Arcus Biosciences, Inc. 10-Q

Item 1. Financial Statements. ARCUS BIOSCIENCES, INC. Condensed Consolidated Balance Sheets (In thousands, except share and per share amounts) (unaudited) June 30, December 31, 2020 2019* ASSETS Current assets: Cash and cash equivalents $ 285,185 $ 57,937 Short-term investments 177,288 130,333 Receivable from collaboration partners 222 132 Accrued interest receivable 239 251 Prepaid expenses and other current assets 8,665 4,052 Total current assets 471,599 192,705 Property and equipment, net 8,264 9,330 Restricted cash 203 203 Other long-term assets 1,323 872 Total assets $ 481,389 $ 203,110 LIABILITIES Current liabilities Accounts payable $ 12,052 $ 4,704 Accrued research and development expenses 13,899 4,572 Other accrued liabilities 5,611 4,950 Deferred revenue, current 7,000 7,000 Other current liabilities 1,463 1,480 Total current liabilities 40,025 22,706 Deferred revenue, noncurrent 8,522 12,022 Deferred rent 3,439 3,734 Other long-term liabilities 693 806 Total liabilities 52,679 39,268 Stockholders’ equity: 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 6 4 Additional paid-in capital 706,713 369,100 Accumulated deficit ( 278,153 ) ( 205,326 ) Accumulated other comprehensive income 144 64 Total stockholders’ equity 428,710 163,842 Total liabilities and stockholders’ equity $ 481,389 $ 203,110 The accompanying notes are an integral part of these condensed consolidated financial statements. * The Condensed Consolidated Balance Sheet as of December 31, 2019 has been derived from the audited financial statements as of that date. 1 ARCUS BIOSCIENCES, INC. Condensed Consolidated Statements of Operations and Comprehensive Loss (In thousands, except share and per share amounts) (unaudited) Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Collaboration and license revenue $ 1,750 $ 1,750 $ 3,500 $ 3,500 Operating expenses: Research and development 35,693 24,999 58,835 40,553 General and administrative 11,432 5,911 18,440 10,879 Total operating expenses 47,125 30,910 77,275 51,432 Loss from operations ( 45,375 ) ( 29,160 ) ( 73,775 ) ( 47,932 ) Non-operating income (expense): Interest and other income, net 301 1,482 948 3,016 Gain on deemed sale from equity method investee 131 - 613 - Share of loss from equity method investee ( 131 ) ( 412 ) ( 613 ) ( 844 ) Total non-operating income, net 301 1,070 948 2,172 Net loss ( 45,074 ) ( 28,090 ) ( 72,827 ) ( 45,760 ) Other comprehensive income (loss) ( 144 ) 84 80 220 Comprehensive loss $ ( 45,218 ) $ ( 28,006 ) $ ( 72,747 ) $ ( 45,540 ) Net loss per share, basic and diluted $ ( 0.93 ) $ ( 0.64 ) $ ( 1.57 ) $ ( 1.05 ) Weighted-average number of shares used to compute basic and diluted net loss per share 48,556,843 43,797,718 46,419,724 43,653,325 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 ARCUS BIOSCIENCES, INC. Condensed Consolidated Statements of Stockholders’ Equity (In thousands, except share and per share amounts) (unaudited) Common stock Additional Paid-In Accumulated Accumulated Other Comprehensive Total Stockholders’ Shares Amount Capital Deficit Income (Loss) Equity Balance at December 31, 2018 * 43,610,823 $ 4 $ 357,873 $ ( 122,828 ) $ ( 107 ) $ 234,942 Cumulative effect adjustment upon adoption of ASC 606 - - - 2,212 - 2,212 Issuance of common stock upon exercise of stock options 69 - - - - - Vesting of early exercised stock options and restricted stock 114,934 - 273 - - 273 Stock-based compensation - - 1,674 - - 1,674 Other comprehensive income - - - - 136 136 Net loss - - - ( 17,670 ) ( 17,670 ) Balance at March 31, 2019 43,725,826 $ 4 $ 359,820 $ ( 138,286 ) $ 29 $ 221,567 Issuance of common stock upon exercise of stock options 17,649 - 99 - - 99 Vesting of early exercised stock options and restricted stock 107,952 - 260 - - 260 Issuance of common stock under Employee Stock Purchase Plan 82,681 - 596 - - 596 Stock-based compensation - - 2,130 - - 2,130 Other comprehensive income - - - - 84 84 Net loss - - - ( 28,090 ) - ( 28,090 ) Balance at June 30, 2019 43,934,108 $ 4 $ 362,905 $ ( 166,376 ) $ 113 $ 196,646 Balance at December 31, 2019 * 44,212,195 $ 4 $ 369,100 $ ( 205,326 ) $ 64 $ 163,842 Issuance of common stock upon exercise of stock options 59,939 - 643 - - 643 Vesting of early exercised stock options and restricted stock 77,388 - 220 - - 220 Stock-based compensation - - 3,462 - - 3,462 Other comprehensive income - - - - 224 224 Net loss - - - ( 27,753 ) - ( 27,753 ) Balance at March 31, 2020 44,349,522 $ 4 $ 373,425 $ ( 233,079 ) $ 288 $ 140,638 Issuance of common stock in public offering, net of $ 21,629 offering costs 12,650,000 2 326,244 - - 326,246 Issuance of common stock upon exercise of stock options 216,286 - 1,751 - - 1,751 Vesting of early exercised stock options and restricted stock 64,501 - 216 - - 216 Issuance of common stock under Employee Stock Purchase Plan 91,859 - 607 - - 607 Stock-based compensation - - 4,470 - - 4,470 Other comprehensive loss - - - - ( 144 ) ( 144 ) Net loss - - - ( 45,074 ) - ( 45,074 ) Balance at June 30, 2020 57,372,168 $ 6 $ 706,713 $ ( 278,153 ) $ 144 $ 428,710 The accompanying notes are an integral part of these condensed consolidated financial statements. * The balances as of December 31, 2019 and 2018 have been derived from the audited financial statements as of that date. 3 ARCUS BIOSCIENCES, INC. Condensed Consolidated Statements of Cash Flows (In thousands) (unaudited) Six Months Ended June 30, 2020 2019 Cash flow from operating activities Net loss $ ( 72,827 ) $ ( 45,760 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation expense 7,932 3,804 Depreciation and amortization 1,629 1,836 Share of loss from equity method investee 613 844 Gain on deemed sale from equity method investee ( 613 ) - Amortization of premiums on investments ( 323 ) ( 1,580 ) Changes in operating assets and liabilities: Receivable from collaboration partners ( 90 ) - Amounts owed by a related party - 21 Prepaid expenses and other current assets ( 4,601 ) ( 952 ) Other long-term assets ( 135 ) ( 35 ) Accounts payable 6,668 ( 566 ) Accrued research and development expenses 9,327 10,094 Accrued liabilities 661 ( 565 ) Other current liabilities - 29 Deferred revenue ( 3,500 ) ( 3,500 ) Deferred rent ( 266 ) ( 262 ) Other long-term liabilities 310 - Net cash used in operating activities ( 55,215 ) ( 36,592 ) Cash flow from investing activities Purchases of short-term and long-term investments ( 139,689 ) ( 123,837 ) Proceeds from maturities of short-term and long-term investments 92,134 165,968 Sales of short-term investments 1,003 - Purchases of property and equipment ( 465 ) ( 1,179 ) Net cash (used in) provided by investing activities ( 47,017 ) 40,952 Cash flow from financing activities Proceeds from issuance of common stock, net of issuance costs 326,512 - Proceeds from issuance of common stock pursuant to equity award plans 3,001 695 Repurchase of unvested shares of stock ( 33 ) ( 51 ) Net cash provided by financing activities 329,480 644 Net increase in cash and cash equivalents 227,248 5,004 Cash, cash equivalents and restricted cash at beginning of period 58,140 71,267 Cash, cash equivalents and restricted cash at end of period $ 285,388 $ 76,271 Non-cash investing and financing activities: Unpaid portion of financing costs included in accounts payable $ 266 $ - Unpaid portion of deferred financing costs included in accounts payable $ 316 $ - Unpaid portion of property and equipment purchases included in accounts payable and accrued liabilities $ 110 $ 48 Vesting of early exercised stock options and restricted stock $ 436 $ 533 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 ARCUS BIOSCIENCES, INC. Notes to Condensed Consolidated Financial Statements Note 1. Organization Description of Business Arcus Biosciences, Inc. (the Company) is a clinical-stage biopharmaceutical company focused on creating best-in-class cancer therapies. The Company’s initial focus has been on well-characterized biological pathways with significant scientific data supporting their importance. Since its inception in 2015, the Company has built a robust and highly efficient drug discovery capability to create highly differentiated small molecules, which the Company is developing in combination with its in-licensed monoclonal antibodies through rationally designed, indication-specific, adaptive clinical trial designs. Liquidity and Capital Resources 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. Note 2. Significant Accounting Policies Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and pursuant to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the Company’s opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the results of operations and cash flows for the periods presented have been included. Operating results for the 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. 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 The Company established a wholly-owned subsidiary in Australia in 2017 and a wholly-owned subsidiary in Ireland in 2019. The condensed consolidated financial statements include the Company’s accounts and those of its wholly-owned subsidiaries. All intercompany accounts, transactions and balances have been eliminated. 5 Use of Estimates The preparation of the Company’s condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as related disclosures of contingent assets and liabilities. Estimates were used to determine the value of stock-based awards and other issuances, accruals for research and development costs, useful lives of long-lived assets, and uncertain tax positions. Actual results could differ materially from the Company’s estimates. Cash Equivalents and Short-Term Investments Cash equivalents include marketable securities having an original maturity of three months or less at the time of purchase. Short-term investments have maturities of greater than three months and up to twelve months at the time of purchase. Collectively, cash equivalents, short-term and long-term investments are considered available-for-sale and are recorded at fair value. Unrealized gains and losses are recorded in accumulated other comprehensive loss. Realized gains and losses are included in interest and other income, net in the condensed consolidated statements of operations and comprehensive income or loss. The basis on which the cost of a security that is sold or an amount that is reclassified out of accumulated other comprehensive income or loss into earnings is determined using the specific identification method. Reconciliation of Cash, Cash Equivalents, and Restricted Cash as Reported in Condensed Consolidated Statements of Cash Flows Restricted cash at 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): June 30, 2020 December 31, 2019 Cash and cash equivalents $ 285,185 $ 57,937 Restricted cash 203 203 Cash, cash equivalents and restricted cash $ 285,388 $ 58,140 Concentration of Credit Risk Cash equivalents, short-term and long-term investments are financial instruments that potentially subject the Company to concentrations of credit risk. The Company invests in money market funds, treasury bills and notes, government bonds, commercial paper and corporate notes. The Company limits its credit risk associated with cash equivalents, short-term and long-term investments by placing them with banks and institutions it believes are credit worthy and in highly rated investments. Research and Development Expenses Research and development costs are expensed as incurred. Research and development expenses consist primarily of personnel costs for the Company’s research and development employees, costs incurred to third-party service providers for the conduct of research, preclinical and clinical studies, laboratory supplies and equipment maintenance costs, product license fees, consulting and other related expenses. The Company estimates research, preclinical and clinical study expenses based on services performed, pursuant to contracts with third-party research and development organizations that conduct and manage research, preclinical and clinical activities on its behalf. The Company estimates these expenses based on discussions with internal management personnel and external service providers as to the progress or stage of completion of services and the contracted fees to be paid for such services. If the actual timing of the performance of services or the level of effort varies from the original estimates, the Company will adjust the accrual accordingly. Payments associated with licensing agreements to acquire licenses to develop, use, manufacture and commercialize products that have not reached technological feasibility and do not have alternative future use are expensed as incurred. 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. 6 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. Income Taxes 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. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 reduces costs and complexity of applying accounting standards while maintaining the usefulness of the information provided to users of financial statements. 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 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 In February 2016, the FASB issued ASU No. 2016-02 (Topic 842), Leases (ASU 2016-02). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases. 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. 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 , 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 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. 7 In August 2018, the FASB issued ASU No.2018-13 (Topic 820), Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements on fair value measurement in Topic 820. 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), 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. 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. In November 2018, the FASB issued ASU No. 2018-18 (Topic 808), Collaborative Arrangements . 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. 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. Note 3. Fair Value Measurements Financial assets and liabilities are recorded at fair value. The accounting guidance for fair value provides a framework for measuring fair value, clarifies the definition of fair value and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows: Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. Level 2—Inputs (other than quoted market prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life. Level 3—Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. During the periods presented, the Company has not changed the manner in which it values assets and liabilities that are measured at fair value. The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers within the hierarchy as of 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): June 30, 2020 Total Level 1 Level 2 Level 3 Money market funds $ 273,190 $ 273,190 $ - $ - U.S. treasury securities 121,015 - 121,015 - U.S. government agency securities 14,990 - 14,990 - Corporate securities and commercial paper 53,278 - 53,278 - Total assets measured at fair value $ 462,473 $ 273,190 $ 189,283 $ - December 31, 2019 Total Level 1 Level 2 Level 3 Money market funds $ 45,498 $ 45,498 $ - $ - U.S. treasury securities 74,854 - 74,854 - Corporate securities and commercial paper 67,918 - 67,918 - Total assets measured at fair value $ 188,270 $ 45,498 $ 142,772 $ - 8 Classified as (with contractual maturities): June 30, 2020 December 31, 2019 Cash and cash equivalents $ 285,185 $ 57,937 Short-term investments (due within one year) 177,288 130,333 Total cash, cash equivalents and investments in marketable securities $ 462,473 $ 188,270 Investments in marketable securities are classified as available-for-sale. 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): Amortized Cost Unrealized Gain Unrealized Loss Fair Value As of June 30, 2020: Money market funds $ 273,190 $ - $ - $ 273,190 U.S. treasury securities 120,894 121 - 121,015 U.S. government agency securities 14,991 - ( 1 ) 14,990 Corporate securities and commercial paper 53,254 30 ( 6 ) 53,278 Total $ 462,329 $ 151 $ ( 7 ) $ 462,473 Amortized Cost Unrealized Gain Unrealized Loss Fair Value As of December 31, 2019: Money market funds $ 45,498 $ - $ - $ 45,498 U.S. treasury securities 74,801 12 ( 1 ) 74,812 Corporate securities and commercial paper 67,907 55 ( 2 ) 67,960 Total $ 188,206 $ 67 $ ( 3 ) $ 188,270 Note 4. Accrued Liabilities Accrued liabilities consisted of the following (in thousands): As of June 30, 2020 As of December 31, 2019 Personnel expenses $ 3,980 $ 4,571 Professional fees 437 183 Other 1,194 196 Total $ 5,611 $ 4,950 Note 5. Equity Investment In 2016, the Company purchased approximately 3.6 million shares of common stock of PACT Pharma, Inc. (PACT Pharma), a privately funded, early-stage biopharmaceutical company focused on adoptive cell therapy, and 1.0 million shares of Series A preferred stock. The Company determined the fair value of such investment to be insignificant to the Company’s 2016 financial statements given the start-up nature of operations of PACT Pharma, and it was recorded at a nominal amount. The Company also received certain warrants to purchase PACT Pharma common stock exercisable upon PACT Pharma’s achievement of certain valuation thresholds pursuant to a Master Services Agreement between the Company and PACT Pharma (the PACT Agreement), which agreement has since expired. The Company determined PACT Pharma to be a variable interest entity, and that the Company has a variable interest in PACT. However, because the Company is not the primary beneficiary of PACT Pharma, it is not required to consolidate the results of operations of PACT Pharma within its condensed consolidated financial statements. 9 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 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. 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. Note 6. License and Collaboration Agreements Taiho Pharmaceutical Co., Ltd 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 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. An additional $ 5.0 million was received in 2018 and the remaining $ 5.0 million was received in 2019. In the event that the Company has not initiated IND enabling studies for at least five Arcus Programs prior to the expiration of the Option Period, Taiho may elect to extend the Option Period, up to a maximum of seven years , subject to an extension fee. For each option that Taiho elects to exercise, Taiho will be obligated to make an option exercise payment of between $ 3.0 million to $ 15.0 million, depending on the development stage of the applicable Arcus Program for which the option is exercised. In addition, the Taiho Agreement provides that the Company is eligible to receive additional clinical and regulatory milestones totaling up to $ 130.0 million per Arcus Program, and it will be eligible to receive contingent payments of up to $ 145.0 million per Arcus Program associated with the achievement of specified levels of Taiho net sales in the Taiho Territory. In addition, the Company will receive royalties ranging from high single-digits to mid-teens on net sales of licensed products in the Taiho Territory. Royalties will be payable on a licensed product-by-licensed product and country-by-country basis during the period of time commencing on the first commercial sale of a licensed product in a country and ending upon the later of: (a) ten (10) years from the date of first commercial sale of such licensed product in such country; and (b) expiration of the last-to-expire valid claim of the Company’s patents covering the manufacture, use or sale or exploitation of such licensed product in such country (the Royalty Term). The Company 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. These deliverables are non-contingent in nature. The Company determined that the obligation to participate in the joint steering committee does not have stand-alone value to Taiho because the committee’s primary purpose is to monitor and govern the research and development activities and, hence, it is inseparable from the research and development services. The Company’s assessment of the transaction price included an analysis of amounts it expected to receive, which at contract inception consisted of the upfront cash payment of $ 20.0 million due upon contract execution in September 2017, a $ 5.0 million payment due within 30 days of contract execution, an anniversary payment of $ 5.0 million due in 2018, and a final anniversary payment of $ 5.0 million due in 2019. All payments were made by Taiho as they became due and payable so given this successful collection history, the Company considers the entire $ 35.0 million in non-refundable fees to be the initial transaction price. 10 The Company determined that the combined performance obligation of the research and development services and the obligation to participate on the joint steering committee are satisfied over time. The Company uses a time-elapsed input method to measure progress toward satisfying its performance obligation, which is the method the Company believes most faithfully depicts the Company’s performance in transferring the promised services during the time period in which Taiho has access to the Company’s research and development activities. Accordingly, the transaction price of $35.0 million is being recognized 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 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 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. In 2019, Taiho exercised its option to the Company’s anti-PD-1 antibody program, including zimberelimab (formerly referred to as AB122) for a fee of $ 8.0 million. The Company identified one performance obligation, the delivery of the license, which was completed in 2019. The transaction price was determined to be the payment of $ 8.0 million, which was recognized by the Company as licensing revenue during the year ended December 31, 2019 under Topic 606. Upon the option exercises, Taiho gained sole responsibility for the development and commercialization of the licensed products from within the programs in the Taiho Territory. The Company also determined that the clinical and regulatory milestone payments under the Taiho Agreement are variable consideration under Topic 606 which need to be added to the transaction price when it is probable that a significant revenue reversal will not occur. Based on the nature of the clinical and regulatory milestones, such as the regulatory approvals which are not within the Company’s control, the Company will not consider achievement of such milestones to be probable until the uncertainty associated with the milestones has been resolved. 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 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. The Company considers the license to be the predominant item to which the royalties relate. 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 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. 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 June 30, Six Months Ended June 30, Revenue recognized in the period from: 2020 2019 2020 2019 Amounts included in deferred revenue at the beginning of the period $ 1,750 $ 1,750 $ 3,500 $ 3,500 Performance obligations satisfied in previous period - - - - 11 WuXi Biologics License Agreement 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 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 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 domvanalimab (formerly referred to as 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 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 In December 2019, the Company and Genentech, through F. Hoffmann-La Roche Ltd (collectively, Genentech) entered into a Master Clinical Collaboration Agreement (the Genentech Agreement) pursuant to which the parties may conduct combination clinical studies involving Genentech’s monoclonal antibody, atezolizumab (TECENTRIQ®) and the Company’s investigational products. 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; and first line metastatic pancreatic cancer. 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 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 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 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 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. 12 Note 7. 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. Note 8. Stock-Based Compensation In March 2018, the Company adopted the 2018 Equity Incentive Plan (2018 Plan). The 2018 Plan replaced the Company’s 2015 Stock Plan (2015 Plan) and 3,570,000 shares were reserved under the 2018 Plan, along with any shares remaining available for issuance under the Company’s 2015 Plan or outstanding awards under its 2015 Plan that subsequently expire, lapse unexercised or are forfeited to or repurchased by the Company. In January 2020, the Company adopted the 2020 Inducement Plan (2020 Plan). 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 June 30, Six Months Ended June 30, 2020 2019 2020 2019 Research and development $ 2,368 $ 868 $ 4,104 $ 1,715 General and administrative 2,102 1,262 3,828 2,089 Total stock-based compensation $ 4,470 $ 2,130 $ 7,932 $ 3,804 Note 9. 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 June 30, Six Months Ended June 30, 2020 2019 2020 2019 Numerator: Net loss $ ( 45,074 ) $ ( 28,090 ) $ ( 72,827 ) $ ( 45,760 ) Denominator: Weighted-average common shares outstanding 50,153,160 45,409,588 48,053,186 44,970,831 Less: weighted-average common shares subject to vesting ( 1,596,317 ) ( 1,611,870 ) ( 1,633,462 ) ( 1,317,506 ) Weighted-average common shares used to compute basic and diluted net loss per share 48,556,843 43,797,718 46,419,724 43,653,325 Net loss per share: basic and diluted $ ( 0.93 ) $ ( 0.64 ) $ ( 1.57 ) $ ( 1.05 ) 13 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 June 30, 2020 2019 Common stock options issued and outstanding 7,201,567 4,449,690 Unvested restricted common stock issued as part of collaboration agreement 1,257,651 1,257,651 Unvested early exercised common stock options 311,114 665,301 Restricted stock units issued 658,950 - Total 9,429,282 6,372,642 Note 10. Commitments Leases 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. Note 11. 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. (Gilead). 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. 14