PRECISION BIOSCIENCES INC 10-Q

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 in conjunction with our financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many important factors, including those set forth in Part II. Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described in, or implied by, these forward-looking statements . As used in this Quarterly Report on Form 10-Q , unless the context otherwise requires, references to “we,” “us,” “our,” “the Company” and “Precision” refer to Precision BioSciences, Inc. and its subsidiaries on a consolidated basis. Overview We are a life sciences company dedicated to improving life through the application of our pioneering, proprietary ARCUS genome editing platform. We leverage ARCUS in the development of our product candidates, which are designed to treat human diseases and create healthy and sustainable food and agricultural solutions. We are actively developing product candidates in three innovative areas: allogeneic CAR T cell immunotherapy, in vivo gene correction, and food. We are currently conducting a Phase 1/2a clinical trial of PBCAR0191 in adult patients with relapsed or refractory, or R/R, non-Hodgkin lymphoma, or NHL, or R/R B-cell precursor acute lymphoblastic leukemia, or B-ALL. PBCAR0191 is our first gene-edited allogeneic chimeric antigen receptor, or CAR, T cell therapy candidate targeting CD19 and is being developed in collaboration with Les Laboratoires Servier, or Servier, pursuant to a collaboration agreement (the “Servier Agreement”). We have received orphan drug designation, or ODD, for PBCAR0191 from the U.S. Food and Drug Administration, or FDA, for the treatment of acute lymphoblastic leukemia, or ALL. The NHL cohort will include patients with mantle cell lymphoma (“MCL”), an aggressive subtype of NHL, for which we have received ODD from the FDA. Made from donor-derived T cells modified using our ARCUS genome editing technology, PBCAR0191 recognizes the well characterized tumor cell surface protein CD19, an important and validated target in several B-cell cancers, and is designed to avoid graft-versus-host disease, or GvHD, a significant complication associated with donor-derived, cell-based therapies. We believe that this trial, which is designed to assess the safety and tolerability of PBCAR0191 at increasing dose levels, as well as to evaluate anti-tumor activity, is the first U.S.-based clinical trial to evaluate an allogeneic CAR T therapy for R/R NHL. Furthermore, we believe that our proprietary, one-step engineering process for producing allogeneic CAR T cells with a potentially optimized cell phenotype, at large scale in a cost-effective manner, will enable us to overcome the fundamental clinical and manufacturing challenges that have limited the CAR T field to date. In December 2019, we announced initial data from this ongoing Phase 1/2a clinical trial of PBCAR0191 in adult patients with R/R NHL and R/R B-ALL. A total of nine adult patients were reported in these initial Phase 1 trial results, including six with NHL (three treated at Dose Level 1 (3x10 5 cells/kg), or DL1, and three treated at Dose Level 2 (1x10 6 cells/kg), or DL2), and three with B-ALL (all treated at DL2). These data indicated no serious adverse events or dose limiting toxicities. In the NHL cohort, four of six patients demonstrated an objective tumor response by Lugano criteria at day 28, for an overall objective response rate of 67%, including three partial responses and one complete response. In the B-ALL cohort, one of three patients achieved a complete response at day 28 following treatment with PBCAR0191. As of December 2019, dosing of patients at Dose Level 3 (3x10 6 cells/kg) was underway. Based on the data observed at DL1 and DL2, we filed a protocol amendment for this trial with the FDA in December 2019. Following feedback from the FDA in January 2020, the protocol amendment is now being implemented and we are actively assessing key clinical questions including the impact of higher total doses of cells, repeat dose of cells, and/or the impact of modified lymphodepletion on the ability to achieve durable clinical benefit. The PBCAR0191 clinical trial continues to progress, and no dose limiting toxicities or serious adverse events have been observed to date. Due to the impacts of COVID-19 and its effect on site activation and patient enrollment on all studies, including PBCAR0191, we expect to present updated interim clinical data from both the NHL and B-ALL cohorts of this trial no earlier than the fourth quarter of 2020. In January 2020, we announced that we expect to advance a program targeting the rare genetic disease primary hyperoxaluria type 1, or PH1 as our lead wholly owned in vivo gene correction program. PH1 affects approximately 1-3 people per million in the United States and is caused by loss of function mutations in the AGXT gene, leading to the accumulation of calcium oxalate crystals in the kidneys. Patients suffer from painful kidney stones which may ultimately lead to renal failure. Using ARCUS, we are developing a potential therapeutic approach to PH1 that involves knocking out a gene called HAO1 which acts upstream of AGXT. Suppressing HAO1 has been shown in preclinical models by us to prevent the formation of calcium oxalate. We therefore believe that a one-time administration of an ARCUS nuclease targeting HAO1 may be a viable strategy for a durable treatment of PH1 patients. In preclinical murine studies of PH1 we have demonstrated that administration of an ARCUS nuclease targeting HAO1 resulted in approximately 70% reduction in urine calcium oxalate levels. We have also demonstrated that ARCUS efficiently knocked out the HAO1 gene in non-human primates. We plan to select a clinical candidate for this program during 2020. 23 In April 2020, we commenced patient dosing in a Phase 1/2a clinical trial with our second allogeneic CAR T cell therapy product candidate, PBCAR20A . PBCAR20A is wholly owned by us and targets the validated tumor cell surface target CD20. It is bein g investigated in two cohorts of patients. The first cohort will enroll patients with R/R NHL, and the second will enroll patients with R/R chronic lymphocytic leukemia, or CLL, or R/R small lymphocytic lymphoma, or SLL. A subset of the NHL patients will h ave the diagnosis of MCL and we have received orphan drug designation for PBCAR20A from the FDA for the treatment of this disease. Based on the safety profile observed to date with PBCAR0191, the FDA agreed to allow us to commence dosing with PBCAR20A dir ectly at what was originally designed to be Dose Level 2 (1x10 6 cells/kg), with the subsequent dose level expected to be 3x10 6 cells/kg . In June 2020, we commenced patient dosing in a Phase 1/2a clinical trial with our third allogenic CAR T cell therapy product candidate, PBCAR269A. PBCAR269A is wholly owned by us and is designed to target the validated tumor cell surface target BCMA. It will be investigated in subjects with R/R multiple myeloma and we have received orphan drug designation from the FDA for this indication. The starting dose of PBCAR269A is 6x10 5 cells/kg. Subsequent cohorts will be treated with escalating doses to a maximum dose of 6x10 6 cells/kg. In July 2020, we announced we will regain full clinical development and commercialization rights and all data we generated for the in vivo chronic hepatitis B virus (HBV) program developed under our 2018 collaboration agreement with Gilead Sciences, effective September 4, 2020. We are exploring partnership or alternative opportunities to enable the continued development of ARCUS-based HBV therapies, the progression toward the submission of an IND for this product candidate and the reassessment of the timing of such IND submission. Since our formation in 2006, we have devoted substantially all of our resources to developing ARCUS, conducting research and development activities, recruiting skilled personnel, developing manufacturing processes, establishing our intellectual property portfolio and providing general and administrative support for these operations. We have financed our operations primarily with proceeds from the sale of our convertible preferred stock and upfront payments from licensing arrangements. As of June 30, 2020, we have generated approximately $480.0 million from third parties through a combination of financings including through our IPO, preferred stock and convertible note financings, an upfront payment under the Servier Agreement and additional funding from other strategic alliances and grants. Since our inception, we have incurred significant operating losses and have not generated any revenue from the sale of products. Our ability to generate any product revenue or product revenue sufficient to achieve profitability will depend on the successful development and eventual commercialization of one or more of our product candidates or the product candidates of our collaborators for which we may receive milestone payments or royalties. Our net losses were $59.5 million and $51.2 million for the six months ended June 30, 2020 and June 30, 2019, respectively. As of June 30, 2020, we had an accumulated deficit of $236.6 million. We expect our operating expenses to increase substantially in connection with the expansion of our product development programs and capabilities. Further, we expect collaboration revenue will decrease in connection with the termination of the Gilead Agreement (as defined below). We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for one of our product candidates or the product candidates of our collaborators for which we may receive milestone payments or royalties. If we obtain regulatory approval for any of our product candidates, we expect to incur significant expenses related to developing our commercialization capability to support product sales, marketing and distribution. As a result of these anticipated expenditures, we will need additional financing to support our continuing operations. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our cash needs through a combination of public equity, debt financings or other sources, which may include current and new collaborations with third parties. Adequate additional financing may not be available to us on acceptable terms, or at all. Our inability 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 cannot assure you that we will ever generate significant revenue to achieve profitability. Because of the numerous risks and uncertainties associated with the development of therapeutic and agricultural products, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate revenue from product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be required to raise additional capital on terms that are unfavorable to us or we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations. We currently conduct our operations through two reportable segments: Therapeutics and Food. Our Therapeutics segment is focused on allogeneic CAR T immunotherapy and in vivo gene correction. Our Food segment focuses on applying ARCUS to develop food and nutrition products through collaboration agreements with consumer-facing companies. 24 Impact of COVID-19 Pandemic We are closely monitoring how the spread of the COVID-19 pandemic is affecting our employees, business, preclinical studies and clinical trials. The Company has taken steps in line with guidance from the U.S. Centers for Disease Control and Prevention (“CDC”) and the State of North Carolina to protect the health and safety of its employees and the community. In particular, the Company has implemented a work-from-home policy and has restricted on-site activities, including certain manufacturing functions and limited laboratory and support activities. We are working closely with our clinical sites, physician partners and the patient community to monitor and manage the impact of the evolving COVID-19 pandemic. We remain committed to our clinical programs and developm ent plans, however, disruptions, competing resource demands and safety concerns caused by the COVID-19 pandemic have caused, and are likely to continue to cause delays in our clinical trial site activation and impact our ability to enroll patients. We may also experience other difficulties, disruptions or delays in conducting preclinical studies or initiating, enrolling, conducting or completing our planned and ongoing clinical trials, and we may incur other unforeseen costs as a result. We expect that the COVID-19 pandemic may continue to impact our business, including our preclinical studies and clinical trials. At this time, there is still significant uncertainty relating to the trajectory of the COVID-19 pandemic and impact of related responses. The impa ct of COVID-19 on our preclinical studies and any further impact to our clinical trials will largely depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the pandemic, travel restrictions and social distancing in the United States and other countries, business closures or business disruptions, the ultimate impact of COVID-19 on financial markets and the global economy, and the effectiveness o f actions taken in the United States and other countries to contain and treat the disease. The Coronavirus, Aid, Relief and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020, which provides for, among other things, the deferral of the deposit and payment of certain taxes. Pursuant to the CARES Act, the Company has elected to defer payment of the employer's share of social security taxes. See “Risk Factors—The outbreak of COVID-19, or other pandemic, epidemic or outbreak of an infectious disease may materially and adversely impact our business, including our preclinical studies and clinical trials.” in Part II, Item 1.A. of this Quarterly Report on Form 10-Q. Collaborations Gilead On July 6, 2020, Gilead Sciences (“Gilead”) notified us of its termination of the collaboration and license agreement dated September 10, 2018, subsequently amended by Amendment No. 1 dated March 10, 2020 or (the “Gilead Agreement”), to develop genome editing tools using ARCUS to target viral DNA associated with the hepatitis B virus. Pursuant to the termination notice, the Gilead Agreement will terminate effective September 4, 2020. Upon termination, as discussed above, we will regain full rights and all data we generated for the in vivo chronic hepatitis B program developed under the Gilead Agreement. Servier In February 2016, we entered into the Servier Agreement, pursuant to which we have agreed to develop allogeneic CAR T cell therapies for up to six unique antigen targets. One target was selected at the agreement’s inception. Upon selection of an antigen target under the agreement, we have agreed to perform early-stage research and development on individual T cell modifications for the selected target, develop the resulting therapeutic product candidates through Phase 1 clinical trials and prepare clinical trial material of such product candidates for use in Phase 2 clinical trials. We received an upfront payment of $105.0 million under the Servier Agreement. We have the ability to receive total payments, including the upfront payment, option fees and milestone payments, in the aggregate across all six targets, of up to approximately $1.6 billion. This includes up to $1.5 billion in milestone payments, consisting of up to $401.3 million in development milestone payments and up to $1.1 billion in commercial milestone payments. We are also entitled to receive tiered royalties ranging from the mid-single digit percentages to the sub-teen percentages on worldwide net sales, subject to potential customary reductions. We also have the right to participate in the development and commercialization of any licensed products resulting from the collaboration through a 50/50 co-development and co-promotion option in the United States, subject to our payment of an option fee, which is exercisable after Servier’s commercial option exercise. Trustees of the University of Pennsylvania In January 2018, we entered into a research, collaboration and license agreement with the University of Pennsylvania (“Penn”) to collaborate on the preclinical development for gene editing products involving the delivery of an ARCUS nuclease. In October 2019, both parties agreed to adjust the activities conducted under the agreement to focus exclusively on the collaboration’s program to edit the PCSK9 gene to reduce levels of LDL-C in the blood, commonly known as “bad cholesterol.” On April 29, 2020, both parties agreed to coordinate a wind-down of all activities in their entirety under the agreement, effective as of June 30, 2020, however, we expect certain portions of the agreement may be extended, subject to ongoing discussions with Penn. We will not be required to make termination payments to Penn. 25 Dole Food Company Through our wholly owned subsidiary, Elo Life Systems, Inc. (“Elo”), on June 22, 2020, we entered into a Research, Development, and Commercialization Agreement with Dole Food Company, Inc. (“Dole”) with the aim to co-develop banana varieties resistant to Fusarium oxysporum f. sp cubense Tropical race 4 (“Foc TR4”), utilizing proprietary computational biology workflows and the ARCUS genome editing platform. The disease caused by Foc TR4, commonly known as Fusarium wilt, threatens the continued cultivation of the world’s most popular variety of banana called Cavendish, which is of considerable economic significance as this variety is used to produce export bananas for key markets around the globe and Dole is one of the largest producers in the industry. Fungicides, or other traditional means of disease control have failed as the pandemic continues to spread across vital banana growing economies. Development of Foc TR4 varieties is critically important to save the banana industry, to protect the livelihoods of millions of banana growers and continue to provide consumers an affordable and nutritious fruit. Under the terms of the collaboration, Dole will fully fund research and development efforts executed by Elo, and Elo is eligible to receive royalties on any commercialized plant product. Cargill, Inc. In 2014, through Elo, we and Cargill, Inc. (“Cargill”) entered into a collaboration to produce ARCUS-optimized canola varieties with significantly lower levels of saturated fatty acids compared to the current levels in greenhouse studies. On July 30, 2020, we and Cargill mutually agreed to terminate the collaboration, effective August 31, 2020. Components of Our Results of Operations Revenue To date, we have not generated any revenue from product sales and do not expect to generate any revenue from product sales in the foreseeable future. We record revenue from collaboration agreements, including amounts related to upfront payments, annual fees for licenses of our intellectual property and research and development funding. Research and Development Expenses Research and development expenses consist primarily of costs incurred for our research activities, including our discovery efforts and the development of our product candidates. These include the following: • salaries, benefits and other related costs, including share-based compensation expense, for personnel engaged in research and development functions; • expenses incurred under agreements with third parties, including contract research organizations, or CROs, and other third parties that conduct preclinical research and development activities and clinical trials on our behalf; • costs of developing and scaling our manufacturing process and manufacturing drug products for use in our preclinical studies and ongoing and future clinical trials, including the costs of contract manufacturing organizations and our MCAT facility that will manufacture our clinical trial material for use in our preclinical studies and ongoing and potential future clinical trials; • costs of outside consultants, including their fees and related travel expenses; • costs of laboratory supplies and acquiring, developing and manufacturing preclinical study and clinical trial materials; • license payments made for intellectual property used in research and development activities; and • facility-related expenses, which include direct depreciation costs and expenses for rent and maintenance of facilities and other operating costs if specifically identifiable to research activities. We expense research and development costs as incurred. We track external research and development costs, including the costs of laboratory supplies and services, outsourced research and development, clinical trials, contract manufacturing, laboratory equipment and maintenance and certain other development costs, by product candidate when the program IND application is accepted by the FDA. Internal and external costs associated with infrastructure resources, other research and development costs, facility related costs and depreciation and amortization that are not identifiable to a specific product candidate are included in the platform development, early-stage research and unallocated expenses category in the table below. 26 The following table summarizes our research and development expenses by product candidate or development progr am for the periods presented: Six Months Ended June 30, Three Months Ended June 30, (in thousands) 2020 2020 Direct research and development expenses by product candidate: CD19 external development costs $ 4,948 $ 2,612 CD20 external development costs 3,029 1,874 BCMA external development costs 2,283 1,682 Platform development, early-stage research and unallocated expenses: Employee-related costs 18,190 9,086 Laboratory supplies and services 6,101 2,443 Outsourced research and development 4,842 2,092 CMOs and research organizations 3,279 1,628 Laboratory equipment and maintenance 761 408 Facility-related costs 1,645 843 Depreciation and amortization 3,710 1,871 Licensing fees 1,150 582 Other research and development costs 124 62 Total research and development expenses $ 50,062 $ 25,183 Research and development activities are central to our business model. We expect that our research and development expenses will continue to increase substantially for the foreseeable future and will comprise a larger percentage of our total expenses as we continue our Phase 1/2a clinical trials for our CD19, CD20 and BCMA product candidates, and continue to discover and develop additional product candidates. We cannot determine with certainty the duration and costs of ongoing and future clinical trials of our CD19, CD20, and BCMA product candidates, or any other product candidate we may develop or if, when or to what extent we will generate revenue from the commercialization and sale of any product candidate for which we obtain marketing approval. We may never succeed in obtaining marketing approval for any product candidate. The duration, costs and timing of clinical trials and development of our CD19, CD20, and BCMA product candidates, and any other our product candidate we may develop will depend on a variety of factors, including: • the scope, rate of progress, expense and results of clinical trials of our CD19, CD20, and BCMA product candidates, as well as of any future clinical trials of other product candidates and other research and development activities that we may conduct; • uncertainties in clinical trial design and patient enrollment rates; • the actual probability of success for our product candidates, including their safety and efficacy, early clinical data, competition, manufacturing capability and commercial viability; • significant and changing government regulation and regulatory guidance; • the timing and receipt of any marketing approvals; and • the expense of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights. 27 A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For exa mple, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we anticipate will be required for the completion of clinical development of a product candidate, or if we experience significant delays in our clinical trials due to slower than expected patient enrollment or other reasons, we would be required to expend significant additional financial resources and time on the completion of clinical development. General and Administrative Expenses General and administrative expenses consist primarily of salaries and other related costs, including share-based compensation, for personnel in our executive, finance, business development, operations and administrative functions. General and administrative expenses also include legal fees relating to intellectual property and corporate matters; professional fees for accounting, auditing, tax and consulting services; insurance costs; travel expenses; and facility-related expenses, which include direct depreciation costs and expenses for rent and maintenance of facilities and other operating costs that are not specifically attributable to research activities. We expect that our general and administrative expenses will increase in the future as we continue research activities and development of product candidates. Change in Fair Value of Convertible Notes Payable We elected on issuance to account for the convertible notes payable we issued in March 2019, or the 2019 Notes, at fair value until their settlement. The change in fair value of the 2019 Notes was recognized through the statement of operations. The 2019 Notes settled into 2,921,461 shares of common stock on the closing of our IPO on April 1, 2019. Interest Expense Interest expense consists of interest from the 2019 Notes at a rate of 6% per annum. Interest Income Interest income consists of interest income earned on our cash and cash equivalents. Results of Operations Comparison of the Three Months Ended June 30, 2020 and June 30, 2019 The following table summarizes our results of operations for the three months ended June 30, 2020 and June 30, 2019, together with the changes in those items in dollars: Three Months Ended June 30, (in thousands) 2020 2019 Change Revenue $ 1,078 $ 5,389 $ (4,311 ) Operating expenses: Research and development 25,183 22,760 2,423 General and administrative 8,703 6,500 2,203 Total operating expenses 33,886 29,260 4,626 Loss from operations (32,808 ) (23,871 ) (8,937 ) Other income: Change in fair value of convertible notes payable - 2,950 (2,950 ) Interest income 107 1,485 (1,378 ) Total other income 107 4,435 (4,328 ) Net loss $ (32,701 ) $ (19,436 ) $ (13,265 ) 28 Revenue Revenue for the three months ended June 30, 2020 was $1.1 million, compared to $5.4 million for the three months ended June 30, 2019. The decrease of $4.3 million in revenue during the three months ended June 30, 2020 was primarily the result of a $1.0 million decrease in collaboration revenue recognized from Servier, a $2.8 decrease in collaboration revenue recognized from Gilead and a decrease of $0.5 million in revenue from various joint development collaborations as agreements to provide services thereunder ended in 2019. Research and Development Expenses Three Months Ended June 30, (in thousands) 2020 2019 Change Direct research and development expenses by product candidate: CD19 external development costs $ 2,612 $ 1,390 $ 1,222 CD20 external development costs 1,874 — 1,874 BCMA external development costs 1,682 — 1,682 Platform development, early-stage research and unallocated expenses: Employee-related costs 9,086 6,424 2,662 Laboratory supplies and services 2,443 3,423 (980 ) Outsourced research and development 2,092 4,482 (2,390 ) CMOs and research organizations 1,628 4,020 (2,392 ) Laboratory equipment and maintenance 408 354 54 Facility-related costs 843 701 142 Depreciation and amortization 1,871 897 974 Licensing fees 582 — 582 Other research and development costs 62 1,069 (1,007 ) Total research and development expenses $ 25,183 $ 22,760 $ 2,423 Research and development expenses for the three months ended June 30, 2020 were $25.2 million, compared to $22.8 million for the three months ended June 30, 2019. The increase of $2.4 million was primarily due to increases in direct research and development expenses related to our CD19, CD20, and BCMA programs of $1.2 million, $1.9 million, and $1.7 million, respectively, due to increases in lab services and CMO and research organization costs as we entered a CD19 Phase 1/2a clinical trial in April 2019, CD20 Phase 1/2a clinical trial in April 2020, and BCMA Phase 1/2a clinical trial in June 2020, offset by a $2.4 million decrease in platform development, early-stage research and unallocated expenses. Platform development, early-stage research and unallocated expenses decreased primarily due to a $2.4 million decrease in outsourced research and development spending, a $2.4 million decrease in CMOs and research organizations spending, a $1.0 million decrease in laboratory supplies and services and a $1.0 million decrease in other research and development costs, offset by a $2.7 million increase in employee-related costs associated with increased headcount to support our technology platform development and manufacturing capabilities, a $1.0 million increase in depreciation and amortization and a $0.7 million increase in licensing fees in the three months ended June 30, 2020 compared to the same period in 2019. General and Administrative Expenses General and administrative expenses were $8.7 million for the three months ended June 30, 2020 compared to $6.5 million for the three months ended June 30, 2019. The increase of $2.2 million was primarily due to costs required to meet our growing infrastructure needs, including increases of $1.0 million in consulting fees, $0.6 million in employee-related costs due to higher general and administrative headcount, $0.3 million in taxes and insurance costs and $0.3 million in information technology costs. Change in Fair Value of Convertible Notes Payable We elected on issuance to account for the 2019 Notes at fair value until their settlement. For the three months ended June 30, 2020, we did not recognize any income due to changes in fair value of the 2019 Notes, compared to $3.0 million of other income due to changes in fair value of the 2019 Notes recognized for the three months ended June 30, 2019. The 2019 Notes were settled on the closing of the IPO in April 2019. 29 Interest Income Interest income was $0.1 million for the three months ended June 30, 2020 compared to $1.5 million for the three months ended June 30, 2019. The decrease of $1.4 million of interest income generated on our cash and cash equivalent balances was the result of lower interest rates in three months ended June 30, 2020 compared to the same period in 2019. Segment Results Three Months Ended June 30, (in thousands) 2020 2019 Change Revenue: Therapeutics $ 1,020 $ 4,819 $ (3,799 ) Food 58 570 (512 ) Total segment revenue 1,078 5,389 (4,311 ) Segment operational cash expenditures: Therapeutics 19,117 17,990 1,127 Food 1,588 2,077 (489 ) Total segment operational cash expenditures 20,705 20,067 638 Segment operating loss: Therapeutics (18,097 ) (13,171 ) (4,926 ) Food (1,530 ) (1,507 ) (23 ) Total segment operating loss (19,627 ) (14,678 ) (4,949 ) We evaluate the operating performance of each segment based on segment operating loss. Segment operating loss is derived by deducting operational cash expenditures, net, from GAAP revenue. Operational cash expenditures are cash disbursements made that are specifically identifiable to the reportable segment (including specifically identifiable research and development and property, equipment and software expenditures). The reportable segment operational cash expenditures include cash disbursements for compensation, laboratory supplies, purchases of property, equipment and software and procuring services from CROs, CMOs and research organizations. We do not allocate general operational expenses or non-cash income statement amounts to our reportable segments. Therapeutics Segment Revenue for the three months ended June 30, 2020 was $1.0 million, compared to $4.8 million for the three months ended June 30, 2019. The decrease of $3.8 million was the result of a $2.8 million decrease in collaboration revenue recognized from Gilead and a $1.0 million decrease in collaboration revenue recognized from Servier . Segment operational cash expenditures for the three months ended June 30, 2020 were $19.1 million, compared to $18.0 million for the three months ended June 30, 2019. The increase of $1.1 million was primarily due to an increase in employee headcount, clinical trial research, consultant fees and lab equipment maintenance, offset by decreases in lab supplies, lab services and fixed assets. Segment operating loss increased $4.9 million to $18.1 million for the three months ended June 30, 2020 compared to $13.2 million for three months ended June 30, 2019 primarily due to the factors discussed above. Food Segment Revenue for the three months ended June 30, 2020 was $0.1 million, compared to $0.6 million for the three months ended June 30, 2019. The decrease of $0.5 million was attributable to a decrease in revenue from various joint development collaborations as agreements to provide services thereunder ended in 2019. Segment operational cash expenditures for the three months ended June 30, 2020 were $1.6 million, compared to $2.1 million for the three months ended June 30, 2019. The decrease of $0.5 million was primarily due to a decrease in fixed assets offset by an increase in employee headcount. Segment operating loss was relatively consistent for three months ended June 30, 2020 compared to the three months ended June 30, 2019. 30 Comparison of the Six Months Ended June 30, 2020 and June 30, 2019 The following table summarizes our results of operations for the six months ended June 30, 2020 and June 30, 2019, together with the changes in those items in dollars: Six Months Ended June 30, (in thousands) 2020 2019 Change Revenue $ 8,076 $ 10,851 $ (2,775 ) Operating expenses: Research and development 50,062 42,721 7,341 General and administrative 18,318 11,495 6,823 Total operating expenses 68,380 54,216 14,164 Loss from operations (60,304 ) (43,365 ) (16,939 ) Other income (expense), net: Change in fair value of convertible notes payable — (9,758 ) 9,758 Interest expense — (182 ) 182 Interest income 767 2,086 (1,319 ) Total other income (expense), net 767 (7,854 ) 8,621 Net loss $ (59,537 ) $ (51,219 ) $ (8,318 ) Revenue for the six months ended June 30, 2020 was $8.1 million, compared to $10.9 million for the six months ended June 30, 2019. The decrease of $2.8 million in revenue during the six months ended June 30, 2020 was primarily the result of a $1.5 million milestone payment received from an agriculture industry collaboration partner, offset by a $2.8 million decrease in collaboration revenue received from Gilead and a decrease of $1.1 million in revenue from various joint development collaborations as agreements to provide services thereunder ended in 2019 and a $0.4 million decrease in collaboration revenue received from Servier. Research and Development Expenses Six Months Ended June 30, (in thousands) 2020 2019 Change Direct research and development expenses by product candidate: CD19 external development costs $ 4,948 $ 3,026 $ 1,922 CD20 external development costs 3,029 — 3,029 BCMA external development costs 2,283 — 2,283 Platform development, early-stage research and unallocated expenses: Employee-related costs 18,190 11,543 6,647 Laboratory supplies and services 6,101 6,637 (536 ) Outsourced research and development 4,842 9,042 (4,200 ) CMOs and research organizations 3,279 6,940 (3,661 ) Laboratory equipment and maintenance 761 587 174 Facility-related costs 1,645 1,290 355 Depreciation and amortization 3,710 1,614 2,096 Licensing fees 1,150 - 1,150 Other research and development costs 124 2,042 (1,918 ) Total research and development expenses $ 50,062 $ 42,721 $ 7,341 Research and development expenses for the six months ended June 30, 2020 were $50.1 million, compared to $42.7 million for the six months ended June 30, 2019. The increase of $7.4 million was primarily due to increases in direct research and development expenses related to our CD19, CD20, and BCMA programs of $1.9 million, $3.0 million, and $2.3 million, respectively, due to increases in lab services and CMO and research organization costs as we entered a CD19 Phase 1/2a clinical trial in April 2019, CD20 Phase 1/2a clinical trial in April 2020, and BCMA Phase 1/2a clinical trial in June 2020, as well as a $0.1 increase in platform development, early-stage research and unallocated expenses. Platform development, early-stage research and unallocated expenses increased primarily due to a $6.6 million increase in employee-related costs associated with increased headcount to support our technology platform development and manufacturing capabilities, a $2.1 million increase in depreciation and amortization and a $1.2 million increase in licensing fees, offset by a $4.2 million decrease in outsourced research and development spending, a $3.7 million decrease in CMOs and research organizations spending and a $1.9 million decrease in other R&D expenses in the six months ended June 30, 2020, compared to the same period in 2019. 31 General and Administrative Expenses General and administrative expenses were $18.3 million for the six months ended June 30, 2020, compared to $11.5 million for the six months ended June 30, 2019. The increase of $6.8 million was primarily due to costs required to meet our growing infrastructure needs, including increases of $2.7 million in employee-related costs due to higher general and administrative headcount, $2.6 million in consulting fees, $0.9 million in taxes and insurance costs and $0.4 million in information technology costs. Change in Fair Value of Convertible Notes Payable We elected on issuance to account for the 2019 Notes at fair value until their settlement. For the six months ended June 30, 2020, we did not recognize any income due to changes in fair value of the 2019 Notes, compared to $9.8 million of expense due to changes in fair value of the 2019 Notes recognized in the six months ended June 30, 2019. The 2019 Notes were settled on the closing of the IPO in April 2019. Interest Expense We did not incur interest expense for the six months ended June 30, 2020. Interest expense of $0.2 million for the six months ended June 30, 2019 consisted of interest from the 2019 Notes at a rate of 6% per annum. Interest Income Interest income was $0.8 million for the six months ended June 30, 2020, compared to $2.1 million for the six months ended June 30, 2019. The decrease of $1.3 million of interest income generated on our cash and cash equivalent balances was the result of lower interest rates in the six months ended June 30, 2020 compared to the same period in 2019. Segment Results Six Months Ended June 30, (in thousands) 2020 2019 Change Revenue: Therapeutics $ 6,493 $ 9,638 $ (3,145 ) Food 1,583 1,213 370 Total segment revenue 8,076 10,851 (2,775 ) Segment operational cash expenditures: Therapeutics $ 38,374 $ 34,653 $ 3,721 Food 4,406 4,184 222 Total segment operational cash expenditures 42,780 38,837 3,943 Segment operating loss: Therapeutics $ (31,881 ) $ (25,015 ) $ (6,866 ) Food (2,823 ) (2,971 ) 148 Total segment operating loss (34,704 ) (27,986 ) (6,718 ) We evaluate the operating performance of each segment based on segment operating loss. Segment operating loss is derived by deducting operational cash expenditures, net, from GAAP revenue. Operational cash expenditures are cash disbursements made that are specifically identifiable to the reportable segment (including specifically identifiable research and development and property, equipment and software expenditures). The reportable segment operational cash expenditures include cash disbursements for compensation, laboratory supplies, purchases of property, equipment and software and procuring services from CROs, CMOs and research organizations. We do not allocate general operational expenses or non-cash income statement amounts to our reportable segments. Therapeutics Segment Revenue for the six months ended June 30, 2020 was $6.5 million, compared to $9.6 million for the six months ended June 30, 2019. The decrease of $3.1 million was primarily the result of a $2.8 million decrease in collaboration revenue recognized from Gilead due to the termination of the Gilead Agreement and a $0.3 million decrease in collaboration revenue recognized from Servier . Segment operational cash expenditures for the six months ended June 30, 2020 were $38.4 million, compared to $34.7 million for the six months ended June 30, 2019. The increase of $3.7 million was primarily due to an increase in employee headcount, CRO costs, clinical trial materials, licensing fees, laboratory supplies and equipment maintenance, consultant fees and rent offset by decreases in research service provider costs, lab services and fixed assets. Segment operating loss increased $6.9 million to $31.9 million for the six months ended June 30, 2020 compared to $25.0 million for six months ended June 30, 2019 primarily due to the factors discussed 32 above. Food Segment Revenue for the six months ended June 30, 2020 was $1.6 million, compared to $1.2 million for the six months ended June 30, 2019. The increase of $0.4 million was attributable due to a $1.5 million milestone payment received from an agriculture industry collaboration partner offset by a decrease of $1.1 million in revenue from various joint development collaborations as agreements to provide services thereunder ended in 2019. Segment operational cash expenditures for the six months ended June 30, 2020 were $4.4 million, compared to $4.2 million for the six months ended June 30, 2019. The increase of $0.2 million was primarily due to an increase in employee headcount and rent, offset by a decrease in fixed assets. Segment operating loss decreased $0.2 million to $2.8 million for the six months ended June 30, 2020 compared to $3.0 million for the six months ended June 30, 2019 primarily due to the factors discussed above. Liquidity and Capital Resources Since our inception, we have incurred significant operating losses. We expect to incur significant expenses and operating losses for the foreseeable future as we advance the preclinical and clinical development of our product candidates. We expect that our research and development and general and administrative costs will continue to increase, including in connection with conducting preclinical studies and clinical trials for our product candidates, contracting with CROs and CMOs, the addition of laboratory equipment to MCAT in support of preclinical studies and clinical trials, expanding our intellectual property portfolio and providing general and administrative support for our operations. As a result, we will need additional capital to fund our operations, which we may obtain from additional equity or debt financings, collaborations, licensing arrangements or other sources. There are no assurances that we will be successful in obtaining an adequate level of financing as and when needed to finance our operations on terms acceptable to us or at all, particularly in light of the economic downturn and ongoing uncertainty related to the COVID-19 pandemic. If we are unable to secure adequate additional funding as and when needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more product candidates. In addition, the magnitude and duration of the COVID-19 pandemic and its impact on our liquidity and future funding requirements is uncertain as of the filing date of this Quarterly Report on Form 10-Q, as the pandemic continues to evolve globally. See “Impact of COVID-19 Pandemic” above and “Risk Factors— The outbreak of COVID-19, or other pandemic, epidemic or outbreak of an infectious disease may materially and adversely impact our business, including our preclinical studies and clinical trials .” in Part II, Item 1A. of this Quarterly Report on Form 10-Q for a further discussion of the potential impact of the COVID-19 pandemic on our business. We do not currently have any approved products and have never generated any revenue from product sales. We have financed our operations primarily with proceeds from our IPO, the sale of our convertible preferred stock and upfront payments from collaboration and licensing arrangements. At June 30, 2020, we have generated approximately $480.0 million from third parties through a combination of financings including the IPO, and preferred stock and convertible note financings, an upfront payment under the Servier Agreement and other collaboration revenue, and additional funding from other strategic alliances and grants. Cash Flows Our cash and cash equivalents totaled $126.9 million and $226.1 million as of June 30, 2020 and 2019, respectively. The following table summarizes our sources and uses of cash for the periods presented: Six Months Ended June 30, (in thousands) 2020 2019 Net cash used in operating activities $ (51,711 ) $ (36,482 ) Net cash used in investing activities (2,888 ) (13,219 ) Net cash provided by financing activities 599 172,607 Increase in cash and cash equivalents $ (54,000 ) $ 122,906 33 Cash F lows for the Six Months Ended June 30, 2020 Operating Activities Net cash used in operating activities for the six months ended June 30, 2020 was $51.7 million, driven primarily by our net loss of $59.5 million as we incurred expenses associated with our CD19, CD20 and BCMA programs, platform development and early-stage research and general and administrative expenses. Investing Activities Net cash used in investing activities for the six months ended June 30, 2020 was $2.9 million, which was attributable to purchases for our right-of-use asset build-out as well as for property, equipment and software. Financing Activities Net cash provided by financing activities for the six months ended June 30, 2020 was $0.6 million, driven primarily by proceeds from stock option exercises and the employee stock purchase plan. Cash Flows for the Six Months Ended June 30, 2019 Operating Activities Net cash used in operating activities for the six months ended June 30, 2019 was $36.5 million, primarily consisting of our net loss of $51.2 million as we incurred expenses associated with our CD19 program, platform development and early-stage research, general and administrative expenses, and recognized a change in fair value to the 2019 Notes. In addition, we had non-cash charges of $6.1 million for depreciation and amortization, share-based compensation expense, interest expense and loss on disposal of assets. Net cash used in operating activities was also impacted by $1.2 million in changes in operating assets and liabilities, including $3.9 million in deferred revenue and $0.9 million in other assets, which were partially offset by changes of $2.4 million in accrued expenses, $0.6 million in prepaid expenses, $0.3 million in accounts receivable and $0.2 million in accounts payable. Investing Activities Net cash used in investing activities for the six months ended June 30, 2019 was $13.2 million, which was attributable to purchases of property, equipment and software. Financing Activities Net cash provided by financing activities for the six months ended June 30, 2019 was $172.7 million, consisting of $130.5 million in proceeds from our IPO, net of issuance costs and the net proceeds from the issuance of our 2019 Notes of $39.5 million. Debt Obligations In March 2019, we issued an aggregate principal amount of $39.6 million of 2019 Notes in a private placement transaction. Upon settlement, the change in fair value of the 2019 Notes was $9.8 million and the accrued interest on the 2019 Notes was $0.2 million. Pursuant to their terms, the 2019 Notes were settled in 2,921,461 shares of our common stock upon the closing of our IPO at a settlement price of $13.60 per share, which is equal to 85% of the IPO price per share. In May 2019, we entered into the Pacific Western Loan Agreement with Pacific Western Bank (“PWB”) as amended by the First Amendment to Loan and Security Amendment, effective September 18, 2019, the Second Amendment to Loan and Security Amendment, effective December 3, 2019 (the “Original Agreement”). On June 23, 2020, the Company and PWB entered into the Third Amendment to Loan and Security Agreement (the “Amendment”) to the Original Agreement (as amended, the “Pacific Western Loan Agreement”). The terms of Amendment No. 3 (a) decrease the aggregate principal amount of advances on a revolving line of credit (the “Revolving Line”) from $50.0 million to $30.0 million and (b) extend the maturity date of the Revolving Line to June 23, 2022, provided that, if the Company receives aggregate cash proceeds of at least $125.0 mil lion from the issuance of the Company’s equity securities and/or upfront cash proceeds from strategic partnerships on terms and conditions reasonably satisfactory to PWB, the maturity date shall then instead be June 23, 2023. Under the terms of Amendment N o. 3, the interest rate increased to a variable annual rate equal to the greater of (a) 2.75% above the Prime Rate (as defined in the Original Agreement), and (b) 6.00%. The Company must also maintain an aggregate balance of unrestricted cash at Bank (not including amounts in certain specified accounts) equal to or greater than $10 .0 million . As of June 30, 2020, there were no borrowings, and we were in compliance with the financial covenants, under the Pacific Western Loan Agreement. 34 Funding R equirements Our operating expenses increased substantially in the six months ended June 30, 2020 and are expected to increase substantially in the future in connection with the initiation of additional human clinical trials and capital expenditures for MCAT. We believe that our existing cash, cash equivalents and available credit will enable us to fund our operating expenses and capital expenditure requirements into 2022. We have based these estimates on assumptions that may prove to be imprecise, and we could utilize our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical and agricultural products, it is difficult to estimate with certainty the amount of our working capital requirements. Our future funding requirements will depend on many factors, including: • the progress, costs and results of our clinical development for our CD19, CD20, and BCMA programs as we progress clinical trials, including CRO costs; • the progress, costs and results of our additional research and preclinical development programs; • the outcome, timing and cost of meeting regulatory requirements established by the FDA and other comparable foreign regulatory authorities; • the costs and timing of internal process development and manufacturing scale-up activities and contract with CMOs associated with our CD19, CD20, and BCMA programs and other programs we advance through preclinical and clinical development; • our ability to establish and maintain strategic collaborations, licensing or other agreements and the financial terms of such agreements; • the scope, progress, results and costs of any product candidates that we may derive from ARCUS or any other product candidates we may develop alone or with collaborators; • the extent to which we in-license or acquire rights to other products, product candidates or technologies; • the costs and timing of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against any intellectual property-related claims; and • the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for any product candidates for which we or our collaborators obtain marketing approval. Until such time, if ever, that we can generate product revenue sufficient to achieve profitability, we expect to finance our cash needs through a combination of public or private equity or debt financings, collaboration agreements, other third-party funding, strategic alliances, licensing arrangements and marketing and/or distribution arrangements. There are no assurances that we will be successful in obtaining an adequate level of financing as and when needed to finance our operations on terms acceptable to us or at all, particularly in light of the economic downturn and ongoing uncertainty related to the COVID-19 pandemic. If we are unable to secure adequate additional funding as and when needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more product candidates. In addition, the magnitude and duration of the COVID-19 pandemic and its impact on our liquidity and future funding requirements is uncertain as of the filing date of this Quarterly Report on Form 10-Q, as the pandemic continues to evolve globally. See “— Impact of COVID-19 Pandemic” above and “Risk Factors— The outbreak of COVID-19, or other pandemic, epidemic or outbreak of an infectious disease may materially and adversely impact our business, including our preclinical studies and clinical trials .” in Part II, Item 1A. of this Quarterly Report on Form 10-Q for a further discussion of the potential impact of the COVID-19 pandemic on our business. We currently have an effective shelf registration statement on Form S-3 (No. 333-238857) filed with the Securities and Exchange Commission (the “SEC”) on June 1, 2020 (the “Form S-3”) under which we may offer from time to time in one or more offerings any combination of common and preferred stock, debt securities, warrants and units of up to $200.0 million in the aggregate. As of June 30, 2020, we have not sold any securities under our shelf registration statement. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our shareholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the 35 rights of our shareholders as c ommon stockholder s . Debt financing and preferred equity financing, if a vailable, may involve agreements that include covenants limiting or restricting our ability to take specifi c actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through other third-party funding, collaboration agreements, strategic alliances, licensing arrangements or m arketing and distrib ution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, product development and research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when n eeded, we may be required to delay, limit, reduce or terminate our product development or future c ommercialization efforts or grant rights to develop and market products or product candidates that w e would otherwise prefer to develop and market ourselves. Contractual Obligations Other than Amendment No. 3 to the Pacific Western Loan Agreement, effective June 23, 2020 described further under “ —Debt Obligations” above, and an amendment to our operating lease at 20 TW Alexander Drive, Research Triangle Park, North Carolina expiring in August 2027, providing for base rent of $0.5 million per year, subject to an annual upward adjustment of 3.0%, and two months of rent abatement as described further in Note 4 “Commitments and Contingencies” of our notes to condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, there have been no material changes to our contractual obligations from those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Critical Accounting Policies and Use of Estimates Our critical accounting policies and estimates are described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Use of Estimates” in our Annual Report on Form 10-K. We have reviewed those critical accounting policies and estimates for the three and six months ended June 30, 2020, and there have been no significant changes in our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules. Emerging Growth Company Status We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of reduced reporting requirements that are otherwise applicable to public companies. Section 107 of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with those standards. We have elected to take advantage of the extended transition period for complying with new or revised accounting standards; and as a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. The JOBS Act also exempts us from having to provide an auditor attestation of internal control over financial reporting under Sarbanes-Oxley Act Section 404(b). We will remain an “emerging growth company” until the earliest of (1) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more, (2) the last day of the fiscal year following the fifth anniversary of the completion of our IPO, (3) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years or (4) the date on which we are deemed to be a large accelerated filer under the rules of the SEC, which means the market value of our common stock held by non-affiliates exceeds $700 million as of the prior June 30 th , we have been a public company for at least 12 months and have filed one Annual Report on Form 10-K.