What changed in this filing

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Item 1. Financial Statements

2020-08-06 compared with 2020-05-05 · 176 added, 110 removed, 286 unchanged (50% of the section changed)

7 unchanged sentences

Receivable from collaboration partners

Accrued interest receivable

Prepaid expenses and other current assets

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Accounts payable

Accrued liabilities

Accrued research and development expenses

Other accrued liabilities

Deferred revenue, current

6 unchanged sentences

Stockholders’ equity:

Preferred stock, $0.0001 par value, 10,000,000 shares authorized as of March 31, 2020 and December 31, 2019;

no shares issued and outstanding as of March 31, 2020 and December 31, 2019

Common stock, $0.0001 par value, 400,000,000 shares authorized as of March 31, 2020 and December 31, 2019;

45,982,788 and 45,925,004 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively

Preferred stock, $ 0.0001 par value, 10,000,000 shares authorized as of June 30, 2020 and December 31, 2019;

no shares issued and outstanding as of June 30, 2020 and December 31, 2019

Common stock, $ 0.0001 par value, 400,000,000 shares authorized as of June 30, 2020 and December 31, 2019;

58,940,933 and 45,925,004 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively

Additional paid-in capital

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Total stockholders’ equity

Total liabilities, convertible preferred stock and stockholders’ equity

Total liabilities and stockholders’ equity

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Three Months Ended

Six Months Ended

Collaboration and license revenue

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Total non-operating income, net

Other comprehensive income

Other comprehensive income (loss)

Comprehensive loss

Net loss per share, basic and diluted

Weighted-average number of shares used to compute basic and diluted net loss per share

Weighted-average number of shares used to

compute basic and diluted net loss per share

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Stock-based compensation

Other comprehensive loss

Other comprehensive income

Balance at March 31, 2019

Issuance of common stock upon exercise of stock options

Vesting of early exercised stock options and restricted stock

Issuance of common stock under Employee Stock Purchase Plan

Stock-based compensation

Other comprehensive income

Balance at June 30, 2019

Balance at December 31, 2019 *

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Stock-based compensation

Other comprehensive loss

Other comprehensive income

Balance at March 31, 2020

Issuance of common stock in public offering, net of $ 21,629 offering costs

Issuance of common stock upon exercise of stock options

Vesting of early exercised stock options and restricted stock

Issuance of common stock under Employee Stock Purchase Plan

Stock-based compensation

Other comprehensive loss

Balance at June 30, 2020

The accompanying notes are an integral part of these condensed consolidated financial statements.

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(In thousands)

Three Months Ended

Six Months Ended

Cash flow from operating activities

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Accounts payable

Accrued research and development expenses

Accrued liabilities

2 unchanged sentences

Deferred rent

Other long-term liabilities

Net cash used in operating activities

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Proceeds from maturities of short-term and long-term investments

Sales of short-term investments

Purchases of property and equipment

Net cash provided by investing activities

Net cash (used in) provided by investing activities

Cash flow from financing activities

Proceeds from issuance of common stock

Proceeds from issuance of common stock, net of issuance costs

Proceeds from issuance of common stock pursuant to equity award plans

Repurchase of unvested shares of stock

Net cash provided by (used in) financing activities

Net increase (decrease) in cash and cash equivalents

Net cash provided by financing activities

Net increase in cash and cash equivalents

Cash, cash equivalents and restricted cash at beginning of period

1 unchanged sentence

Non-cash investing and financing activities:

Unpaid portion of financing costs included in accounts payable

Unpaid portion of deferred financing costs included in accounts payable

Unpaid portion of property and equipment purchases included in accounts payable and accrued liabilities

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Liquidity and Capital Resources

As of March 31, 2020, the Company had cash and investments of $157.9 million, 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 filing date of this report.

As of June 30, 2020, the Company had cash and investments of $ 462.5 million, 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 filing date of this report.

Significant Accounting Policies

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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, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 or for any future period.

Operating results for the six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 or for any future period.

The balance sheet as of December 31, 2019 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.

Certain reclassifications have been made to prior period amounts to conform to the current year presentation.

“Accrued interest receivable,” which was previously reported as “Prepaid expenses and other current assets”, and “Accrued research and development expense”, which was previously reported as “Other accrued liabilities” on the consolidated balance sheets, are now reported as separate line items.

The accompanying 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, 2019 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 5, 2020.

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB), or other standard setting bodies and adopted by the Company as of the specified effective date.

Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s condensed consolidated financial statements upon adoption.

Under the Jumpstart Our Business Startups Act of 2012, as amended (the JOBS Act), the Company meets the definition of an emerging growth company and has elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.

The Company will remain an emerging growth company until the earliest of (1) the last day of its first fiscal year (a) following the fifth anniversary of the completion of its initial public offering, (b) in which the Company has a total annual gross revenue of at least $1.07 billion, or (c) in which the Company is deemed to be a large accelerated filer, which means the market value of the common stock that is held by non-affiliates exceeds $700.0 million of the prior June 30th or (2) the date on which the Company has issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

The Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and will remain an emerging growth company until December 31, 2020.

Under the JOBS Act, the Company elected the extended transition period for complying with new or revised accounting standards.

At June 30, 2020 the Company determined that it will become a large accelerated filer at December 31, 2020 and in the process will no longer qualify as an emerging growth company.

The Company will adopt any accounting pronouncements deferred under the extended transition period election on or before December 31, 2020.

Principles of Consolidation

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Reconciliation of Cash, Cash Equivalents, and Restricted Cash as Reported in Condensed Consolidated Statements of Cash Flows

Restricted cash at March 31, 2020 and December 31, 2019 represents cash balances held as security in connection with the Company’s facility lease agreements.

Restricted cash at June 30, 2020 and December 31, 2019 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):

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Payments made to third parties under these arrangements in advance of the performance of the related services by the third parties are recorded as prepaid expenses until the services are rendered.

Recently Adopted Accounting Stan dards

Stock-Based Compensation

Stock-based awards granted include stock options and restricted stock awards with time-based vesting.

ASC 718 requires the recognition of compensation expense, using a fair value-based method, for costs related to all stock-based payments.

The Company’s determination of the fair value of stock options with time-based vesting on the date of grant utilizes the Black-Scholes option-pricing model, and is impacted by the Company’s common stock price as well as other variables including, but not limited to, expected term that options will remain outstanding, expected common stock price volatility over the term of the option awards, risk-free interest rates and expected dividends.

Compensation expense associated with restricted stock awards is based on the fair value of common stock on the date of grant.

On March 18, 2020, the Families First Coronavirus Response act (FFCR Act), and on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) were each enacted in response to the COVID-19 pandemic.

The FFCR Act and the CARES Act contain numerous tax-related provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property.

On June 29, 2020 California State Assembly Bill 85 (the Trailer Bill) was enacted which suspends the use of California net operating loss (NOL) deductions and certain tax credits, including research and development tax credits, for the 2020, 2021, and 2022 tax years.

The FFCR Act, CARES Act and Trailer Bill did not have a material impact on the Company’s condensed consolidated financial statements as of June 30, 2020;

however, the Company continues to examine the impacts the FFCR Act, CARES Act and Trailer Bill may have on its business, results of operations, financial condition and liquidity.

Recently Adopted Accounting Standards

In December 2019, the FASB issued ASU No.

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While not required to be adopted until 2021 for most calendar year public business entities, early adoption is permitted for any financial statements not yet issued.

The Company has decided to early adopt this ASU as of January 1, 2020, with an immaterial impact on the financial statements.

The Company early adopted this ASU as of January 1, 2020, with an immaterial impact on its financial statements.

Recently Issued Accounting Standards or Updates Not Yet Effective

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The ASU will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases.

For public entities, ASU 2016-02 became effective for fiscal years beginning after December 15, 2018.

As a result of the Company having elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, ASU 2016-02 is effective for the Company for the year ended December 31, 2021, and all interim periods within that fiscal year.

Early adoption is permitted.

The Company is assessing the impact of Topic 842 and believes it will likely have a material impact on its condensed consolidated balance sheet when adopted.

The Company is still evaluating the impact that the statement will have on its condensed consolidated statement of operations.

In July 2018, the FASB issued ASU No.

2018-10 , Codification Improvements to Topic 842, Leases and ASU No.

2018-11, Leases (Topic 842):

Targeted Improvements , which offers a practical expedient for transitioning at the adoption date.

The Company is required to adopt these ASUs for its year ended December 31, 2020, with an effective date of January 1, 2020.

The Company expects to adopt the standard using the modified retrospective approach which requires a cumulative-effect adjustment to retained earnings for adjustments prior to January 1, 2020.

The Company also expects to adopt certain practical expedients provided by ASU 2018-11.

The Company is in the process of implementing its plan, which includes the identification of its lease population and implementing changes to existing process that will be required to meet the requirements of the new standard.

The adoption of Topic 842 is expected to impact the Company’s condensed consolidated financial statements as the Company has certain operating lease arrangements for which it is the lessee.

The Company is currently evaluating the impact the adoption of Topic 842 will have on its financial position and results of operations but anticipates the recognition of additional material assets and corresponding material liabilities on its condensed consolidated balance sheet related to leases.

The adoption of this accounting standard update is also expected to impact the Company’s condensed consolidated financial statement disclosures.

In June 2016, the FASB issued ASU No.

2016 -13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments , an amendment which modifies the measurement and recognition of credit losses for most financial assets and certain other instruments.

The amendment updates the guidance for measuring and recording of current expected credit losses on financial assets measured at amortized cost by replacing the “incurred loss” model with an “expected loss” model.

Measurement of Credit Losses on Financial Instruments , which modifies the measurement and recognition of credit losses for most financial assets and certain other instruments.

The ASU updates the guidance for measuring and recording of current expected credit losses on financial assets measured at amortized cost by replacing the “incurred loss” model with an “expected loss” model.

Accordingly, these financial assets will be presented at the net amount expected to be collected.

The amendment also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through net income rather than reducing the carrying amount under the current, other-than-temporary-impairment model.

As a result of the Company having elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, ASU 2016-13 is effective for the Company for the year ended December 31, 2023, and all interim periods within that fiscal year.

Early adoption is permitted.

The ASU also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through net income rather than reducing the carrying amount under the current, other-than-temporary-impairment model.

The Company is required to adopt ASU 2016-13 for its year ended December 31, 2020, with an effective date of January 1, 2020.

The Company expects to adopt the standard using the modified retrospective approach which requires a cumulative-effect adjustment to accumulated deficit for adjustments prior to January 1, 2020.

The adoption of this standard is not expected to have a material impact on the Company’s condensed consolidated financial statements.

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ASU 2018-13 modifies the disclosure requirements on fair value measurement in Topic 820.

For public entities, ASU 2018-013 is effective for fiscal years beginning after December 15, 2019.

As a result of the Company having elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, ASU 2018-13 is effective for the Company for the year ended December 31, 2021, and all interim periods within that fiscal year.

Early adoption is permitted.

The Company is required to adopt ASU 201 8 - 13 by December 31, 2020, with an effective date of January 1, 2020.

The Company expects to adopt the standard on December 31, 2020.

The adoption of this standard is not expected to have a material impact on the Company’s condensed consolidated financial statements.

In August 2018, the FASB issued ASU No.2018-15 (Subtopic 350-40), Intangible – Goodwill and Other – Internal-Use Software.

In August 2018, the FASB issued ASU No.2018-15 (Subtopic 350-40), Intangibles – Goodwill and Other – Internal-Use Software.

ASU 2018-15 requires an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to internal-use software.

For public entities, ASU 2018-15 is effective for fiscal years beginning after December 15, 2019.

As a result of the Company having elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, ASU 2018-15 is effective for the Company for the year ended December 31, 2022, and all interim periods within that fiscal year.

Early adoption is permitted.

The Company is required to adopt ASU 2018-15 by December 31, 2020, with an effective date of January 1, 2020.

The Company expects to adopt the standard on December 31, 2020.

The adoption of this standard is not expected to have a material impact on the Company’s condensed consolidated financial statements.

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ASU 2018-18 clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606 when the collaborative arrangement participant is a customer in the context of a unit of account and precludes recognizing as revenue consideration received from a collaborative arrangement participant if the participant is not a customer.

For public entities, ASU 2018-18 is effective for fiscal years beginning after December 15, 2019.

As a result of the Company having elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, ASU 2018-18 is effective for the Company for the year ended December 31, 2021, and all interim periods within that fiscal year.

Early adoption is permitted.

The Company is required to adopt ASU 2018-18 by December 31, 2020, with an effective date of January 1, 2020.

The adoption of this standard is not expected to have a material impact on the Company’s condensed consolidated financial statements.

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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.

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 as follows:

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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, 2020 and December 31, 2019.

There were no transfers within the hierarchy as of June 30, 2020 and December 31, 2019.

The following tables set forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):

March 31, 2020

June 30, 2020

Money market funds

government treasury and agency securities

treasury securities

government agency securities

Corporate securities and commercial paper

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Money market funds

government treasury and agency securities

treasury securities

Corporate securities and commercial paper

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Classified as (with contractual maturities):

March 31, 2020

June 30, 2020

December 31, 2019

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Investments in marketable securities are classified as available-for-sale.

At March 31, 2020 and December 31, 2019, the balance in the Company’s accumulated other comprehensive loss comprised activity 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, 2020 and December 31, 2019, and as a result, the Company did not reclassify any amounts out of accumulated other comprehensive loss for the periods then ended.

The Company has a limited number of available-for-sale marketable securities in loss positions as of March 31, 2020, which the Company does not intend to sell and has concluded it will not be required to sell before recovery of the amortized cost for the investment at maturity.

The fair value and amortized cost of investments in marketable securities by major security type as of March 31, 2020 and December 31, 2019 are presented in the tables that follow (in thousands):

As of March 31, 2020:

At June 30, 2020 and December 31, 2019, the balance in the Company’s accumulated other comprehensive loss comprised activity related to the Company’s available-for-sale marketable securities.

There were immaterial and no realized gains or losses recognized on the sale or maturity of available-for-sale marketable securities as of June 30, 2020 and December 31, 2019, respectively, and as a result, the Company did no t reclassify any amounts out of accumulated other comprehensive loss for the periods then ended.

The Company has a limited number of available-for-sale marketable securities in loss positions as of June 30, 2020, which the Company does not intend to sell and has concluded it will not be required to sell before recovery of the amortized cost for the investment at maturity .

The fair value and amortized cost of investments in marketable securities by major security type as of June 30, 2020 and December 31, 2019 are presented in the tables that follow (in thousands):

As of June 30, 2020:

Money market funds

government treasury and agency securities

treasury securities

government agency securities

Corporate securities and commercial paper

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Money market funds

government treasury and agency securities

treasury securities

Corporate securities and commercial paper

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

As of June 30, 2020

As of December 31, 2019

Personnel expenses

Professional fees

Equity Investment

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The Company’s investment in PACT Pharma is accounted for as an equity method investment, and as a result the Company records its share of PACT Pharma’s operating results in interest and other income, net, in its condensed consolidated statements of operations and comprehensive loss.

The investment balance was zero at March 31, 2020 and December 31, 2019.

In January 2020, PACT Pharma closed its Series C convertible preferred stock financing.

The Company did not participate in this financing and therefore its equity ownership percentage in PACT Pharma decreased.

As a result of the dilution in its equity ownership percentage and an increase in PACT Pharma’s estimated fair value per share, the Company realized a $1.3 million gain on deemed sale from equity method investee during the quarter ended March 31, 2020.

After applying the $0.8 million in losses accumulated in prior periods when the equity investment balance was zero, the Company recorded a gain of $0.5 million and an increase to the fair value of the investment balance in the consolidated balance sheet as of March 31, 2020 by the same amount.

The Company’s share of PACT Pharma’s losses for the three months ended March 31, 2020 exceeded the gains on deemed sale recognized as a result of the Series C financing.

The investment balance was zero at June 30, 2020 and December 31, 2019.

In January and June 2020, PACT Pharma issued shares in its Series C and Series C-1 preferred stock financings.

The Company did not participate in these financings, and therefore its equity ownership percentage in PACT Pharma decreased.

As a result of the dilution in its equity ownership percentage and an increase in PACT Pharma’s estimated fair value per share, the Company realized a $ 0.2 million and $ 1.5 million gain on deemed sale from equity method investee during the three and six months ended June 30, 2020, respectively.

After applying a total of $ 0.1 and $ 0.9 million in losses accumulated in prior periods when the equity investment balance was zero, the Company recorded a gain of $ 0.1 million and $ 0.6 million for the three and six months ended June 30, 2020, respectively.

The Company’s share of PACT Pharma’s losses for the for the three and six months ended June 30, 2020 exceeded the gains on deemed sale recognized as a result of the Series C and Series C-1 financings.

Since the Company has no obligation to provide cash financing to PACT Pharma, no additional losses are being recorded beyond the investment’s carrying amount.

For the three months ended March 31, 2020, the Company recorded $0.5 million for its share of PACT Pharma’s operating losses.

No losses were recognized during the three months ended March 31, 2019 because the value of the investment at that date was zero.

The unrecognized equity method losses in excess of the Company’s investment was $0.1 million as of March 31, 2020.

At March 31, 2020 and December 31, 2019, the Company determined the fair value of the warrants to be insignificant to the condensed consolidated financial statements.

The Company recorded $ 0.1 million and $ 0.6 million for its share of PACT Pharma’s operating losses for the three and six months ended June 30, 2020, respectively.

The Company recorded $ 0.4 million and $ 0.8 million for its share of PACT Pharma’s operating losses for the three or six months ended June 30, 2019, respectively .

The unrecognized equity method losses in excess of the Company’s investment was $ 0.6 million as of June 30, 2020.

At June 30, 2020 and December 31, 2019, the Company determined the fair value of the warrants to be insignificant to the condensed consolidated financial statements.

License and Collaboration Agreements

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In September 2017, the Company and Taiho entered into an option and license agreement (the Taiho Agreement) to collaborate on the potential development and commercialization of certain investigational products from the Company’s portfolio in Japan and certain other territories in Asia (excluding China) (the Taiho Territory).

The Taiho Agreement provides Taiho with exclusive options, over a five-year period (the Option Period), to obtain an exclusive development and commercialization license to clinical stage investigational products from the Company’s programs (each, an Arcus Program).

The Taiho Agreement provides Taiho with exclusive options in the Taiho Territory, over a five-year period (the Option Period), to obtain an exclusive development and commercialization license to clinical stage investigational products from the Company’s programs (each, an Arcus Program).

In consideration for the exclusive options and other rights contained in the Taiho Agreement, Taiho agreed to make non-refundable, non-creditable cash payments to the Company totaling $ 35.0 million, of which the Company received $ 25.0 million during 2017.

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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 pro ducts 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 produ ct in such country (the Royalty Term).

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 evaluated the Taiho Agreement under ASC 606 and determined that the current performance obligations consist of (1) the research and development services, in which the Company will use commercially reasonable efforts to initiate IND enabling studies for at least five Arcus Programs, as well as further develop such Arcus Programs during the term of the Agreement, and (2) the obligation to participate on the joint steering committee.

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Accordingly, the transaction price of $35.0 million is being recognized using this input method over the estimated performance period of five years .

The Company also concluded that, at the inception of the agreement, Taiho’s exclusive options are not considered material rights as the opti ons do not contain a significant and incremental discount.

The Company also concluded that, at the inception of the agreement, Taiho’s exclusive options are not considered material rights as the options do not contain a significant and incremental discount.

The Company therefore excludes the exclusive options from the initial transaction price and accounts for them as separate contracts.

In 2018, Taiho exercised its option to the Company’s adenosine receptor antagonist program, including AB928, for a fee of $3.0 million, which was recognized by the Company as revenue during the year ended December 31, 2018 under Topic 605.

In 2018, Taiho exercised its option to the Company’s adenosine receptor antagonist program, including etrumadenant (formerly referred to as AB928), for a fee of $ 3.0 million, which was recognized by the Company as revenue during the year ended December 31, 2018 under Topic 605.

The adoption of Topic 606 in 2019 had no effect on the revenue recognized for this fee.

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When it is probable that a significant reversal of revenue will not occur, the milestone payment will be added to the transaction price, which will then be allocated to each performance obligation, on a relative standalone selling price basis, for which the Company recognizes revenue.

As of March 31, 2020, no clinical or regulatory milestones had been achieved under the Taiho Agreement.

As of June 30, 2020, no clinical or regulatory milestones had been achieved under the Taiho Agreement.

The Company also considers the contingent payments due from Taiho upon the achievement of specified sales volumes to be similar to royalty payments.

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The Company will recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).

As of March 31, 2020, no sales milestone or royalty revenue has been recognized.

As of June 30, 2020, no sales milestone or royalty revenue has been recognized.

The Taiho Agreement shall remain in effect until expiry of all Royalty Terms for the licensed products, in each case subject to certain exceptions.

During each of the three months ended March 31, 2020 and 2019, the Company recognized a total of $1.8 million of revenue under the Taiho Agreement, consisting of revenue recognized for the non-refundable upfront research and development fees.

As of March 31, 2020, the Company recorded deferred revenue, current and deferred revenue, noncurrent of $7.0 million and $10.3 million, respectively, in its condensed consolidated balance sheet.

The Company recognized a total of $ 1.8 million of revenue under the Taiho Agreement during each of the three months ended June 30, 2020 and 2019, and $ 3.5 million of revenue during each of the six months ended June 30, 2020 and 2019.

Revenue recognized under the Taiho Agreement related to the non-refundable upfront research and development fees received in prior periods.

As of June 30, 2020, the Company recorded deferred revenue, current and deferred revenue, noncurrent of $ 7.0 million and $ 8.5 million, respectively, in its condensed consolidated balance sheet.

Changes in Deferred Revenue Balances

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,

Three Months Ended June 30,

Six Months Ended June 30,

Revenue recognized in the period from:

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The Company entered into a license agreement (the WuXi Agreement) with WuXi Biologics (Cayman) Inc.

(WuXi Biologics) in August 2017, as subsequently amended in June 2019, in which it obtained an exclusive license to develop, use, manufacture, and commercial ize products including an anti-PD-1 antibody worldwide except for Greater China and Thailand.

From the inception of the WuXi Agreement through March 31, 2020, the Company has made upfront and milestone payments of $26.0 million and incurred a sub-license fee of $1.2 million.

The sub-license fee was incurred in the fourth quarter of 2019 and paid in the first quarter of 2020.

(WuXi Biologics) in August 2017, as subsequently amended in June 2019 and March 2020, in which the Company obtained an exclusive license to develop, use, manufacture, and commercialize products including an anti-PD-1 antibody worldwide except for Greater China and Thailand.

From the inception of the WuXi Agreement through June 30, 2020, the Company has made upfront and milestone payments of $ 26.0 million and incurred sub-license fees of $ 1.2 million.

The Company also incurred a $ 5.0 million payment obligation in the second quarter of 2020 upon its achievement of a development milestone.

These payments were recorded as research and development expense, as the products had not reached technological feasibility and do not have an alternative future use.

The WuXi 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.

The Company incurred no expense on the WuXi Agreement during the three months ended March 31, 2020.

The WuXi Agreement also provides for additional 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.

The Company incurred $ 5.0 million in development milestone expense under the WuXi Agreement during the three and six months ended June 30, 2020.

Abmuno License Agreement

In December 2016, the Company entered into a license agreement (the Abmuno Agreement) with Abmuno Therapeutics LLC (Abmuno) for a worldwide exclusive license to develop, use, manufacture, and commercialize products that include an anti-TIGIT antibody, including AB154.

Under the Abmuno Agreement, the Company has made upfront and milestone payments totaling $ 6.6 million as of December 31, 2019.

The Abmuno Agreement also provides for additional clinical, regulatory and commercialization milestone remaining payments of up to $101.0 million as of March 31, 2020.

No upfront or milestone payments were made under the Abmuno Agreement during the three months ended March 31, 2020 or 2019, respectively.

The Abmuno Agreement also provides for additional clinical, regulatory and commercialization milestone remaining payments of up to $ 101.0 million as of June 30, 2020.

No upfront or milestone payments were made under the Abmuno Agreement during the three and six months ended June 30, 2020 and 2019, respectively.

Genentech Collaboration Agreement

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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 (TECENTRIQ®) and the Company’s investigational products.

Pursuant to the Genentech Agreement, the parties entered into Trial Supplements for the evaluation of AB928 and atezolizumab utilizing the MORPHEUS platform in two separate study indications:

Pursuant to the Genentech Agreement, the parties entered into Trial Supplements for the evaluation of etrumadenant (formerly referred to as AB928) and atezolizumab utilizing the MORPHEUS platform in two separate study indications:

second and third line metastatic colorectal cancer;

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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.

No expense was incurred on this collaboration for the quarter ended March 31, 2020.

No expense was incurred on this collaboration for the three and six months ended June 30, 2020.

Strata Collaboration Agreement

On April 30, 2019, the Company and Strata Oncology, Inc.

(Strata) entered into a Co-Development and Collaboration Agreement (the Co-Development and Collaboration Agreement) to pursue a clinical development collaboration utilizing Strata’s precision drug development platform and proprietary biomarkers to evaluate zimberelimab, the Company’s clinical-stage anti-PD-1 antibody, in patients in a tumor-agnostic fashion.

Under the terms of the Co-Development and Collaboration Agreement, the parties will share a portion of development costs for the clinical collaboration under specified terms.

(Strata) entered into a Co-Development and Collaboration Agreement (the Strata Agreement) to pursue a clinical development collaboration utilizing Strata’s precision drug development platform and proprietary biomarkers to evaluate zimberelimab, the Company’s clinical-stage anti-PD-1 antibody, in patients in a tumor-agnostic fashion.

Under the terms of the Strata Agreement, the parties will share a portion of development costs for the clinical collaboration under specified terms.

Strata is eligible to receive $ 2.5 million upon the achievement of a development milestone, as well as regulatory and commercial milestones of up to $ 125.0 million and up to double-digit royalties on U.S.

net sales of zimberelimab in the biomarker-identified in dication.

From the inception of the Agreement through March 31, 2020, the Company has made a milestone payment of $2.5 million and has incurred expenses of $1.4 million, of which $0.3 million had been reimbursed by Strata as development cost sharing.

These payments were recorded as research and development expense.

As further consideration in connection with the Co-Development and Collaboration Agreement, the Company issued to Strata 1,257,651 restricted shares of its common stock with an initial measured fair value of $15.0 million, which are subject to vesting based upon the achievement of specified regulatory milestones within certain timelines.

net sales of zimberelimab in the biomarker-identified indication.

From the inception of the Agreement through June 30, 2020, the Company has made a milestone payment of $ 2.5 million and has incurred expenses of $ 2.0 million, of which $ 0.4 million had been reimbursed by Strata as development cost sharing.

These amounts were recorded within research and development expense.

As further consideration in connection with the Strata Agreement, the Company issued to Strata 1,257,651 restricted shares of its common stock with an initial measured fair value of $ 15.0 million, which are subject to vesting based upon the achievement of specified regulatory milestones within certain timelines.

Expense relating to the restricted shares subject to these milestones is recognized if it is considered probable that the associated shares will vest.

The probability of achievement is

assessed at the end of each quarterly period.

As of March 31, 2020 , the Company determined that none of the restricted shares were probable of vesting and, as a result, no compensati on expense related to the restricted shares has been recognized to date.

For the three months ended March 31, 2020, the Company incurred expenses of $0.4 million, of which $0.1 million had been reimbursed by Strata as development cost sharing.

Net expenses related to this co-development agreement were recorded within research and development expenses.

The probability of achievement is assessed at the end of each quarterly period.

As of June 30, 2020, the Company determined that none of the restricted shares were probable of vesting and, as a result, no compensation expense related to the restricted shares has been recognized to date.

For the three and six months ended June 30, 2020, the Company incurred expenses pursuant to the Strata Agreement of $ 0.6 million and $ 1.0 million, respectively.

Of these expenses, $ 0.1 million and $ 0.2 million have been reimbursed by Strata as development cost sharing for the three and six months ended June 30, 2020, respectively.

Net expenses related to this co-development agreement are recorded within research and development expenses.

Stockholders’ Equity

In June 2020, pursuant to a shelf registration statement on Form S-3 that was filed in May 2020, the Company issued 12,650,000 shares of its common stock at $ 27.50 per share in an underwritten public offering (the May 2020 Public Offering).

The total number of shares sold consisted of 11,000,000 base shares and an additional 1,650,000 shares sold pursuant to the underwriters’ option exercise.

Net proceeds from the May 2020 Public Offering were approximately $ 326.2 million after deducting underwriting discounts, commissions and other offering expenses.

Stock-Based Compensation

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Under the 2020 Plan, 3,000,000 shares were reserved for issuance.

Restricted Stock Units

In June 2020, the Company issued a total of 658,950 shares of common stock under restricted stock agreements to its employees and directors under the 2018 Plan.

At the date of grant, the shares had an estimated weighted average fair value of $ 29.41 per share.

Under the terms of the restricted stock agreements, shares vest annually over four years for employees and over 12 months for directors.

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,

Three Months Ended June 30,

Six Months Ended June 30,

Research and development

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Total stock-based compensation

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

As of March 31, 2020

As of December 31, 2019

Accrued personnel expenses

Accrued research and development expenses

Professional fees

Net Loss per Share

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,

Three Months Ended June 30,

Six Months Ended June 30,

Weighted-average common shares outstanding

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The following outstanding potentially dilutive securities were excluded from the computation of diluted net loss per share for the periods presented because including them would have been antidilutive:

As of March 31,

As of June 30,

Common stock options issued and outstanding

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Unvested early exercised common stock options

Unvested restricted common stock

Restricted stock units issued

The Company leases laboratory and office space in Hayward, California under non-cancelable operating leases that expire in 2025 , subject to an option by the Company to extend the lease term.

In June 2020, the Company entered into a lease amendment for 36,303 square feet of additional space in Hayward, California, that is expected to commence January 2021 for an eight-year term with minimum lease payments of $ 10.1 million.

The lease amendment provides for one eight-year extension period.

Subsequent Events

On May 27, 2020, the Company entered into an Option, License and Collaboration Agreement (Gilead Collaboration Agreement), Common Stock Purchase Agreement (the Purchase Agreement), and Investor Rights Agreement, each with Gilead Sciences, Inc.

The transaction closed on July 13, 2020 following expiration of the antitrust waiting period.

Upon closing, Gilead made an upfront payment of $ 175 million pursuant to the Gilead Collaboration Agreement, Gilead 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 Purchase Agreement, and the Company appointed Gilead’s designee, Merdad Parsey, M.D., Ph.D., to the Company’s Board of Directors pursuant to the Investor Rights Agreement.

Pursuant to the terms of the Gilead Collaboration Agreement, Gilead has an exclusive license to develop and commercialize zimberelimab (formerly referred to as AB122) in certain markets and obtained exclusive options to acquire an exclusive license to develop and commercialize 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 may exercise its option, on a program-by-program basis, upon payment of an option fee that ranges from $ 200 million to $ 275 million per program for the Company’s current clinical programs, and $ 150 million per program for all other programs that enter clinical development.

If Gilead exercises its option with respect to the Company’s TIGIT program, the Company is also eligible to receive up to $ 500 million in potential U.S.

regulatory approval milestones with respect to domvanalimab (formerly referred to as AB154).

Upon Gilead’s exercise of its option to a program, the two companies will co-develop and equally share global development costs, subject to certain opt-out rights of the Company, expense caps on the Company’s spending and true-up adjustments.

For each optioned program, provided the Company has not exercised its opt-out rights, 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 the high teens to the low twenties.

Gilead will further provide ongoing research and development support of up to $ 400 million over the collaboration term.

Pursuant to the Purchase Agreement and the Investor Rights 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 the next five years , 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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements