing of ongoing manufacturing development efforts.

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.

General and administrative expenses were $75.1 million for the year ended
December 31, 2021 compared to $51.5 million for the year ended December 31,
2020, an increase of $23.6 million. The period-over-period increase in general
and administrative expenses was primarily attributable to an increase of $16.2
million in increased personnel-related costs due to increased headcount and
includes an increase of $9.1 million in stock-based compensation expense. Other
period-over-period changes included increases to G&A outside spend of $4.0
million related to legal costs, accounting and financial service costs, and
costs incurred by our early commercial development efforts. Finally, we incurred
incremental facilities and other administrative costs of $3.4 million not
otherwise allocated to research and development expenses.

We anticipate that our general and administrative expenses will increase during
the first quarter of 2022 due to the employment severance and retention related
costs associated with the Reorganization Plan. We believe that the
Reorganization Plan will reduce our overall spending, excluding stock-based
compensation, in subsequent quarters. Additionally, we expect to continue 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, information technology and facility
activities, and other ancillary administrative and professional services.

interest income

Interest income was $0.4 million for the year ended December 31, 2021 compared
to $4.3 million for the year ended December 31, 2020, a decrease of $3.9
million. The year-over-year decrease is primarily attributable to lower interest
rates and lower investment balances held during the current year.

Other income (expenses), net

Other income (expense), net, for the year ended December 31, 2021 reflected a
gain of $1.2 million compared to a loss of $0.7 million for the year ended
December 31, 2020. Other income (expense), net, for the year ended December 31,
2021 included a $1.9 million gain as a result of the lease modification entered
into in November 2021 which was partially offset by fluctuations in foreign
currency rates.

Cash and capital resources

Sources of liquidity

As of December 31, 2021, we had cash, cash equivalents and marketable securities
of $424.2 million. Based on our existing business plan, we believe that our
current cash, cash equivalents and marketable securities 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.

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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-up offer

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-up offer

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.

Offer of shares “at the market”

On May 10, 2021, we entered into a Sales Agreement (the "Sales Agreement") with
Cowen and Company, LLC ("Cowen"). Pursuant to the terms of the Sales Agreement,
we had the ability to sell, from time to time up to an aggregate of $400.0
million of our common stock through an "at-the-market" offering as defined in
Rule 415 under the Securities Act of 1933, as amended. We agreed to pay Cowen a
commission equal to 3.0% of the gross proceeds from the sale of shares of our
common stock under the Sales Agreement and reimburse up to $60,000 of legal
expenses incurred by Cowen.

We were not obligated to make any sales of shares of our common stock under the
Sales Agreement. As of December 31, 2021, no shares of our common stock were
sold under this Sales Agreement. The Sales Agreement was terminated effective
February 24, 2022.

Summary Cash Flows

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

                                                       Year Ended December 

31,

                                                  2021           2020       

2019

Net cash used in operating activities ($207,853) ($113,924)

  $  (63,012 )
Net cash provided by (used in) investing
activities                                        143,238          3,897       (311,971 )
Net cash provided by financing activities          10,260        278,837    

381 163

Net increase (decrease) in cash, cash
equivalents and
  restricted cash                              $  (54,355 )   $  168,810     $    6,180


Comparison of the years ended December 31, 2021 and 2020

Cash flows used in operating activities

Net cash used in operating activities was $207.9 million for the year ended
December 31, 2021, which was primarily attributable to our net loss of $269.9
million adjusted for net noncash charges of $57.3 million and net changes in
operating assets and liabilities of $4.7 million. Noncash charges included $50.8
million in stock-based compensation expense, $3.4 million in net amortization of
premiums and discounts on marketable securities, $2.3

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million dollars of depreciation charges, $2.6 million in non-cash rental expenses and $1.9 million in the gains from a lease modification.

Net cash used in operating activities was $113.9 million for the year ended
December 31, 2020, which was primarily attributable to our net loss of $153.5
million adjusted for net noncash charges of $1.4 million and net changes in
operating assets and liabilities of $38.2 million. Noncash charges included
$33.4 million in stock-based compensation expense, $2.4 million in net
amortization of premiums and discounts on marketable securities, $1.5 million in
depreciation and amortization expense and $0.9 million in amortization of
right-of-use asset.

Cash used in investing activities

Net cash provided by investing activities was $143.2 million for the year ended
December 31, 2021, which consisted of $564.0 million in proceeds from maturities
of marketable securities, partially offset by $387.5 million for the purchases
of marketable securities and $33.2 million for the purchases of property and
equipment.

Net cash provided by investing activities was $3.9 million for the year ended
December 31, 2020, which consisted of $546.8 million in proceeds from maturities
of marketable securities, partially offset by $542.3 million for the purchases
of marketable securities and $0.6 million for the purchases of property and
equipment.

Cash provided by financing activities

Net cash provided by financing activities was $10.3 million for the year ended
December 31, 2021, which consisted primarily of $8.5 million in proceeds
received from employees for the exercise of stock options and $1.8 million in
proceeds from the issuance of common stock under the 2018 ESPP.

Net cash provided by financing activities was $278.8 million for the year ended
December 31, 2020, which consisted primarily of $271.7 million in net proceeds
from the issuance of common stock, $5.7 million in proceeds received from
employees for the exercise of stock options and $1.5 million in proceeds from
the issuance of common stock under the 2018 ESPP.

Financing needs

We will continue to require additional capital to develop our product candidates
and fund operations for the foreseeable future. We may seek to raise funding
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:

•

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

•

the scope and costs of manufacturing activities;

•

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

•

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

•

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

•

the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property 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.

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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

The following table presents our contractual obligations and commitments as of
December 31, 2021 (in thousands) and does not take into account cancellations or termination agreements entered into after December 31, 2021:

                                                            Payments Due by Period
                                                   Less than         1-3          3-5         More than 5
                                       Total         1 Year         Years        Years           Years

Operating lease obligations (1) $77,664 $7,445 $14,334

     $ 15,208     $      40,677
Purchase obligations (2)               284,826        161,787       123,039            -                 -
Total                                $ 362,490     $  169,232     $ 137,373     $ 15,208     $      40,677



(1)
Operating lease obligations represent future lease payments due under our two
lease agreements.
(2)
Purchase obligations represent noncancelable amounts due to counterparties under
various master service agreements.

In addition to the amounts included in the table above, we enter into contracts
in the normal course of business 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.

Approximately $231.2 million of the $284.8 million total noncancellable purchase
obligations as of December 31, 2021 related to manufacturing services agreements
with Lonza AG or affiliates (such agreements, the "MSAs"). On February 14, 2022
(the "Effective Date"), we entered into a termination agreement (the
"Termination Agreement") with Lonza AG, Lonza Sales Ltd and Lonza Sales AG
(collectively, "Lonza") terminating such MSAs. Lonza 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 approximately $136.1 million
(126 million Swiss Francs) (the "Termination Amount") to Lonza as a result of
such termination, 95% of which is to be paid within 30 days after the Effective
Date, and 5% of which is be paid within 30 days of the release of the remaining
cGMP batches. If we fail to pay the first 95% of the Termination Amount to Lonza
within 30 days of the Effective Date, Lonza may at its option give notice to us
that the Termination Agreement is terminated. 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.

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 SECOND.

Significant 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 generally accepted accounting principles in the United States
("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.

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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.

We believe that the accounting policies described below are essential to understanding our historical and future performance, as these policies relate to the most significant areas involving management’s judgments and estimates.

Accumulated contract research and development costs

As part of our preparation of the financial statements, we are required to
estimate our accrued expenses as of each balance sheet date. This process
involves reviewing open contracts and purchase orders, as well as working with
internal personnel to identify the existence and extent of services that have
been performed on our behalf which have not yet been invoiced. We make estimates
of our accrued expenses as of each balance sheet date based on facts and
circumstances known to us at that time. We periodically confirm the accuracy of
our estimates, recording adjustments, if necessary.

Estimates underlying accrued contract research and development expense primarily
relate to our evaluation of the timing and extent of development and
manufacturing services performed by our CDMOs, as well as research activities
performed by CROs and clinical investigative sites activities on our behalf. As
the financial terms included within service agreements with such vendors vary
from contract to contract and often include uneven payment flows, our evaluation
focuses on the level of effort and resources expended. Accordingly, the
calculation of accrued contract research and development expense requires us to
analyze a significant amount of inputs and data from multiple internal and
external sources, including information from communications with clinical
operations and technical operations personnel.

Although we do not expect our estimates to be materially different from amounts
actually incurred, if our estimates of the status and timing of services
performed differ from the actual status and timing of services performed, it
could result in us reporting amounts that are higher or lower in any particular
period. To date, there have been no material differences between our estimates
of such expenses and the amounts actually incurred for the periods reported.

Operating leases

We account for our leases in accordance with Financial Accounting Standards
Board ("FASB") Accounting Standards Codification ("ASC") 842, "Leases" ("ASC
842"). Right-of-use assets represent our 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 our total lease payments over the lease term,
calculated using our incremental borrowing rate. In determining our incremental
borrowing rate, we considered the term of the lease and our credit risk. We
recognize options to extend a lease when it is reasonably certain that we will
exercise such extension. We do not recognize options to terminate a lease when
it is reasonably certain that we will not exercise such early termination
options.

Stock-based compensation

We account for stock-based compensation expense resulting from stock-based
awards granted to employees and nonemployees in accordance with ASC 718,
Compensation-Stock Compensation, ("ASC 718"). Per ASC 718, we measure the fair
value of stock-based awards on the date of grant and recognize the associated
compensation expense, net of impact from estimated forfeitures, over the
requisite service period on a straight-line basis. The vesting period of the
stock-based award has historically served as the requisite service period for
the respective grants to our employees, nonemployee directors and consultants.
At each subsequent reporting date, we are required to evaluate whether the
achievement of any associated vesting conditions is probable and whether or not
any such events have occurred that would have resulted in the acceleration of
vesting.

To determine the amount of stock-based compensation expense to recognize, we must develop estimates of the grant date fair value of stock options. We estimate the fair value of each equity-based award using

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the Black-Scholes option-pricing model. The Black-Scholes option-pricing model
uses highly subjective inputs such as the fair value of our common stock, as
well as other assumptions including the expected volatility of our common stock,
the expected term of the respective stock-based award, the risk-free interest
rate for a period that approximates the expected term of the stock-based award
being valued and the expected dividend yield on our common stock over the
expected term.

Expected volatility. As we do not have sufficient trading history for our common
stock, we have based our computation of expected volatility on the historical
volatility of a representative group of public life science companies with
similar characteristics to us, including company age and stage of product
development. The historical volatility data is calculated based on a period of
time commensurate with the expected term of the stock-based award being valued.
We will continue to utilize this approach until a sufficient amount of
historical information regarding the volatility of our own stock price becomes
available or until other relevant circumstances change, such as our assessment
that our identified entities are no longer appropriate to use as representative
companies. In the latter case, more suitable, similar entities with publicly
available stock prices will be incorporated in the calculation.

Expected term. In order to estimate the expected term of a stock-based award, we
use the simplified method prescribed by SEC Staff Accounting Bulletin No. 107,
Share-Based Payment, as we do not have sufficient historical exercise data to
provide a reasonable basis upon which to estimate the expected term. Under this
approach, the expected term is presumed to be the average of the contractual
term (ten years) and the vesting term (generally four years) of the stock-based
award. We have not historically experienced, nor do we expect there to be
substantially different exercise or post-vesting termination behavior among our
employees and directors.

Risk-free interest rate. The risk-free interest rate is based on the publicly available yields of we Treasury instruments with maturities matching the expected duration of the stock-based award.

Expected dividend yield. The expected dividend yield is assumed to be zero as we
have never paid dividends and have no current plans to pay any dividends on our
common stock.

Income Taxes

We account for income taxes under the asset and liability method. Current income
tax expense or benefit represents the amount of income taxes we expect to pay or
have refunded in the current year. Our deferred income tax assets and
liabilities are determined based on differences between financial statement
reporting and tax basis accounting of assets and liabilities and net operating
loss and credit carryforwards, which we measure using the enacted tax rates and
laws that will be in effect when such items are expected to reverse. We reduce
deferred income tax assets, as necessary, by applying a valuation allowance to
the extent that we determined it is more likely than not that some or all of our
tax benefits will not be realized.

We account for uncertain tax positions in accordance with ASC 740-10, Accounting
for Uncertainty in Income Taxes. We assess all material positions reflected in
our income tax returns, including all significant uncertain positions, for all
tax years that are subject to assessment or challenge by relevant taxing
authorities. Upon determining the sustainability of our positions, we measure
the largest amount of benefit possessing greater than fifty percent likelihood
of being realized upon ultimate settlement. We reassess such positions at each
balance sheet date to determine whether any factors underlying the
sustainability assertion have changed and whether or not the amount of the
recognized tax benefit is still appropriate.

As of December 31, 2021, our gross deferred tax assets were $203.5 million. Due
to our lack of earnings history and uncertainties surrounding our ability to
generate future taxable income, we have offset the total net deferred tax assets
with a full valuation allowance. The deferred tax assets were primarily
comprised of federal and state tax net operating losses, ("NOLs"), which may be
limited by certain rules governing changes in ownership, as defined in Section
382 of the Internal Revenue Code of 1986, as amended. Similar rules may apply
under state tax laws. Our ability to use our remaining NOLs may be further
limited if we experience future ownership changes.

Judgments regarding the recognition and measurement of our tax benefits, as well as the limitations surrounding their realization, may change as new information becomes available.

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Recent accounting pronouncements

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

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