Arcus Biosciences, Inc. 10-Q

Item 1. Financial Statements. ARCUS BIOSCIENCES, INC. Condensed Consolidated Balance Sheets (unaudited) (In thousands, except share and per share amounts) March 31, December 31, 2021 2020* ASSETS Current assets: Cash and cash equivalents $ 390,260 $ 173,415 Short-term investments 436,666 555,231 Receivable from collaboration partners ($ 4,924 and $ 943 from a related party) 5,235 1,049 Accrued interest receivable 1,029 649 Prepaid expenses and other current assets 8,680 5,471 Total current assets 841,870 735,815 Long-term investments 57,986 6,440 Property and equipment, net 14,849 10,807 Right-of-use assets 12,243 12,781 Restricted cash 1,988 203 Other long-term assets 6,183 6,246 Total assets $ 935,119 $ 772,292 LIABILITIES Current liabilities: Accounts payable $ 24,544 $ 15,682 Accrued research and development expenses 23,023 18,307 Other accrued liabilities 7,536 9,543 Deferred revenue, current ($ 67,571 and $ 67,571 to a related party) 74,571 74,571 Other current liabilities 2,381 3,566 Total current liabilities 132,055 121,669 Deferred revenue, noncurrent ($ 110,097 and $ 117,808 to a related party) 113,369 122,830 Operating lease liabilities, noncurrent 14,706 15,243 Other long-term liabilities ($ 9,703 and $ 9,703 to a related party) 10,199 10,246 Total liabilities 270,329 269,988 Commitments (Note 10) Stockholders’ equity: Preferred stock, $ 0.0001 par value, 10,000,000 shares authorized as of March 31, 2021 and December 31, 2020; no shares issued and outstanding as of March 31, 2021 and December 31, 2020 - - Common stock, $ 0.0001 par value, 400,000,000 shares authorized as of March 31, 2021 and December 31, 2020; 70,965,513 and 65,114,685 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively 7 6 Additional paid-in capital 1,065,562 830,438 Accumulated deficit ( 400,777 ) ( 328,184 ) Accumulated other comprehensive (loss) income ( 2 ) 44 Total stockholders’ equity 664,790 502,304 Total liabilities and stockholders’ equity $ 935,119 $ 772,292 The accompanying notes are an integral part of these condensed consolidated financial statements. * The Condensed Consolidated Balance Sheet as of December 31, 2020 has been derived from the audited financial statements as of that date. 1 ARCUS BIOSCIENCES, INC. Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited) (In thousands, except share and per share amounts) Three Months Ended March 31, 2021 2020 Revenues: Collaboration revenue ($ 7,711 and $ 0 from a related party) $ 9,461 $ 1,750 Total collaboration and license revenues 9,461 1,750 Operating expenses: Research and development (($ 4,924 ) and $ 0 from a related party) 66,387 23,142 General and administrative 15,821 7,008 Total operating expenses 82,208 30,150 Loss from operations ( 72,747 ) ( 28,400 ) Non-operating income (expense): Interest and other income, net 154 647 Gain on deemed sale from equity method investee - 482 Share of loss from equity method investee - ( 482 ) Total non-operating income, net 154 647 Net loss ( 72,593 ) ( 27,753 ) Other comprehensive income (loss) ( 46 ) 224 Comprehensive loss $ ( 72,639 ) $ ( 27,529 ) Net loss per share, basic and diluted $ ( 1.08 ) $ ( 0.63 ) Weighted-average number of shares used to compute basic and diluted net loss per share 67,082,161 44,282,607 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 ARCUS BIOSCIENCES, INC. Condensed Consolidated Statements of Stockholders’ Equity (unaudited) (In thousands, except share amounts) Common stock Additional Paid-In Accumulated Accumulated Other Comprehensive Total Stockholders’ Shares Amount Capital Deficit Income (Loss) Equity Balance at December 31, 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 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 Balance at December 31, 2020 * 63,691,901 $ 6 $ 830,438 $ ( 328,184 ) $ 44 $ 502,304 Issuance of common stock and rights to purchase additional shares in accordance with Amended and Restated Gilead Purchase Agreement, net of $ 55 offering costs 5,650,000 1 220,295 - - 220,296 Issuance of common stock upon exercise of stock options and vesting of restricted stock 200,828 - 1,885 - - 1,885 Vesting of early exercised stock options 54,039 - 183 - - 183 Stock-based compensation - - 12,761 - - 12,761 Other comprehensive loss - - - - ( 46 ) ( 46 ) Net loss - - - ( 72,593 ) - ( 72,593 ) Balance at March 31, 2021 69,596,768 $ 7 $ 1,065,562 $ ( 400,777 ) $ ( 2 ) $ 664,790 The accompanying notes are an integral part of these condensed consolidated financial statements. * The balances as of December 31, 2020 and 2019 have been derived from the audited financial statements as of that date. 3 ARCUS BIOSCIENCES, INC. Condensed Consolidated Statements of Cash Flows (unaudited) (In thousands) Three Months Ended March 31, 2021 2020 Cash flow from operating activities Net loss $ ( 72,593 ) $ ( 27,753 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation expense 12,761 3,462 Depreciation and amortization 800 842 Amortization of right-of-use assets 538 144 Amortization of premiums on investments 506 ( 248 ) Changes in operating assets and liabilities: Receivable from collaboration partners (($ 3,981 ) and $ 0 from a related party) ( 4,186 ) ( 212 ) Prepaid expenses and other current assets ( 4,568 ) ( 3,704 ) Other long-term assets 63 ( 91 ) Accounts payable 7,722 ( 2,342 ) Accrued research and development expenses 4,716 2,226 Other accrued liabilities ( 2,007 ) ( 1,578 ) Deferred revenue (($ 7,711 ) and $ 0 to a related party) ( 9,461 ) ( 1,750 ) Operating lease liabilities ( 605 ) ( 273 ) Other long-term liabilities ( 2 ) - Net cash used in operating activities ( 66,316 ) ( 31,277 ) Cash flow from investing activities Purchases of short-term and long-term investments ( 192,398 ) ( 8,885 ) Proceeds from maturities of short-term and long-term investments 251,365 49,150 Sales of short-term and long-term investments 7,500 - Purchases of property and equipment ( 3,641 ) ( 209 ) Net cash provided by investing activities 62,826 40,056 Cash flow from financing activities Proceeds from issuance of common stock to related party 220,235 - Proceeds from issuance of common stock pursuant to equity award plans 1,885 643 Repurchase of unvested shares of stock - ( 33 ) Net cash provided by financing activities 222,120 610 Net increase in cash and cash equivalents 218,630 9,389 Cash, cash equivalents and restricted cash at beginning of period 173,618 58,140 Cash, cash equivalents and restricted cash at end of period $ 392,248 $ 67,529 Supplemental disclosures: Cash paid for amounts included in measurement of lease liabilities $ 927 $ 519 Non-cash investing and financing activities: Unpaid portion of property and equipment purchases included in accounts payable and accrued liabilities $ 2,784 $ 76 Vesting of early exercised stock options $ 183 $ 220 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 clinical trial designs. The Company currently has five investigational products in clinical development: domvanalimab (formerly referred to as AB154), etrumadenant (formerly referred to as AB928), AB680, zimberelimab (formerly referred to as AB122), and AB308. Liquidity and Capital Resources As of March 31, 2021, the Company had cash and investments of $ 884.9 million, which are cash, cash equivalents, and investments in marketable securities, which the Company believes will be sufficient to fund its planned operations for a period of at least twelve months following the date of filing of this report. Note 2. Significant Accounting Policies Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and pursuant to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the Company’s opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the results of operations and cash flows for the periods presented have been included. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021 or for any future period. The balance sheet as of December 31, 2020 has been derived from audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2020 included in the Company’s Annual Report on Form 10-K filed with the SEC on February 25, 2021. There have been no significant changes to the Company’s significant accounting policies described in Note 2, Summary of Significant Accounting Policies, in Notes to Consolidated Financial Statements in Item 8 of Part II of the Form 10-K. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Arcus Biosciences, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. 5 Use of Estimates The preparation of the Company’s condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as related disclosures of contingent assets and liabilities. Estimates were used to determine the standalone selling price of performance obligations and the timing of revenue recognition, the value of stock-based awards and other issuances, accruals for research and development costs, useful lives of long-lived assets, and uncertain tax positions. Actual results could differ materially from the Company’s estimates. Cash Equivalents and Investments Cash equivalents include marketable securities having an original maturity of three months or less at the time of purchase. Short-term investments have maturities of greater than three months and up to twelve months at the time of purchase. Long-term investments have maturities greater than 12 months at the time of purchase. Collectively, cash equivalents, short-term and long-term investments are considered available-for-sale and are recorded at fair value. Unrealized gains and losses are recorded in accumulated other comprehensive income (loss). Realized gains and losses are included in interest and other income, net in the condensed consolidated statements of operations and comprehensive income or loss. The basis on which the cost of a security that is sold or an amount that is reclassified out of accumulated other comprehensive income or loss into earnings is determined using the specific identification method. Reconciliation of Cash, Cash Equivalents, and Restricted Cash as Reported in Condensed Consolidated Statements of Cash Flows Restricted cash at March 31, 2021 and 2020 represents cash balances held as security in connection with the Company’s facility lease agreements. The following table provides a reconciliation of cash, cash equivalents, and restricted cash within the condensed consolidated balance sheets to the total shown in the condensed consolidated statements of cash flows (in thousands): March 31, 2021 2020 Cash and cash equivalents $ 390,260 $ 67,326 Restricted cash 1,988 203 Cash, cash equivalents and restricted cash 392,248 $ 67,529 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. Leases and Rent Expense The Company recognizes a lease asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation. The Company determines whether an arrangement is or contains a lease at contract inception. Operating leases are included in operating lease right-of-use assets, other current liabilities, and operating lease liabilities, noncurrent in our condensed consolidated balance sheets at March 31, 2021 and December 31, 2020. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the net present value of lease payments, the Company uses its incremental borrowing rate based on the information available at the lease commencement date. The incremental borrowing rate represents the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The Company considers a lease term to be the noncancelable period that it has the right to use the underlying asset, including any periods where it is reasonably assured the Company will exercise the option to extend the contract. Periods covered by an option to extend are included in the lease term if the lessor controls the exercise of that option. The Company elected to not apply the recognition requirements of the new leasing standard to short-term leases with terms of 12 months or less which do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise. For short-term leases, lease payments are recognized as operating expenses on a straight-line basis over the lease term. 6 Note 3. Fair Value Measurements Financial assets and liabilities are recorded at fair value. The accounting guidance for fair value provides a framework for measuring fair value, clarifies the definition of fair value and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. During the periods presented, the Company has not changed the manner in which it values assets and liabilities that are measured at fair value. The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers within the hierarchy as of March 31, 2021 and December 31, 2020. The following tables set forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands): March 31, 2021 Total Level 1 (Quoted Prices in Active Markets For Identical Assets) Level 2 (Significant Other Observable Remaining Inputs) Level 3 (Significant Other Unobservable Remaining Inputs) Money market funds $ 362,762 $ 362,762 $ - $ - U.S. treasury securities 206,460 - 206,460 - U.S. government agency securities 5,002 - 5,002 - Corporate securities and commercial paper 310,688 - 310,688 - Total assets measured at fair value $ 884,912 $ 362,762 $ 522,150 $ - December 31, 2020 Total Level 1 (Quoted Prices in Active Markets For Identical Assets) Level 2 (Significant Other Observable Remaining Inputs) Level 3 (Significant Other Unobservable Remaining Inputs) Money market funds $ 146,468 $ 146,468 $ - $ - U.S. treasury securities 301,112 - 301,112 - U.S. government agency obligations 25,001 - 25,001 - Corporate securities and commercial paper 262,505 - 262,505 - Total assets measured at fair value $ 735,086 $ 146,468 $ 588,618 $ - Classified as (with contractual maturities): March 31, 2021 December 31, 2020 Cash and cash equivalents $ 390,260 $ 173,415 Short-term investments (due within one year) 436,666 555,231 Long-term investments (due between one and two years) 57,986 6,440 Total cash, cash equivalents and investments in marketable securities $ 884,912 $ 735,086 7 Investments in marketable securities are classified as available-for-sale. At March 31, 2021 and December 31, 2020, 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 realized gains or losses recognized on the sale or maturity of available-for-sale marketable securities as of March 31, 2021 and December 31, 2020, 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 March 31, 2021, which the Company does not intend to sell and has concluded it will not be required to sell before recovery of the amortized cost for the investment at maturity. The fair value and amortized cost of investments in marketable securities by major security type as of March 31, 2021 and December 31, 2020 are presented in the tables that follow (in thousands): Amortized Cost Unrealized Gain Unrealized Loss Fair Value As of March 31, 2021: Money market funds $ 362,762 $ - $ - $ 362,762 U.S. treasury securities 206,422 40 ( 2 ) 206,460 U.S. government agency securities 5,000 2 - 5,002 Corporate securities and commercial paper 310,730 14 ( 56 ) 310,688 Total $ 884,914 $ 56 $ ( 58 ) $ 884,912 Amortized Cost Unrealized Gain Unrealized Loss Fair Value As of December 31, 2020: Money market funds $ 146,468 $ - $ - $ 146,468 U.S. treasury securities 301,075 38 ( 1 ) 301,112 U.S. government agency obligations 24,997 4 - 25,001 Corporate securities and commercial paper 262,502 15 ( 12 ) 262,505 Total $ 735,042 $ 57 $ ( 13 ) $ 735,086 Note 4. Accrued Liabilities Accrued liabilities consisted of the following (in thousands): As of March 31, 2021 As of December 31, 2020 Accrued personnel expenses $ 7,128 $ 8,632 Professional fees 67 295 Other 341 616 Total $ 7,536 $ 9,543 Note 5. Equity Investment in PACT Pharma 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 clinical-stage biopharmaceutical company focused on pioneering individualized, non-viral precision genome engineered, tumor-specific T cell therapies for the treatment of patients with solid tumors. 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 loss. The investment balance was zero at March 31, 2021 and December 31, 2020. 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. The decrease in the Company’s equity ownership percentage and increase in PACT Pharma’s estimated fair value per share resulted in gains on dilution totaling $ 1.3 million during the three months ended March 31, 2020. After applying $ 0.8 million in losses accumulated in prior periods when the equity investment balance was zero , the Company recorded a gain of $ 0.5 million for the three months ended March 31, 2020. There was no similar gain on dilution in the quarter ended March 31, 2021. For the three months ended March 31, 2021, the Company accounted for its $ 0.8 million share of PACT Pharma’s losses as unrecognized equity method losses. 8 The Company’s share of PACT Pharma’s losses for the three months ended March 31, 2021 and 2020 exceeded gains for the same periods. The Company recorded zero and $ 0.5 million for its share of PACT Pharma’s operating losses for the three months ended March 31, 2021 and 2020, respectively. The unrecognized equity method losses in excess of the Company’s investment was $ 2.1 million as of March 31, 2021. At March 31, 2021 and December 31, 2020, the Company determined the fair value of the warrants to be insignificant to the condensed consolidated financial statements. Note 6. License and Collaboration Agreements The following table summarizes the revenues for the three months ended March 31, 2021 and 2020 received as a result of the Company’s collaboration agreements with Gilead Sciences, Inc. (Gilead) and Taiho Pharmaceutical Co., Ltd. (Taiho): Three Months Ended March 31, 2021 2020 Collaboration revenue $ 9,461 $ 1,750 Total collaboration and license revenue $ 9,461 $ 1,750 The following table summarizes details of revenues for the three months ended March 31, 2021 and 2020 by collaboration and by category of revenue: Three Months Ended March 31, Revenues recognized: Over time Point in time 2021 2020 Gilead access rights related to the Company's research and development pipeline * $ 7,711 $ - Taiho collaboration agreement * 1,750 1,750 Total collaboration and license revenue $ 9,461 $ 1,750 The Company recognized the following revenue as a result of changes in the deferred revenue balance during the period below (in thousands): Three Months Ended March 31, Revenue recognized in the period from: 2021 2020 Amounts included in deferred revenue at the beginning of the period $ 9,461 $ 1,750 Performance obligations satisfied in previous period - - 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. (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, 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. Pursuant to the Investor Rights Agreement, the Company appointed Gilead’s designees, Merdad Parsey, M.D., Ph.D. and Michael Quigley, Ph.D., to the Company’s Board of Directors. See Note 11 for further discussion of the agreements with Gilead. Pursuant to the terms of the Gilead Collaboration Agreement, Gilead has an exclusive license to develop and commercialize zimberelimab 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 access rights payments of up to $ 400 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 clinical programs in existence at the date of the agreement, and $ 150 million per program for all other programs that enter clinical development thereafter should Gilead elect to exercise its options. 9 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 a five year period from closing of the initial transaction, at a purchase price equal to the greater of a 20 % premium to market (based on a trailing five-day average closing price) at the time Gilead exercises such option, and the $ 33.54 initial purchase price. Based on the value of the Company’s common stock at the contract closing, the right to purchase additional shares had no value. In January 2021, the Company and Gilead entered into an Amended and Restated Common Stock Purchase Agreement, which amended and restated in its entirety the Common Stock Purchase Agreement, pursuant to which Gilead purchased 5,650,000 shares of the Company’s common stock at a purchase price of $ 39.00 per share for total gross proceeds of $ 220.4 million. All other terms of the original Stock Purchase Agreement remain unchanged. 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 $ 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 $ 365.6 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 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 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. If the option is exercised, the performance obligations associated with the option will be identified and the Company will determine the accounting for the option’s transaction price. If the option is allowed to lapse after development milestones trigger the start of the opt-in period, the Company will recognize any deferred revenue allocated to the option at the time of the lapse. At March 31, 2021, the Company had $ 127.0 million of deferred revenue on its condensed consolidated balance sheets related to this performance obligation. The Company has evaluated the program’s status as of the balance sheet date and believes that some or all of the revenue associated with the opt-in will be recognized within the minimum four-year term of the Gilead Collaboration Agreement. Domvanalimab 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 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. If the option is exercised, the performance obligations associated with the option will be identified and will determine the accounting for the option’s transaction price. If the option is allowed to lapse after development milestones trigger the start of the opt-in period, the Company will recognize any deferred revenue allocated to the option at the time of the lapse. At March 31, 2021, the Company had $ 36.7 million of deferred revenue on its condensed consolidated balance sheets related to this performance obligation. The Company has evaluated the program’s status and believes that revenue associated with the opt-in will be recognized within one year . Access rights related to the Company’s research and development pipeline 10 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 million, with the first payment of $ 100 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 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 uses a time-elapsed input method to measure progress toward satisfying this obligation, which is the method the Company believes most faithfully depicts the Company’s performance in transferring the promised services during the time period in which Gilead has access to the Company’s research and development pipeline. Accordingly, the revenue allocated to the performance obligation is being recognized using this input method over the minimum four-year period. The Company further determined that Gilead is not obligated to pay the remaining $ 300 million due over the remainder of the term. Failure to pay the non-obligatory 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. At March 31, 2021, the Company had $ 114.0 million of deferred revenue on its consolidated balance sheets related to this performance obligation, classified between current and noncurrent based on the amortization of the revenue. Development and commercialization services for zimberelimab monotherapy 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 as a monotherapy. 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 as a monotherapy. The Company will recognize the amounts allocated to these services as the performance obligation is satisfied. Any additional 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. At March 31, 2021, the Company had $ 9.7 million of contract liabilities on its consolidated balance sheets related to this performance obligation. The Company has evaluated the program’s status and believes that revenue associated with these services will be recognized over the full term of the contract. As of March 31, 2021, no revenue had been recognized from this performance obligation. 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 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 Agreements. 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 with timing consistent with the associated performance obligation. During the three months ended March 31, 2021, the Company recognized $ 0.1 million in expense from the amortization of these assets. At March 31, 2021, the Company had $ 4.1 million in prepaid expenses from costs to obtain the Gilead Agreements, of which $ 1.0 million was recorded in prepaid expenses and other current assets and $ 3.1 million was recorded in other long-term assets. Taiho Pharmaceutical Co., Ltd In September 2017, the Company and Taiho entered into an option and license agreement (the Taiho Agreement) to collaborate on the potential development and commercialization of certain investigational products from the Company’s portfolio in Japan and certain other territories in Asia (excluding China) (the Taiho Territory). The Taiho Agreement provides Taiho with exclusive options, over a five-year period (the Option Period), to obtain an exclusive development and commercialization license to clinical stage investigational products from the Company’s programs (each, an Arcus Program). 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, it will be obligated to make an option exercise payment of between $ 3.0 million to $ 15.0 million, depending on the development stage of the applicable Arcus Program for which the option is exercised. In addition, the Taiho Agreement provides that the Company is eligible to receive additional clinical and regulatory milestones totaling up to $ 130.0 million 11 per Arcus Program, and it will be eligible to receive contingent payments of up to $ 145.0 million per Arcus Program associated with the achievement of specified levels of Taiho net sales in the Taiho Territory. In addition, the Company will receive royalties ranging from high single-digits to mid-teens on net sales of licensed products in the Taiho Territory. Royalties will be payable on a licensed product-by-licensed product and country-by-country basis during the period of time commencing on the first commercial sale of a licensed product in a country and ending upon the later of: (a) ten (10) years from the date of first commercial sale of such licensed product in such country; and (b) expiration of the last-to-expire valid claim of the Company’s patents covering the manufacture, use or sale or exploitation of such licensed product in such country (the Royalty Term). The Company determined that the identified performance obligations, which include the combined performance obligation of the research and development services and the obligation to participate on the joint steering committee, are satisfied over time. The Company uses a time-elapsed input method to measure progress toward satisfying its performance obligation, which is the method the Company believes most faithfully depicts the Company’s performance in transferring the promised services during the time period in which Taiho has access to the Company’s research and development activities. Accordingly, the transaction price of $ 35.0 million is being recognized using this input method over the estimated performance period of five years . 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 March 31, 2021, 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 March 31, 2021, 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. WuXi Biologics License Agreements The Company entered into a license agreement (the WuXi PD-1 Agreement) with WuXi Biologics in August 2017, as subsequently amended, in which it obtained an exclusive license to develop, use, manufacture, and commercialize products including an anti-PD-1 antibody worldwide except for Greater China and Thailand. From the inception of the WuXi PD-1 Agreement through March 31, 2021, the Company has made upfront and milestone payments of $ 41.0 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 did not have an alternative future use. The WuXi PD-1 Agreement also provides for clinical and regulatory milestone payments, commercialization milestone payments of up to $ 375.0 million, and tiered royalty payments to be made to WuXi Biologics that range from the high single-digits to low teens of net sales by the Company of licensed products. The Company incurred $ 10.0 million in development milestone expense under the WuXi PD-1 Agreement during the three months ended March 31, 2021. In December 2020, the Company entered into a separate license agreement (the WuXi CD-39 Agreement) with WuXi Biologics to develop anti-CD39 antibodies. Under the agreement, the Company was granted exclusive worldwide rights to anti-CD39 antibodies discovered under the collaboration and will be responsible for the further development and commercialization of those antibodies. From the inception of the WuXi CD-39 Agreement through March 31, 2021, the Company has paid $ 0.5 million in upfront payments which was recorded in research and development expense, as the products are still in research stage. The WuXi CD-39 Agreement provides for clinical and regulatory milestone payments totaling $ 16.5 million, and royalty payments in the low single digits of net sales by the Company of licensed products. 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 $ 14.6 million as of March 31, 2021. The Abmuno Agreement also provides for additional clinical, regulatory and commercialization milestone remaining payments of up to $ 93.0 million as of March 31, 2021. 12 The Company incurred $ 5.0 million in development milestone expense under the Abmuno Agreement during the three months ended March 31, 2021. Genentech Collaboration Agreement In December 2019, the Company and Genentech, through F. Hoffmann-La Roche Ltd (collectively, Genentech) entered into a Master Clinical Collaboration Agreement (the Genentech Agreement) pursuant to which the parties may conduct combination clinical studies involving Genentech’s monoclonal antibody, atezolizumab and the Company’s investigational products. Pursuant to the Genentech Agreement, the parties entered into Trial Supplements for the evaluation of etrumadenant and atezolizumab utilizing the MORPHEUS platform in two separate study indications: second and third line metastatic colorectal cancer and first line metastatic pancreatic cancer. 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. From the inception of the Agreement through March 31, 2021, the Company has incurred net expenses of $ 0.8 million. For the three months ended March 31, 2021 and 2020, the Company incurred expenses pursuant to the Genentech Agreement of $ 0.3 million and zero , respectively. Net expenses related to this co-development agreement are recorded within research and development expenses. 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 March 31, 2021, the Company has made a milestone payment of $ 2.5 million and has incurred expenses of $ 3.3 million, of which $ 0.7 million had been reimbursed by Strata as development cost sharing. Net expenses related to this co-development agreement were recorded within research and development expenses. As further consideration in connection with the Strata Agreement, the Company issued to Strata 1,257,651 restricted shares of its common stock with an initial measured fair value of $ 15.0 million, which are subject to vesting based upon the achievement of specified regulatory milestones within certain timelines. Expense relating to the restricted shares subject to these milestones is recognized if it is considered probable that the associated shares will vest. The probability of achievement is assessed at the end of each quarterly period. As of March 31, 2021, 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 months ended March 31, 2021 and 2020, the Company incurred expenses pursuant to the Strata Agreement of $ 0.6 million and $ 0.4 million, respectively. Of these expenses, $ 0.1 million have been reimbursed by Strata as development cost sharing for each of the three months ended March 31, 2021 and 2020. Net expenses related to this co-development agreement are recorded within research and development expenses. AstraZeneca Agreement On October 29, 2020 the Company announced a collaboration with AstraZeneca to evaluate domvanalimab, the Company’s investigational anti-TIGIT antibody, in combination with AstraZeneca’s Imfinzi (durvalumab) in a registrational Phase 3 clinical trial in patients with unresectable Stage III non-small cell lung cancer (NSCLC). Under the terms of the agreement, each company will retain existing rights to their respective molecules and any future commercial economics. AstraZeneca will conduct the trial, and each company will supply its respective anti-cancer agent to support the trial. Under the terms of the agreement and subject to the parties’ approval of a final budget for the clinical trial, the Company may be obligated to reimburse AstraZeneca for a portion of the costs incurred. Consistent with the terms of the Gilead Collaboration Agreement, 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. For the three months ended March 31, 2021, the Company incurred immaterial expenses pursuant to the AstraZeneca Agreement. Expense from this co-development agreement are recorded within research and development expenses. 13 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. 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. In February 2021, the Company closed the Amended and Restated Common Stock Purchase Agreement with Gilead, pursuant to which Gilead made an equity investment of approximately $ 220.4 million in the Company by purchasing 5,650,000 shares of the Company’s common stock at a per share price of $ 39.00 . Note 8. Stock-Based Compensation The Company grants awards under its 2018 Equity Incentive Plan and the 2020 Inducement Plan. Total stock-based compensation expense was recognized in the condensed consolidated statements of operations and comprehensive loss as follows (in thousands): Three Months Ended March 31, 2021 2020 Research and development $ 6,170 $ 1,736 General and administrative 6,591 1,726 Total stock-based compensation $ 12,761 $ 3,462 Note 9. Net Loss per Share Basic net loss per share is calculated based on the weighted-average number of shares of the Company’s common stock during the period. Diluted net loss per share is calculated based on the weighted-average number of shares of the Company’s common stock and other dilutive securities outstanding during the period. The following table sets forth the computation of basic and diluted net loss per share (in thousands, except share and per share data): Three Months Ended March 31, 2021 2020 Numerator: Net loss $ ( 72,593 ) $ ( 27,753 ) Denominator: Weighted-average common shares outstanding 68,476,799 45,953,213 Less: weighted-average common shares subject to vesting ( 1,394,638 ) ( 1,670,606 ) Weighted-average common shares used to compute basic and diluted net loss per share 67,082,161 44,282,607 Net loss per share: basic and diluted $ ( 1.08 ) $ ( 0.63 ) 14 The following outstanding potentially dilutive securities were excluded from the computation of diluted net loss per share because including them would have been antidilutive: Three Months Ended March 31, 2021 2020 Common stock options issued and outstanding 11,708,625 6,725,835 Unvested restricted common stock issued as part of collaboration agreement 1,257,651 1,257,651 Unvested early exercised common stock options 111,094 375,615 Unvested restricted stock units 1,532,162 - Employee Stock Purchase Plan shares 96,591 - Total 14,706,123 8,359,101 The Company also excluded the effect of Gilead’s right to purchase additional shares of the Company’s common stock from its calculation as these rights had no intrinsic value at March 31, 2021. Note 10. Commitments Standby Letters of Credit The Company has standby letters of credit up to an aggregate of $ 2.0 million provided as collateral for its leases. The letters of credit are secured by $ 2.0 million in deposits classified as restricted cash on the Company’s condensed consolidated balance sheets. At March 31, 2021 the facilities were not drawn down. Note 11. Related parties Relationship and transactions with Gilead Sciences, Inc. (Gilead) As of March 31, 2021, Gilead held approximately 19.5 % of the Company’s outstanding common stock. These holdings resulted from Gilead’s participation in the May 2020 Public Offering as well as purchases of stock under the stock purchase agreements. In the May 2020 public offering, Gilead purchased 2,200,000 shares of common stock for an amount of $ 56.7 million, net of offering costs. Under the stock purchase agreements, Gilead purchased 5,963,029 and 5,650,000 shares in July 2020 and February 2021, respectively, for a total investment of $ 327.8 million, net of offering costs. Gilead has the right, at its option, to purchase up to a maximum of 35 % of the Company’s then-outstanding voting common stock, from time to time over a five-year period from the closing of the initial transaction in July 2020. Gilead also has the right under the Investor Rights Agreement to designate two individuals to be appointed to the Company’s board of directors. Pursuant to the Investor Rights Agreement, the Company appointed the Gilead designees, Merdad Parsey, M.D., Ph.D. and Michael Quigley, Ph.D., to its board of directors, in July 2020 and January 2021, respectively. See Note 6 for further discussion of the agreements with Gilead. At March 31, 2021, the Company had a $ 4.9 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 $ 177.7 million in deferred revenue at March 31, 2021, of which $ 110.1 million represented the long-term portion of revenue allocated to performance obligations not expected to be completed within one year of the balance sheet date, which was recorded in deferred revenue, noncurrent on the condensed consolidated balance sheets. The Company also had $ 9.7 million in contract liabilities for future development and commercialization services which Gilead prepaid, all of which was recorded in other long-term liabilities on the consolidated balance sheets. For the three months ended March 31, 2021, the Company recognized $ 7.7 million in revenue under the Gilead Collaboration Agreement. The Company also recognized a $ 4.9 million reduction in research and development expense, including $ 4.0 million of cost sharing reimbursement related to milestone expense, related to its cost-sharing provisions of the agreement. The Company received a $ 175 million upfront payment from Gilead in connection with the Gilead Collaboration Agreement in July 2020 and identified $ 100 million in unconstrained consideration to be received in 2022. In addition, in July 2020 the Company received $ 200 million from Gilead in connection with the Stock Purchase Agreement, of which approximately $ 109.4 million represented the fair value of stock purchased at the transaction closing date with the remaining premium of $ 90.6 million allocated to the transaction price. In February 2021, the Company received $ 220.4 million from Gilead in connection with the purchase by Gilead of 5,650,000 shares of the Company’s common stock at a per share price of $ 39.00 pursuant to the amended and restated Stock Purchase Agreement. 15 Note 12. Subsequent event In April 2021, the Company entered into a lease amendment that modifies rent schedules for its existing operating leases in Hayward, California, extends the terms of those leases, and adds 14,460 square feet of additional space in Hayward in a new operating lease expected to commence in 2022 . Any extension periods defined under previous amendments are cancelled under the lease amendment and replaced by two options to extend the lease term for the entire Hayward premises for a period of eight years each. The amended leases will end at the same time as the Company’s lease of its building in Brisbane, expected to be no earlier than December 2031 . The lease amendment includes approximately $ 43 million in additional undiscounted future minimum lease payments throughout the expected term and provides additional tenant improvement allowances totaling $ 5.8 million with options to increase the allowance by $ 10.9 million. The lease amendment requires an additional $ 1.0 million in collateral for the operating leases in Hayward. In accordance with this requirement, the Company issued an additional $ 1.0 million letter of credit in April 2021. 16