Arcus Biosciences, Inc. 10-K

Item 8. Financial Statements and Supplementary Data ARCUS BIOSCIENCES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID No. 42) 67 Audited Consolidated Financial Statements Consolidated Statements of Operations 69 Consolidated Statements of Comprehensive Income (Loss) 70 Consolidated Balance Sheets 71 Consolidated Statements of Stockholders’ Equity 72 Consolidated Statements of Cash Flows 73 Notes to Consolidated Financial Statements 74 66 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Arcus Biosciences, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Arcus Biosciences, Inc. (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 21, 2024 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 67 Table of Contents Accounting for agreements with Gilead Sciences, Inc. Description of the Matter As described in Notes 3 and 5 to the consolidated financial statements, the Company has ongoing Option, License and Collaboration Agreements with Gilead Sciences, Inc., a related party, referred to as the “Gilead Agreements”, which resulted in the recognition of $112 million of revenue for the year ended December 31, 2023 and $375 million of deferred revenue at December 31, 2023. Of the revenue recognized under the Gilead Agreements in 2023, $79 million related to amounts recognized as revenue when services are performed, based on the level of effort expended in a given period in relation to the total effort expected to be incurred to satisfy the applicable performance obligation. Management periodically updates its estimates of the amount, and timing, of the total effort expected to be incurred to satisfy such performance obligations, with any changes in estimate potentially changing the amount of revenue previously recognized and/or the amount to be recognized in future periods. Auditing the Company’s process for estimating the amount and timing of effort expected to be incurred to satisfy such performance obligations is complex, particularly with regard to the significant judgment applied by the Company when updating clinical trial assumptions, including the cost, timing and duration of such trials. Changes to these assumptions can have a material effect on the amount and timing of revenue recognized. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls addressing the risks of material misstatement relating to the Company’s process for estimating the cost, timing, and duration of the total effort expected to be incurred to satisfy the identified performance obligations pursuant to the Gilead Agreements. For example, we tested management’s controls over the identification of changes in estimates and significant assumptions related to the cost, timing and duration of clinical trial activity and development. Our audit procedures included, among others, obtaining and reading applicable board and committee meeting minutes, inquiring of research and development personnel, including program managers, obtaining third-party confirmations for a sample of clinical trial and development activity, and testing the completeness and accuracy of the data used by management. We also performed a sensitivity analysis to evaluate the impact that changes in significant assumptions would have on the revenue recognized during 2023. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2016. San Mateo, California February 21, 2024 68 Table of Contents ARCUS BIOSCIENCES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In millions, except per share amounts) Year Ended December 31, 2023 2022 2021 Revenues: License and development service revenue (Includes $ 75 , $ 74 and $ 330 from a related party) $ 80 $ 74 $ 345 Other collaboration revenue (Includes $ 37 , $ 33 and $ 31 from a related party) 37 38 38 Total revenues 117 112 383 Operating expenses: Research and development (Net of recoveries of $ 110 , $ 132 and $ 25 from a related party) 340 288 257 General and administrative (Net of recoveries of $ — , $ 1 and $ — from a related party) 117 104 72 Total operating expenses 457 392 329 Income (loss) from operations ( 340 ) ( 280 ) 54 Non-operating income (expense): Interest and other income, net 41 16 1 Effective interest on liability for sale of future royalties ( 2 ) ( 2 ) — Total non-operating income, net 39 14 1 Income (loss) before income taxes ( 301 ) ( 266 ) 55 Income tax expense ( 6 ) ( 1 ) ( 2 ) Net income (loss) $ ( 307 ) $ ( 267 ) $ 53 Net income (loss) per share: Basic $ ( 4.15 ) $ ( 3.71 ) $ 0.76 Diluted $ ( 4.15 ) $ ( 3.71 ) $ 0.71 Shares used to compute net income (loss) per share: Basic 74.0 72.0 69.3 Diluted 74.0 72.0 74.0 See accompanying notes. 69 Table of Contents ARCUS BIOSCIENCES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In millions) Year Ended December 31, 2023 2022 2021 Net income (loss) $ ( 307 ) $ ( 267 ) $ 53 Other comprehensive income (loss) 7 ( 6 ) ( 1 ) Comprehensive income (loss) $ ( 300 ) $ ( 273 ) $ 52 See accompanying notes. 70 Table of Contents ARCUS BIOSCIENCES, INC. CONSOLIDATED BALANCE SHEETS December 31, 2023 and 2022 (In millions, except per share amounts) December 31, 2023 2022 ASSETS Current assets: Cash and cash equivalents $ 127 $ 206 Marketable securities 632 803 Receivable from collaboration partners ($ 20 and $ 39 from a related party) 38 39 Prepaid expenses and other current assets 34 19 Total current assets 831 1,067 Long-term marketable securities 107 129 Property and equipment, net 51 35 Other noncurrent assets ($ 6 and $ 2 from a related party) 106 114 Total assets $ 1,095 $ 1,345 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 17 $ 20 Deferred revenue ($ 84 and $ 97 to a related party) 91 97 Other current liabilities 76 76 Total current liabilities 184 193 Deferred revenue, noncurrent ($ 291 and $ 355 to a related party) 307 355 Other noncurrent liabilities 142 140 Commitments (Note 16) Stockholders’ equity: Common stock and additional paid-in capital: $ 0.0001 par value per share; 400.0 shares authorized; 75.5 shares in 2023 and 72.9 shares in 2022 issued and outstanding 1,311 1,206 Accumulated deficit ( 849 ) ( 542 ) Accumulated other comprehensive loss — ( 7 ) Total stockholders’ equity 462 657 Total liabilities and stockholders’ equity $ 1,095 $ 1,345 See accompanying notes. 71 Table of Contents ARCUS BIOSCIENCES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended December 31, 2023, 2022 and 2021 (In millions) Number of shares of common stock Common stock and additional paid-in capital Accumulated deficit Accumulated other comprehensive loss Total stockholders’ equity Balance at December 31, 2020 63.7 $ 830 $ ( 328 ) $ — $ 502 Issuance of common stock (see Note 3, Related party - Gilead Sciences, Inc. and Note 14, Stockholders' Equity) 5.7 220 — — 220 Issuance of common stock in connection with our equity award programs 1.4 13 — — 13 Stock-based compensation — 55 — — 55 Other comprehensive loss — — — ( 1 ) ( 1 ) Net income — — 53 — 53 Balance at December 31, 2021 70.8 1,118 ( 275 ) ( 1 ) 842 Issuance of common stock in connection with our equity award programs 2.1 23 — — 23 Stock-based compensation — 65 — — 65 Other comprehensive loss — — — ( 6 ) ( 6 ) Net loss — — ( 267 ) — ( 267 ) Balance at December 31, 2022 72.9 1,206 ( 542 ) ( 7 ) 657 Issuance of common stock (see Note 3, Related party - Gilead Sciences, Inc. and Note 14, Stockholders' Equity) 1.2 25 — — 25 Issuance of common stock in connection with our equity award programs 1.4 7 — — 7 Stock-based compensation — 73 — — 73 Other comprehensive gain — — — 7 7 Net loss — — ( 307 ) — ( 307 ) Balance at December 31, 2023 75.5 $ 1,311 $ ( 849 ) $ — $ 462 See accompanying notes. 72 Table of Contents ARCUS BIOSCIENCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) Year Ended December 31, 2023 2022 2021 Cash flow from operating activities Net income (loss) $ ( 307 ) $ ( 267 ) $ 53 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Stock-based compensation expense 73 65 55 Depreciation and amortization 8 6 4 Noncash lease expense 8 8 3 Amortization of premiums (discounts) on marketable securities ( 19 ) — 5 Other items, net 2 3 — Changes in operating assets and liabilities: Receivable from collaboration partners ($ 19 , $ 704 and ($ 17 ) from a related party) 15 704 ( 17 ) Other assets (($ 4 ), ($ 2 ) and $ — from a related party) ( 14 ) 2 ( 3 ) Accounts payable ( 1 ) 8 ( 5 ) Deferred revenue (($ 77 ), ($ 107 ) and ($ 361 ) to a related party) ( 68 ) ( 112 ) ( 368 ) Other liabilities ( 3 ) 21 17 Net cash provided by (used in) operating activities ( 306 ) 438 ( 256 ) Cash flow from investing activities Purchases of marketable securities ( 788 ) ( 1,241 ) ( 719 ) Proceeds from maturities of marketable securities 982 694 690 Proceeds from sales of marketable securities 24 143 51 Purchases of property and equipment ( 24 ) ( 6 ) ( 26 ) Purchases of in-process research and development — ( 6 ) — Collaboration reimbursements of in-process research and development from a related party — 3 — Net cash provided by (used in) investing activities 194 ( 413 ) ( 4 ) Cash flow from financing activities Proceeds from issuance of common stock ($ 20 , $ — and $ 220 from a related party) 25 — 220 Proceeds from issuance of common stock pursuant to equity award plans 8 23 12 Proceeds from sale of future royalties — 10 5 Net cash provided by financing activities 33 33 237 Net increase (decrease) in cash, cash equivalents and restricted cash ( 79 ) 58 ( 23 ) Cash, cash equivalents and restricted cash at beginning of period 209 151 174 Cash, cash equivalents and restricted cash at end of period $ 130 $ 209 $ 151 Supplemental disclosure of cash flow information Income taxes paid $ 5 $ 3 $ — Non-cash investing and financing activities: Unpaid portion of property and equipment purchases included in Accounts payable and Other current liabilities $ 2 $ 3 $ 1 Unpaid portion of other assets included in accrued research and development $ — $ — $ 1 Vesting of early exercised stock options and restricted stock $ — $ — $ 1 See accompanying notes. 73 Table of Contents ARCUS BIOSCIENCES, INC. Notes to Consolidated Financial Statements Note 1. Organization, liquidity and capital resources Organization Arcus Biosciences, Inc. (referred to as “Arcus,” “we,” “our,” “us,” or the “Company”) is a clinical-stage biopharmaceutical company focused on creating best-in-class therapies. Using our robust and highly efficient drug discovery capability, we have created a significant portfolio of investigational products which are in clinical development, with our most advanced molecule, an anti-TIGIT antibody, now in multiple Phase 3 registrational studies targeting lung and gastrointestinal cancers. Our deep portfolio of novel small molecules and enabling antibodies allows us to create highly differentiated therapies, which we are developing to treat multiple large indications. We operate and manage our business as one reportable and operating segment, which is the business of developing and commercializing highly differentiated therapies that have a meaningful impact on patients. Liquidity and Capital Resources As of December 31, 2023, we had cash, cash equivalents and marketable securities of $ 866 million. In January 2024, we received $ 320 million from Gilead for shares purchased pursuant to the Third Stock Purchase Agreement Amendment (see Note 3. Related party - Gilead Sciences, Inc.). We believe our cash, cash equivalents and marketable securities will be sufficient to fund our planned operations for a period of at least twelve months following the date of filing of this Annual Report. Note 2. Summary of significant accounting policies Basis of Presentation The Consolidated Financial Statements, which include the accounts of Arcus as well as its wholly owned subsidiary, have been prepared in accordance with U.S. GAAP and include all adjustments necessary for the fair presentation of the Company’s financial position for the periods presented. All intercompany transactions and balances have been eliminated in consolidation. We assess whether we are the primary beneficiary of a Variable Interest Entity ("VIE") at the inception of the arrangement and at each reporting date. This assessment is based on our power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and our obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. We do not have any significant interests in any variable interest entities of which we are the primary beneficiary. Use of Estimates The preparation of the 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 and related disclosures. We base our estimates on historical experience and on various market-specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates are assessed and updated each period to reflect current information. Actual results may differ materially from those estimates. Collaborative Arrangements We assess whether our licensing and other agreements are collaborative arrangements 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. For arrangements that we determine are collaborations, we identify each distinct performance obligation, and then determine whether a customer relationship exists for that distinct performance obligation. If we determine a performance obligation within the collaborative arrangement to be with a customer, we apply our revenue accounting policy. If a portion of a distinct bundle of goods or services within the collaborative arrangement is not with a customer, we apply recognition and measurement based on an analogy to authoritative accounting literature or, if there is no appropriate analogy, a reasonable, rational, and consistently applied accounting policy election. See Note 4, License and collaborations, for more information. 74 Table of Contents Revenues We recognize revenue when a customer obtains control of promised goods or services in a contract for an amount that reflects the consideration we expect to receive in exchange for those goods or services. For contracts with customers, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy each performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. As part of the accounting for contracts with customers, we develop assumptions that require judgment to determine the standalone selling price of each performance obligation identified in the contract. In addition, variable consideration such as milestone payments are evaluated to determine if they are constrained and, therefore, excluded from the transaction price. We then allocate the total transaction price proportionally to each performance obligation based on their estimated standalone selling prices. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. We currently do not have product sales and our revenues are derived from arrangements for the development of our investigational products. Such arrangements may require us to deliver various rights, services and/or goods, including intellectual property rights/licenses, R&D services, manufacturing services and/or commercialization services. The underlying terms of these arrangements may generally include consideration to Arcus in the form of one or more of the following: (i) nonrefundable, up-front 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) profit sharing. In arrangements involving more than one performance obligation, each performance obligation is evaluated to determine whether it qualifies as distinct based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or service is separately identifiable from other promises in the contract. The consideration under the arrangement is then allocated to each separate distinct performance obligation based on its respective relative stand-alone selling price. The estimated selling price of each deliverable reflects our best estimate of what the selling price would be if the deliverable was regularly sold by us on a stand-alone basis or by using an adjusted market assessment approach if selling price on a stand-alone basis is not available. The consideration allocated to each distinct performance obligation is recognized as revenue when control of the related goods is transferred or services are performed. We evaluate each performance obligation to determine if it can be satisfied at a point in time or over time as services are performed. For performance obligations that are determined to be satisfied over time we determine an appropriate method of measuring progress for purposes of recognizing revenue. Consideration associated with at-risk substantive performance milestones is recognized as revenue when it is probable that a significant reversal of the cumulative revenue recognized will not occur. For arrangements that include sales-based royalties, including milestone payments based on sales thresholds, and for which the license is deemed to be the predominant item to which the royalties relate, we 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). To date, we have not recognized any royalty revenue resulting from any of our arrangements. The accounting for these arrangements requires us to develop estimates and assumptions that require judgment. These estimates may include items such as forecasted revenues or costs, development timelines, discount rates, and probabilities of technical and regulatory success. Actual results may differ materially from those estimates. See Note 5, Revenues, for more information. Research and Development Expenses R&D costs are expensed as incurred and primarily include: salaries, benefits and other staff-related costs; facilities and overhead costs; third-party service provider costs for preclinical and clinical studies; laboratory supplies and equipment maintenance costs; consulting; payments under collaborative and other arrangements including milestone payments, licenses and fees; expense reimbursements to collaboration partners; and other related expenses. Under certain collaborative arrangements, we are reimbursed for a portion of the R&D expenses, including costs of drug supplies. When these R&D expenses are incurred under a reimbursement or cost sharing model with a collaboration partner, we record the related reimbursements as a reduction of R&D expense in our Consolidated Statements of Operations. Acquired in-process R&D projects with no alternative future use are recorded in R&D expense upon acquisition. 75 Table of Contents Net payment or reimbursement of R&D costs is recognized when the obligations are incurred or as we become entitled to the cost recovery. See Note 4, License and collaboration agreements, for more information. Clinical trial costs are a significant component of R&D expenses. Our clinical studies are primarily performed by third-party CROs. We monitor levels of performance under each significant contract including the extent of patient enrollment and other activities and accrue costs for clinical studies performed over the service periods specified in the contract. We adjust our estimates, if required, based upon our ongoing review of the level of effort and costs actually incurred by the CROs. All of our material CRO contracts are terminable by us upon written notice, and we are generally only liable for actual services completed by the CRO and certain noncancellable expenses incurred at termination. General and Administrative Expenses G&A expenses relate to: finance; human resources; legal and other administrative activities which consist primarily of personnel costs; facilities and overhead costs; legal expenses; and other general and administrative costs. G&A expenses also include cost recoveries associated with collaborative R&D arrangements. Stock-Based Compensation We provide stock-based compensation in the form of various types of equity-based awards, including Restricted Stock Units ("RSUs") and stock options. The fair values of RSUs and stock options, which are subject to service conditions and vesting, are recognized as compensation expense on a straight-line basis over the service period net of forfeitures as they occur. See Note 8, Stock-based compensation, for more information. Income Taxes We provide for income taxes under the asset and liability method. Current income tax expense or benefit represents the amount of income taxes expected to be payable or refundable for the current year. Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and net operating loss and credit carryforwards, measured using the enacted tax rates and laws that will be in effect when such items are expected to reverse. Deferred income tax assets are reduced, as necessary, by a valuation allowance when we determine it is more likely than not that some or all of the tax benefits will not be realized. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by tax authorities. We assess all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and we will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate. We include any penalties and interest expense related to income taxes as a component of other expense and interest income, net, as necessary. See Note 6, Income taxes, for more information. Cash Equivalents Cash equivalents consist of marketable securities having an original maturity of three months or less at the time of purchase. Marketable Securities We consider our interest-bearing securities investment portfolio as available-for-sale, and accordingly, these investments are recorded at fair value, with unrealized gains and losses recorded in Accumulated Other Comprehensive Income. See Note 10, Cash, cash equivalents and marketable securities, and Note 15, Fair value measurements, for more information. Property and Equipment Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets, ranging from three to ten years . Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease term. We review property and equipment for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. See Note 11, Property and equipment, for more information. 76 Table of Contents Leases We determine whether an arrangement is or contains a lease at contract inception. Operating lease right-of-use assets and lease liabilities are recognized at the commencement date based on the present value of the lease payments over the lease term, which is the non-cancelable period stated in the contract adjusted for any options to extend or terminate when it is reasonably certain that we will exercise that option. Right-of-use assets are adjusted for prepaid lease payments, lease incentives and initial direct costs incurred. Operating lease expense for the minimum lease payments is recognized on a straight-line basis over the lease term. When our operating leases do not provide an implicit interest rate, we generally utilize our incremental borrowing rate, based on the information available at the commencement date to determine the lease liability. We do not recognize the right-of-use assets and liabilities for leases with lease terms of one year or less with payments recognized as operating expenses on a straight-line basis over the lease term. We sublease parts of our facilities to third parties and recognize sublease income on a straight-line basis over the sublease term. We evaluate the underlying assets for impairment at sublease inception. See Note 13, Leases, for more information. Fair Value of Financial Instruments We apply fair value accounting for all financial and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities which are required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risks. See Note 15, Fair value measurements, for more information. Other Significant Accounting Policies Our other significant accounting policies are described in the remaining appropriate notes to the Consolidated Financial Statements. Recent Accounting Pronouncements There have been no new accounting pronouncements issued or adopted during the year ended December 31, 2023 with a significant impact to our financial statements. Note 3. Related party - Gilead Sciences, Inc. In 2020, we and Gilead entered into an Option, License and Collaboration Agreement (the "Gilead Collaboration Agreement"), Common Stock Purchase Agreement (the "Stock Purchase Agreement"), and Investor Rights Agreement (the "Investor Rights Agreement"). In 2021, we amended the Gilead Collaboration Agreement (the "First Gilead Collaboration Agreement Amendment") and the Stock Purchase Agreement (the "First Stock Purchase Agreement Amendment"). In 2022, we amended the Investor Rights Agreement (the "First Investor Rights Agreement Amendment"). In 2023, we further expanded our collaboration (the "Second Gilead Collaboration Agreement Amendment") and further amended the Stock Purchase Agreement (the "Second Stock Purchase Agreement Amendment"). On January 29, 2024, we further amended the Gilead Collaboration Agreement (the "Third Gilead Collaboration Agreement Amendment"), amended and restated our stock purchase agreements (the "Third Stock Purchase Agreement Amendment") and amended and restated our investor rights agreement (the "Second Investor Rights Agreement Amendment"). We refer to these agreements collectively as the Gilead Agreements. Stock Purchase Agreement and Investor Rights Agreement In 2020, under the Stock Purchase Agreement, Gilead purchased 6.0 million shares of our common stock for total gross proceeds of $ 200 million, of which $ 91 million was allocated to the revenue related performance obligations created by the Gilead Collaboration Agreement (See Note 5, Revenues for more information). In 2021, under the First Stock Purchase Agreement Amendment, Gilead purchased 5.7 million shares of our common stock for total gross proceeds of $ 220 million. In 2023, under the Second Stock Purchase Agreement Amendment, Gilead purchased 1.0 million shares of our common stock for total gross proceeds of $ 20 million. On January 29, 2024, under the Third Stock Purchase Agreement Amendment, Gilead purchased 15.2 million shares of our common stock for total gross proceeds of $ 320 million. 77 Table of Contents Gilead has the right, at its option until July 2025, to purchase up to a maximum of 35 % of the Company’s then-outstanding voting common stock, at a purchase price equal to the greater of a 20 % premium to market (based on a trailing five-day average closing price at option exercise) or the $ 33.54 initial purchase price. Based on the value of our common stock at each contract closing, the right to purchase additional shares had no value. Under the Investor Rights Agreement entered into in 2020, Gilead has the right, which they have exercised, to designate two members of our board of directors. This agreement also included a three-year standstill and a two-year lockup, provided Gilead with registration rights commencing at the end of the lockup period and provides Gilead with pro rata participation rights in certain future financings. In October 2022, we registered shares purchased by Gilead under the Stock Purchase Agreement and the First Stock Purchase Agreement Amendment and entered into the First Investor Rights Agreement Amendment, primarily to extend the two-year lockup period to three-years which expired on July 13, 2023. On January 29, 2024, under the Second Investor Rights Agreement Amendment, and in connection with the Third Stock Purchase Agreement Amendment, Gilead received the right, which they have exercised, to designate a third individual to be appointed to our board. As of December 31, 2023, Gilead held approximately 19.6 % of our outstanding common stock arising from purchases in our May 2020 public offering and purchases under the Stock Purchase Agreement and the First and Second Stock Purchase Agreement Amendments. As of January 31, 2024, after including shares purchased by Gilead under the Third Stock Purchase Agreement Amendment, Gilead held approximately 33.1 % of our outstanding common stock. Collaboration Agreements In 2020, we entered into the Gilead Collaboration Agreement, which gave Gilead an exclusive license to develop and commercialize zimberelimab (the anti PD-1 program) in certain markets and time-limited options to acquire exclusive licenses to develop and commercialize any of our then-current and future clinical programs arising during the 10 -year collaboration term, contingent upon $ 100 million option continuation payments payable on each of the second, fourth, sixth and eighth anniversaries of the agreement. Upon closing of the transaction in July 2020, Gilead made an upfront payment of $ 175 million. In 2021, we entered into the First Gilead Collaboration Agreement Amendment pursuant to which Gilead exercised its option to three programs—providing Gilead with exclusive licenses to develop and commercialize domvanalimab and AB308 (collectively, the anti-TIGIT program), etrumadenant (the adenosine receptor antagonist program) and quemliclustat (the CD73 program), in certain markets—for a total payment of $ 725 million that was received in 2022. The amendment also (i) provided for a slight reduction in the royalties for these three programs, such that Gilead will pay us tiered royalties as a percentage of revenues ranging from the mid-teens to the low twenties; and (ii) removed the $ 100 million option continuation payment that was otherwise due on the second anniversary of the Gilead Collaboration Agreement. Gilead's option, on a program-by-program basis, will expire after a prescribed period following the achievement of a clinical development milestone in such program and our delivery to Gilead of the requisite data package. Gilead may exercise its option to any program at any time prior to expiration of the option and will pay Arcus an option fee of $ 150 million per program. With respect to domvanalimab, we are also eligible to receive up to $ 500 million in potential U.S. regulatory approval milestones. For each program that Gilead opts in to, both companies will co-develop and equally share global development costs, subject to certain opt-out rights that we have, caps on our spending and related subsequent adjustments, and certain other exceptions. For each program, provided we have not exercised our opt-out rights, we have the option to co-promote in the United States with equal sharing of related profits and losses. Gilead has the right to exclusively commercialize outside of the U.S., subject to the rights of our existing partners in any territories and will pay us tiered royalties as a percentage of revenues ranging from the high teens to the low twenties. Under the First Gilead Collaboration Agreement Amendment, Gilead also has option rights to two oncology research programs for which we will lead discovery and early development activities. With respect to these two research programs, Gilead has the right to exercise its option, on a program-by-program basis, either (i) upon our completion of certain IND-enabling activities for an option payment of $ 60 million or (ii) following the achievement of a clinical development milestone for an option payment of $ 150 million. These research programs were not determined to be performance obligations at contract inception, due to the very early stages of the programs. 78 Table of Contents In May 2023, we entered into the Second Gilead Collaboration Agreement Amendment pursuant to which we expanded our collaboration to provide Gilead with options to license up to four jointly selected research-stage programs that target inflammatory diseases for which we will lead discovery and early development activities. We will receive an upfront payment of $ 17.5 million for each initiated program and Gilead will have an option to license each program at two separate, prespecified time points. For the first two research programs, Gilead has the right to exercise its option, on a program-by-program basis, either (i) upon our completion of certain IND-enabling activities for an option payment of $ 45 million or (ii) following the achievement of a clinical development milestone for an option payment of $ 150 million. If Gilead exercises its option at the earlier time point for the first two programs, we would be eligible to receive up to $ 375 million in regulatory and commercial milestone payments as well as tiered royalties for each optioned program. For any other program option exercise by Gilead, the parties would have rights to co-develop and share global development costs and to co-commercialize and share profits in the U.S. for that program. We received a total upfront payment of $ 35 million for an initial two research programs in June 2023. For the other two research programs, Gilead’s options expire unless the programs are selected prior to the first anniversary of the Second Gilead Collaboration Agreement Amendment. On January 29, 2024, we entered into the Third Gilead Collaboration Agreement Amendment. The Third Gilead Collaboration Agreement Amendment, among other things, (i) requires Gilead to pay the $ 100 million option continuation payment due on the fourth anniversary of the Gilead Collaboration Agreement, (ii) provides that we will operationalize and fund a Phase 3 study we plan to initiate to evaluate quemliclustat in pancreatic cancer, (iii) provides that we will solely fund our share of PACIFIC-8, subject to Gilead’s right to reinstate PACIFIC-8 as part of the parties’ joint development activities for the TIGIT Program in the first quarter of 2026, and (iv) provides that we will fund certain other activities. All other terms of the existing collaboration agreements, remain unchanged. We are evaluating the impact of this amendment under the accounting rules for contract modifications as a change in scope or price of the original contract. Once we determine that a contract has been modified, the modification may be required to be treated as separate, standalone contract, or combined with the original contract. In addition, some modifications are accounted for on a prospective basis and others on a cumulative catch-up basis. As of December 31, 2023, Gilead has licenses to domvanalimab, AB308, etrumadenant, quemliclustat and zimberelimab. For the years ended December 31, 2023, 2022 and 2021; we recognized revenue under the Gilead Agreements of $ 112 million, $ 107 million and $ 361 million, respectively and net reimbursements from Gilead recognized as reductions in R&D expense of $ 110 million, $ 132 million and $ 25 million, respectively. For the year ended December 31, 2022, we recognized reimbursements from Gilead as reductions in G&A expense of $ 1 million. For a more detailed discussion on revenues recognized under the Gilead Agreements, see Note 5, Revenues. Note 4. License and collaborations We enter into licensing agreements, strategic collaborations and other similar arrangements with third parties for the development and commercialization of certain investigational products. These arrangements may be collaborative and involve two or more parties who are active participants in the operating activities of the collaboration and are exposed to significant risks and rewards depending on the commercial success of the activities. These arrangements may include: non-refundable upfront payments; payments for options to acquire certain rights; potential development and regulatory milestone payments and/or sales-based milestone payments; royalty payments; revenue or profit-sharing arrangements; expense reimbursements; and cost-sharing arrangements. See Note 2, Summary of significant accounting policies, for additional discussion of revenues recognized under these types of arrangements. Operating expenses for costs incurred pursuant to these arrangements are reported in their respective expense line items in the Consolidated Statements of Operations, net of any payments due to or reimbursements due from our collaboration partners, with such reimbursements being recognized at the time the party becomes obligated to pay. Our significant arrangements are discussed below. Gilead Collaboration See Note 3, Related party - Gilead Sciences, Inc. Taiho Collaboration In 2017, we entered into an agreement with Taiho under which we granted them exclusive options to programs arising over a five-year period which ended in September 2022 for an upfront payment of $ 35 million. Upon an option exercise of a program, Taiho would obtain exclusive development and commercialization rights to investigational products under the program for the Taiho Territory. 79 Table of Contents For each option that Taiho exercises, they will be obligated to make a payment of $ 3 million to $ 15 million, depending on the development stage of the optioned program. Upon exercise, Taiho is solely responsible for continued development and commercialization in the Taiho Territory. In addition, for each optioned program we would be eligible to receive clinical and regulatory milestones of up to $ 130 million and commercial milestone payments of up to $ 145 million with the achievement of certain sales thresholds in the Taiho Territory. We will also receive royalties ranging from high single-digits to mid-teens on net sales of licensed products in the Taiho Territory. Royalties will be payable by product and country commencing on the first commercial sale and ending upon the later of: (a) 10 years; and (b) expiration of the last-to-expire valid claim of our patents covering the manufacture, use or sale. As of December 31, 2023, Taiho has licenses for the Taiho Territory to (i) etrumadenant (the adenosine receptor antagonist program); (ii) zimberelimab (the anti PD-1 program); and (iii) domvanalimab and AB308 (collectively, the anti-TIGIT program). During 2022, Taiho opted to participate in two global Phase 3 trials of domvanalimab and zimberelimab combinations, STAR-121 and STAR-221, and became obligated to make certain milestone payments contingent upon successfully satisfying the related clinical milestones. During the year ended December 31, 2023, the clinical milestones for domvanalimab and zimberelimab for the STAR-221 study were met and Taiho became obligated to pay us $ 28 million and in early 2024 the clinical milestones for domvanalimab and zimberelimab for the STAR-121 study were met and Taiho became obligated to pay us $ 26 million. For each of the years ended December 31, 2023, 2022 and 2021, we recognized revenue of $ 5 million, $ 5 million and $ 22 million, respectively, under this agreement. For a more detailed discussion on revenues see Note 5, Revenues. For the year ended December 31, 2023, we recognized net reimbursements from Taiho as a reduction in R&D expense of $ 8 million. AstraZeneca Collaboration In 2020, we entered into a collaboration with AstraZeneca to evaluate domvanalimab, our investigational anti-TIGIT antibody, in combination with AstraZeneca’s durvalumab in a registrational Phase 3 clinical trial in patients with unresectable Stage 3 NSCLC, known as the PACIFIC-8 trial. The terms of the agreement were amended in January 2024. Under the collaboration, as amended, 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 their respective investigational product to support the trial. We may incur milestones of up to $ 24 million upon the achievement of certain clinical trial progress milestones or under certain circumstances if the agreement is terminated early and we will reimburse AstraZeneca annually for a portion of the trial costs. The portion of the costs that we consider to be unavoidable are accrued as incurred and milestones that are deemed probable of occurring are accrued in advance of the achievement of the milestone. For the years ended December 31, 2023, 2022 and 2021 under this arrangement we recognized as R&D expense $ 6 million, $ 4 million, and $ 1 million respectively, before expected recoveries from our cost-sharing agreement with Gilead. At December 31, 2023 and 2022, we have recognized liabilities of $ 11 million and $ 5 million, respectively, related to our obligation to AstraZeneca which is recorded in Other noncurrent liabilities. As of December 31, 2023, the PACIFIC-8 trial formed part of the Arcus and Gilead joint development program for domvanalimab and our portion of the trial costs were shared with Gilead. At December 31, 2023 and 2022, we have recognized receivables due from Gilead for these shared costs of $ 6 million and $ 2 million, respectively, which is recorded in Other noncurrent assets. On January 29, 2024, under the Third Gilead Collaboration Agreement Amendment, we agreed to solely fund our share of PACIFIC-8, subject to Gilead’s right to reinstate PACIFIC-8 as part of the parties’ joint development activities for the TIGIT Program in the first quarter of 2026. On the date of this amendment, we will incur $ 6 million of R&D costs reflecting our additional share of incurred costs to date. WuXi Biologics License – anti-PD-1 In 2017, we entered into an agreement with WuXi Biologics which, as amended, provides us with exclusive rights to (i) develop, use and manufacture products that include an anti-PD-1 antibody, including zimberelimab, worldwide and (ii) commercialize any such products worldwide, except in Greater China. Under the agreement, as of December 31, 2023 we may incur (i) regulatory milestone payments of up to $ 50 million for zimberelimab, and commercialization milestone payments of up to $ 375 million, (ii) tiered royalties that range from the high single-digits to low teens on net sales of the licensed products and (iii) fees related to any sublicenses. During the year ended December 31, 2021, we incurred milestones of $ 10 million related to this agreement which were recorded as R&D expense. 80 Table of Contents WuXi Biologics License – anti-CD39 In 2020, we entered into an agreement with WuXi Biologics, under which we obtained the exclusive worldwide license to develop and commercialize anti-CD39 antibodies discovered under the agreement. As of December 31, 2023 we may incur additional clinical and regulatory milestone payments of up to $ 14 million and royalty payments in the low single digits on net sales of the licensed products under this agreement. During the years ended December 31, 2023 and 2022, we incurred development milestones of $ 1 million and $ 2 million, respectively, related to this agreement, which were recognized as R&D expense. Abmuno License In 2016, we entered into an agreement with Abmuno, under which we obtained the exclusive worldwide license to develop, use, manufacture, and commercialize products that include an anti-TIGIT antibody, including domvanalimab. Under the agreement, as of December 31, 2023 we may incur additional clinical, regulatory and commercialization milestone payments of up to $ 88 million. During the years ended 2022 and 2021, we incurred development milestone expenses of $ 5 million and $ 5 million, respectively, related to this agreement, which were recorded as R&D expense. Exelixis Collaboratio n In 2023, we entered into a clinical trial collaboration with Exelixis for STELLAR-009, a Phase 1b/2 trial to evaluate casdatifan, our investigational inhibitor of the transcription factor HIF-2⍺, in combination with Exelixis’s zanzalintinib, a next-generation tyrosine kinase inhibitor, in patients with ccRCC. Under the collaboration, each company will retain existing rights to their respective molecules and any future commercial economics. Exelixis will conduct the STELLAR-009 trial, and each company will supply their respective investigational product to support the trial. We will reimburse Exelixis for a portion of the trial costs. Patient enrollment for STELLAR-009 opened at the end of 2023. For the year ended December 31, 2023, we recognized R&D expense of $ 3 million under this arrangement. Note 5. Revenues The following table summarizes our revenues by collaboration, category of revenue, and the method of recognition (in millions): Year Ended December 31, Over time Point in time 2023 2022 2021 Gilead Collaboration License to domvanalimab * $ — $ — $ 329 License and R&D services * 79 74 1 Access rights * 33 33 31 Taiho Collaboration License to domvanalimab * — — 15 R&D services * 5 — — Access rights * — 5 7 Total revenues $ 117 $ 112 $ 383 Revenues from Gilead accounted for 96 % of Total revenues for both years ended December 31, 2023 and 2022, and 94 % of Total revenues for the year ended December 31, 2021. The following table summarizes the revenue recognized as a result of changes in the deferred revenue balance (in millions): Year Ended December 31, 2023 2022 2021 Revenue recognized from amounts in deferred revenue at the beginning of the period $ 108 $ 112 $ 202 81 Table of Contents We had $ 398 million and $ 452 million of deferred revenue remaining on our Consolidated Balance Sheets at December 31, 2023 and December 31, 2022, respectively, allocated between current and noncurrent based on the expected timing of future recognition. Revenue from the Gilead Collaboration In 2021, we determined that the First Gilead Collaboration Agreement Amendment represented a contract modification and at the amendment closing date of December 21, 2021, we allocated the transaction price to the new and remaining performance obligations (see Note 3, Related party - Gilead Sciences, Inc., for more information). The following table summarizes the transaction price and the allocation of the transaction price to the performance obligations (in millions): Transaction price Amount Deferred revenues as of December 21, 2021 $ 165 Option payment for Domvanalimab 275 Option payment for Etrumadenant 250 Option payment for Quemliclustat 200 Total transaction price $ 890 Allocation to performance obligations Distinct Combined Amount Domvanalimab - License * $ 329 Domvanalimab - R&D services * 34 Etrumadenant - License and R&D services * 219 Quemliclustat - License and R&D services * 176 Zimberelimab - R&D and commercial services * 11 Access rights * 84 Option continuation periods * 37 Total allocated transaction price $ 890 Our assessment of the transaction price for the First Gilead Collaboration Agreement Amendment included an analysis of amounts we expected to receive, which at contract inception consisted of the upfront cash payment of $ 725 million, as well as amounts totaling $ 165 million deferred from the original Gilead transaction. This excludes the $ 100 million option continuation payment that was eliminated in the amendment. We determined the entire $ 890 million to be the allocable transaction price as of the amendment closing date, due to the history of timely payments by Gilead including the receipt of $ 725 million in January 2022. We accounted for each performance obligation as follows: Domvanalimab – License Under the Gilead Collaboration Agreement, Gilead obtained an option to the exclusive rights to our anti-TIGIT program, including domvanalimab and AB308, in exchange for an option payment of $ 275 million, if exercised. Prior to the closing of the First Gilead Collaboration Agreement Amendment, we had $ 37 million of deferred revenue on our Consolidated Balance Sheet related to this performance obligation. Effective December 2021, under the First Gilead Collaboration Agreement Amendment, Gilead exercised the option and obtained an exclusive license to domvanalimab. We determined that this license was distinct based on an evaluation of the delivery of the license, noting that the program was in the later stages of development and it met the criteria for being distinct from the R&D services required under the First Gilead Collaboration Agreement Amendment. Specifically, the domvanalimab program was in a Phase 3 clinical trial at the time that Gilead acquired the license and the Company concluded that: (i) the R&D services for such later-stage, Phase 3 IP, primarily involved validating the drug’s efficacy, and (ii) the ongoing R&D services do not significantly modify or customize the drug compound such that the IP is not significantly different at the end of the arrangement as a result of the services. We determined the standalone selling price of this license using a discounted cash flow method. We recognized as revenue the full $ 329 million of the allocated transaction price in the year ended December 31, 2021. 82 Table of Contents Domvanalimab – R&D Services Under the First Gilead Collaboration Agreement Amendment, we determined that we retain a separate performance obligation to perform further R&D services for Gilead related to domvanalimab. The standalone selling price of this obligation was determined using an expected cost-plus margin approach. We recognize the amounts allocated to these services as the performance obligation is satisfied, calculated as an estimated percentage of completion based on management's estimated total effort for the program. We recognized $ 5 million in both years ended December 31, 2023 and 2022 within License and development services revenue in our Consolidated Statements of Operations. No revenue was recognized in 2021 as the R&D services had not yet commenced. At December 31, 2023 we had $ 25 million of deferred revenue remaining on our Consolidated Balance Sheet related to this performance obligation. Etrumadenant – License and R&D Services Under the Gilead Collaboration Agreement, Gilead obtained an option to the exclusive rights to our adenosine receptor program, etrumadenant, in exchange for an option payment of $ 250 million, if exercised. Prior to the closing of the First Gilead Collaboration Agreement Amendment, we had $ 127 million of deferred revenue on our Consolidated Balance Sheet related to this performance obligation. Effective December 2021, under the First Gilead Collaboration Agreement Amendment, Gilead exercised the option and obtained an exclusive license to etrumadenant and we were also obligated to perform further R&D services for Gilead related to etrumadenant. We determined that the license and R&D services were combined based on an evaluation of the delivery of the license, due to the early stage of the technology and the specialized nature of our know-how. We determined the standalone selling price of the license using a discounted cash flow method and the R&D services using an expected cost-plus margin approach. We recognize the amounts allocated to the combined license and services as the performance obligation is satisfied, calculated as an estimated percentage of completion based on management's estimated total effort for the program. We recognized $ 52 million and $ 34 million in the years ended December 31, 2023 and 2022, respectively, within License and development service revenue in our Consolidated Statements of Operations. No revenue was recognized in 2021 as the R&D services had not yet commenced. At December 31, 2023 we had $ 133 million of deferred revenue remaining on our Consolidated Balance Sheet related to this performance obligation. Quemliclustat – License and R&D Services Under the Gilead Collaboration Agreement, Gilead obtained an option to the exclusive rights to the Company's CD73 program, quemliclustat, in exchange for an option payment of $ 200 million, if exercised. Prior to the closing of the First Gilead Collaboration Agreement Amendment, we had no deferred revenue on our Consolidated Balance Sheet related to this performance obligation. Effective December 2022, under the First Gilead Collaboration Agreement Amendment, Gilead exercised the option and obtained an exclusive license to quemliclustat and we were also obligated to perform further R&D services for Gilead related to quemliclustat. We determined that the license and R&D services were combined based on an evaluation of the delivery of the license, due to the early stage of the technology and the specialized nature of our know-how. We determined the standalone selling price of the license using a discounted cash flow method and the R&D services using an expected cost-plus margin approach. We recognize the amounts allocated to the combined license and services as the performance obligation is satisfied, calculated as an estimated percentage of completion based on management's estimated total effort for the program. We recognized $ 17 million and $ 26 million in the years ended December 31, 2023 and 2022, respectively, within License and development service revenue in our Consolidated Statements of Operations. No revenue was recognized in 2021 as the R&D services had not yet commenced. At December 31, 2023 we had $ 132 million of deferred revenue remaining on our Consolidated Balance Sheet related to this performance obligation. Zimberelimab – R&D and Commercialization Services Under the First Gilead Collaboration Agreement Amendment, we determined that we retained separate performance obligations to perform further R&D and commercialization services for Gilead related to zimberelimab, as a monotherapy and in combination with other agents. Prior to the closing of the First Gilead Collaboration Agreement Amendment, we had $ 10 million of deferred revenue on our Consolidated Balance Sheet, related to these performance obligations. The standalone selling price of these obligations were determined using an expected cost-plus margin approach. We recognize the amounts allocated to these services as the performance obligations are satisfied, calculated as an estimated percentage of completion based on management's estimated total effort for the program. 83 Table of Contents We recognized $ 1 million, $ 9 million, and $ 1 million for R&D and commercialization services in the years ended December 31, 2023, 2022, and 2021, respectively, within License and development service revenue in our Consolidated Statements of Operations. At December 31, 2023, the performance obligation was fully satisfied and all revenue has been recognized. Access Rights and Option Continuation Periods Under the First Gilead Collaboration Agreement Amendment, Gilead has exclusive access to our current programs as well as the future programs for a period of ten years , contingent upon option continuation payments totaling $ 300 million, consisting of a $ 100 million payment on each of the fourth, sixth, and eighth anniversaries of the Gilead Collaboration Agreement. Prior to the closing of the First Gilead Collaboration Agreement Amendment, we had $ 92 million of deferred revenue on our Consolidated Balance Sheet related to this performance obligation from the Gilead Collaboration Agreement. The standalone selling price of this ongoing R&D pipeline access was determined using an expected cost-plus margin approach. We use a time-elapsed input method to measure progress toward satisfying this obligation, which is the method we believe most faithfully depicts the Company’s performance in transferring the promised services during the time period in which Gilead has access to our R&D pipeline. Accordingly, the revenue allocated to this performance obligation is being recognized using this input method over the minimum four-year period. We determined that as of the closing date of December 21, 2021, Gilead is not obligated to pay the remaining $ 300 million due over the remainder of the term and excluded these payments from the transaction price. Failure to pay the non-obligatory option continuation payments will result in Gilead’s loss of certain rights to access and obtain licenses to the programs arising from our R&D pipeline. See Note 3. Related party - Gilead Sciences, Inc., for a description of the amendment that occurred on January 29, 2024, which requires Gilead to pay the $ 100 million option continuation payment due on the fourth anniversary of the Gilead Collaboration Agreement. We recognized as revenue $ 33 million associated with this performance obligation in both years ended December 31, 2023 and 2022, and $ 31 million in the year ended December 31, 2021 within Other collaboration revenue in our Consolidated Statements of Operations. At December 31, 2023, we had $ 54 million of deferred revenue on our Consolidated Balance Sheet related to this performance obligation. Inflammation Programs - R&D Services In May 2023, we entered into the Second Gilead Collaboration Agreement Amendment pursuant to which we expanded our collaboration to provide Gilead with options to license up to four jointly selected research-stage programs that target inflammatory diseases for which we will lead discovery and early development activities (see Note 3, Related party - Gilead Sciences, Inc., for more information). In June 2023, we received a total upfront payment of $ 35 million for an initial two jointly selected research-stage programs. We determined that the Second Gilead Collaboration Agreement Amendment represented a separate contract and, at the amendment closing date, we allocated the transaction price of $ 35 million to the performance obligations created as of the date of this amendment. The following table summarizes the allocation of the transaction price to the distinct performance obligations (in millions): Allocation to performance obligations Distinct Amount Inflammation target 1 - R&D services * $ 18 Inflammation target 2 - R&D services * 17 Total allocated transaction price $ 35 We determined that we have separate performance obligations to perform R&D services for Gilead related to discovery and early development activities for each research program for which they have made an upfront payment. The standalone selling price of these obligations was determined using an expected cost-plus margin approach. We recognize the amounts allocated to these services as the performance obligation is satisfied, calculated as an estimated percentage of completion based on management's estimated total effort for the program. The options to acquire additional licenses or services did not result in additional performance obligations because they did not provide a material right at contract inception, primarily due to the very early stages of the programs. We recognized revenue of $ 4 million for the year ended December 31, 2023, respectively, within Other collaboration revenue in our Consolidated Statements of Operations. At December 31, 2023, we had $ 31 million of deferred revenue remaining on our Consolidated Balance Sheet related to these performance obligations. 84 Table of Contents Revenue from the Taiho Collaboration Domvanalimab and Zimberelimab - R&D Services In 2023, under the Taiho collaboration, certain clinical milestones for domvanalimab and zimberelimab were met through the STAR-221 study and Taiho became obligated to pay us $ 28 million, of which $ 14 million was paid the in the fourth quarter 2023 and the remaining $ 14 million is recorded in Receivable from collaboration partners at December 31, 2023 on our Consolidated Balance Sheet. We determined that we have a performance obligation to perform R&D services for Taiho related to the global development activities for the STAR-221 study in support of the Taiho Territory. We allocated the $ 28 million to this single performance obligation and recognize the amounts allocated to this service as the performance obligation is satisfied, calculated as an estimated percentage of completion based on management's estimated total effort for the programs. We recognized revenue of $ 5 million for the year ended December 31, 2023 within License and development service revenue in our Consolidated Statements of Operations. At December 31, 2023, we had $ 23 million of deferred revenue remaining on our Consolidated Balance Sheet related to this performance obligation, allocated between current and noncurrent based on the expected timing of future recognition. In early 2024, the clinical milestones for domvanalimab and zimberelimab for the STAR-121 study were met and Taiho became obligated to pay us $ 26 million. We have not recognized any revenue for this milestone for the year ended December 31, 2023. Note 6. Income taxes Income (loss) before income taxes included the following (in millions): Year Ended December 31, 2023 2022 2021 Domestic $ ( 301 ) $ ( 267 ) $ 54 Foreign — 1 1 Income (loss) before income tax $ ( 301 ) $ ( 266 ) $ 55 The provision for income taxes included the following (in millions): Year Ended December 31, 2023 2022 2021 Current provision: Federal $ 4 $ — $ 1 State 2 1 1 Total income tax expense $ 6 $ 1 $ 2 The reconciliation between the federal statutory income tax rate and our effective tax rate was as follows: Year Ended December 31, 2023 2022 2021 Federal statutory income tax rate 21.0 % 21.0 % 21.0 % State taxes, net of federal benefit ( 0.7 ) % ( 0.1 ) % 0.8 % Equity investment 0.4 % 0.9 % ( 4.1 ) % Research and development credits 5.2 % 3.1 % ( 11.9 ) % Change in valuation allowance ( 26.3 ) % ( 24.5 ) % ( 2.6 ) % Stock based compensation ( 2.1 ) % 0.1 % ( 0.8 ) % Non-deductible expenses and other 0.5 % ( 0.6 ) % 0.9 % Provision for income taxes ( 2.0 ) % ( 0.1 ) % 3.3 % Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carryforwards. 85 Table of Contents Significant components of our deferred tax assets and liabilities were as follows (in millions): Year Ended December 31, 2023 2022 Deferred tax assets: Federal and state net operating loss carryforwards $ 1 $ 24 Research and development credits carryforwards 26 22 Stock-based compensation 21 16 Depreciation and amortization 3 6 Deferred revenue 66 19 Lease liability 26 25 Capitalized research and development costs 109 53 Other 1 7 Total deferred tax assets 253 172 Deferred tax liabilities: Right-of-use assets ( 20 ) ( 22 ) Total deferred tax liabilities ( 20 ) ( 22 ) Less valuation allowance ( 233 ) ( 150 ) Net deferred tax assets (liabilities) $ — $ — The accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of net deferred tax assets. We considered factors such as our history of operating losses, the nature of our deferred tax assets, and the timing, likelihood and amount, if any, of future taxable income during the periods in which those temporary differences and carryforwards become deductible, including amounts that may arise under the collaboration agreements with Gilead and related program opt-ins. As a result of our evaluation of these factors, including the uncertainty that exists with respect to the option fees and milestone payments, we do not believe that it is more likely than not that the deferred tax assets will be realized. Accordingly, a full valuation allowance has been established and no deferred tax asset is shown in the accompanying Consolidated Balance Sheets. The valuation allowance increased by approximately $ 83 million for the year ended December 31, 2023 and increased by approximately $ 67 million for the year ended December 31, 2022. The United States enacted the Tax Cuts and Jobs Act in December 2017, which requires companies to capitalize all of their R&D costs for U.S. tax purposes, including software development costs, incurred in tax years beginning after December 21,2021. Beginning in 2022, for tax purposes we began capitalizing and amortizing R&D costs over a five-year period for domestic research and a fifteen-year period for international research rather than expensing these costs immediately. At December 31, 2023, we have federal research tax credits of approximately $ 24 million that begin to expire in 2039. We also have state NOLs of approximately $ 21 million that begin to expire in 2035, and state research tax credits of approximately $ 15 million that have no expiration date, and foreign research tax credits of approximately $ 3 million that have no expiration date. Use of the U.S. federal and state NOLs and credit carryforwards may be subject to a substantial annual limitation due to the ownership change provisions of U.S. tax law, as defined in IRC Sections 382 and 383, and similar state provisions. The annual limitation may result in the expiration of NOLs and credits before use. We have determined that an ownership change, as defined under IRC Section 382, occurred in previous years. While we do not expect these ownership changes to result in the expiration of net operating loss and credit carryforwards prior to utilization, we are subject to an annual limitation on the use of its tax attributes. The limitation on the use of net operating loss and credit carryforwards could reduce our ability to use a portion of the tax attributes to offset future taxable income. We have not been audited by the Internal Revenue Service, any state or foreign tax authority. We are subject to taxation in the United States and in Australia. Due to net operating loss and research credit carryforwards, all of our tax years, from 2015 to 2023, remain open to U.S. federal and California state tax examinations. In addition, our fiscal years from 2019 to 2023 are open to examination in Australia. Uncertain Tax Positions We follow the provisions of FASB Accounting Standards Codification ("ASC 740-10"), Accounting for Uncertainty in Income Taxes . ASC 740-10 prescribes a comprehensive model for the recognition, measurement, 86 Table of Contents presentation and disclosure in financial statements of uncertain tax positions that have been taken or are expected to be taken on a tax return. No liability related to uncertain tax positions is recorded in the Consolidated Financial Statements. The reserve for unrecognized tax benefits was approximately $ 13 million and $ 8 million at December 31, 2023, and 2022, respectively. Due to the full valuation allowance at December 31, 2023 and 2022, current adjustments to the unrecognized tax benefit will have no impact on our effective income tax rate; any adjustments made after the valuation allowance is released will have an impact on the tax rate. Interest and penalties related to unrecognized tax benefits are included in the provision for income taxes. There were no material interest or penalties accrued at December 31, 2023 or 2022. The following table summarizes the activity related to our unrecognized tax benefits (in millions): Year Ended December 31, 2023 2022 Beginning balance $ 8 $ 5 Additions for tax positions taken in prior year 2 — Additions for tax positions taken in current year 3 3 Ending balance $ 13 $ 8 As of December 31, 2023, the total amount of gross unrecognized tax benefits was $ 13 million, of which, if recognized, none would impact our effective tax rate. We do not anticipate material changes to our uncertain tax positions through the next 12 months. Note 7. Net income (loss) per share The computation of basic net income (loss) per share is based on the weighted-average number of our common shares outstanding during the period. The computation of diluted net income (loss) per share is based on the weighted-average number of our common shares and dilutive potential common shares, which primarily include shares that may be issued under our stock option, restricted stock award, and Employee Stock Purchase Plans ("ESPP") (collectively, "dilutive securities") as determined under the treasury stock method. The following table sets forth the computation of basic and diluted net income (loss) per share (in millions, except per share data): Year Ended December 31, 2023 2022 2021 Net income (loss) (Numerator): Net income (loss) $ ( 307 ) $ ( 267 ) $ 53 Weighted-average shares (Denominator): Outstanding 74.0 72.0 70.3 Less: Subject to vesting — — ( 1.0 ) Weighted-average shares for basic EPS 74.0 72.0 69.3 Effect of dilutive securities — — 4.7 Weighted-average shares for diluted EPS 74.0 72.0 74.0 Net income (loss) per share Basic $ ( 4.15 ) $ ( 3.71 ) $ 0.76 Diluted $ ( 4.15 ) $ ( 3.71 ) $ 0.71 87 Table of Contents The following table summarizes potentially dilutive securities excluded from the computation of diluted net income (loss) per share calculations because they would have been antidilutive (in millions): At December 31, 2023 2022 2021 Common stock options issued and outstanding 13.5 12.0 4.5 Restricted stock units issued 1.5 1.3 — Employee Stock Purchase Plan shares 0.3 0.2 0.1 Total potential dilutive securities 15.3 13.5 4.6 We have also excluded the effect of Gilead's right to purchase additional shares of our common stock from the calculation as these rights had no intrinsic value at December 31, 2023, 2022 or 2021. Note 8. Stock-based compensation Stock-based compensation expense The following table reflects the components of stock-based compensation expense recognized in our Consolidated Statements of Operations (in millions): Year Ended December 31, 2023 2022 2021 Research and development $ 35 $ 33 $ 29 General and administrative 38 32 26 Total stock-based compensation $ 73 $ 65 $ 55 As of December 31, 2023, unrecognized compensation costs related to non-vested stock option awards and RSUs totaled $ 73 million and $ 35 million, respectively, and is expected to be recognized over a weighted average period of 2.2 years and 2.4 years, respectively. Stock Plans We grant awards to employees and nonemployees under a series of equity incentive plans (collectively, the Stock Plans). Awards under our Stock Plans are made with newly issued shares reserved for this purpose. 2020 Stock Plan In January 2020, we adopted the 2020 Inducement Plan (the "2020 Stock Plan") for the award of stock options and other equity-based awards as an inducement to eligible individuals to enter into employment with us. As of December 31, 2023, there were 3.2 million shares available for grant under this plan. 2015 Stock Plan and 2018 Equity Incentive Plan In 2015, we adopted the 2015 Stock Plan, which in March 2018, we replaced with the 2018 Equity Incentive Plan (the "2018 Equity Incentive Plan"). Any outstanding awards under the 2015 Stock Plan that subsequently expire, lapse unexercised or are forfeited to us are added to the shares reserved for issuance under the 2018 Equity Incentive Plan. The number of shares reserved for issuance will automatically increase on January 1 of each year by a number equal to or the smaller of (i) 3.6 million shares, (ii) 4 % of the shares of common stock outstanding on the last business day of the prior fiscal year, or (iii) an amount as determined by the board of directors. As of December 31, 2023, there were 3.8 million shares available for grant under this plan. On January 1, 2024, the number of shares available for issuance under the 2018 Equity Incentive Plan automatically increased by 3.0 million. 88 Table of Contents Employee Stock Purchase Plan In March 2018, we adopted the 2018 Employee Stock Purchase Plan (the "2018 ESPP"). The 2018 ESPP provides eligible employees with the opportunity to purchase shares of common stock through payroll deductions at a price equal to 85 % of the lower of the fair market value per share on the first trading day of the applicable 24 -month offering period or on the applicable purchase date. Employees are limited to a maximum purchase limit of 3,000 shares on each purchase date or $ 25,000 of shares purchased in a calendar year based on the stock price on the first day of the offering period. The 2018 ESPP is intended to constitute an “employee stock purchase plan” under IRC Section 423(b). The 2018 ESPP may be terminated by our board of directors at any time. The number of shares reserved for issuance will automatically increase on January 1 of each year by a number equal to or the smaller of (i) 1.1 million shares, (ii) 1 % of the shares of common stock outstanding on the last business day of the prior fiscal year, or (iii) an amount as determined by the board of directors. As of December 31, 2023, there were 2.4 million shares available for purchase under this plan. On January 1, 2024, the number of shares available for purchase under this Plan automatically increased by 0.8 million shares. Restricted Stock Units We grant RSUs to our employees and directors under the 2018 Equity Incentive Plan. The RSUs vest annually or quarterly over four years for employees and annually for directors. The following table summarizes information regarding our RSUs for the year ended December 31, 2023: Total Restricted Stock Units (in millions) Weighted Average Grant Date Fair Value Per Share Nonvested at December 31, 2022 1.3 $ 31.09 RSUs granted 1.1 $ 21.02 RSUs vested ( 0.7 ) $ 28.93 RSUs forfeited or canceled ( 0.2 ) $ 25.70 Nonvested at December 31, 2023 1.5 $ 25.43 The total fair value of shares at vesting date during the years ended December 31, 2023, 2022 and 2021 was $ 13 million, $ 12 million and $ 12 million, respectively. Stock Options The exercise price of stock options is set at the closing price of our common stock on the grant date, and the related number of shares granted is fixed at that point in time. Awards expire 10 years from the date of grant. The following table summarizes information regarding our stock options for the year ended December 31, 2023: Shares Subject to Outstanding Options (in millions) Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in millions) Outstanding at December 31, 2022 12.0 $ 21.77 Options granted 2.9 $ 21.21 Options exercised ( 0.3 ) $ 10.08 Options forfeited or canceled ( 1.1 ) $ 29.26 Outstanding at December 31, 2023 13.5 $ 21.31 7.05 $ 39 Options vested and expected to vest as of December 31, 2023 13.5 $ 21.31 7.05 $ 39 Options exercisable as of December 31, 2023 9.0 $ 19.41 6.38 $ 38 During the years ended December 31, 2023, 2022 and 2021, the intrinsic value of shares exercised was $ 3 million, $ 26 million, and $ 17 million, respectively. 89 Table of Contents Valuation Assumptions for Stock Options and Employee Stock Purchase Plan We utilize the Black-Scholes pricing model to estimate the fair value of stock options and shares issued under our 2018 ESPP. The following table summarizes the key assumptions used to calculate the fair value and the resulting weighted-average grant date fair value of stock options granted: Year Ended December 31, Stock Options 2023 2022 2021 Weighted average closing price of our common stock on grant date $ 21.21 $ 30.37 $ 33.03 Risk-free interest rate 3.6 % - 4.6 % 2.4 % - 4.0 % 1.0 % - 1.4 % Expected term (in years) 6.02 6.02 6.02 Volatility 77.7 % - 79.1 % 76.5 % - 79.3 % 75.3 % - 77.6 % Dividend yield 0 % 0 % 0 % Weighted average fair value of stock options granted $ 14.81 $ 20.75 $ 22.05 Year Ended December 31, ESPP 2023 2022 2021 Risk-free interest rate 4.3 % - 5.4 % 1.6 % - 4.7 % — % - 0.6 % Expected term (in years) 0.5 - 2.0 0.5 - 2.0 0.5 - 2.0 Volatility 61.1 % - 86.9 % 68.9 % - 82.5 % 61.2 % - 95.7 % Dividend yield 0 % 0 % 0 % Weighted average closing price of our common stock on grant date — Our awards are valued based on the closing price of our common stock on the grant date. Risk-free interest rate — The risk-free rate assumption is based on the U.S. treasury yield in effect at the time of grant for instruments with maturities similar to the expected term of our stock options. Expected term — We use the “simplified method” for estimating the expected term of options, whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option (generally 10 years). Volatility — Our estimate of expected volatility is based on the historical volatility of our common stock price. Prior to 2023, due to our limited operating history and a lack of company specific historical and implied volatility data, our estimate of expected volatility included the historical volatility of a group of similar publicly traded companies. The historical volatility data was computed using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards. Dividend yield — We have not issued any dividends in our history and do not expect to issue dividends over the life of the options. Note 9. Defined Contribution Plan We have a 401(k) defined contribution plan for all our employees which allows tax-deferred salary deductions. The Company matches, at its discretion, employee contributions. For the years ended December 31, 2023, 2022, and 2021, we made contributions of $ 3 million, $ 2 million and $ 1 million, respectively, to the plan. 90 Table of Contents Note 10. Cash, cash equivalents and marketable securities The following table summarizes the amortized cost, gross unrealized gains and losses and the fair value of our cash, cash equivalents and marketable securities, all of which are considered available for sale, by type of securities (in millions): Types of securities as of December 31, 2023 Amortized Cost Unrealized Gain Unrealized Loss Fair Value Money market funds $ 85 $ — $ — $ 85 U.S. treasury securities 213 1 ( 1 ) 213 Corporate securities and commercial paper 471 — — 471 U.S. government agency securities 90 — — 90 Certificate of deposit 7 — — 7 Total cash, cash equivalents and marketable securities $ 866 $ 1 $ ( 1 ) $ 866 Types of securities as of December 31, 2022 Amortized Cost Unrealized Gain Unrealized Loss Fair Value Money market funds $ 169 $ — $ — $ 169 U.S. treasury securities 317 — ( 3 ) 314 Corporate securities and commercial paper 635 — ( 4 ) 631 U.S. government agency securities 20 — — 20 Certificate of deposit 4 — — 4 Total cash, cash equivalents and marketable securities $ 1,145 $ — $ ( 7 ) $ 1,138 The following table summarizes the fair values of our cash, cash equivalents and marketable securities by location in the Consolidated Balance Sheets and contractual maturity (in millions): Contractual Maturity As of December 31, Location in Consolidated Balance Sheets 2023 2022 Cash and cash equivalents — $ 127 $ 206 Marketable securities Within one year 632 803 Long-term marketable securities Between one and three years 107 129 Total cash, cash equivalents and marketable securities $ 866 $ 1,138 Realized gains or losses recognized on the sale of available-for-sale marketable securities were not material for the years ended December 31, 2023, 2022 and 2021. Realized gains and losses are included in Interest and other income, net, in the Consolidated Statements of Operations. The cost of a security sold is determined using the specific-identification method. We limit the credit risk associated with our investments by placing them with banks and institutions we believe are highly credit worthy and investing in highly rated investments. We held a total of 105 and 219 positions in securities which were in unrealized loss positions as of December 31, 2023 and 2022, respectively. We do not intend to sell our securities with unrealized loss positions and have concluded we will not be required to sell the securities before recovery of the amortized cost for the investment at maturity. No credit related losses have been recognized for any of the periods presented. 91 Table of Contents The following table provides a reconciliation of cash, cash equivalents, and restricted cash within the Consolidated Balance Sheets to the total shown in the Consolidated Statements of Cash Flows (in millions): As of December 31, 2023 2022 Cash and cash equivalents $ 127 $ 206 Restricted cash (included in Other noncurrent assets) 3 3 Total cash, cash equivalents and restricted cash $ 130 $ 209 Restricted cash at December 31, 2023 and 2022 represents cash balances held as security in connection with our facility lease agreements. Note 11. Property and equipment Property and equipment, net was all located in the United States and consisted of the following (in millions): Useful Life (in years) As of December 31, 2023 2022 Leasehold improvements 5 - 10 $ 54 $ 34 Scientific equipment 5 24 17 Furniture and equipment 3 - 5 3 3 Construction in progress — 1 4 Property and equipment, gross 82 58 Less: Accumulated depreciation and amortization ( 31 ) ( 23 ) Property and equipment, net $ 51 $ 35 Note 12. Consolidated balance sheet components Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consisted of the following (in millions): As of December 31, 2023 2022 Prepaid expenses and other assets $ 30 $ 15 Accrued interest receivable 4 4 Total prepaid expenses and other current assets $ 34 $ 19 Other Current Liabilities Other current liabilities consisted of the following (in millions): As of December 31, 2023 2022 Accrued research and development $ 36 $ 45 Accrued personnel expenses 26 25 Current portion of lease liabilities 11 3 Other 3 3 Total other current liabilities $ 76 $ 76 92 Table of Contents Note 13. Leases We lease our corporate headquarters, which includes approximately 151,000 square feet of executive offices, R&D, and business operations, in Hayward, California. We also lease approximately 109,000 square feet of office space in Brisbane, California. Both leases: are non-cancelable; extend through 2031; have two options, at our sole discretion, to extend each lease term for a period of eight years ; and require monthly lease payments that are subject to annual increases throughout the lease term. Our sublease of approximately 31,000 square feet of our Brisbane office to another company commenced in October 2023. This sublease included a tenant improvement allowance to be paid by us of $ 9 million, of which approximately $ 1 million was outstanding at December 31, 2023. Under the terms of the agreement, we will receive sublease payments of approximately $ 3 million per year, beginning in 2024. For the year ended December 31, 2023, we recorded gross sublease income of $ 1 million. Income from the sublease is recognized on a straight-line basis as reduction of rent expense within G&A. This sublease is non-cancelable and extends through 2028, with the sublessee having options to extend the lease term. At December 31, 2023 and 2022, our lease portfolio had a weighted average remaining term of 8 years and 9 years, respectively, and a weighted average discount rate of 5.2 % for both periods. The following table summarizes information related to our leases, all of which are classified as operating (in millions): As of December 31, Location in Consolidated Balance Sheets 2023 2022 Assets: Other noncurrent assets - right-of-use assets $ 92 $ 100 Liabilities: Other current liabilities - net current operating lease liabilities $ 11 $ 3 Other noncurrent liabilities - noncurrent operating lease liabilities $ 110 $ 117 For the years ended December 31, 2023, 2022 and 2021, we incurred lease expense of $ 18 million, $ 18 million, and $ 7 million, respectively. Lease costs include rent expense, which consists primarily of our proportionate share of operating expenses, property taxes, and insurance which we have elected to include in lease costs. The following table summarizes our cash and non-cash information related to our operating leases (in millions): Year Ended December 31, 2023 2022 2021 Cash paid for amounts included in measurement of lease liabilities $ 15 $ 11 $ 5 Cash received from tenant improvement allowances $ 9 $ 8 $ 3 Right-of-use assets obtained in exchange for new operating lease liabilities $ — $ 3 $ 95 Recognition of tenant improvement allowance receivable included in Other current liabilities $ 4 $ 6 $ 11 93 Table of Contents The following table summarizes our future minimum lease payments at December 31, 2023 (in millions): Year Ending December 31, Operating Leases 2024 $ 17 2025 17 2026 17 2027 18 2028 19 Thereafter 61 Total undiscounted future minimum lease payments $ 149 Less: Imputed interest ( 28 ) Total present value of lease liabilities $ 121 As of December 31, 2023, we have provided deposits for letters of credit totaling $ 3 million to secure our obligations under our leases, which are included in Other noncurrent assets on the Consolidated Balance Sheet. Note 14. Stockholders’ equity Common Stock We are authorized to issue up to 400.0 million shares of common stock. Gilead Stock Purchase Agreement In 2021, under the First Stock Purchase Agreement, Gilead purchased 5.7 million shares of our common stock at a price of $ 39.00 per share for total gross proceeds of $ 220 million. In 2023, under the Second Stock Purchase Agreement, Gilead purchased 1.0 million shares of our common stock at the closing day purchase price of $ 19.26 per share for total gross proceeds of $ 20 million. On January 29, 2024, under the Third Stock Purchase Agreement Amendment, Gilead purchased 15.2 million shares of our common stock at a price of $ 21.00 per share for total gross proceeds of $ 320 million. At-the Market Facility In 2023, we entered into an equity distribution agreement pursuant to which we may, from time to time, sell shares of our common stock, par value $ 0.0001 per share, having an aggregate offering price of up to $ 200 million. During the year ended December 31, 2023, we issued and sold under this agreement 0.2 million shares of our common stock for total net proceeds of $ 5 million. Preferred Stock We have authorized 10.0 million shares of preferred stock, par value $ 0.0001 . There was no preferred stock outstanding as of December 31, 2023 and 2022. Note 15. Fair value measurements We determine the fair value of financial and non-financial assets and liabilities using the fair value hierarchy, which establishes three levels of inputs that may be used to measure fair value, as follows: • Level 1 inputs include unadjusted quoted prices in active markets for identical assets or liabilities; • Level 2 inputs include observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability; and • Level 3 inputs include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. Our Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation. 94 Table of Contents 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 following tables summarize the types of assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy (in millions): Fair value measurement as of December 31, 2023 Level 1 Level 2 Level 3 Total Assets Money market funds $ 85 $ — $ — $ 85 U.S. treasury securities — 213 — 213 Corporate securities and commercial paper — 471 — 471 U.S. government agency obligations — 90 — 90 Certificate of deposit — 7 — 7 Total assets measured at fair value $ 85 $ 781 $ — $ 866 Liabilities Liability for sale of future royalties $ — $ — $ 19 $ 19 Total liabilities measured at fair value $ — $ — $ 19 $ 19 Fair value measurement as of December 31, 2022 Level 1 Level 2 Level 3 Total Assets Money market funds $ 169 $ — $ — $ 169 U.S. treasury securities — 314 — 314 Corporate securities and commercial paper — 631 — 631 U.S. government agency obligations — 20 — 20 Certificate of deposit — 4 — 4 Total assets measured at fair value $ 169 $ 969 $ — $ 1,138 Liabilities Liability for sale of future royalties $ — $ — $ 17 $ 17 Total liabilities measured at fair value $ — $ — $ 17 $ 17 Liability for sale of future royalties In 2021, we entered into an agreement with BVF, under which BVF funded the discovery and development of compounds for the treatment of inflammatory diseases (the "BVF Program") for $ 15 million in non-refundable payments which were paid in 2021 and 2022. In return, we are obligated to perform R&D activities in the BVF Program; make contingent payments upon the achievement of certain clinical and regulatory milestones of up to $ 73 million or $ 160 million depending on whether the BVP Program is solely developed by us or with Gilead if they opt-in under the Gilead Collaboration Agreement; and pay mid- to high-single digit royalties on any net product sales generated by the BVF Program. We account for the BVF agreement as a liability primarily because we have significant continuing involvement in generating the cash flows due to BVF. The liability is recorded at fair value by using probability-adjusted discounted cash flows and is revalued each reporting period until the related contingencies have been resolved. The fair value measurement is based on significant unobservable inputs that are reviewed quarterly by management and include, as applicable, estimated probabilities and the timing of achieving specified development, regulatory and commercial milestones as well as estimated annual sales. Significant changes that increase or decrease the probabilities of achieving the related development, regulatory and commercial events or that shorten or lengthen the time required to achieve such events or that increase or decrease estimated annual sales would result in corresponding increases or decreases in the fair values of the obligations, as applicable. Changes in the fair value of this liability related to interest accretion are recognized in Non-operating income (expense) in the Consolidated Statements of Operations. 95 Table of Contents During the second quarter of 2023, new preclinical information from our BVF Program led to revised assumptions which decreased the estimated probabilities of success and delayed the projected timing of achieving specified development, regulatory and commercial milestones and commercial sales. These changes in estimates are accounted for prospectively and resulted in a decrease in the imputed effective interest rate on the unamortized portion of the liability to 10.1 % commencing with the quarter ended June 30, 2023, compared to 20.6 % for the quarters ended March 31, 2023 and prior. The impact of this change on the non-cash interest expense for the year ended December 31, 2023 was not material when compared to the prior year periods. The liability for sale of future royalties is reported in Other noncurrent liabilities in the Consolidated Balance Sheets and changes were as follows (in millions): Year Ended December 31 2023 2022 Beginning balance $ 17 $ 5 Cash received — 10 Interest accretion 2 2 Ending balance $ 19 $ 17 Note 16. Commitments Standby Letters of Credit We have standby letters of credit up to an aggregate of $ 3 million provided as collateral for our leases. The letters of credit are secured by $ 3 million in deposits classified as restricted cash and included in Other noncurrent assets on the Consolidated Balance Sheet. At December 31, 2023 the standby letters of credit were not drawn down. Purchase Commitments We have contractual arrangements with CROs and suppliers. These contracts are generally cancellable on 30 days’ notice and the obligations under these contracts arise as the services are performed. Indemnification As permitted under Delaware law and in accordance with our bylaws, we are required to indemnify our officers and directors for certain events or occurrences while the officer or director is or was serving in such capacity. We are also party to indemnification agreements with our directors and officers. We believe the fair value of the indemnification rights and agreements is minimal and accordingly, we have not recorded any liabilities as of December 31, 2023 and 2022. 96 Table of Contents Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.