What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-06 compared with 2020-05-05 · 126 added, 69 removed, 107 unchanged (65% of the section changed)

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, 2019, included in our Annual Report on Form 10-K filed with the U.S.

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, 2019, and management’s discussion and analysis, included in our Annual Report on Form 10-K filed with the U.S.

Securities and Exchange Commission (SEC) on March 5, 2020.

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Taiho Pharmaceutical Co., Ltd.

(Taiho) has a time-limited option to exclusively license the development and commercialization rights to each of our programs for Japan and certain other territories in Asia (excluding China), which they have exercised with respect to our adenosine receptor antagonist program (including AB928) and our anti-PD-1 program (including zimberelimab).

Our clinical development program for AB928, our dual A 2a /A 2b adenosine receptor antagonist, includes four Phase 1b expansion studies in specific cancer indications:

advanced colorectal cancer, triple negative breast cancer, EGFR-mutated lung cancer, prostate cancer, and renal cancer;

(Taiho) has a time-limited option to exclusively license the development and commercialization rights to each of our programs for Japan and certain other territories in Asia (excluding China), which they have exercised with respect to our adenosine receptor antagonist program, including etrumadenant (formerly referred to as AB928), and our anti-PD-1 program, including zimberelimab.

Gilead Sciences, Inc.

(Gilead) has a time-limited option to obtain an exclusive license to all of our current and future clinical programs, subject to the rights of our existing partners to any territories.

Upon closing of our Option, License and Collaboration Agreement with Gilead (the Gilead Collaboration Agreement), Gilead obtained an exclusive license to our zimberelimab program.

Etrumadenant (formerly referred to as AB928), our small molecule dual A 2a /A 2b adenosine receptor antagonist, is in clinical development, and is being evaluated in four Phase 1b expansion studies in specific cancer indications:

advanced colorectal cancer, triple negative breast cancer, EGFR-mutated lung cancer, and prostate cancer;

two collaboration studies with Genentech utilizing their MORPHEUS Phase 1b/2 platform in third-line metastatic colorectal cancer and first-line metastatic pancreatic cancer;

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This study consists of a safety dose-escalation portion, followed by an enrollment expansion to evaluate the combination of AB680, zimberelimab (our anti-PD-1 antibody) and the standard-of-care chemotherapies gemcitabine and nab-paclitaxel.

AB154, our in-licensed anti-TIGIT monoclonal antibody, is in Phase 2 development for the treatment of first-line metastatic non-small cell lung cancer in combination with zimberelimab and AB928.

Domvanalimab (formerly referred to as AB154), our in-licensed anti-TIGIT monoclonal antibody, is in Phase 2 development for the treatment of first-line metastatic non-small cell lung cancer in combination with zimberelimab and etrumadenant (formerly referred to as AB928).

Zimberelimab (formerly referred to as AB122), our in-licensed anti-PD-1 monoclonal antibody, is the cornerstone of our combination strategy.

In addition to the combination studies with zimberelimab described above, we are also evaluating zimberelimab as monotherapy in a tumor-agnostic, biomarker-selected Phase 1b trial.

Gilead Collaboration

On May 27, 2020, we 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 us by purchasing 5,963,029 shares of our common stock at a per share price of $33.54 pursuant to the Purchase Agreement, and we appointed Gilead’s designee, Merdad Parsey, M.D., Ph.D., to our 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 our 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 our current clinical programs, and $150 million per program for all other programs that enter clinical development.

If Gilead exercises its option with respect to our TIGIT program, we are 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 of our opt-out rights, expense caps on our spending and true-up adjustments.

For each optioned program, provided we have not exercised our opt-out rights, we have 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 our existing partners to any territories, and Gilead will pay to us 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 us, up to a maximum of 35% of our 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 our Board of Directors.

COVID-19 Pandemic

The degree to which COVID-19 impacts our business operations, research and development programs and financial condition will depend on future developments, including new information which may emerge concerning the duration and/or severity of the outbreak, actions by government authorities to contain the spread of the virus, and how quickly and to what extent normal economic and operating conditions can resume.

The degree to which COVID-19 impacts our business operations, research and development programs and financial condition will depend on future developments, including new information which may emerge concerning the duration and/or severity of the outbreak and any resurgences, actions by government authorities to contain the spread of the virus, and when and to what extent normal economic and operating conditions can resume.

Our management is actively monitoring this health crisis and its effects on our operations, key vendors and workforce.

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Most of our non-laboratory operations, including the conduct and management of our clinical trials and the contract manufacturing organizations engaged in CMC activities on our behalf, were easily and quickly transitioned to remote work arrangements.

However, we are not able to transition our laboratory operations to work-from-home and have only arranged for limited outsourcing of our discovery activities to third-party research organizations;

most of our scientific staff have been engaged remotely in non-laboratory activities such as the evaluation and planning for future discovery efforts and writing of regulatory reports and other documents.

Entering into 2020, we anticipated that our discovery-stage programs would lead to the advancement of two new molecules into the clinic in the first quarter of 2021.

Based upon current timelines, the first program that we were looking to advance into the clinic in this timeframe continues in preclinical development, with no delays anticipated thus far.

Our inability to conduct laboratory operations, however, may delay the advancement of the second of these two discovery-stage programs into the clinic;

the magnitude

of this delay will not be known until the duration of the current shelter-in-place and any additional public he alth orders are known.

Currently, the shelter-in-place order imposed by the State of California has no specified expiration date , and the local shelter in place order has been extended to the end of May 2020 and may be extended further.

Prolonged impositio n of the shelter-in-place and other public health orders will also have an adverse impact on our financial condition.

Since we have not taken any measures to furlough or reduce our personnel costs, we will continue to incur costs for overhead and employees for the duration of the shelter-in-place, despite reduced productivity for some of our employees .

We also expect that our ability to resume our laboratory and other on-site business operations, when permissible, will be limited by employee safety measures , such as social distancing requirements, shift work and our ability to procure sufficient amounts of protective equipment for our employees.

Despite the public health and mandatory self-quarantine measures, we continue to see relatively robust enrollment across our ongoing Arcus-sponsored studies.

However, w e expect that this pandemic may result in delays to some of our clinical programs, particularly in initiating new trials and/or new investigational sites due to diversion of their resources away from necessary start-up activities, and by limiting the ability of investigational sites to conduct all activities associated with our ongoing trials.

However, we were not able to transition our laboratory operations to work-from-home and only arranged for limited outsourcing of our discovery activities to third-party research organizations.

In late June, we began to transition our laboratory-based personnel back into our facilities;

however, our laboratories are operating at reduced capacity due to employee safety measures, such as social distancing requirements and shift work.

Our non-laboratory-based personnel continue to work remotely.

Entering 2020, we anticipated that our discovery-stage programs would lead to the advancement of two new molecules into clinical studies in the first quarter of 2021.

Based upon current timelines, the first program that we expect to advance into clinical studies remains on-track to meet this objective.

The suspension of our laboratory operations has delayed the advancement of the second of these two discovery-stage programs into clinical studies;

however, the magnitude of this delay is not yet known.

Despite the public health and mandatory self-quarantine measures in force during the second quarter, we continued to see relatively robust enrollment across our ongoing Arcus-sponsored studies.

However, w e continue to expect that this pandemic will result in delays to some of our clinical programs, particularly in initiating new studies and/or new investigational sites due to diversion of their resources away from necessary start-up activities, and by limiting the ability of investigational sites to conduct all activities associated with our ongoing studies.

For example, the circumstances may hinder their ability to screen patients for enrollment.

We are collaborating with our investigational sites to implement measures to minimize disruptions to patients and ensure continued access to treatment, in accordance with health authority guidance.

With respect to manufacturing and supply, we currently have sufficient drug supply for our ongoing clinical studies.

With respect to manufacturing and supply, we believe we currently have sufficient drug supply for our ongoing clinical studies.

Our third-party contract manufacturers continue to operate at or near normal levels and, at this time and subject to further COVID-19 implications, we do not anticipate any disruptions to our drug supply chain.

Components of Operating Results

The full impact of the COVID-19 outbreak continues to evolve and is highly uncertain and subject to change.

In connection with our resumption of laboratory operations, we instituted regular COVID-19 testing services in order to minimize the risk to our employees.

These additional operating costs, along with the absence of any furlough or measures to reduce personnel costs despite reduced laboratory capacity, will have a negative impact on our operations and financial condition.

We do not expect the forward impact will be material due to adjustments in operations that we have made.

However, there are many uncertainties around the COVID pandemic and future developments, which are unpredictable, may result in a material, negative impact to our operations and financial condition.

C omponents of Operating Results

Collaboration and License Revenue

Under the Taiho Agreement, we recognize revenue from the upfront and annual payments for research and development services performed by us to develop our product candidates and from option exercise payments upon Taiho’s exercise of options during the Option Period.

Under the Taiho Agreement, we recognize revenue from the upfront and annual payments for research and development services performed by us to develop our investigational products and from option exercise payments upon Taiho’s exercise of options during the Option Period.

Operating Expenses

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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.

We expect our research and development expenses to increase substantially during the next few years as we seek to complete existing and initiate additional clinical trials, pursue regulatory approval for our investigational products, and advance other programs into the clinic.

Over the next few years, we expect our preclinical, clinical, and contract manufacturing expenses to increase significantly relative to what we have incurred to date.

We expect our research and development expenses to increase substantially during the next few years due to our Gilead collaboration and as we seek to complete existing clinical trials and advance our programs into later-stage clinical trials, pursue regulatory approval for our investigational products, and advance other programs into the clinic.

Later-stage clinical trials 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.

Moreover, in order to maximize the potential of our collaboration with Gilead, we believe it will be important to grow our discovery capabilities and pipeline.

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 clinical outcomes from our ongoing clinical trials, whether our collaborators opt into any of our programs, the amount of opt-in and milestone payments we receive from our collaborators, and the breadth of any joint development program agreed to with Gilead for programs they opt into.

In addition, under our license agreements with WuXi Biologics (Cayman) Inc.

(WuXi Biologics) and Abmuno Therapeutics LLC (Abmuno), and our co-development and collaboration agreement with Strata Oncology, Inc.

(Strata), we may be required to pay additional clinical and regulatory milestone payments based on the development progress of zimberelimab and AB154.

Predicting the timing or the final cost to complete our clinical programs or validation of our manufacturing and supply processes is difficult and delays may occur due to numerous factors.

(Strata), we may be required to pay additional clinical and regulatory milestone payments based on the development progress of zimberelimab and domvanalimab (formerly known as AB154).

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 “Risk Factors.”

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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 a result of staff expansion , additional occupancy costs, and other costs associated with ope rating as a growing company .

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.

Interest and Other Income, Net

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Gain on deemed sale from equity method investee consists of a gain related to the dilution of our investment in PACT Pharma, Inc.

(PACT Pharma) typically occurring upon PACT Pharma’s new issuances of equity securities in which we do not participate on a pro rata basis or at all.

(PACT Pharma) occurring upon PACT Pharma’s new issuances of equity securities in which we do not participate on a pro rata basis or at all.

Share of Loss from Equity Method Investee

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We believe that the accounting policies relating to revenue recognition, clinical trial accruals and stock-based compensation reflect the more significant estimates and assumptions used in the preparation of our condensed consolidated financial statements.

There have been no significant changes in our critical accounting policies and estimates during the three months ended March 31, 2020, as compared to the critical accounting policies and estimates disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2019 and more fully described in Note 2 of the accompanying condensed consolidated financial statements.

There have been no significant changes in our critical accounting policies and estimates during the six months ended June 30, 2020, as compared to the critical accounting policies and estimates disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2019 and more fully described in Note 2 of the accompanying condensed consolidated financial statements.

Results of Operations

Three Months Ended March 31, 2020 and 2019

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

Three months ended March 31,

Three Months Ended June 30, 2020 and 2019

The following table summarizes our results of operations for the three months ended June 30, 2020 and 2019 (in thousands):

Three Months Ended June 30,

Collaboration and license revenue

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Collaboration and License Revenue

Collaboration and license revenue was $1.8 million for the three months ended March 31, 2020 and 2019.

We recognized the revenue from non-refundable upfront payments previously received under the Taiho Agreement.

Collaboration and license revenue was $1.8 million for the three months ended June 30, 2020 and 2019 and relates to our license and collaboration agreement with Taiho.

Research and Development Expenses

Research and development expenses increased $7.5 million, or 49%, from $15.6 million for the three months ended March 31, 2019 to $23.1 million for the three months ended March 31, 2020.

The increase in research and development expenses was due to an increase of $4.7 million in clinical costs for our ongoing clinical trials, an increase of $3.1 million in employee compensation costs primarily due to additional headcount, approximately $0.9 million of which consists of stock-based compensation, and a $0.6 million increase in consulting expense.

Those increases were partially offset by a decrease of $0.8 million in certain manufacturing costs.

Research and development expenses increased $10.7 million, or 43%, from $25.0 million for the three months ended June 30, 2019 to $35.7 million for the three months ended June 30, 2020.

The increase in research and development expenses was due to a $6.3 million increase in manufacturing costs required to supply our clinical studies, an increase of $3.8 million in clinical costs for our ongoing clinical studies, and an increase of $3.9 million in employee compensation costs primarily due to additional headcount, approximately $1.5 million of which consists of non-cash stock-based compensation.

Those increases were partially offset by a decrease of $2.5 million due to the achievement of certain development milestones which resulted in expenses of $5.0 million pursuant to the terms of our WuXi Agreement, compared to a $7.5 million milestone payment to WuXi that was recorded in the same period in the prior year.

We also saw a decrease of $1.2 million in lab supplies and equipment due to decreased lab activities caused by shelter-in-place orders amid the COVID pandemic.

General and Administrative Expenses

General and administrative expenses increased $2.0 million, or 41%, from $5.0 million for the three months ended March 31, 2019 to $7.0 million for the three months ended March 31, 2020.

The increase in general and administrative expenses was primarily due to an increase of $1.4 million in employee compensation costs primarily due to additional headcount, approximately $0.9 million of which consists of stock-based compensation, a $0.5 million increase in consulting expenses, and a $0.4 million increase in expenses driven by investments in software and telecommunication supplies.

General and administrative expenses increased $5.5 million, or 93%, from $5.9 million for the three months ended June 30, 2019 to $11.4 million for the three months ended June 30, 2020.

The increase in general and administrative expenses was due to $2.0 million in legal and accounting expenses largely incurred as a result of our collaboration agreement with Gilead, as well as $1.9 million in consulting expenses driven largely by corporate development activities.

We also incurred increased expense of $1.3 million in employee compensation costs primarily due to additional headcount, approximately $0.8 million of which consists of non-cash stock-based compensation.

Interest and Other Income, Net

Interest and other income, net decreased $0.9 million or 58%, from $1.5 million for the three months ended March 31, 2019 to $0.6 million for the three months ended March 31, 2020.

The decrease was primarily due to lower interest income resulting from lower investment yields on our portfolio of marketable fixed-income securities and lower average cash and investment balances in the three months ended March 31, 2020 as compared to the previous period.

Interest and other income, net decreased $1.2 million or 80%, from $1.5 million for the three months ended June 30, 2019 to $0.3 million for the three months ended June 30, 2020.

Gain on Deemed Sale from Equity Method Investee

Gain on deemed sale from equity method investee was $0.5 million for the three months ended March 31, 2020 due to a gain recorded in connection with PACT Pharma’s Series C convertible preferred financing in January 2020 in which we did not participate.

Gain on deemed sale from equity method investee was $0.1 million for the three months ended June 30, 2020 due to a gain recorded in connection with PACT Pharma’s Series C-1 preferred financing in June 2020 in which we did not participate.

Share of Loss from Equity Method Investee

Share of loss from equity method investee increased $0.1 million, from $0.4 million for the three months ended March 31, 2019 to $0.5 million for the three months ended March 31, 2020.

The increase was largely due to PACT’s increasing losses resulting from its expanding operations.

Share of loss from equity method investee was $0.1 million for each of the three months ended June 30, 2020 and 2019 due to equity method losses resulting from PACT’s expanding operations.

Six Months Ended June 30, 2020 and 2019

The following table summarizes our results of operations for the six months ended June 30, 2020 and 2019 (in thousands):

Six Months Ended June 30,

Collaboration and license revenue

Operating expenses:

Research and development

General and administrative

Loss from operations

Non-operating income (expense):

Interest and other income, net

Gain on deemed sale from equity method investee

Share of loss from equity method investee

Total non-operating income, net

* Not meaningful

Collaboration and License Revenue

Collaboration and license revenue was $3.5 million for the six months ended June 30, 2020 and 2019 and relates to our license and collaboration agreement with Taiho.

Research and Development Expenses

Research and development expenses increased $18.2 million, or 45%, from $40.6 million for the six months ended June 30, 2019 to $58.8 million for the six months ended June 30, 2020.

The increase in research and development expenses was due to an increase of $8.5 million in clinical costs for our ongoing clinical studies, an increase of $6.9 million in employee compensation costs primarily due to additional headcount, approximately $2.4 million of which consists of non-cash stock-based compensation, and a $5.9 million increase in manufacturing costs required to supply our clinical studies.

We also saw a decrease of $1.4 million in lab supplies and equipment due to decreased lab activities caused by shelter-in-place orders amid the COVID pandemic.

General and Administrative Expenses

General and administrative expenses increased $7.5 million, or 70%, from $10.9 million for the six months ended June 30, 2019 to $18.4 million for the six months ended June 30, 2020.

The increase in general and administrative expenses was due to $2.3 million in legal and accounting expenses largely incurred as a result of our collaboration agreement with Gilead, as well as $2.4 million in consulting expenses driven largely by corporate development activities.

We also incurred increased expense of $2.4 million in employee compensation costs primarily due to additional headcount, approximately $1.7 million of which consists of non-cash stock-based compensation, and a $0.5 million increase in expenses driven by investments in information technology and network security.

Interest and Other Income, Net

Interest and other income, net decreased $2.1 million or 69%, from $3.0 million for the six months ended June 30, 2019 to $0.9 million for the six months ended June 30, 2020.

The decrease was primarily due to lower interest income resulting from lower investment yields on our portfolio of marketable fixed-income securities and lower average cash and investment balances during the six months ended June 30, 2020 as compared to the same period in the prior year.

Gain on Deemed Sale from Equity Method Investee

Gain on deemed sale from equity method investee was $0.6 million for the six months ended June 30, 2020 due to gains recorded in connection with PACT Pharma’s Series C and Series C-1 preferred financings in January 2020 and June 2020, respectively, in which we did not participate.

Share of Loss from Equity Method Investee

Share of loss from equity method investee was $0.6 million and $0.8 million for the six months ended June 30, 2020 and 2019, respectively, due to equity method losses resulting from PACT’s expanding operations.

Liquidity and Capital Resources

To date, we have financed our operations primarily through net proceeds of $226.2 million from private placements of convertible preferred stock, $46.0 million in proceeds from the Taiho Agreement, and net proceeds of $124.7 million from our initial public offering of our common stock in March 2018.

As of March 31, 2020, we had $157.9 million of cash, cash equivalents, and investments in marketable securities.

To date, we have financed our operations primarily through net proceeds of $226.2 million from private placements of convertible preferred stock, $46.0 million in proceeds from the Taiho Agreement, net proceeds of $124.7 million from our initial public offering of our common stock in March 2018, and $326.2 million of net proceeds in our May 2020 Public Offering.

As of June 30, 2020, we had $462.5 million of cash, cash equivalents, and investments in marketable securities.

Our cash and investments are held in a variety of interest-bearing instruments, including money market funds, U.S.

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government agency securities, and investments in corporate securities.

In addition, in July 2020 we received $375.0 million from Gilead upon the closing of the transactions under the Collaboration Agreement and Purchase Agreement with Gilead.

Based on our existing business plan, we believe that our existing cash, cash investments, and short-term investments will be sufficient to fund our planned level of operations through at least the next 12 months following the filing date of this report.

We will continue to require additional capital to develop our product candidates and fund operations for the foreseeable future.

We may seek to raise capital through private or public equity or debt financings, collaborative or other arrangements with other companies, or through other sources of financing.

Adequate additional funding may not be available to us on acceptable terms or at all.

Our failure to raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue our business strategies.

We anticipate that we will need to raise substantial additional capital, the requirements of which will depend on many factors, including:

We may require additional capital to complete the development and any commercialization of our investigational products.

Our future capital requirements will depend on many factors, including:

the scope, rate of progress and costs of our drug discovery, preclinical development activities, laboratory testing and clinical trials for our investigational products;

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the scope and costs of manufacturing development and commercial manufacturing activities;

the timing and amount of milestone payments we receive under the Taiho Agreement;

the extent to which we acquire or in-license other product candidates and technologies;

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

the cost and timing of establishing sales and marketing capabilities, if any of our i nvestigational products receive marketing approval;

the timing and amount of programs Gilead exercises its option to, and the costs associated with our share of the global development plan for such optioned programs;

the timing and amount of milestone payments we receive under the Taiho Agreement and Gilead Collaboration Agreement, and option fees under the Gilead Collaboration Agreement;

the extent to which we acquire or in-license other investigational products and technologies;

the cost, timing and outcome of regulatory review of our investigational products;

the cost and timing of establishing sales and marketing capabilities, if any of our investigational products receive marketing approval;

the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;

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the costs associated with being a public company;

the cost associated with commercializing our product candidates, if they receive marketing approval.

the cost associated with commercializing our investigational products, if they receive marketing approval.

If we raise additional funds by issuing equity securities, our stockholders may experience dilution.

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If we are unable to raise additional funds when needed, we may be required to delay, reduce, or terminate some or all of our development programs and clinical trials.

We may also be required to sell or license to others rights to our product candidates in certain territories or indications that we would prefer to develop and commercialize ourselves.

We may also be required to sell or license to others rights to our investigational products in certain territories or indications that we would prefer to develop and commercialize ourselves.

See “Risk Factors” for additional risks associated with our substantial capital requirements.

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The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below (in thousands):

Three Months Ended March 31,

Six Months Ended June 30,

Net cash (used in) provided by:

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Cash Used in Operating Activities

Net cash used in operating activities for the three months ended March 31, 2020 increased by $14.5 million to $31.3 million as compared to $16.8 million for the same period in the prior year.

Net cash used in operating activities for the six months ended June 30, 2020 increased by $18.6 million to $55.2 million as compared to $36.6 million for the same period in the prior year.

The increase in cash used is primarily due to the $27.1 million increase in our net loss to $72.8 million.

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Additional increase in cash used resulted from changes in our asset and liability balances due to the timing of payments to or from our vendors and collaborators.

Cash Provided by Investing Activities

Cash provided by investing activities was $40.1 million for the three months ended March 31, 2020 compared to $14.3 for the same period in the prior year.

The change in cash flow was primarily due to year-over-year changes in the timing of purchases and maturities of our investments in fixed-income marketable securities.

Cash Provided by (Used In) Investing Activities

Cash provided by (used in) investing activities was a $47.0 million use of cash for the six months ended June 30, 2020 compared to $41.0 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 purchases and maturities of our investments in fixed-income marketable securities, as we invested proceeds from our May 2020 Public Offering.

Cash Provided by Financing Activities

Cash provided by financing activities was $0.6 million for the three months ended March 31, 2020 compared to an immaterial use of cash in the same period in the prior year.

The increase in cash provided is primarily due to funds received during the three months ended March 31, 2020 for issuance of common stock due to the exercise of stock options.

Cash provided by financing activities was $329.5 million for the six months ended June 30, 2020 compared to an immaterial amount of cash provided in the same period in the prior year.

The increase in cash provided is primarily due to cash received from our May 2020 Public Offering, net of direct offering costs, as well as funds received during the six months ended June 30, 2020 for issuance of common stock pursuant to equity award plans.

Contractual Obligations and Commitments

There have been no material changes outside the ordinary course of business to our contractual obligations during the three months ended March 31, 2020, as compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.

In June 2020, we entered into a lease amendment for an additional 36,303 square feet of research and development offices in Hayward, California, that is expected to commence in 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.

Other than this lease, there have been no material changes outside the ordinary course of business during the six months ended June 30, 2020, as compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.

JOBS Act Accounting Election

The Jumpstart Our Business Startups Act of 2012 (the JOBS Act), permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies.

We are choosing to elect the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act.

As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

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

We are 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, we elected the extended transition period for complying with new or revised accounting standards.

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

We will adopt any accounting pronouncements deferred under this election on or before December 31, 2020.

Off-Balance Sheet Arrangements

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What changed 10-Q

Item 2. Management’s Discussion and Analysis