What changed in this filing

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Item 1. Financial Statements

2020-11-05 compared with 2020-08-06 · 270 added, 112 removed, 350 unchanged (52% of the section changed)

3 unchanged sentences

(In thousands, except share and per share amounts)

September 30,

Current assets:

5 unchanged sentences

Total current assets

Long-term investments

Property and equipment, net

9 unchanged sentences

Deferred revenue, noncurrent

Deferred rent

Deferred rent, noncurrent

Other long-term liabilities

1 unchanged sentence

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

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

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

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

64,924,073 and 45,925,004 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively

Additional paid-in capital

6 unchanged sentences

ARCUS BIOSCIENCES, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(In thousands, except share and per share amounts)

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Collaboration and license revenue

3 unchanged sentences

Total operating expenses

Loss from operations

Income (loss) from operations

Non-operating income (expense):

3 unchanged sentences

Total non-operating income, net

Net income (loss)

Other comprehensive income (loss)

Comprehensive loss

Net loss per share, basic and diluted

Comprehensive income (loss)

Net income (loss) per share, basic

Weighted-average number of shares used to

compute basic and diluted net loss per share

compute basic net income (loss) per share

Net income (loss) per share, diluted

Weighted-average number of shares used to

compute diluted net income (loss) per share

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

1 unchanged sentence

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands, except share and per share amounts)

(In thousands, except share amounts)

Comprehensive

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Balance at June 30, 2019

Issuance of common stock upon exercise of stock options

Vesting of early exercised stock options and restricted stock

Stock-based compensation

Other comprehensive income

Balance at September 30, 2019

Balance at December 31, 2019 *

11 unchanged sentences

Balance at June 30, 2020

Issuance of common stock and rights to purchase additional shares in accordance with Gilead Purchase Agreement, net of $ 1,931 offering costs

Issuance of common stock upon exercise of stock options

Vesting of early exercised stock options and restricted stock

Stock-based compensation

Other comprehensive income

Balance at September 30, 2020

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

3 unchanged sentences

(In thousands)

Six Months Ended

Nine Months Ended

September 30,

Cash flow from operating activities

17 unchanged sentences

Other long-term liabilities

Net cash used in operating activities

Net cash (used in) provided by operating activities

Cash flow from investing activities

5 unchanged sentences

Cash flow from financing activities

Proceeds from issuance of common stock, net of issuance costs

Proceeds from issuance of common stock and rights to purchase additional shares, net of issuance costs

Proceeds from issuance of common stock pursuant to equity award plans

5 unchanged sentences

Non-cash investing and financing activities:

Unpaid portion of financing costs included in accounts payable

Unpaid portion of deferred financing costs included in accounts payable

Unpaid portion of financing costs included in accrued liabilities

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

9 unchanged sentences

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.

As of September 30, 2020, the Company had cash and investments of $ 785.1 million, which are cash, cash equivalents, and investments in marketable securities, which the Company believes will be sufficient to fund its planned operations for a period of at least twelve months following the filing date of this report.

Significant Accounting Policies

6 unchanged sentences

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.

Operating results for the nine months ended September 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.

14 unchanged sentences

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.

Estimates were used to determine the standalone selling price of performance obligations and the timing of revenue recognition, the value of stock-based awards and other issuances, accruals for research and development costs, useful lives of long-lived assets, and uncertain tax positions.

Actual results could differ materially from the Company’s estimates.

Cash Equivalents and Short-Term Investments

Cash Equivalents and Investments

Cash equivalents include marketable securities having an original maturity of three months or less at the time of purchase.

Short-term investments have maturities of greater than three months and up to twelve months at the time of purchase.

Long-term investments have maturities greater than 12 months at the time of purchase.

Collectively, cash equivalents, short-term and long-term investments are considered available-for-sale and are recorded at fair value.

Unrealized gains and losses are recorded in accumulated other comprehensive loss.

Unrealized gains and losses are recorded in accumulated other comprehensive income (loss).

Realized gains and losses are included in interest and other income, net in the condensed consolidated statements of operations and comprehensive income or loss.

1 unchanged sentence

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.

Restricted cash at September 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):

September 30,

Cash and cash equivalents

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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.

Collaborative Arrangements and Contracts with Customers

The Company assesses whether its collaboration agreements are subject to Accounting Standards Codification (ASC) Topic 808, Collaborative Arrangements (ASC 808) based on whether they involve joint operating activities and whether both parties have active participation in the arrangement and are exposed to significant risks and rewards.

To the extent that the arrangement falls within the scope of ASC 808, the Company applies the unit of account guidance under ASC Topic 606, Revenue from Contracts with Customers (ASC 606) to identify distinct performance obligations, and then determine whether a customer relationship exists for each distinct performance obligation.

If the Company determines a performance obligation within the arrangement is with a customer, it applies the guidance in ASC 606.

If a portion of a distinct bundle of goods or services within an arrangement is not with a customer, then the unit of account is not within the scope of ASC 606, and the recognition and measurement of that unit of account shall be based on analogy to authoritative accounting literature or, if there is no appropriate analogy, a reasonable, rational, and consistently applied accounting policy election.

The Company enters into collaborative arrangements that typically include one of more of the following:

(i) license fees;

(ii) milestone payments related to the achievement of developmental, regulatory, or commercial goals;

(iii) royalties on net sales of licensed products;

(iv) fees attributable to options to intellectual property;

and (v) cost-sharing or research and development (R&D) funding arrangements.

When a portion of non‑refundable upfront fees or other payments received are allocated to continuing performance obligations under the terms of a collaborative arrangement, they are recorded as deferred revenue and recognized as revenue when (or as) the underlying performance obligation is satisfied.

Fees attributable to options are deferred until the option expires or is exercised.

When an option is exercised, the performance obligations associated with the option are identified, which will determine the accounting for the transaction price attributable to the option.

As part of the accounting for these arrangements, the Company must develop estimates and assumptions that require judgment to determine the underlying stand-alone selling price for each performance obligation which determines how the transaction price is allocated among the performance obligation.

To determine t he stand-alone selling price , the Company may consider items such as forecasted revenues, development timelines, discount rates, and probabilities of technical and regulatory success.

The Company evaluate s each performance obligation to determine if it can be satisfied at a point in time or over time.

In addition, variable consideration must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price.

If a license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from non-refundable, upfront fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license.

For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue.

The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

Milestone Payments and Variable Consideration

At the inception of each arrangement that includes milestone payments or variable consideration, the Company evaluates whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method.

If it is probable that a significant revenue reversal would not occur, the associated value is included in the transaction price.

Milestone payments that are not within the control of the Company or the Company’s collaboration partner, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received.

The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied.

At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price.

Any such adjustments are recorded on a cumulative catch-up basis, which would affect license, collaboration or other revenues and earnings in the period of adjustment.

Cost-Sharing or R&D Funding Arrangements

Under certain collaborative arrangements, the Company has been reimbursed for a portion of its research and development expenses, including costs of drug supplies.

When these R&D services are performed under a reimbursement or cost sharing model with a collaboration partner, the Company records these reimbursements as a reduction of R&D expense in its condensed consolidated statements of operations.

For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and for which the license is deemed to be the predominant item to which the royalties relate, the Company recognizes 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).

To date, the Company has not recognized any royalty revenue resulting from any of its collaborative arrangements.

Research and Development Expenses

8 unchanged sentences

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.

Accounting standards require 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.

3 unchanged sentences

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;

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

6 unchanged sentences

The Company early adopted this ASU as of January 1, 2020, with an immaterial impact on its 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, Revenue from Contracts with Customers , (Topic 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 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

14 unchanged sentences

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

While the Company is finalizing its evaluation of adopting this accounting standard update on its financial statements and related disclosures, the Company expects to recognize on its balance sheet for associated leases new ROU assets and corresponding liabilities as of January 1, 2020, approximately $ 6 million and $ 10 million, respectively.

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.

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

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.

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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.

Fair Value Measurements

11 unchanged sentences

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.

There were no transfers within the hierarchy as of September 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

September 30, 2020

Money market funds

9 unchanged sentences

Classified as (with contractual maturities):

June 30, 2020

September 30, 2020

December 31, 2019

1 unchanged sentence

Short-term investments (due within one year)

Long-term investments (due between one and two years)

Total cash, cash equivalents and investments in marketable securities

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):

As of June 30, 2020:

At September 30, 2020 and December 31, 2019, the balance in the Company’s accumulated other comprehensive income 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 September 30, 2020 and December 31, 2019, respectively, and as a result, the Company did no t reclassify any amounts out of accumulated other comprehensive income for the periods then ended.

The Company has a limited number of available-for-sale marketable securities in loss positions as of September 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 September 30, 2020 and December 31, 2019 are presented in the tables that follow (in thousands):

As of September 30, 2020:

Money market funds

8 unchanged sentences

Accrued liabilities consisted of the following (in thousands):

As of June 30, 2020

As of September 30, 2020

As of December 31, 2019

2 unchanged sentences

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.

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.

The Company owns approximately 3.6 million shares of common stock, 1.0 million shares of Series A preferred stock, and warrants to purchase additional stock of PACT Pharma, Inc.

(PACT Pharma), a privately funded, early-stage biopharmaceutical company focused on adoptive cell therapy.

This interest 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 income (loss).

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

Since the Company has no obligation to provide cash financing to PACT Pharma, the Company is not required to record losses beyond the carrying amount of the investment.

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.

The Company did not participate in these financings.

The decrease in the Company’s equity ownership percentage and an increase in PACT Pharma’s estimated fair value per share resulted in gains on dilution totaling an immaterial amount and $ 1.5 million during the three and nine months ended September 30, 2020.

After applying an immaterial amount and $ 0.9 million in losses accumulated in prior periods when the equity investment balance was zero , the Company recorded a gain of zero and $ 0.6 million for the three and nine months ended September 30, 2020, respectively.

The Company’s share of PACT Pharma’s losses for the for the three and nine months ended September 30, 2020 exceeded gains for the same period.

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

The unrecognized equity method losses in excess of the Company’s investment was $ 1.2 million as of September 30, 2020.

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

License and Collaboration Agreements

The following table summarizes the revenues for the three and nine months ended September 30, 2020 and 2019 received as a result of the Company’s collaboration agreements with Gilead Sciences, Inc.

(Gilead) and Taiho Pharmaceutical Co., Ltd.

Three Months Ended September 30,

Nine Months Ended September 30,

License revenue

Collaboration revenue

Collaboration and license revenue

The following table summarizes details of revenues for the three and nine months ended September 30, 2020 and 2019 by collaboration and by category of revenue:

Three Months Ended September 30,

Nine Months Ended September 30,

Revenues recognized:

Point in time

Gilead license to zimberelimab

Gilead access rights related to the Company's research and development pipeline

Taiho collaboration agreement

Total collaboration and license revenue

In addition to revenues, the Company recognized $ 0.5 million as a reduction to R&D expense for the three months ended September 30, 2020 due to the development services performed during the period for zimberelimab .

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 September 30,

Nine Months Ended September 30,

Revenue recognized in the period from:

Amounts included in deferred revenue at the beginning of the period

Performance obligations satisfied in previous period

The Company received $ 175 million in upfront payments from Gilead in connection with the Option, License and Collaboration Agreement and identified $ 100 million in unconstrained consideration to be received in 2022.

In addition, the Company received $ 200 million from Gilead in connection with the Stock Purchase Agreement, of which approximately $ 109.4 million represented the fair value of stock purchased at the transaction closing date in July 2020 with the remaining premium of $ 90.6 million allocated to the transaction price.

The Company determined the present value of the unconstrained variable consideration to be $ 99.1 million at the contract closing date.

These payments were allocated to the performance obligations identified as follows:

September 30, 2020

Allocation of transaction price

Upfront cash consideration

Payment for access rights related to the Company's research and development pipeline

Premium from Stock Purchase Agreement

Total transaction price allocated to revenue

Allocation to performance obligations

Zimberelimab license

Etrumadenant option

Domvanalimab option

Access rights related to the Company's research and development pipeline

Development and commercialization services for zimberelimab

Gilead Sciences, Inc.

On May 27, 2020, the Company entered into an Option, License and Collaboration Agreement (Gilead Collaboration Agreement), Common Stock Purchase Agreement (the Stock Purchase Agreement), and Investor Rights Agreement, (collectively, the Gilead Agreements), 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, and made an equity investment of approximately $ 200 million in the Company by purchasing 5,963,029 shares of Arcus common stock at a per share price of $ 33.54 pursuant to the Stock Purchase Agreement, 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, contingent upon Gilead’s payment of up to $ 400.0 million 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 should Gilead elect to exercise its options.

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, and expense caps on the Company’s spending and related subsequent adjustments.

For each optioned program, provided the Company has not exercised its opt-out rights, 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 in the form of research and development pipeline access rights payments of up to $ 400 million over the collaboration term.

Pursuant to the Stock 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.

Based on the value of the Company’s common stock at the contract closing, the right to purchase additional shares had no value.

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.

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 $ 175.0 million due upon contract closing in July 2020, the present value of the $ 100.0 million payment related to the research and development access rights due in 2022, and the $ 90.6 million premium resulting from Gilead’s purchase of common stock.

All payments to date have been made by Gilead as they became due and payable so given this successful collection history, the Company considers the entire $ 364.7 million outlined above to be the initial transaction price.

The Company evaluated the Gilead Agreements under ASC 606 and determined that the performance obligations at the contract inception consisted of the following:

Zimberelimab (formerly AB122) license

Effective on closing, Gilead obtained an exclusive license to zimberelimab.

The standalone selling price of this license was determined using a discounted cash flow method.

The Company recognized the full revenues associated with this performance obligation on the date the transaction closed.

Etrumadenant (formerly AB928) option

Gilead has the right to exercise an option for exclusive rights to etrumadenant, the Company’s adenosine receptor program, in exchange for an option payment of $ 250.0 million, that expires after a proscribed period following the Company’s achievement of certain development milestones.

The Company calculated the standalone selling price of this program using a discounted cash flow method and concluded that it exceeded the price of the option, creating a material right and a distinct performance obligation.

The Company will recognize revenue allocated to the material right either upon the option’s exercise or expiration.

Domvanalimab (formerly AB154) option

Gilead has the right to exercise an option for exclusive rights to domvanalimab, the Company’s anti-TIGIT monoclonal antibody, in exchange for an option payment of $ 275.0 million, that expires after a proscribed period following the Company’s achievement of certain development milestones.

The Company will recognize revenue allocated to the material right either upon the option’s exercise or expiration.

Access rights related to the Company’s research and development pipeline

Gilead receives exclusive access to the Company’s current programs as well as the future programs for a period of ten years , contingent upon Gilead’s payment of $ 400.0 million, with the first payment of $ 100.0 million in 2022 , and an additional $ 100 million payment due at Gilead’s option on each of the fourth, sixth, and eighth anniversaries of the agreement.

The standalone selling price of this ongoing research and development pipeline access was determined using an expected cost-plus margin approach.

The Company evaluated its rights and obligations in the Gilead Collaboration Agreement and determined that Gilead is contractually obligated to make the $ 100.0 million payment due in 2022 resulting in a minimum term of four years for this performance obligation.

As a result, the amount was included in the transaction price.

The Company determined that the revenue allocated to the performance obligation should be recognized over the four-year period.

The Company further determined that Gilead is not obligated to pay the remaining $ 300.0 million due over the remainder of the term.

Failure to pay the non-obligatory payments will result in Gilead’s loss of certain rights to access and obtain licenses to the programs arising from the Company’s research and development pipeline.

Development and commercialization services for zimberelimab

In conjunction with the license, the Company determined there existed a separate obligation to perform further development and commercialization services for Gilead.

The standalone selling price of this obligation was determined using an expected cost-plus margin approach.

This obligation includes a 50/50 share of the costs associated with all future development and commercialization of zimberelimab.

The portion of the transaction price allocated to this performance obligation has been allocated in accordance with the total costs forecast for the development and commercialization of zimberelimab.

The Company will recognize the amounts allocated to development services throughout the initial 4 year period of the contract.

The Company will defer the portion allocated to

commercialization services until future periods when the actual costs are incurred .

Any payments received from or payments made to Gilead for the 50/50 cost share will be recognized as a reduction or an increase to R&D expense, respectively.

Gilead was also granted option rights to programs not yet in development.

These programs were not determined to be performance obligations at contract inception, as there are no identified programs, revenues, or costs to compare against the option price.

Prepaid expenses and contract liabilities

The Company incurred $ 7.3 million in expenses to obtain the contract, which consisted of consultant and legal fees that were directly connected to the successful completion of the Gilead Collaboration Agreement, the Stock Purchase Agreement and the Investor Rights Agreement.

The Company determined that $ 1.9 million of these expenses were related to the Stock Purchase Agreement and recorded them as offering costs.

The Company allocated the remaining expenses between the various performance obligations, to be recognized when the underlying revenue is recognized.

The portion allocated to the delivery of zimberelimab was recognized immediately, and the portion allocated to the remaining performance obligations will be recognized over the initial noncancelable four-year term of the Gilead Collaboration Agreement.

During the three and nine months ended September 30, 2020, the Company recognized $ 1.1 million in expense from the amortization of these assets.

At September 30, 2020, the Company had $ 4.3 million in prepaid expenses from costs to obtain the Gilead Agreements, of which $ 2.9 million was recorded in prepaid expenses and other current assets and $ 1.4 million was recorded in other long-term assets.

The Company also recognized $ 9.2 million in contract liabilities for future development and promotion costs which Gilead prepaid, of which $ 1.9 million and $ 7.3 million represented the short and long-term portions of the liability, recorded in other current liabilities and other non-current liabilities on the condensed consolidated balance sheets, respectively.

Taiho Pharmaceutical Co., Ltd

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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.

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 .

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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.

The adoption of ASC 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.

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 ASC 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.

The Company also determined that the clinical and regulatory milestone payments under the Taiho Agreement are variable consideration under ASC 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.

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

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

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

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

As of September 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:

Amounts included in deferred revenue at the beginning of the period

Performance obligations satisfied in previous period

WuXi Biologics License Agreement

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(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.

From the inception of the WuXi Agreement through September 30, 2020, the Company has made upfront and milestone payments of $ 31.0 million and incurred sub-license fees of $ 11.3 million.

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.

The Company incurred $ 10.1 million and $ 15.1 million in expense under the WuXi Agreement during the three and nine months ended September 30, 2020, which includes a sub-license fee of $ 10.1 million due in connection with the grant of a sublicense to Gilead for zimberelimab under the Gilead Collaboration Agreement in July 2020, and a $ 5.0 million development milestone expense.

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.

Under the Abmuno Agreement, the Company has made upfront and milestone payments totaling $ 9.6 million as of September 30, 2020.

The Abmuno Agreement also provides for additional clinical, regulatory and commercialization milestone remaining payments of up to $ 98.0 million as of September 30, 2020.

The Company incurred $ 3.0 million in development milestone expense during the three and nine months ended September 30, 2020.

Genentech Collaboration Agreement

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The Company and Genentech will each supply their respective investigational products for use in the collaboration studies and will share a portion of the development costs under specific terms as set forth in the agreement.

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

For the three and nine months ended September 30, 2020, the Company incurred expenses pursuant to the Genentech Agreement of $ 0.1 million.

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

Strata Collaboration Agreement

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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.

From the inception of the Agreement through September 30, 2020, the Company has made a milestone payment of $ 2.5 million and has incurred expenses of $ 2.2 million, of which $ 0.4 million had been reimbursed by Strata as development cost sharing.

These amounts were recorded within research and development expense.

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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.

As of September 30, 2020, the Company determined that no ne 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 nine months ended September 30, 2020, the Company incurred expenses pursuant to the Strata Agreement of $ 0.3 million and $ 1.2 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 nine months ended September 30, 2020, respectively.

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

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

In July 2020, the Company closed the Gilead Collaboration Agreement, Common Stock Purchase Agreement, and the Investor Rights Agreement, each signed with Gilead in May 2020.

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

Upon closing, 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 Stock Purchase Agreement.

Of the $ 200 million equity investment, approximately $ 90.6 million was determined to be a premium on the purchase of common stock and allocated to the performance obligations created by the Gilead Collaboration Agreement.

See Note 6 in this Form 10-Q for further discussion of the agreements with Gilead.

Net proceeds from Gilead’s equity investment were approximately $ 107.5 million after allocating the premium and deducting direct offering expenses of $ 1.9 million.

Stock-Based Compensation

3 unchanged sentences

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.

1 unchanged sentence

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,

During the three and nine months ended September 30, 2020, 5,000 shares were forfeited.

There were 653,950 shares of restricted stock outstanding at September 30, 2020.

Total stock-based compensation expense was recognized in the condensed consolidated statements of operations and comprehensive income (loss) as follows (in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

Research and development

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Total stock-based compensation

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,

Net Income (Loss) per Share

Basic net income (loss) per share is calculated based on the weighted-average number of shares of the Company’s common stock during the period.

Diluted net income (loss) per share is calculated based on the weighted-average number of shares of the Company’s common stock and other dilutive securities outstanding during the period.

The potentially dilutive shares of the Company’s common stock resulting from the assumed exercise of outstanding stock options and equivalents were determined under the treasury stock method.

The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except share and per share data):

Three Months Ended September 30,

Nine Months Ended September 30,

Net income (loss)

Weighted-average common shares outstanding

weighted-average common shares subject to vesting

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

Net loss per share:

basic and diluted

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,

Weighted-average common shares used to compute basic net income (loss) per share

Dilutive effect of stock options

Dilutive effect of ESPP

Weighted-average common shares used to compute diluted net income (loss) per share

Net income (loss) per share:

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

Three Months Ended September 30,

Nine Months Ended September 30,

Common stock options issued and outstanding

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Restricted stock units issued

Employee Stock Purchase Plan shares

The Company also excluded the effect of Gilead ’s right to purchase additional shares of the Company’s common stock from its calculation as the se rights had no intrinsic value at September 30, 2020.

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.

1 unchanged sentence

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

Subsequent Events

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

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

Upon closing, Gilead made an upfront payment of $ 175 million pursuant to the Gilead Collaboration Agreement, Gilead made an equity investment of approximately $ 200 million in the Company by purchasing 5,963,029 shares of Arcus common stock at a per share price of $ 33.54 pursuant to the Purchase Agreement, and the Company appointed Gilead’s designee, Merdad Parsey, M.D., Ph.D., to the Company’s Board of Directors pursuant to the Investor Rights Agreement.

Pursuant to the terms of the Gilead Collaboration Agreement, Gilead has an exclusive license to develop and commercialize zimberelimab (formerly referred to as AB122) in certain markets and obtained exclusive options to acquire an exclusive license to develop and commercialize all of the Company’s current and future clinical programs during the 10 -year collaboration term and, for those programs that enter clinical development prior to the end of the collaboration term, for up to an additional three years thereafter.

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 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.

Related parties

Relationship and transactions with Gilead Sciences, Inc.

As of September 30, 2020, Gilead held approximately 13 % of the Company’s outstanding common stock, and has the right, at its option, to purchase up to a maximum of 35 % of the Company’s then-outstanding voting common stock, from time to time over the next five years.

Gilead also has the right under the Investor Rights Agreement to designate two individuals to be appointed to the Company’s board of directors.

In July 2020, in accordance with Gilead’s right, the Company appointed the first Gilead designee, Merdad Parsey, M.D., Ph.D., to its board of directors.

At September 30, 2020, the Company had a $ 2.5 million cost sharing receivable recorded on the condensed consolidated balance sheets under receivable from collaboration partners, to be invoiced the following quarter.

The Company also had $ 193.1 million in deferred revenue at September 30, 2020, of which $ 84.5 million represented the long-term portion of revenue allocated to Gilead’s access rights to the Company’s research and development pipeline and was recorded in deferred revenue, noncurrent on the condensed consolidated balance sheets.

The Company also recognized $ 9.2 million in contract liabilities for future development and promotion costs which Gilead prepaid , of which $ 1.9 million and $ 7.3 million represented the short and long-term portions of the liability, recorded in other current liabilities and other long-term liabilities on the condensed consolidated balance sheets, respectively.

For the three and nine months ended September 30, 2020, the Company recognized $ 62.8 million in revenue under the Gilead Collaboration Agreement.

The Company also recognized a $ 3.0 million reduction in research and development expense related to its cost-sharing provisions of the agreement, of which $ 2.5 million relates to the ongoing collaboration over zimberelimab and $ 0.5 million relates to the development and commercialization activities performance obligation.

Subsequent event

On October 29, 2020 the Company announced a collaboration with AstraZeneca to evaluate domvanalimab (AB154), the Company’s investigational anti-TIGIT antibody, in combination with AstraZeneca’s Imfinzi (durvalumab) in a registrational Phase 3 clinical trial in patients with unresectable Stage III non-small cell lung cancer (NSCLC).

Under the terms of the agreement, each company will retain existing rights to their respective molecules and any future commercial economics.

AstraZeneca will conduct the trial, and each company will supply its respective anti-cancer agent to support the trial.

Pursuant to the terms of the agreement, the parties will share costs for the trial.

Consistent with the terms of the recently completed Arcus-Gilead partnership, Gilead maintains an option to co-develop and co-commercialize domvanalimab.

If Gilead exercises its option to domvanalimab, the trial from this AstraZeneca collaboration is expected to form part of the Arcus and Gilead joint development program and Arcus’s portion of the trial costs would be shared with Gilead.

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

What changed 10-Q

Item 1. Financial Statements