Arcus Biosciences, Inc. 10-Q

Item 1. Financial Statements. ARCUS BIOSCIENCES, INC. Condensed Consolida ted Balance Sheets (unaudited) (In thousands, except share and per share amounts) March 31, December 31, 2022 2021 ASSETS Current assets: Cash and cash equivalents $ 548,783 $ 147,914 Short-term investments 664,751 351,394 Receivable from collaboration partners ($ 29,262 and $ 744,535 from a related party) 29,419 744,595 Accrued interest receivable 2,746 2,227 Prepaid expenses and other current assets 18,527 15,620 Total current assets 1,264,226 1,261,750 Long-term investments 128,836 181,990 Property and equipment, net 33,481 32,455 Right-of-use assets 102,992 104,968 Restricted cash 3,005 3,005 Other long-term assets ($ 1,135 and $ 0 from a related party) 10,887 7,730 Total assets $ 1,543,427 $ 1,591,898 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 18,094 $ 10,261 Accrued research and development 37,654 29,587 Other accrued liabilities 16,196 24,181 Deferred revenue, current ($ 86,038 and $ 96,981 to a related party) 89,310 102,003 Other current liabilities - 52 Total current liabilities 161,254 166,084 Deferred revenue, noncurrent ($ 456,905 and $ 462,217 to a related party) 456,905 462,217 Operating lease liabilities, noncurrent 114,815 116,887 Other long-term liabilities 13,874 5,260 Total liabilities 746,848 750,448 Commitments (Note 10) Stockholders’ equity: Preferred stock, $ 0.0001 par value, 10,000,000 shares authorized as of March 31, 2022 and December 31, 2021; no shares issued and outstanding as of March 31, 2022 and December 31, 2021 - - Common stock, $ 0.0001 par value, 400,000,000 shares authorized as of March 31, 2022 and December 31, 2021; 71,622,313 and 70,781,736 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively. Shares outstanding includes zero and 9,946 shares issued but subject to vesting as of March 31, 2022 and December 31, 2021, respectively. 7 7 Additional paid-in capital 1,144,579 1,118,058 Accumulated deficit ( 343,347 ) ( 275,354 ) Accumulated other comprehensive loss ( 4,660 ) ( 1,261 ) Total stockholders’ equity 796,579 841,450 Total liabilities and stockholders’ equity $ 1,543,427 $ 1,591,898 The accompanying notes are an integral part of these condensed consolidated financial statements. 1 ARCUS BIOSCIENCES, INC. Condensed Consolidated Statements o f Operations and Comprehensive Loss (unaudited) (In thousands, except share and per share amounts) Three Months Ended March 31, 2022 2021 Revenues: Other collaboration revenue ($ 8,316 and $ 7,711 from a related party) $ 10,066 $ 9,461 License and development service revenue ($ 7,939 from a related party) 7,939 - Total revenues 18,005 9,461 Operating expenses: Research and development (($ 30,299 ) and ($ 4,924 ) from a related party) 61,211 66,387 General and administrative (($ 98 ) and $ 0 from a related party) 23,974 15,821 Total operating expenses 85,185 82,208 Loss from operations ( 67,180 ) ( 72,747 ) Non-operating income (expense): Interest and other income, net 582 154 Effective interest on liability for sale of future royalties ( 391 ) - Total non-operating income, net 191 154 Net loss before income taxes ( 66,989 ) ( 72,593 ) Income tax expense ( 1,004 ) - Net loss ( 67,993 ) ( 72,593 ) Other comprehensive loss ( 3,399 ) ( 46 ) Comprehensive loss $ ( 71,392 ) $ ( 72,639 ) Net loss per share, basic and diluted $ ( 0.96 ) $ ( 1.08 ) Weighted-average number of shares used to compute basic and diluted net loss per share 71,194,778 67,082,161 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 ARCUS BIOSCIENCES, INC. Condensed Consolidated Sta tements of Stockholders’ Equity (unaudited) (In thousands, except share amounts) Common stock Additional Paid-In Accumulated Accumulated Other Comprehensive Total Stockholders’ Shares Amount Capital Deficit Income (Loss) Equity Balance at December 31, 2020 63,691,901 $ 6 $ 830,438 $ ( 328,184 ) $ 44 $ 502,304 Issuance of common stock and rights to purchase additional shares in accordance with Amended and Restated Gilead Purchase Agreement, net of $ 55 offering costs 5,650,000 1 220,295 - - 220,296 Issuance of common stock upon exercise of stock options and vesting of restricted stock 200,828 - 1,885 - - 1,885 Vesting of early exercised stock options 54,039 - 183 - - 183 Stock-based compensation - - 12,761 - - 12,761 Other comprehensive loss - - - - ( 46 ) ( 46 ) Net loss - - - ( 72,593 ) - ( 72,593 ) Balance at March 31, 2021 69,596,768 $ 7 $ 1,065,562 $ ( 400,777 ) $ ( 2 ) $ 664,790 Balance at December 31, 2021 70,771,790 $ 7 $ 1,118,058 $ ( 275,354 ) $ ( 1,261 ) $ 841,450 Issuance of common stock upon exercise of stock options and vesting of restricted stock 840,577 - 9,928 - - 9,928 Vesting of early exercised stock options 9,946 - 52 - - 52 Stock-based compensation - - 16,541 - - 16,541 Other comprehensive loss - - - - ( 3,399 ) ( 3,399 ) Net loss - - - ( 67,993 ) - ( 67,993 ) Balance at March 31, 2022 71,622,313 $ 7 $ 1,144,579 $ ( 343,347 ) $ ( 4,660 ) $ 796,579 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 ARCUS BIOSCIENCES, INC. Condensed Consolidated S tatements of Cash Flows (unaudited) (In thousands) Three Months Ended March 31, 2022 2021 Cash flow from operating activities Net loss $ ( 67,993 ) $ ( 72,593 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation expense 16,541 12,761 Depreciation and amortization 1,457 800 Noncash lease expense 1,976 538 Amortization of premiums on investments 1,670 506 Acquired in-process research and development 2,500 - Effective interest on liability for sale of future royalties 391 - Changes in operating assets and liabilities: Receivable from collaboration partners ($ 715,273 and ($ 3,981 ) from a related party) 715,176 ( 4,186 ) Prepaid expenses and other current assets ( 5,590 ) ( 4,568 ) Other long-term assets (($ 1,135 ) and $ 0 to a related party) ( 1,727 ) 63 Accounts payable 8,138 7,722 Accrued research and development 5,567 4,716 Other accrued liabilities ( 8,462 ) ( 2,007 ) Deferred revenue (($ 16,255 ) and ($ 7,711 ) to a related party) ( 18,005 ) ( 9,461 ) Operating lease liabilities 92 ( 605 ) Other long-term liabilities 2,270 ( 2 ) Net cash provided by (used in) operating activities 654,001 ( 66,316 ) Cash flow from investing activities Purchases of short-term and long-term investments ( 377,573 ) ( 192,398 ) Proceeds from maturities of short-term and long-term investments 93,817 251,365 Sales of short-term and long-term investments 18,484 7,500 Purchases of property and equipment ( 2,788 ) ( 3,641 ) Net cash provided by (used in) investing activities ( 268,060 ) 62,826 Cash flow from financing activities Proceeds from issuance of common stock ($ 0 and $ 220,235 from a related party) - 220,235 Proceeds from sale of future royalties 5,000 - Proceeds from issuance of common stock pursuant to equity award plans 9,928 1,885 Net cash provided by financing activities 14,928 222,120 Net increase in cash and cash equivalents 400,869 218,630 Cash, cash equivalents and restricted cash at beginning of period 150,919 173,618 Cash, cash equivalents and restricted cash at end of period $ 551,788 $ 392,248 Non-cash investing and financing activities: Unpaid acquisition of in-process research and development $ 2,500 $ - Unpaid portion of property and equipment purchases included in accounts payable and accrued liabilities $ 691 $ 2,784 Vesting of early exercised stock options and restricted stock $ 52 $ 183 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 ARCUS BIOSCIENCES, INC. Notes to Condensed Con solidated Financial Statements Note 1. Organization Description of Business Arcus Biosciences, Inc. (the Company) is a clinical-stage biopharmaceutical company focused on creating best-in-class cancer therapies. Using its robust and highly efficient drug discovery capability, the Company has now advanced six investigational products into clinical development, with its most advanced molecule, an anti-TIGIT antibody, now in two Phase 3 registrational studies. The Company’s deep portfolio of novel small molecules and enabling antibodies allows it to create highly differentiated combination therapies, which the Company is developing to treat multiple large tumor types including lung, colorectal, prostate and pancreatic cancers. The Company expects its clinical-stage portfolio to continue to expand and to include molecules targeting both immuno-oncology and cancer cell-intrinsic pathways. The Company’s vision is to create, develop and commercialize highly differentiated combination cancer therapies that have a meaningful impact on patients. The Company currently has six investigational products in clinical development: domvanalimab (previously referred to as AB154), etrumadenant (previously referred to as AB928), quemliclustat (previously referred to as AB680), zimberelimab (previously referred to as AB122), AB308 and AB521. In 2020, the Company entered into an Option, License and Collaboration Agreement (Gilead Collaboration Agreement) with Gilead Sciences, Inc. (Gilead), whereby Gilead obtained an exclusive license to zimberelimab and time-limited exclusive options to all of the Company's then-current and future programs during the 10-year collaboration term. In December 2021, Gilead obtained rights to an additional four of the Company's investigational products: domvanalimab, etrumadenant, quemliclustat and AB308. For each program to which Gilead exercised or exercises its option, the parties will co-develop globally and co-commercialize the program in the U.S., subject to certain exceptions, and Gilead will have the right to commercialize the program outside of the United States, subject to the rights of our existing partners in certain territories. Liquidity and Capital Resources As of March 31, 2022, the Company had cash and investments of $ 1,342.4 m illion, which are cash, cash equivalents, and investments in marketable securities, which the Company believes will be sufficient to fund its planned operations for a period of at least twelve months following the date of filing of this report. Note 2. Significant Accounting Policies Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and pursuant to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the Company’s opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the results of operations and cash flows for the periods presented have been included. Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 or for any future period. The balance sheet as of December 31, 2021 has been derived from audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K filed with the SEC on February 23, 2022. There have been no significant changes to the Company’s significant accounting policies described in Note 2, Summary of Significant Accounting Policies, in Notes to Consolidated Financial Statements in Item 8 of Part II of the Form 10-K. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Arcus Biosciences, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. 5 Use of Estimates The preparation of the Company’s condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as related disclosures of contingent assets and liabilities. Estimates were used to determine the standalone selling price of performance obligations and the timing of revenue recognition, the value of stock-based awards and other issuances, accruals for research and development costs, useful lives of long-lived assets, and uncertain tax positions. Actual results could differ materially from the Company’s estimates. Cash Equivalents and Investments Cash equivalents include marketable securities having an original maturity of three months or less at the time of purchase. Short-term investments have maturities of greater than three months and up to twelve months at the time of purchase. Long-term investments have maturities greater than 12 months at the time of purchase. Collectively, cash equivalents, short-term and long-term investments are considered available-for-sale and are recorded at fair value. Unrealized gains and losses are recorded in accumulated other comprehensive income (loss). Realized gains and losses are included in interest and other income, net in the condensed consolidated statements of operations and comprehensive income or loss. The basis on which the cost of a security that is sold or an amount that is reclassified out of accumulated other comprehensive income or loss into earnings is determined using the specific identification method. Reconciliation of Cash, Cash Equivalents, and Restricted Cash as Reported in Condensed Consolidated Statements of Cash Flows Restricted cash at March 31, 2022 and 2021 represents cash balances held as security in connection with the Company’s facility lease agreements. The following table provides a reconciliation of cash, cash equivalents, and restricted cash within the condensed consolidated balance sheets to the total shown in the condensed consolidated statements of cash flows (in thousands): March 31, 2022 2021 Cash and cash equivalents $ 548,783 $ 390,260 Restricted cash 3,005 1,988 Cash, cash equivalents and restricted cash $ 551,788 $ 392,248 Concent ration of Credit Risk Cash equivalents, short-term and long-term investments are financial instruments that potentially subject the Company to concentrations of credit risk. The Company invests in money market funds, treasury bills and notes, government bonds, commercial paper, corporate notes, and certificates of deposit. The Company limits its credit risk associated with cash equivalents, short-term and long-term investments by placing them with banks and institutions it believes are credit worthy and in highly rated investments. Leases and Rent Expense The Company recognizes a lease asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation. The Company determines whether an arrangement is or contains a lease at contract inception. Operating leases and related tenant improvement allowances receivable are included in operating lease right-of-use assets, prepaid expenses and other current assets, and operating lease liabilities, noncurrent in our condensed consolidated balance sheets at March 31, 2022 and December 31, 2021. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the net present value of lease payments, the Company uses its incremental borrowing rate based on information available at the lease commencement date. The incremental borrowing rate represents the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The Company considers a lease term to be the noncancelable period that it has the right to use the underlying asset, including any periods where it is reasonably assured the Company will exercise the option to extend the contract. Periods covered by an option to extend are included in the lease term if the lessor controls the exercise of that option. The Company elected to not apply the recognition requirements of the new leasing standard to short-term leases with terms of 12 months or less which do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise. For short-term leases, lease payments are recognized as operating expenses on a straight-line basis over the lease term. The following table summarizes supplemental cashflow disclosures related to the Company's operating leases (in thousands): Year Ended March 31, 2022 2021 Cash paid for amounts included in measurement of lease liabilities $ 1,470 $ 927 6 Note 3. Fair Value Measurements Financial assets and liabilities are recorded at fair value. The accounting guidance for fair value provides a framework for measuring fair value, clarifies the definition of fair value and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. During the periods presented, the Company has not changed the manner in which it values assets and liabilities that are measured at fair value. The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers within the hierarchy as of March 31, 2022 or December 31, 2021. The following tables set forth the Company’s financial instruments (excluding restricted cash) that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands): March 31, 2022 Total Level 1 (Quoted Prices in Active Markets For Identical Assets) Level 2 (Significant Other Observable Remaining Inputs) Level 3 (Significant Other Unobservable Remaining Inputs) Money market funds $ 475,934 $ 475,934 $ - $ - U.S. treasury securities 321,642 - 321,642 - Corporate securities and commercial paper 524,051 - 524,051 - Certificates of deposit 20,743 20,743 Total assets measured at fair value $ 1,342,370 $ 475,934 $ 866,436 $ - December 31, 2021 Total Level 1 (Quoted Prices in Active Markets For Identical Assets) Level 2 (Significant Other Observable Remaining Inputs) Level 3 (Significant Other Unobservable Remaining Inputs) Money market funds $ 147,914 $ 147,914 $ - $ - U.S. treasury securities 112,170 - 112,170 - Corporate securities and commercial paper 421,214 - 421,214 - Total assets measured at fair value $ 681,298 $ 147,914 $ 533,384 $ - Classified as (with contractual maturities): March 31, 2022 December 31, 2021 Cash and cash equivalents $ 548,783 $ 147,914 Short-term investments (due within one year) 664,751 351,394 Long-term investments (due between one and three years) 128,836 181,990 Total cash, cash equivalents and investments in marketable securities $ 1,342,370 $ 681,298 7 All the Company's investments in marketable securities are classified as available-for-sale. At March 31, 2022 and December 31, 2021, the balance in the Company’s accumulated other comprehensive income (loss) related to the Company’s available-for-sale marketable securities. There were no realized gains or losses recognized on the sale or maturity of available-for-sale marketable securities as of March 31, 2022 and December 31, 2021, and as a result, the Company did no t reclassify any amounts out of accumulated other comprehensive income for the periods then ended. The Company has not recognized any allowances for credit losses given the nature of its receivables and investment portfolio and the immaterial amount of unrealized losses on available for sale securities. No credit related losses have been recognized for any of the periods presented. The fair value and amortized cost of investments in marketable securities by major security type as of March 31, 2022 and December 31, 2021 are presented in the tables that follow (in thousands): Amortized Cost Unrealized Gain Unrealized Loss Fair Value As of March 31, 2022: Money market funds $ 475,934 $ - $ - $ 475,934 U.S. treasury securities 323,034 7 ( 1,399 ) 321,642 Corporate securities and commercial paper 527,328 24 ( 3,301 ) 524,051 Certificates of deposit 20,734 10 ( 1 ) 20,743 Total $ 1,347,030 $ 41 $ ( 4,701 ) $ 1,342,370 Amortized Cost Unrealized Gain Unrealized Loss Fair Value As of December 31, 2021: Money market funds $ 147,914 $ - $ - $ 147,914 U.S. treasury securities 112,473 1 ( 304 ) 112,170 Corporate securities and commercial paper 422,172 3 ( 961 ) 421,214 Total $ 682,559 $ 4 $ ( 1,265 ) $ 681,298 As of March 31, 2022, the fair value of the liability for sale of future royalties recorded on the balance sheet in other long-term liabilities is based on the Company's current estimates of future contingent milestones and royalties expected to be paid to BVF Partners L.P. (BVF) over the term of the parties' funding agreement (the BVF Agreement). These estimates are considered Level 3 fair value inputs. See Note 5 for further discussion of the liability and related estimates . Note 4. Other Accrued Liabilities Other accrued liabilities consisted of the following (in thousands): As of March 31, 2022 As of December 31, 2021 Accrued personnel expenses $ 11,665 $ 16,648 Professional fees 234 4,938 Income taxes payable 2,819 1,815 Other 1,478 780 Total $ 16,196 $ 24,181 Note 5. Liability for Sale of Future Royalties In October 2021, the Company and BVF entered into the BVF Agreement, under which BVF will fund the discovery and development of compounds for the treatment of inflammatory diseases (the Program) by providing the Company with $ 15 million in three non-refundable payments. Consistent with the terms of the Gilead Collaboration Agreement, Gilead has an option to the Program. The Company received $ 5 million from BVF in the fourth quarter of 2021 and an additional $ 5 million in the first quarter of 2022. The Company expects to receive the third $ 5 million payment in 2022. In return, the Company is obligated to perform research and development activities in the Program, to make contingent payments upon the achievement of certain clinical and regulatory milestones of up to $ 72.5 million or $ 160.0 million depending on whether the program is solely developed by Arcus or as part of the collaboration with Gilead. The Company also must pay mid- to high-single digit royalties based on net sales of products generated by the Program. The agreement also provides BVF with the option to provide an additional $ 10 million in funding for the Program in exchange for an increase in the royalty rate. The Company accounts for the BVF Agreement as a liability primarily because it has significant continuing involvement in generating the cash flows due to BVF. If the Program achieves certain development and regulatory milestones and commercial sales, the Company will recognize the portion of milestone payments and royalties paid to BVF as a decrease to the accumulated liability with a corresponding reduction in cash. 8 The carrying amount of the liability for sale of future royalties is based on management's estimate of the future contingent milestones and royalties to be paid to BVF over the life of the arrangement as discounted using an imputed rate of interest. The excess of future estimated contingent milestone and royalty payments over the $ 15 million of allocated proceeds is recognized as non-cash interest expense using the effective interest method, which is reported in the condensed consolidated statements of operations as non-operating expense. The balance associated with the liability was $ 10.7 million at March 31, 2022 and is reported on the consolidated balance sheets in other long-term liabilities. The imputed effective rate of interest on the unamortized portion of the liability was approximately 20.6 % as of March 31, 2022. The Company periodically reassess the amount and timing of expected payments. To the extent such payments are greater or less than the Company's initial estimates or the timing of such payments is materially different than those estimates, the Company will adjust the liability and the effective interest rate using a retrospective method, catch-up method, or prospective method, subject to an accounting policy election applied on a consistent basis. As of March 31, 2022, there have been no changes to the estimated effective interest rate. There are a number of factors that could materially affect the amount and timing of contingent milestone and royalty payments, most of which are not within the Company's control. The liability is recognized using significant unobservable inputs. These inputs are derived using internal management estimates, based in part on external data when available, and reflect management’s judgements and forecasts. The significant unobservable inputs include the forecasted revenues, the probability and timing of clinical and regulatory milestones, the expected term of the royalty stream, and the royalty rate as well as the overall probability of success. These estimates are considered Level 3 fair value inputs. A significant change in unobservable inputs could result in a material increase or decrease to the effective interest rate of the liability. Changes to the liability for sale of future royalties were as follows for the three months ended March 31, 2022 (in thousands): 2022 Beginning balance, January 1 $ 5,260 Cash received from BVF 5,000 Interest accretion 391 Ending balance, March 31 $ 10,651 The Company incurred $ 0.4 million in non-cash interest expense for the three months ended March 31, 2022. Note 6. License and Collaboration Agreements The following table summarizes the revenues recognized from the Company’s collaboration agreements with Gilead and Taiho Pharmaceutical Co., Ltd. (Taiho) (in thousands): Three Months Ended March 31, 2022 2021 Other collaboration revenue $ 10,066 $ 9,461 License and development services revenue 7,939 - Total collaboration and license revenues $ 18,005 $ 9,461 The following table summarizes revenues by collaboration, category of revenue, and the method of recognition (in thousands): Three Months Ended March 31, Revenues recognized: Over time Point in time 2022 2021 Gilead access rights related to the Company's research and development pipeline * $ 8,316 $ 7,711 License and development services for all Gilead programs * 7,939 - Taiho access rights * 1,750 1,750 Total collaboration and license revenues $ 18,005 $ 9,461 The Company recognized the following revenue as a result of changes in the deferred revenue balance during the period below (in thousands): Three Months Ended March 31, Revenue recognized in the period from: 2022 2021 Amounts included in deferred revenue at the beginning of the period $ 18,005 $ 9,461 Performance obligations satisfied in a previous period - - 9 Gilead Sciences, Inc. Summary In May 2020, the Company entered into the Gilead Collaboration Agreement, Common Stock Purchase Agreement (the Stock Purchase Agreement), and Investor Rights Agreement, (collectively, the Gilead Agreements), each with Gilead. Upon closing in July 2020, Gilead made an upfront payment of $ 175 million pursuant to the Gilead Collaboration Agreement and made an equity investment of approximately $ 200 million in the Company by purchasing 5,963,029 shares of Arcus common stock at a per share price of $ 33.54 pursuant to the Stock Purchase Agreement. In November 2021, the Company and Gilead entered into an amendment to the Gilead Collaboration Agreement (the Amended Gilead Collaboration Agreement), under which Gilead exercised its options to three programs for a total option payment of $ 725 million that was received in January 2022. In connection with Gilead’s exercise of its options to the three programs, the parties agreed to (i) slightly reduce the royalties for these programs, such that Gilead will pay the Company tiered royalties as a percentage of revenues ranging from the mid-teens to the low twenties and (ii) remove the $ 100 million option continuation payment that was otherwise due on the second anniversary of the Gilead Collaboration Agreement. As of March 31, 2022, Gilead had obtained licenses to the following investigational products: zimberelimab (in 2020), domvanalimab, AB308, etrumadenant, and quemliclustat (the latter four in 2021). Pursuant to the terms of the Gilead Collaboration Agreement, as amended, Gilead obtained exclusive licenses to zimberelimab, domvanalimab, AB308, etrumadenant, and quemliclustat, and time-limited exclusive options to all of the Company’s current and future clinical programs during the 10 -year collaboration term and, for those programs that enter clinical development prior to the end of the collaboration term, for up to an additional three years thereafter. Gilead's option rights to future programs are contingent upon Gilead’s payments of up to $ 300 million in option continuation payments, consisting of a $ 100 million payment due at Gilead's option on each of the fourth, sixth, and eighth anniversaries of the agreement. Gilead's option, on a program-by-program basis, will expire after a prescribed period, following the achievement of a clinical development milestone in such program and the Company's delivery to Gilead of the requisite data package. Gilead may exercise its option to any program at any time prior to expiration of the option, and will pay the Company an option fee of $ 150 million per program. Gilead has exercised its option to all of the clinical programs in existence at the date of the 2020 agreement, and the Company may not exercise its opt-out rights for any of these programs. With respect to domvanalimab, the Company is also eligible to receive up to $ 500 million in potential U.S. regulatory approval milestones. Gilead was also granted option rights to two research programs for which the Company will lead discovery and early development activities. With respect to these two research programs, Gilead has the right to exercise its option, on a program-by-program basis, either (i) upon the Company's completion of certain IND-enabling activities for an option payment of $ 60 million or (ii) following the achievement of a clinical development milestone for an option payment of $ 150 million. These research programs were not determined to be performance obligations at contract inception, due to the very early stages of the programs and the amounts of the option payments. The Company’s assessment of the transaction price upon the signing of the Amended Gilead Collaboration Agreement included an analysis of amounts it expected to receive, which at contract inception consisted of the upfront cash payment of $ 725 million committed upon contract closing following expiration of the antitrust waiting period in December 2021, as well as amounts totaling $ 165.1 million deferred from the original Gilead transaction, which excludes the $ 100 million option continuation payment that would otherwise have been due on the second anniversary of the Gilead Collaboration Agreement. The Company considers the entire $ 890.1 million to be the allocable transaction price as of the amendment closing date, due to the Company's history of timely payments from Gilead and receipt of the full $ 725 million in January 2022 per the terms of the amendment. The Company determined that the Amended Gilead Collaboration Agreement represented a contract modification under the application of ASC 606. At the amendment closing date, the Company allocated the transaction price to the new and remaining performance obligations identified as follows: 10 Amount Allocation of transaction price Deferred revenues as of 12/21/2021 $ 165,086 Option payment for Domvanalimab 275,000 Option payment for Etrumadenant 250,000 Option payment for Quemliclustat 200,000 Total transaction price allocated to performance obligations $ 890,086 Allocation to performance obligations Distinct Combined Amount Domvanalimab license * $ 328,838 Etrumadenant license and R&D activities * 218,722 Quemliclustat license and R&D activities * 175,618 Domvanalimab R&D activities * 34,528 Zimberelimab R&D and commercial services * 11,243 Access rights related to the Company's research and development pipeline * 84,076 Material rights to option continuation periods * 37,061 Total $ 890,086 Upon closing of Gilead’s exercise of its option to a program, the two companies will co-develop and equally share global development costs for the joint development program, subject to opt-out rights of the Company applicable to certain programs, and expense caps on the Company’s spending and related subsequent adjustments. For each optioned program, provided the Company has not exercised its opt-out rights (if applicable), the Company has an option to co-promote in the United States with equal sharing of related profits and losses. Gilead has the right to exclusively commercialize any optioned programs outside of the U.S., subject to the rights of the Company’s existing partners to any territories, and Gilead will pay to the Company tiered royalties as a percentage of revenues ranging from (i) the mid-teens to the low twenties for the three 2021 optioned programs, (ii) high single digits to low double digits for research programs if Gilead exercises its option rights at the IND stage, and (iii) the high teens to the low twenties for all other programs. The Company had $ 542.9 million and $ 559.2 million of deferred revenue remaining on its consolidated balance sheets related to this performance obligation at March 31, 2022 and December 31, 2021, respectively, allocated between current and noncurrent based on the expected timing of future recognition. Stock Purchase Agreement and Investor Rights Agreement Pursuant to the Stock Purchase Agreement, Gilead has the right, at its option, to purchase additional shares from the Company, up to a maximum of 35 % of the Company’s then-outstanding voting common stock, from time to time over five years from closing of the initial transaction, at a purchase price equal to the greater of a 20 % premium to market (based on a trailing five-day average closing price) at the time Gilead exercises such option, and the $ 33.54 initial purchase price. The Investor Rights Agreement also includes a three-year standstill and a two-year lockup and provides Gilead with registration rights commencing at the end of the lockup period, pro rata participation rights in certain future financings and the right to designate two individuals to be appointed to the Company’s Board of Directors. In the year ended December 31, 2020, Gilead made an equity investment of approximately $ 200 million in the Company by purchasing 5,963,029 shares of the Company's common stock at a per share price of $ 33.54 pursuant to the Stock Purchase Agreement. Of the $ 200 million equity investment, approximately $ 90.6 million was determined to be a premium on the purchase of common stock and allocated to the performance obligations created by the Gilead Collaboration Agreement. Gilead made an additional equity investment in the Company of approximately $ 56.7 million, net of offering costs, by purchasing 2,200,000 shares of its common stock at a per share price of $ 27.50 in the May 2020 public offering. In January 2021, the Company and Gilead entered into an Amended and Restated Common Stock Purchase Agreement, which amended and restated in its entirety the Common Stock Purchase Agreement, pursuant to which Gilead purchased from the Company 5,650,000 shares of its common stock at a purchase price of $ 39.00 per share, for a total of $ 220.3 million, net of offering costs. All other terms of the original Common Stock Purchase Agreement, including Gilead's option to purchase additional shares from the Company, up to a maximum ownership of 35 % of its then-outstanding common stock, remain unchanged. Pursuant to the Investor Rights Agreement, the Company appointed Gilead's two designees to the Company’s Board of Directors. Based on the value of the Company’s common stock at the contract closing, the right to purchase additional shares had no value. See Note 11 for further discussion of the agreements with Gilead. 11 The Company evaluated the agreements with Gilead under ASC 808 and ASC 606 and determined that the licenses to zimberelimab and domvanalimab, and access rights related to the Company's research and development pipeline, were within the scope of ASC 606 because Gilead meets the definition of a customer with respect to those performance obligations. The Company accounted for each performance obligation as follows: Zimberelimab license Effective on the July 2020 closing of the Gilead Collaboration Agreement, Gilead obtained an exclusive license to zimberelimab. The standalone selling price of this license was determined using a discounted cash flow method. The Company recognized the full amount associated with this distinct performance obligation in license revenue on the date the transaction closed. Domvanalimab option and license Gilead obtained the right in the Gilead Collaboration Agreement to exercise an option for exclusive rights to the Company’s anti-TIGIT monoclonal antibody program, including domvanalimab and AB308, in exchange for an option payment of $ 275 million. Prior to the closing of the Amended Gilead Collaboration Agreement, the Company had $ 36.7 million of deferred revenue on its consolidated balance sheets related to this performance obligation. Effective on the December 2021 closing of the Amended Gilead Collaboration Agreement, Gilead obtained an exclusive license to domvanalimab. The standalone selling price of this license was determined using a discounted cash flow method. The Company further evaluated the delivery of the license, noting that the program was in later stages of development and it met the criteria for being distinct from the research and development services required under the Gilead Collaboration Agreement (as amended). As the license had been made available in the fourth quarter of 2021, the Company recognized the full $ 328.8 million of transaction price allocated to this performance obligation as license revenue in December 2021. Etrumadenant option, license and R&D activities Gilead obtained the right in the Gilead Collaboration Agreement to exercise an option for exclusive rights to the Company’s adenosine receptor program, etrumadenant, in exchange for an option payment of $ 250 million. Prior to the closing of the Amended Gilead Collaboration Agreement, the Company had $ 127.0 million of deferred revenue on its consolidated balance sheets related to this performance obligation. Effective on the December 2021 closing of the Amended Gilead Collaboration Agreement, Gilead obtained an exclusive license to etrumadenant. The standalone selling price of this license was determined using a discounted cash flow method. The Company further evaluated the delivery of the license, noting that it was combined with the research and development services required under the agreements due to the early stage of the technology and the specialized nature of the Company's know-how. The Company determined that it retains obligations to perform further development services for Gilead related to etrumadenant. The standalone selling price of this obligation was determined using an expected cost-plus margin approach. The Company will recognize the amounts allocated to the combined license and services as the performance obligation is satisfied, calculated as an estimated percentage of completion based on management's estimated full-time employee expense for the program. Due to the combined nature of the performance obligation, the Company determined that the revenue from the license would be recognized at the same rate and using the same input-driven methodology as the revenue from the research and development services. The Company determined that its performance of the R&D activities commenced January 1, 2022 and accordingly the Company recognized $ 5.0 million in license and development services revenue associated with these obligations for the three months ended March 31, 2022. At March 31, 2022, the Company had $ 213.8 million of deferred revenue remaining on its consolidated balance sheets related to this performance obligation, allocated between current and noncurrent based on the expected timing of future recognition. Quemliclustat option, license and R&D activities Gilead obtained the right in the Gilead Collaboration Agreement to exercise an option for exclusive rights to the Company's CD73 program, quemliclustat, in exchange for an option payment of $ 200 million. Prior to the closing of the Amended Gilead Collaboration Agreement, the Company had no deferred revenue on its consolidated balance sheets related to this performance obligation. The Company determined that it retains obligations to perform further development services for Gilead related to quemliclustat. The standalone selling price of this obligation was determined using an expected cost-plus margin approach. The Company will recognize the amounts allocated to these services as the performance obligation is satisfied, calculated as an estimated percentage of completion based on management's estimated full-time employee expense for the program. Effective on the December 2021 closing of the Amended Gilead Collaboration Agreement, Gilead obtained an exclusive license to quemliclustat. The standalone selling price of this license was determined using a discounted cash flow method. The Company further evaluated the delivery of the license, noting that it was combined with the research and development services required under the agreements due to the expertise and the know-how developed by the Company. 12 Due to the combined nature of the performance obligation, the Company determined that the revenue from the license would be recognized at the same rate and using the same input-driven methodology as the revenue from the research and development services. The Company determined that its performance of the R&D activities commenced January 1, 2022 and accordingly the Company recognized $ 1.8 million in license and development services revenue associated with these obligations for the three months ended March 31, 2022. At March 31, 2022, the Company had $ 173.8 million of deferred revenue remaining on its consolidated balance sheets related to this performance obligation, allocated between current and noncurrent based on the expected timing of future recognition. R&D activities for domvanalimab The Company determined that it retains separate obligations to perform further development services for Gilead related to domvanalimab. The standalone selling price of this obligation was determined using an expected cost-plus margin approach. The Company will recognize the amounts allocated to these services as the performance obligation is satisfied, calculated as an estimated percentage of completion based on management's estimated full-time employee expense for the program. The Company determined that its performance of the R&D activities commenced as of January 1, 2022 and accordingly the Company recognized $ 0.9 million in license and development services revenue associated with these obligations in the three months ended March 31, 2022. At March 31, 2022, the Company had $ 33.6 million of deferred revenue remaining on its consolidated balance sheets related to this performance obligation, allocated between current and noncurrent based on the expected timing of future recognition. R&D and commercialization activities for zimberelimab monotherapy The Company determined that it retains an obligation to perform further development and commercialization services for Gilead related to zimberelimab monotherapy. Prior to the closing of the Amended Gilead Collaboration Agreement, the Company had $ 9.7 million deferred revenue on its consolidated balance sheets, related to the two performance obligations. The standalone selling price of this obligation was determined using an expected cost-plus margin approach. The Company will recognize the amounts allocated to these services as the performance obligation is satisfied, calculated as an estimated percentage of completion based on management's estimated full-time employee expense for the program. The Company determined that its performance of the R&D activities had commenced in 2021 and accordingly the Company recognized $ 0.3 million in license and development services revenue associated with these obligations in the three months ended March 31, 2022. At March 31, 2022, the Company had $ 9.8 million of deferred revenue remaining on its consolidated balance sheets related to this performance obligation, allocated between current and noncurrent based on the expected timing of future recognition. Access rights related to the Company’s research and development pipeline and material rights to option continuation periods Gilead receives exclusive access to the Company’s current programs as well as the future programs for a period of ten years , contingent upon Gilead’s payment of $ 300 million, consisting of three $ 100 million option continuation payments due at Gilead’s option on each of the fourth, sixth, and eighth anniversaries of the agreement. The standalone selling price of this ongoing research and development pipeline access was determined using an expected cost-plus margin approach. The Company uses a time-elapsed input method to measure progress toward satisfying this obligation, which is the method the Company believes most faithfully depicts the Company’s performance in transferring the promised services during the time period in which Gilead has access to the Company’s research and development pipeline. Accordingly, the revenue allocated to the performance obligation is being recognized using this input method over the minimum four-year period. The Company determined that Gilead is not obligated to pay the remaining $ 300 million due over the remainder of the term. Failure to pay the non-obligatory option continuation payments will result in Gilead’s loss of certain rights to access and obtain licenses to the programs arising from the Company’s research and development pipeline. Prior to the closing of the Amended Gilead Collaboration Agreement, the Company had $ 91.7 million deferred revenue on its consolidated balance sheets related to this performance obligation. The Company recognized $ 8.3 million and $ 7.7 million in other collaboration revenues associated with these obligations in the three months ended March 31, 2022 and 2021, respectively. At March 31, 2022, the Company had $ 111.9 million of deferred revenue on its consolidated balance sheets related to this performance obligation, classified between current and noncurrent based on the amortization of the revenue. Cost-sharing reimbursements The Company's research and development obligations under the Gilead Collaboration Agreement includes a 50/50 share of the joint development costs associated with optioned programs. Payments received from Gilead for their share of costs incurred will be recognized as a reduction of R&D expense or G&A expense depending on the type of expense reimbursed. Payments made to Gilead for the Company's share of costs incurred will be recognized as an increase to those expenses depending on the type of cost reimbursed. The Company recognized reductions of operating expenses totaling $ 30.4 million and $ 4.9 million during the three months ended March 31, 2022 and 2021, respectively, as a result of this cost-sharing provision. 13 Capitalized costs to obtain contract The Company incurred $ 7.3 million in costs to obtain the contract in 2020, which consisted of consultant and legal fees that were directly connected to the successful completion of the Gilead Agreements. The Company determined that $ 1.9 million of these expenses were related to the Stock Purchase Agreement which were recognized as offering costs. The Company allocated the remaining costs between the various performance obligations, to be recognized when the underlying revenue is recognized. The Company incurred an additional $ 4.5 million in fees to a third party as part of entering into the Amended Gilead Collaboration Agreement in 2021. These fees were combined with the $ 3.8 million of capitalized fees that remained from the original agreement at the date of closing, and the total $ 8.3 million was allocated among the performance obligations identified under the Amended Gilead Collaboration Agreement and deferred or recognized accordingly. The Company recognized $ 0.1 million in expense related to these capitalized costs during each of the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, the Company had $ 4.8 million in capitalized costs to obtain the contract, of which $ 0.8 million was recorded in prepaid expenses and other current assets and $ 4.0 million was recorded in other long-term assets. Taiho Pharmaceutical Co., Ltd In September 2017, the Company and Taiho entered into an option and license agreement (the Taiho Agreement) under which Taiho obtained exclusive options to Arcus programs arising over a five-year period ending September 2022 (the Option Period). If Taiho timely exercises its option, Taiho obtains exclusive development and commercialization rights to investigational products from such Arcus Program for Japan and certain other territories in Asia (excluding China) (the Taiho Territory). In consideration for the exclusive options and other rights contained in the Taiho Agreement, Taiho paid non-refundable, non-creditable cash payments to the Company totaling $ 35.0 million. For each option that Taiho elects to exercise, it will be obligated to make an option exercise payment of between $ 3.0 million to $ 15.0 million, depending on the development stage of the applicable Arcus Program for which the option is exercised. Upon exercise Taiho is solely responsible for continued development and commercialization in the Taiho Territory. In addition, the Taiho Agreement provides that the Company is eligible to receive additional clinical and regulatory milestones totaling up to $ 130.0 million per Arcus Program, and it will be eligible to receive contingent payments of up to $ 145.0 million per Arcus Program associated with the achievement of specified levels of Taiho net sales in the Taiho Territory. In addition, the Company will receive royalties ranging from high single-digits to mid-teens on net sales of licensed products in the Taiho Territory. Royalties will be payable on a licensed product-by-licensed product and country-by-country basis during the period of time commencing on the first commercial sale of a licensed product in a country and ending upon the later of: (a) ten (10) years from the date of first commercial sale of such licensed product in such country; and (b) expiration of the last-to-expire valid claim of the Company’s patents covering the manufacture, use or sale or exploitation of such licensed product in such country (the Royalty Term). The Company determined that the identified performance obligations for the Taiho Agreement, which include the combined performance obligation of the research and development services and the obligation to participate on the joint steering committee, are satisfied over time. The Company uses a time-elapsed input method to measure progress toward satisfying its performance obligation, which is the method the Company believes most faithfully depicts the Company’s performance in transferring the promised services during the time period in which Taiho has access to the Company’s research and development activities. Accordingly, the transaction price of $ 35.0 million is being recognized in other collaboration revenues using this input method over the estimated performance period of five years . From the inception of the Taiho Agreement through March 31, 2022, Taiho has exercised its option to the Company's adenosine receptor antagonist program (including etrumadenant), its anti-PD-1 program (including zimberelimab), and its anti-TIGIT program (including domvanalimab and AB308) for option payments totaling $ 26.0 million. The Taiho Agreement will remain in effect until the expiry of all royalty terms for the licensed products. As of March 31, 2022, no clinical or regulatory milestones had been achieved under the Taiho Agreement. As of March 31, 2022, no sales milestone or royalty revenue has been recognized. In November 2021, Taiho exercised its option under the Taiho Agreement to the Company's anti-TIGIT program, including domvanalimab and AB308, in exchange for a $ 15.0 million option exercise fee. In November 2019, Taiho exercised its option to the Company's anti-PD-1 antibody program, including zimberelimab, for a fee of $ 8.0 million. For each of these exercises, the Company identified one performance obligation comprised of the delivery of the license, which was recognized by the Company as license revenue during the years ended December 31, 2021 and 2019, respectively. Upon the option exercises, Taiho gained sole responsibility for the development and commercialization of the licensed products within the Taiho Territory. As of March 31, 2022 and December 31, 2021, the Company recorded deferred revenue, current of $ 3.3 million and $ 5.0 million, respectively, on its consolidated balance sheet. 14 WuXi Biologics License Agreements The Company entered into a license agreement (the WuXi PD-1 Agreement) with WuXi Biologics in August 2017, as subsequently amended, in which it obtained an exclusive license to develop, use, manufacture, and commercialize products including an anti-PD-1 antibody worldwide except for Greater China. From the inception of the WuXi PD-1 Agreement through March 31, 2022, the Company has made upfront and milestone payments of $ 41.0 million and incurred sub-license fees of $ 11.3 million. These milestone payments and sub-license fees were recorded as research and development expense, as the products had not reached technological feasibility and did not have alternative future use. During the three months ended March 31, 2022 and 2021, the Company made milestone payments of zero and $ 10 million, respectively, and incurred no sub-license fees under the WuXi PD-1 Agreement. The WuXi PD-1 Agreement also provides for clinical and regulatory milestone payments, commercialization milestone payments of up to $ 375.0 million and tiered royalty payments to be made to WuXi Biologics that range from the high single-digits to low teens of net sales by the Company of licensed products. In December 2020, the Company entered into a separate license agreement (the WuXi CD39 Agreement) with WuXi Biologics to develop anti-CD39 antibodies. Under the agreement, the Company was granted exclusive worldwide rights to anti-CD39 antibodies discovered under the collaboration and will be responsible for the further development and commercialization of those antibodies. The WuXi CD39 Agreement provides for clinical and regulatory milestone payments totaling $ 16.5 million, and royalty payments in the low single digits of net sales by the Company of licensed products. From the inception of the WuXi CD39 Agreement through March 31, 2022, the Company has paid a $ 1.5 million development milestone and $ 0.5 million in upfront payments, both of which were recorded in research and development expense, as the products are still in research stage. The Company incurred $ 1.5 million in development milestone expense under the WuXi CD39 Agreement during the three months ended March 31, 2022 and none in the same period in 2021. Abmuno License Agreement In December 2016, the Company entered into a license agreement (the Abmuno Agreement) with Abmuno Therapeutics LLC (Abmuno) in which it obtained a worldwide exclusive license to develop, use, manufacture, and commercialize products that include an anti-TIGIT antibody, including domvanalimab. Under the Abmuno Agreement, the Company has made upfront and milestone payments totaling $ 14.6 million as of March 31, 2022. The Abmuno Agreement also provides for additional clinical, regulatory and commercialization milestone remaining payments of up to $ 93.0 million as of March 31, 2022. The Company incurred zero and $ 5.0 million development milestone expense for the three months ended March 31, 2022 and 2021, respectively. AstraZeneca Agreement In October 2020 the Company announced a collaboration with AstraZeneca to evaluate domvanalimab, the Company’s investigational anti-TIGIT antibody, in combination with AstraZeneca’s Imfinzi (durvalumab) in a registrational Phase 3 clinical trial in patients with unresectable Stage III non-small cell lung cancer (NSCLC), which study the parties refer to as PACIFIC-8. Under the terms of the agreement, each company will retain existing rights to their respective molecules and any future commercial economics. AstraZeneca will conduct the trial, and each company will supply its respective anti-cancer agent to support the trial. Under the terms of the agreement, the Company will reimburse AstraZeneca for its share of the trial costs upon achievement of certain milestones. If the agreement is terminated early, in certain circumstances, the Company is obligated to reimburse AstraZeneca for a portion of the trial costs incurred. This portion of the clinical trial costs that is considered unavoidable is accrued as research and development expenses in advance of the achievement of milestones. From the inception of the agreement through March 31, 2022, the Company has incurred gross expense of $ 2.3 million which is recorded on the condensed consolidated balance sheet in other long-term liabilities. This PACIFIC-8 trial forms part of the Arcus and Gilead joint development program for domvanalimab and Arcus’s portion of the trial costs will be shared with Gilead. At March 31, 2022 the Company had recognized a receivable of $ 1.1 million from Gilead related to the reimbursement of these costs, which is recorded on the condensed consolidated balance sheet in other noncurrent assets. For the three months ended March 31, 2022 and 2021, the Company incurred expenses pursuant to the AstraZeneca Agreement of $ 1.2 million and zero , respectively, before expected recoveries from its cost-sharing agreement with Gilead. 15 Genentech Collaboration Agreement In December 2019, the Company and Genentech, through F. Hoffmann-La Roche Ltd (collectively, Genentech) entered into a Master Clinical Collaboration Agreement (the Genentech Agreement) pursuant to which the parties may conduct combination clinical studies involving Genentech’s monoclonal antibody, atezolizumab and the Company’s investigational products. Pursuant to the Genentech Agreement, the parties entered into Trial Supplements for the evaluation of etrumadenant and atezolizumab utilizing the MORPHEUS platform in two separate study indications: second and third line metastatic colorectal cancer and first line metastatic pancreatic cancer. From the inception of the agreement through March 31, 2022, the Company has incurred expense of $ 1.8 million which was recorded in research and development expense. The Company and Genentech will each supply their respective investigational products for use in the collaboration studies and will share a portion of the development costs under specific terms as set forth in the agreement. The Company incurred expense under the collaboration of $ 0.3 million for each of the three months ended March 31, 2022 and 2021. Note 7. Stock-Based Compensation The Company grants awards under its 2018 Equity Incentive Plan and the 2020 Inducement Plan. Total stock-based compensation expense was recognized in the condensed consolidated statements of operations and comprehensive loss as follows (in thousands): Three Months Ended March 31, 2022 2021 Research and development $ 8,502 $ 6,170 General and administrative 8,039 6,591 Total stock-based compensation $ 16,541 $ 12,761 Note 8. Income Taxes The provision or benefit from income taxes for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into consideration in the relevant period. Each quarter, the Company updates the estimate of the annual effective tax rate, and if the estimated tax rate changes, the Company records a cumulative adjustment to the provision. The Company’s provision for income taxes was $ 1.0 million and zero for the three months ended March 31, 2022 and 2021 with an effective tax rate of - 1.4 % and 0 %, respectively. The effective tax rate differs from the U.S. statutory tax rate primarily due to the valuation allowances on the Company’s deferred tax assets and state income taxes. The income tax provision includes the effects of the mandatory capitalization and amortization of research and development expenses starting in 2022, as required by the 2017 Tax Cuts and Jobs Act. As of March 31, 2022 and December 31, 2021, the Company has provided a valuation allowance against U.S. federal and state deferred tax assets. Management continues to evaluate the realizability of deferred tax assets and the related valuation allowance. If management's assessment of the deferred tax assets or the corresponding valuation allowance were to change, the Company would record the related adjustment to income during the period in which management makes the determination. The Company recognizes interest and penalties associated with uncertain tax benefits as part of the income tax provision. To date, the Company has not recognized any interest and penalties in its condensed consolidated statements of operations, nor has it accrued for or made payments for interest and penalties. The Company is subject to taxation in the U.S. and various foreign jurisdictions. The tax years subsequent to 2015 remain open and subject to examination by federal, state, and foreign taxing authorities in which the Company is subject to tax. 16 Note 9. Net Loss per Share Basic net loss per share is calculated based on the weighted-average number of shares of the Company’s common stock during the period. Diluted net loss per share is calculated based on the weighted-average number of shares of the Company’s common stock and other dilutive securities outstanding during the period. Potentially dilutive securities are excluded from the calculation if their inclusion would have been antidilutive. The following table sets forth the computation of basic and diluted net loss per share (in thousands, except share and per share data): Three Months Ended March 31, 2022 2021 Numerator: Net loss $ ( 67,993 ) $ ( 72,593 ) Denominator: Weighted-average common shares outstanding 71,194,778 68,476,799 Less: weighted-average common shares subject to vesting - ( 1,394,638 ) Weighted-average common shares used to compute basic and diluted net loss per share 71,194,778 67,082,161 Net loss per share: basic and diluted $ ( 0.96 ) $ ( 1.08 ) The following outstanding potentially dilutive securities were excluded from the computation of diluted net loss per share because including them would have been antidilutive: Three Months Ended March 31, 2022 2021 Common stock options issued and outstanding 12,564,969 11,708,625 Restricted stock units issued 1,558,381 1,532,162 Employee Stock Purchase Plan shares 102,414 96,591 Unvested early exercised common stock options - 111,094 Unvested restricted common stock issued as part of collaboration agreement - 1,257,651 Total 14,225,764 14,706,123 The Company also excluded the effect of Gilead’s right to purchase additional shares of the Company’s common stock from its calculation as these rights had no intrinsic value at March 31, 2022. Note 10. Commitments Standby Letters of Credit The Company has standby letters of credit up to an aggregate of $ 3.0 million provided as collateral for its leases. The letters of credit are secured by $ 3.0 million in deposits classified as restricted cash on the Company’s condensed consolidated balance sheets. At March 31, 2022 the standby letters of credit were not drawn down. Note 11. Related parties Relationship and transactions with Gilead As of March 31, 2022, Gilead held approximately 19.3 % o f the Company’s outstanding common stock. These holdings resulted from a combination of Gilead’s participation in the May 2020 public offering as well as purchases of stock under the stock purchase agreement. In the May 2020 public offering, Gilead purchased 2,200,000 shares of common stock for an amount of $ 56.7 million, net of offering costs. Under the stock purchase agreement (as amended and restated), Gilead purchased 5,963,029 and 5,650,000 shares in July 2020 and February 2021, respectively, for a total investment of $ 327.8 million, net of offering costs and amounts allocated to the performance obligations created by the Gilead Collaboration Agreement. Gilead has the right, at its option, to purchase up to a maximum of 35 % of the Company’s then-outstanding voting common stock, from time to time over five years from the closing of the initial transaction. Pursuant to the Investor Rights Agreement, the Company appointed Gilead's two designees to the Company’s Board of Directors. See Note 6 for further discussion of the agreements with Gilead. At March 31, 2022, the Company had a $ 29.3 million cost sharing receivable recorded on the condensed consolidated balance sheets under receivable from collaboration partners, to be invoiced the following quarter. The Company had a $ 1.1 million long-term cost-share receivable recorded in other long-term assets on the balance sheet, to be invoiced upon the achievement of milestones under the 17 AstraZeneca agreement in future years. The Company also had $ 86.0 million in deferred revenue, current and $ 456.9 million in deferred revenue, noncurrent recorded on its condensed consolidated balance sheets at March 31, 2022. For the three months ended March 31, 2022 and 2021, the Company recognized $ 16.3 million and $ 7.7 million, respectively, in revenue under the Gilead Collaboration Agreement. For each of these periods, the Company also recognized net reductions in operating expenses totaling $ 30.4 million and $ 4.9 million, respectively. The Company received a $ 175 million upfront payment from Gilead upon closing of the Gilead Collaboration Agreement in July 2020. In addition, in July 2020 the Company received $ 200 million from Gilead in connection with the Stock Purchase Agreement, of which approximately $ 109.4 million represented the fair value of stock purchased at the transaction closing date with the remaining premium of $ 90.6 million allocated to the transaction price. In February 2021, the Company received $ 220.4 million from Gilead in connection with the purchase by Gilead of 5,650,000 shares of the Company’s common stock at a per share price of $ 39.00 pursuant to the amended and restated Stock Purchase Agreement. In January 2022, the Company received $ 725 million in option exercise payments from Gilead. 18 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and notes thereto in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and notes thereto for the year ended December 31, 2021, included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (SEC) on February 23, 2022. This discussion and other parts of this report contain forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations, and intentions. Further, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. Our actual results could differ materially from those discussed in these forward-looking and other statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this report entitled “Risk Factors.” Overview We are a clinical-stage biopharmaceutical company focused on creating best-in-class cancer therapies. Using our robust and highly efficient drug discovery capability, we have now advanced six investigational products into clinical development, with our most advanced molecule, an anti-TIGIT antibody, now in two Phase 3 registrational studies, with others in planning. Our deep portfolio of novel small molecules and enabling antibodies allows us to create highly differentiated combination therapies, which we are developing to treat multiple large tumor types including lung, colorectal, prostate and pancreatic cancers. We expect our clinical-stage portfolio to continue to expand and to include molecules targeting both immuno-oncology and cancer cell-intrinsic pathways. Our vision is to create, develop and commercialize highly differentiated combination cancer therapies that have a meaningful impact on patients. In May 2020, we entered into an Option, License and Collaboration Agreement (Gilead Collaboration Agreement) with Gilead Sciences, Inc. (Gilead), whereby Gilead obtained an exclusive license to zimberelimab and time-limited exclusive options to all of our then-current and future programs during the 10-year collaboration term. In December 2021, Gilead obtained rights to an additional four of our investigational products: domvanalimab, etrumadenant, quemliclustat and AB308, for which we subsequently received a total of $725 million in option exercise payments. For each program to which Gilead exercised or exercises its option, the parties will co-develop globally and co-commercialize the program in the U.S., subject to certain exceptions, and Gilead will have the right to commercialize the program outside of the United States, subject to the rights of our existing partners in certain territories. In 2017, we entered into an Option and License Agreement (Taiho Agreement) with Taiho Pharmaceutical Co., Ltd. (Taiho) pursuant to which Taiho has time-limited options to exclusively license the development and commercialization rights to each of our programs for Japan and certain other territories in Asia (excluding China). Taiho has exercised its option rights to our adenosine receptor antagonist program (including etrumadenant), our anti-PD-1 program (including zimberelimab), and, in December 2021, they exercised their option right to our anti-TIGIT program (including domvanalimab and AB308). In connection with our entry into the Gilead Collaboration Agreement in 2020, we also entered into a Common Stock Purchase Agreement pursuant to which Gilead has the right, at its option from time to time over five years from closing of the initial transaction, to purchase up to a maximum ownership of 35% of our then-outstanding voting common stock, and an Investor Rights Agreement that provides for a three-year standstill, two-year lockup and the right to designate two individuals to be appointed to our Board of Directors. Gilead currently owns approximately 19.3% of our outstanding common stock. We currently have six investigational products in clinical development: • Domvanalimab (previously referred to as AB154), our Fc-silent anti-TIGIT monoclonal antibody, is being evaluated in combination with zimberelimab with or without etrumadenant vs. zimberelimab monotherapy in ARC-7, our randomized, 150-patient Phase 2 trial in first-line metastatic PD-L1≥50% non-small cell lung cancer (NSCLC). In 2021, we initiated ARC-10, our first registrational trial evaluating domvanalimab in combination with zimberelimab and zimberelimab monotherapy vs. chemotherapy in this same setting. Furthermore, in January 2022, AstraZeneca initiated PACIFIC-8, a registrational study, which is evaluating domvanalimab plus durvalumab after chemoradiation therapy in Stage 3 NSCLC. We and Gilead are planning to initiate additional Phase 3 studies for domvanalimab in 2022 based on our interim analyses for ARC-7, which demonstrated encouraging clinical activity for both domvanalimab combination arms. • AB308, our Fc-enabled anti-TIGIT monoclonal antibody, is being evaluated in a Phase 1/1b study (ARC-12). In 2021, we completed the dose escalation portion of the study and are now enrolling five expansion cohorts which are designed to generate data to support the future development of AB308 and further development planning for both domvanalimab and AB308. 19 • Etrumadenant (previously referred to as AB928), our small molecule dual A2a/A2b adenosine receptor antagonist, is being evaluated in several randomized or Phase 2 trials across major tumor types, including in our ARC-6, ARC-7, and ARC-9 studies. We expect to initiate additional clinical studies of etrumadenant in 2022. • Quemliclustat (previously referred to as AB680), our small-molecule CD73 inhibitor, is being evaluated in a Phase 1/1b study for the treatment of first-line metastatic pancreatic cancer (ARC-8) as well as late-line metastatic prostate cancer (ARC-6) and metastatic colorectal cancer (ARC-9). We expect to initiate additional clinical studies of quemliclustat in 2022. • Zimberelimab (previously referred to as AB122), our anti-PD-1 monoclonal antibody, is the cornerstone of our combination strategy. We are currently evaluating zimberelimab, either alone or in combination with other agents across several tumor types, including non-small cell lung cancer in ARC-7, our Phase 2 trial, and ARC-10, our registrational trial which is designed to support the approval of zimberelimab. • AB521, our HIF-2α inhibitor, is being evaluated in a healthy volunteer study (ARC-14) to expeditiously characterize the pharmacokinetic and safety profile of AB521 and to identify the starting dose for a Phase 1 study in oncology indications. We plan to evaluate AB521 in renal cell carcinoma as well as in other tumor types, and in combination with other molecules, including those targeting the CD73-adenosine axis. COVID-19 Pandemic The degree to which COVID-19 impacts our business operations, research and development programs and financial condition remains highly uncertain and will depend on future developments, including the ultimate duration and/or severity of the pandemic, the impact of any resurgences and new variants that emerge, actions by government authorities to contain the spread of the virus, the availability, adoption and effectiveness of vaccines and boosters, and when and to what extent normal economic and operating conditions can resume. Our management continues to actively monitor this health crisis and its effects on our operations, key vendors and workforce. We conduct our clinical trials in the U.S. and internationally in geographic regions that are impacted by COVID-19 to varying degrees. While we have seen relatively robust enrollment in most of our ongoing Arcus-sponsored studies, disruptions caused by the COVID-19 pandemic will continue to impact our ability to initiate, supply, enroll, conduct or complete our ongoing or planned clinical trials. For example, in the first half of 2020, the pandemic led to a decline in screening, diagnosis and treatment for cancer patients. While cancer screening rates have rebounded, resurgences due to new variants may cause patients to delay screening and treatment for fear of exposure to COVID-19, thereby adversely impacting the enrollment of patients in clinical trials targeting early-stage cancers and retention of patients overall in our trials. At times, investigative sites have needed to divert resources away from our studies in order to respond to the ongoing health crisis, hindering their ability to conduct study assessments and report data. Patient safety remains our paramount concern and we continue to collaborate with our existing and with new investigational sites to implement measures to minimize disruptions to patients and ensure continued access to treatment, in accordance with health authority guidance. We are unable to predict the ultimate impact of this pandemic on our ongoing and planned clinical programs. With respect to manufacturing and supply, our third-party contract manufacturers continue to operate at or near normal levels. However, global shipping has been severely challenged by the evolving pandemic, leading to delays in our receipt of materials and supplies, including standard-of-care drugs used in the conduct of our clinical trials. We actively manage the inventory for each of our investigational products and our overall supply chain needs in order to prevent or minimize the impact of any disruptions to our clinical programs. Due to the availability of vaccines and our mandatory vaccine policy, our laboratory operations are operating at or near normal levels and we began returning office-based employees to our offices on a hybrid schedule. The safety, health and well-being of our employees remains a primary concern, and we may restrict our business activities or modify our employee work arrangements in response to new developments in the COVID-19 pandemic in order to reduce the risk of exposure among our employees. The COVID-19 pandemic continues to evolve and future developments, which are unpredictable, may result in a material, negative impact to our operations and financial condition. 20 Components of Operating Results Collaboration and License Revenue Our collaboration and license revenue consists of revenue recognized from the nonrefundable upfront payments received from Gilead and Taiho, for licenses or research and development services performed by us to develop our investigational products under the terms of our collaboration agreements, and from any option exercise payments. Operating Expenses Research and Development Expenses Our research and development expenses consist of expenses incurred in connection with the research and development of our pipeline programs. These expenses include pre-clinical and clinical expenses, payroll and personnel expenses, including stock-based compensation for our employees, laboratory supplies, product licenses, consulting costs, contract research, and depreciation. Shared facility expenses are allocated to functional groups proportionally based on usage. Under certain collaboration agreements we agree to share research and development expenses with our partners. Such cost sharing arrangements may result in receiving reimbursement from our partners or require that we reimburse our partners for qualified expenses. We expense both internal and external research and development costs as they are incurred. We record advance payments for services that will be used or rendered for future research and development activities as prepaid expenses and recognize them as an expense as the related services are performed. We recognize reimbursement for shared costs incurred by us and reimbursed by our partners as a reduction in research and development expense. We do not allocate our costs by investigational product, as a significant amount of research and development expenses include internal costs, such as payroll and other personnel expenses, and certain external costs that are not recorded at the investigational product level. In particular, with respect to internal costs, several of our departments support multiple research and development programs, and we do not allocate those costs by investigational product. In December 2021, Gilead obtained rights to four of our investigational products: domvanalimab, etrumadenant, quemliclustat and AB308, for which we subsequently received a total of $725 million in option exercise payments. We expect our research and development expenses to increase substantially during the next few years as we pursue joint development programs with Gilead for our five optioned molecules and advance these programs towards regulatory approval. We also expect to advance new programs into the clinic. All of this will require significant growth in our development capabilities and infrastructure. In addition, our joint development programs with Gilead for the optioned molecules are anticipated to include a significant number of later-stage clinical trials, which typically include a larger number of subjects, are of a longer duration and include more geographic regions. As we advance our clinical-stage programs and prepare to seek regulatory approval, we will also need to conduct certain validation activities with respect to our manufacturing processes for the investigational products in each program. As a result, we expect our preclinical, clinical, and contract manufacturing expenses to increase significantly relative to what we have incurred to date. The level of our future research and development investment will depend on a number of factors and uncertainties, including the breadth of the joint development program agreed to with Gilead for the optioned programs, the outcome of our efforts, and the amount of cost reimbursements or milestone payments we receive from our collaborators. In addition, under our license agreements with WuXi Biologics and Abmuno, and our co-development, collaboration, and research and development arrangements with AstraZeneca, BVF and Strata, we may be required to pay additional clinical and regulatory milestone payments based on the development progress of our investigational products. We may also be required to pay royalties to these parties in the event of a successful product launch and our receipt of commercial revenues. Therefore, we are unable to predict the timing or the final cost to complete our clinical programs or validation of our manufacturing and supply processes and delays may occur due to numerous factors. Factors that could cause or contribute to delays or additional costs include, but are not limited to, those discussed in “Item 1A. Risk Factors.” General and Administrative Expenses General and administrative expenses consist principally of personnel-related costs including payroll and stock-based compensation for personnel in executive, finance, human resources, information technology, business and corporate development, and other administrative functions. Shared facility expenses are allocated to functional groups proportionally based on usage. Our general and administrative expenses also include professional fees for legal, consulting, and accounting services, rent and other facilities costs, fixed asset depreciation, and other general operating expenses not otherwise classified as research and development expenses. We anticipate that our general and administrative expenses will increase substantially during the next few years as we support our growing research and development activities, including due to staff expansion, additional occupancy costs, and other costs associated with increased infrastructure needs. Non-Operating Income, net Non-operating income, net consists primarily of interest earned on our investments in fixed-income marketable securities and non-cash interest expense incurred under the effective interest method on our liability for sale of future royalties to BVF. 21 Critical Accounting Judgments and Estimates Our condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these consolidated 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 consolidated financial statements, as well as the reported revenue and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s significant judgments and estimates. While our significant accounting policies are described in the notes to our consolidated financial statements, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results. Revenue Recognition At the inception of an arrangement, we evaluate if a counterparty to a contract is a customer, if the arrangement is within the scope of revenue from contracts with customers guidance, and the term of the contract. We recognize revenue when our customer obtains control of promised goods or services in a contract for an amount that reflects the consideration we expect to receive in exchange for those goods or services. For contracts with customers, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy each performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. As part of the accounting for contracts with customers, we must develop assumptions that require judgment to determine the standalone selling price of each performance obligation identified in the contract. We then allocate the total transaction price to each performance obligation based on their estimated standalone selling prices. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. The estimation of the standalone selling price may include such estimates as forecasted revenues or costs, development timelines, discount rates, and probabilities of technical and regulatory success. We evaluate each performance obligation to determine if it can be satisfied at a point in time or over time, and we measure the services delivered to the customer, which we periodically review based on the progress of the related program. The effect of any change made to an estimated input component and, therefore revenue or expense recognized, would be recorded as a change in estimate. In addition, variable consideration (e.g. milestone payments) must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price. Revenue related to certain performance obligations over time could be materially impacted as a result of changes in the estimated total research effort required to satisfy those obligations. If we were to increase total estimated effort required to satisfy the license and R&D activities performance obligations related to the agreement with Gilead by 10%, it would result in cumulative catch up adjustments that decrease revenue recognition by $0.7 million in the current quarter. Alternatively, if we were to decrease total estimated effort required to satisfy those performance obligations by 10%, it would result in cumulative catch up adjustments that increase revenue recognition by $0.9 million in the current quarter. 22 Results of Operations Three Months Ended March 31, 2022 and 2021 The following table summarizes our results of operations for the three months ended March 31, 2022 and 2021 (in thousands): Three Months Ended March 31, Change 2022 2021 $ % Revenues: Other collaboration revenue $ 10,066 $ 9,461 $ 605 6 % License and development service revenue 7,939 - 7,939 * Total collaboration and license revenues 18,005 9,461 8,544 90 % Operating expenses: Research and development 61,211 66,387 (5,176 ) -8 % General and administrative 23,974 15,821 8,153 52 % Total operating expenses 85,185 82,208 2,977 4 % Loss from operations (67,180 ) (72,747 ) 5,567 -8 % Non-operating income, net 191 154 37 24 % Loss before income taxes (66,989 ) (72,593 ) 5,604 -8 % Income tax expense (1,004 ) - (1,004 ) * Net loss $ (67,993 ) $ (72,593 ) $ 4,600 -6 % * Not meaningful Collaboration and License Revenue Collaboration and license revenue increased $8.5 million, from $9.5 million for the three months ended March 31, 2021 to $18.0 million for the three months ended March 31, 2022. In the three months ended March 31, 2022, we recognized $8.3 million in other collaboration revenues related to Gilead’s ongoing rights to access our intellectual property in accordance with the Gilead Collaboration Agreement, $7.9 million in license and development service revenues for all programs optioned by Gilead, recognized based on estimates of each performance obligation's percentage of completion at the period end, as well as $1.8 million of other collaboration revenues under the Taiho Agreement. In the three months ended March 31, 2021, we recognized $7.7 million in collaboration revenues in accordance with the Gilead Collaboration Agreement, as well as $1.8 million under the Taiho Agreement. See Note 6 to our condensed consolidated financial statements in Part I, Item 1 for further discussion of the amount and timing of revenues recognized from our collaboration agreements. Research and Development Expenses Research and development expenses decreased $5.2 million, or 8% from $66.4 million for the three months ended March 31, 2021 to $61.2 million for the three months ended March 31, 2022. The increase in costs incurred to support our expanded clinical and development activities was offset by increased cost-sharing reimbursements from Gilead for its optioned programs. Cost-sharing reimbursements increased to $30.3 million from $4.9 million in the same quarter in the prior year. There was also a $13.5 million decrease in scientific licenses expense. In the three months ended March 31, 2022 we paid a $1.5 million milestone fee, compared to $15.0 million in milestones in the same quarter in the prior year. Clinical costs for our ongoing studies increased $12.1 million as a result of the increased number of programs and clinical trials compared to the same quarter in the prior year. Our growing headcount and our 2022 stock awards drove a $10.2 million increase in employee compensation costs, including approximately $2.3 million of increased non-cash stock-based compensation. We incurred an additional $6.0 million increase in preclinical and manufacturing costs, $2.3 million increase in consulting costs, and $2.2 million increase in office facilities and technology expense. General and Administrative Expenses General and administrative expenses increased $8.2 million, or 52%, from $15.8 million for the three months ended March 31, 2021 to $24.0 million for the three months ended March 31, 2022. The increase in general and administrative expenses was driven by the increased complexity of supporting our expanding clinical pipeline and partnership obligations. We incurred an approximately $3.5 million increase in office facilities expense due to our expanding headcount and office space. Our growing headcount as well as our 2022 stock awards drove a $3.2 million increase in employee compensation costs, including approximately $1.4 million in increased non-cash stock-based compensation. We also incurred an increase of $1.1 million in consulting expenses incurred in corporate development activities. 23 Non-Operating Income, Net Non-operating income, net was unchanged, at $0.2 million for each of the three months ended March 31, 2021 and 2022. Increases in interest income from our portfolio of investments in marketable fixed-income securities compared to the same quarter in the prior year were offset by increases in non-cash interest expense incurred on our liability for sale of future royalties to BVF. Income Tax Expense Income tax expense was $1.0 million for the three months ended March 31, 2022, compared to none in the same period the prior year. The increase in income tax expense was due to the completion of a U.S. state nexus study for the 2021 tax year. Liquidity and Capital Resources Sources of Liquidity To date, we have financed our operations primarily through net proceeds of approximately $677.1 million from equity offerings and proceeds of approximately $1,381.4 million from our collaboration and stock purchase agreements, including the receipt of $725 million in option exercise payments from Gilead in January 2022. We also receive cost-sharing reimbursements from Gilead for certain shared expenses incurred on optioned programs. For the three months ended March 31, 2022 and 2021, we recognized reductions of operating expense due to reimbursements of $30.4 million and $4.9 million, respectively, for shared expenses incurred on optioned programs. We expect future reimbursements to be higher than historical amounts due to Gilead's opt-in on three additional programs in 2021. As of March 31, 2022, we had $1,342.4 million of cash, cash equivalents, and investments in marketable securities, compared to $681.3 million as of December 31, 2021. The increase in cash from the prior year end is primarily due to the receipt of $725 million in option exercise payments from Gilead in January 2022. Our cash and investments are held in a variety of interest-bearing instruments, including money market funds, U.S. government treasury obligations, investments in corporate securities and certificates of deposit. Based on our existing business plan, we believe that our existing cash, cash equivalents, and investments will be sufficient to fund our planned level of operations into 2026. Our cash flow and financing requirements are determined by analyses of operating and capital spending budgets. It is challenging to predict the nature, timing and estimated long-range costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our investigational products. This is made more challenging by events outside of our control, such as the recent COVID-19 pandemic. Accordingly, our operating plan may change, including as a result of factors currently unknown to us, and we may need to seek additional funds sooner than planned. Such financing may result in dilution to stockholders, imposition of debt covenants and repayment obligations, or other restrictions that may adversely affect our business. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. See “Risk Factors” below for additional risks associated with our substantial capital requirements. Summary Condensed Consolidated Statement of Cash Flows The following table sets forth the primary sources and uses of cash, cash equivalents and restricted cash for each of the periods presented below (in thousands): Three Months Ended March 31, Net cash (used in) provided by: 2022 2021 Operating activities $ 654,001 $ (66,316 ) Investing activities (268,060 ) 62,826 Financing activities 14,928 222,120 Net increase in cash, cash equivalents and restricted cash $ 400,869 $ 218,630 24 Cash Provided by Operating Activities Net cash provided by operating activities was $654.0 million for the three months ended March 31, 2022, as compared to $66.3 million used in operating activities for the same period in the prior year. The change in cash flow from operating activities is primarily due to the receipt of $725 million in January 2022 from Gilead for their exercised options to three programs. This was partially offset by our net loss of $68.0 million. The increase in expenses incurred for development activities is partially offset by $30.4 million in reimbursements from Gilead as well as year-over-year changes in non-cash items, including an increase of $3.8 million in non-cash stock-based compensation, and changes in our asset and liability balances due to the timing of payments to or from our vendors and collaborators. Cash Used in Investing Activities Cash used in investing activities was $268.1 million for the three months ended March 31, 2022 compared to $62.8 million provided by investing activities for the same period in the prior year. The change in cash flow from investing activities was primarily due to higher net purchases of short-term and long-term securities as we invested a portion of the $725 million received from Gilead in January 2022 in fixed income marketable securities. Cash Provided by Financing Activities Cash provided by financing activities was $14.9 million for the three months ended March 31, 2022 compared to $222.1 million in the same period in the prior year. The decrease in cash flow from financing activities was primarily due to the $220.4 million received from Gilead in February 2021 pursuant to the terms of the Amended and Restated Stock Purchase Agreement which did not recur in the three months ended March 31, 2022. The overall decrease is partially offset by increased funds received for issuance of common stock pursuant to equity award plans and $5.0 million received under the BVF agreement. Contractual Obligations and Commitments There have been no material changes to our contractual obligations outside the ordinary course of business during the three months ended March 31, 2022, as compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021. Off-Balance Sheet Arrangements Since our inception, we have not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the SEC. Item 3. Quantitative and Qualitati ve Disclosures About Market Risk. The market risk inherent in our financial instruments and in our financial position represents the potential loss arising from adverse changes in interest rates, exchange rates, or general market and economic conditions. Our market risks have not changed materially from those discussed in our Annual Report on Form 10-K filed with the SEC on February 23, 2022. We do not believe that inflation, interest rate changes, exchange rate fluctuations, or general market and economic conditions had a significant impact on our results of operations for any periods presented herein.