RCUS US Equity☆

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes included elsewhere in this Annual Report. This discussion and other parts of this report contain forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations, and intentions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this report titled “Risk Factors.”

Overview

We are a clinical-stage biopharmaceutical company focused on creating best-in-class cancer therapies. Using our robust and highly efficient drug discovery capability, we have now advanced six investigational products into clinical development, with our most advanced molecule, an anti-TIGIT antibody, now in two Phase 3 registrational studies. Our deep portfolio of novel small molecules and enabling antibodies allows us to create highly differentiated combination therapies, which we are developing to treat multiple large tumor types including lung, colorectal, prostate and pancreatic cancers. We expect our clinical-stage portfolio to continue to expand and to include molecules targeting both immuno-oncology and cancer cell-intrinsic pathways. Our vision is to create, develop and commercialize highly differentiated combination cancer therapies that have a meaningful impact on patients.

In May 2020, we entered into an Option, License and Collaboration Agreement (Gilead Collaboration Agreement) with Gilead Sciences, Inc. (Gilead), whereby Gilead obtained an exclusive license to zimberelimab and time-limited exclusive options to all of our then-current and future programs during the 10-year collaboration term. In December 2021, Gilead obtained rights to an additional four of our investigational products: domvanalimab, etrumadenant, quemliclustat and AB308, for which we subsequently received a total of $725 million in option exercise payments. For each program to which Gilead exercised or exercises its option, the parties will co-develop globally and co-commercialize the program in the U.S., subject to certain exceptions, and Gilead will have the right to commercialize the program outside of the United States, subject to the rights of our existing partners in certain territories. In 2017, we entered into an Option and License Agreement (Taiho Agreement) with Taiho Pharmaceutical Co., Ltd. (Taiho) pursuant to which Taiho has time-limited options to exclusively license the development and commercialization rights to each of our programs for Japan and certain other territories in Asia (excluding China). Taiho has exercised its option rights to our adenosine receptor antagonist program (including etrumadenant), our anti-PD-1 program (including zimberelimab), and, in December 2021, they exercised their option right to our anti-TIGIT program (including domvanalimab and AB308).

In connection with our entry into the Gilead Collaboration Agreement in 2020, we also entered into a Common Stock Purchase Agreement pursuant to which Gilead has the right, at its option from time to time over five years from closing of the initial transaction, to purchase up to a maximum ownership of 35% of our then-outstanding voting common stock, and an Investor Rights Agreement that provides for a three-year standstill, two-year lockup and the right to designate two individuals to be appointed to our Board of Directors. Gilead currently owns approximately 19.5% of our outstanding common stock.

We currently have six investigational products in clinical development:

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Domvanalimab (previously referred to as AB154), our Fc-silent anti-TIGIT monoclonal antibody, is being evaluated in combination with zimberelimab with or without etrumadenant vs. zimberelimab monotherapy in ARC-7, our randomized, 150-patient Phase 2 trial in first-line metastatic PD-L1≥50% non-small cell lung cancer (NSCLC). In 2021, we initiated ARC-10, our first registrational trial evaluating domvanalimab in combination with zimberelimab and zimberelimab monotherapy vs. chemotherapy in this same setting. Furthermore, in January 2022, AstraZeneca initiated PACIFIC-8, a registrational study, which is evaluating domvanalimab plus durvalumab after chemoradiation therapy in Stage 3 NSCLC. We and Gilead are planning to initiate additional Phase 3 studies for domvanalimab in 2022 based on our interim analyses for ARC-7, which demonstrated encouraging clinical activity for both domvanalimab combination arms.

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AB308, our Fc-enabled anti-TIGIT monoclonal antibody, is being evaluated in a Phase 1/1b study (ARC-12). In 2021, we completed the dose escalation portion of the study and are now enrolling five expansion cohorts which are designed to generate data to support the future development of AB308 and further development planning for both domvanalimab and AB308.

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Etrumadenant (previously referred to as AB928), our small molecule dual A2a/A2b adenosine receptor antagonist, is being evaluated in several randomized or Phase 2 trials across major tumor types, including in our ARC-6, ARC-7, and ARC-9 studies. We expect to initiate additional clinical studies of etrumadenant in 2022, including the triplet combination of domvanalimab plus etrumadenant plus zimberelimab, based on encouraging clinical data from the triplet arm in our ARC-7 study.

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Quemliclustat (previously referred to as AB680), our small-molecule CD73 inhibitor, is being evaluated in a Phase 1/1b study for the treatment of first-line metastatic pancreatic cancer (ARC-8) as well as late-line metastatic prostate cancer (ARC-6) and metastatic colorectal cancer (ARC-9). We expect to initiate additional clinical studies of quemliclustat in 2022.

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Zimberelimab (previously referred to as AB122), our anti-PD-1 monoclonal antibody, is the cornerstone of our combination strategy. We are currently evaluating zimberelimab, either alone or in combination with other agents across several tumor types, including non-small cell lung cancer in ARC-7, our Phase 2 trial, and ARC-10, our registrational trial which is designed to support the approval of zimberelimab.

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AB521, our HIF-2α inhibitor, is being evaluated in a healthy volunteer study (ARC-14) to expeditiously characterize the pharmacokinetic and safety profile of AB521 and to identify the starting dose for a Phase 1 study in oncology indications. We plan to evaluate AB521 in renal cell carcinoma as well as in other tumor types, and in combination with other molecules, including those targeting the CD73-adenosine axis.

COVID-19 Pandemic

The degree to which COVID-19 impacts our business operations, research and development programs and financial condition remains highly uncertain and will depend on future developments, including the ultimate duration and/or severity of the pandemic, the impact of any resurgences and new variants that emerge, actions by government authorities to contain the spread of the virus, the availability, adoption and effectiveness of vaccines and boosters, and when and to what extent normal economic and operating conditions can resume. Our management continues to actively monitor this health crisis and its effects on our operations, key vendors and workforce.

We conduct our clinical trials in the U.S. and internationally in geographic regions that are impacted by COVID-19 to varying degrees. While we have seen relatively robust enrollment in most of our ongoing Arcus-sponsored studies, disruptions caused by the COVID-19 pandemic will continue to impact our ability to initiate, supply, enroll, conduct or complete our ongoing or planned clinical trials. For example, in the first half of 2020, the pandemic led to a decline in screening, diagnosis and treatment for cancer patients. While cancer screening rates have rebounded, resurgences due to new variants may cause patients to delay screening and treatment for fear of exposure to COVID-19, thereby adversely impacting the enrollment of patients in clinical trials targeting early-stage cancers and retention of patients overall in our trials. At times, investigative sites have needed to divert resources away from our studies in order to respond to the ongoing health crisis, hindering their ability to conduct study assessments and report data. Patient safety remains our paramount concern and we continue to collaborate with our existing and with new investigational sites to implement measures to minimize disruptions to patients and ensure continued access to treatment, in accordance with health authority guidance. We are unable to predict the ultimate impact of this pandemic on our ongoing and planned clinical programs.

With respect to manufacturing and supply, our third-party contract manufacturers continue to operate at or near normal levels. However, global shipping has been severely challenged by the evolving pandemic, leading to delays in our receipt of materials and supplies, including standard-of-care drugs used in the conduct of our clinical trials. We actively manage the inventory for each of our investigational products and our overall supply chain needs in order to prevent or minimize the impact of any disruptions to our clinical programs.

Due to the availability of vaccines and our mandatory vaccine policy, our laboratory operations are operating at or near normal levels and we are permitting periodic in-person meetings for our office-based employees, who continue to work remotely. The safety, health and well-being of our employees remains a primary concern, and we may restrict our business activities or modify our employee work arrangements in response to new developments in the COVID-19 pandemic in order to reduce the risk of exposure among our employees.

The COVID-19 pandemic continues to evolve and future developments, which are unpredictable, may result in a material, negative impact to our operations and financial condition.

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Financial Overview

Since commencing operations in 2015, we have devoted substantially all of our efforts and financial resources to building our research and development capabilities, advancing our investigational product pipeline, and establishing our corporate infrastructure.

To date, we have derived all of our revenue from non-refundable payments we received under the Gilead Collaboration Agreement (as amended) and the Taiho Agreement. We have not generated any revenue from product sales and have not had a profitable fiscal year prior to 2021. Prior to 2021, we incurred annual net losses and we had an accumulated deficit of $275.4 million as of December 31, 2021. We reported net income of $52.8 million during the year ended December 31, 2021 primarily due to the recognition of $328.8 million in license revenues due to Gilead's 2021 exercise of its option to our anti-TIGIT program. We do not expect to generate revenue from product sales unless and until we obtain regulatory marketing approval and commercially launch a product candidate. We cannot assure you that we will ever generate significant revenue or profits.

Through December 31, 2021, we have financed our operations primarily through net proceeds of approximately $677.1 million from equity offerings and proceeds of approximately $656.4 million from our collaboration and stock purchase agreements, excluding the receipt of $725 million in option exercise payments from Gilead in January 2022. As of December 31, 2021, we had $681.3 million of cash, cash equivalents and investments. Upon the receipt of $725 million in option exercise payments from Gilead in January 2022, our cash, cash equivalents and investments totaled approximately $1.4 billion, which we believe will be sufficient to fund our planned operations into 2026. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect.

We expect to incur substantial expenditures in the foreseeable future as we expand our pipeline and advance our investigational products through clinical development, the regulatory approval process and, if approved, commercial launch activities. Specifically, in the near term we expect to incur substantial expenses relating to our ongoing and planned clinical trials, the development and validation of our manufacturing processes, and other preclinical, research and discovery development activities. These expenditures will be partially offset by cost-sharing reimbursements from Gilead for certain expenses incurred on optioned programs. For the years ended December 31, 2021 and 2020, we recognized reductions of research and development expense due to reimbursements of $24.9 million and $3.4 million, respectively, for shared expenses incurred on optioned programs. We expect these reimbursements to increase in the short term due to Gilead's opt-in on three additional programs in December 2021.

We have no internal manufacturing facilities, and thus all of our manufacturing activities are contracted to third parties. We currently utilize third-party clinical research organizations to manage and execute various aspects of our clinical development and trials.

We will need substantial additional funding to support our continuing operations and pursue our development strategy. Until such time that we can generate significant revenue from sales of our product candidates, if ever, we expect to finance our operations through the sale of equity, debt financings or other capital sources, including existing or potential collaborations with other companies or other strategic transactions. Adequate funding may not be available to us on acceptable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back, or discontinue the development and commercialization of our product candidates or delay our efforts to expand our product pipeline.

Gilead Collaboration

Summary

In May 2020, we entered into the Gilead Collaboration Agreement (as subsequently amended), Common Stock Purchase Agreement (as subsequently amended and restated) and Investor Rights Agreement. From the inception of the agreement through December 31, 2021, Gilead has funded $420.4 million under the stock purchase agreements and provided $175.0 million for our programs pursuant to the collaboration agreement. These amounts do not include the $725 million in option exercise payments we received in January 2022 nor amounts received from Gilead's participation in our May 2020 public offering. Gilead obtained rights to four Arcus Programs: our anti-PD-1 program (including zimberelimab), anti-TIGIT program (including domvanalimab and AB308), adenosine receptor antagonist program (including etrumadenant), and CD73 inhibitor program (including quemliclustat). Gilead also has options to our earlier stage programs.

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As of December 31, 2021, Gilead held approximately 19.5% of our outstanding common stock and the right to purchase up to a maximum of 35% of our then-outstanding common stock.

The following discussion should be read in conjunction with "Item 1. Business - License and Collaboration Agreements - Gilead Agreements" and the consolidated financial statements and related notes in Item 8 of this Annual Report.

Collaboration Agreement

Pursuant to the terms of the Gilead Collaboration Agreement, as amended (the Amended Gilead Collaboration Agreement), Gilead obtained exclusive licenses to zimberelimab, domvanalimab, AB308, etrumadenant, and quemliclustat, and time-limited exclusive options to all of our current and future clinical programs during the 10-year collaboration term and, for those programs that enter clinical development prior to the end of the collaboration term, for up to an additional three years thereafter. Gilead’s option rights to future programs are contingent upon Gilead's payments of up to $300 million in option continuation payments. Gilead may exercise its option, on a program-by-program basis, at any time prior to the expiration of the option and upon payment of 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.

Upon closing of Gilead’s exercise of its option to a program, the two companies will co-develop and equally share global development costs for the joint development program, subject to opt-out rights applicable to certain programs and expense caps on our spending and true-up adjustments. For each optioned program, provided we have not exercised our opt-out rights (if applicable), we have an option to co-promote in the United States with equal sharing of related profits and losses. Gilead has the right to exclusively commercialize any optioned programs outside of the U.S., subject to the rights of our existing partners to any territories, and Gilead will pay to us tiered royalties as a percentage of revenues.

In addition, the parties agreed to collaborate on two 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.

As of December 31, 2021, Gilead has exercised its option to all of the clinical programs in existence at the date of the 2020 agreement, and we may not exercise our opt-out rights for any of these programs. The amendment to the Gilead Collaboration Agreement closed in December 2021 and we received option payments totaling $725 million for the three option exercises in January 2022.

Stock Purchase Agreement and Investor Rights Agreement

Pursuant to the Stock Purchase Agreement, Gilead has the right, at its option, to purchase additional shares from us, up to a maximum ownership of 35% of our then-outstanding voting common stock, from time to time over five years from closing of the initial Gilead Agreements, at a purchase price per share equal to the greater of a 20% premium to market (based on a trailing five-day average closing price) at the time Gilead exercises such option, and the $33.54 initial purchase price. The Investor Rights Agreement also includes a three-year standstill and a two-year lockup and provides Gilead with registration rights commencing at the end of the lockup period, pro rata participation rights in certain future financings and the right to designate two individuals to be appointed to our Board of Directors.

In the year ended December 31, 2020, Gilead made an equity investment of approximately $200 million in us by purchasing 5,963,029 shares of our common stock at a per share price of $33.54 pursuant to the Stock Purchase Agreement. Gilead made an additional equity investment in us of approximately $56.7 million, net of offering costs, by purchasing 2,200,000 shares of our common stock at a per share price of $27.50 in our May 2020 public offering.

In January 2021, we and Gilead entered into an Amended and Restated Common Stock Purchase Agreement, which amended and restated in its entirety the Common Stock Purchase Agreement, pursuant to which Gilead purchased from us 5,650,000 shares of our common stock at a purchase price of $39.00 per share. All other terms of the original Common Stock Purchase Agreement, including Gilead’s option to purchase additional shares from us, up to a maximum ownership of 35% of our then-outstanding common stock, remain unchanged.

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As of December 31, 2021, Gilead held 19.5% of our outstanding common stock. Pursuant to the Investor Rights Agreement, we appointed two Gilead designees to our Board of Directors.

Taiho Agreement

In September 2017, we entered into the Taiho Agreement under which we granted Taiho exclusive options to Arcus programs arising over a five-year period ending September 2022 (the Option Period). If Taiho timely exercises its option, Taiho obtains exclusive development and commercialization rights to investigational products from such Arcus Program for Japan and certain other territories in Asia (excluding China) (the Taiho Territory).

In November 2021, Taiho exercised its option to our anti-TIGIT program, including domvanalimab and AB308, in exchange for a $15.0 million option exercise fee. We identified one performance obligation which was the delivery of the license, recognized as licensing revenue during the year ended December 31, 2021. Upon the option exercise, Taiho has sole responsibility for the development and commercialization of the licensed products from this program within the Taiho Territory.

As of December 31, 2021, Taiho had exercised its options to etrumadenant (exercised in 2018), zimberelimab (exercised in 2019), and our anti-TIGIT program (exercised in 2021) in exchange for option fees totaling $26.0 million.

Other Licenses, Collaborations, and R&D Arrangements

We in-licensed rights to zimberelimab and CD39 from WuXi Biologics, and in-licensed rights to products that include an anti-TIGIT antibody, including domvanalimab, from Abmuno Therapeutics LLC (Abmuno). We also have co-development, collaboration and research and development arrangements with AstraZeneca, BVF Partners L.P. (BVF), and Strata Oncology, Inc. (Strata).

Components of Operating Results

Collaboration and License Revenue

Our collaboration and license revenue consists of revenue recognized from the nonrefundable upfront payments received from Gilead and Taiho, for licenses or research and development services performed by us to develop our investigational products under the terms of our collaboration agreements, and from any option exercise payments.

Operating Expenses

Research and Development Expenses

Our research and development expenses consist of expenses incurred in connection with the research and development of our pipeline programs. These expenses include pre-clinical and clinical expenses, payroll and personnel expenses, including stock-based compensation for our employees, laboratory supplies, product licenses, consulting costs, contract research, and depreciation. Shared facility expenses are allocated to functional groups proportionally based on usage. Under certain collaboration agreements we agree to share research and development expenses with our partners. Such cost sharing arrangements may result in receiving reimbursement from our partners or require that we reimburse our partners for qualified expenses. We expense both internal and external research and development costs as they are incurred. We record advance payments for services that will be used or rendered for future research and development activities as prepaid expenses and recognize them as an expense as the related services are performed. We recognize reimbursement for shared costs incurred by us and reimbursed by our partners as a reduction in research and development expense.

We do not allocate our costs by investigational product, as a significant amount of research and development expenses include internal costs, such as payroll and other personnel expenses, and certain external costs that are not recorded at the investigational product level. In particular, with respect to internal costs, several of our departments support multiple research and development programs, and we do not allocate those costs by investigational product.

In December 2021, Gilead obtained rights to four of our investigational products: domvanalimab, etrumadenant, quemliclustat and AB308, for which we subsequently received a total of $725 million in option exercise payments. We expect our research and development expenses to increase substantially during the next few years as we pursue joint development programs with Gilead for our five optioned molecules and advance these programs towards

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regulatory approval. We also expect to advance new programs into the clinic. All of this will require significant growth in our development capabilities and infrastructure. In addition, our joint development program with Gilead for the optioned molecules are anticipated to include a significant number of later-stage clinical trials, which typically include a larger number of subjects, are of a longer duration and include more geographic regions. As we advance our clinical-stage programs and prepare to seek regulatory approval, we will also need to conduct certain validation activities with respect to our manufacturing processes for the investigational products in each program. As a result, we expect our preclinical, clinical, and contract manufacturing expenses to increase significantly relative to what we have incurred to date.

The level of our future research and development investment will depend on a number of factors and uncertainties, including the breadth of the joint development program agreed to with Gilead for the optioned programs, the outcome of our efforts, and the amount of cost reimbursements or milestone payments we receive from our collaborators. In addition, under our license agreements with WuXi Biologics and Abmuno, and our co-development, collaboration and research and development arrangements with AstraZeneca, BVF, and Strata we may be required to pay additional clinical and regulatory milestone payments based on the development progress of our investigational products. We may also be required to pay royalties to these parties in the event of a successful product launch and our receipt of commercial revenues. Therefore, we are unable to predict the timing or the final cost to complete our clinical programs or validation of our manufacturing and supply processes and delays may occur due to numerous factors. Factors that could cause or contribute to delays or additional costs include, but are not limited to, those discussed in “Item 1A. Risk Factors.”

General and Administrative Expenses

General and administrative expenses consist principally of personnel-related costs including payroll and stock-based compensation for personnel in executive, finance, human resources, information technology, business and corporate development, and other administrative functions. Shared facility expenses are allocated to functional groups proportionally based on usage. Our general and administrative expenses also include professional fees for legal, consulting, and accounting services, rent and other facilities costs, fixed asset depreciation, and other general operating expenses not otherwise classified as research and development expenses.

We anticipate that our general and administrative expenses will increase substantially during the next few years as we support our growing research and development activities, including due to staff expansion, additional occupancy costs, and other costs associated with increased infrastructure needs.

Other Non-Operating Income, net

Other non-operating income, net consists primarily of interest earned on our investments in fixed-income marketable securities, activity related to our equity method investment in PACT Pharma, Inc. (PACT Pharma). To date, gains have consisted of gains on dilution of our investment in PACT Pharma, typically occurring upon PACT Pharma’s new issuances of equity securities. Losses associated with the investment consist of our share of PACT Pharma’s net losses.

Critical Accounting Judgments and Estimates

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenue and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s significant judgments and estimates.

While our significant accounting policies are described in the notes to our consolidated financial statements, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results.

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Revenue Recognition

At the inception of an arrangement, we evaluate if a counterparty to a contract is a customer, if the arrangement is within the scope of revenue from contracts with customers guidance, and the term of the contract. We recognize revenue when our 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 must develop assumptions that require judgment to determine the standalone selling price of each performance obligation identified in the contract. We then allocate the total transaction price 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.

The estimation of the standalone selling price may include such estimates as forecasted revenues or costs, development timelines, discount rates, and probabilities of technical and regulatory success. We evaluate each performance obligation to determine if it can be satisfied at a point in time or over time, and we measure the services delivered to the customer, which we periodically review based on the progress of the related program. The effect of any change made to an estimated input component and, therefore revenue or expense recognized, would be recorded as a change in estimate. In addition, variable consideration (e.g. milestone payments) must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price.

Results of Operations

Comparison of the Years Ended December 31, 2021 and 2020

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

Year EndedDecember 31, $Change %Change

Revenues:

License and development services revenue 1,135 - 1,135 *

Operating expenses:

* Not meaningful

Collaboration and License Revenue

Collaboration and license revenue increased $305.4 million, from $77.5 million for the year ended December 31, 2020 to $382.9 million for the year ended December 31, 2021. The increase was primarily driven by Gilead's exercise of its option to three of our programs and consisted of increases of $288.7 million in license revenues, $15.5 million in collaboration revenues, and $1.1 million in license and development services revenues. See Note 8 to our consolidated financial statements in Item 8 for further discussion of the amount and timing of revenues recognized from our collaboration agreements.

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Research and Development Expenses

Research and development expenses increased $97.0 million, or 61%, from $159.3 million for the year ended December 31, 2020 to $256.3 million for the year ended December 31, 2021. The increase in research and development expenses was driven by costs incurred to support our expanded clinical and development activities. Our growing headcount and our 2021 stock awards drove a $46.7 million increase in employee compensation costs, including approximately $17.1 million of increased non-cash stock-based compensation. Costs for our ongoing clinical studies and related manufacturing increased $41.6 million and $11.3 million, respectively, as a result of the increased number of clinical-stage programs and trials compared to the prior year. We incurred increases of $9.5 million in office facilities and technology expense, $7.0 million in consulting services, and $5.2 million in lab supplies and equipment, as we expanded our development efforts. The overall increase in research and development expense was partially offset by a net $21.4 million increase in reimbursement from collaboration partners for shared expenses and a $3.5 million decrease in expense for scientific licenses. In the year ended December 31, 2021, we recognized reimbursement of approximately $24.9 million for certain applicable costs of developing zimberelimab in accordance with the Gilead Collaboration Agreement.

General and Administrative Expenses

General and administrative expenses increased $29.9 million, or 70%, from $42.4 million for the year ended December 31, 2020 to $72.3 million for the year ended December 31, 2021. The increase in general and administrative expenses was primarily driven by the increased complexity of supporting our expanding clinical pipeline and partnership obligations, as well as costs associated with being a public company. Our growing headcount and our 2021 stock awards drove a $23.5 million increase in employee compensation costs, including approximately $15.6 million in increased non-cash stock-based compensation. We also incurred an approximately $4.1 million increase in office facilities expense due to our expanding headcount and office space and an increase of $2.2 million in consulting expenses incurred in corporate development activities.

Non-Operating Income, Net

Non-operating income, net decreased $1.0 million or 71%, from $1.4 million for the year ended December 31, 2020 to $0.4 million for the year ended December 31, 2021. The decrease was primarily due to lower interest income resulting from lower investment yields on our portfolio of marketable fixed-income securities during the year ended December 31, 2020 as compared to the same period in the prior year.

Income Tax Expense

Income tax expense increased $1.8 million, from zero for the year ended December 31, 2020 to $1.8 million for the year ended December 31, 2021. The increase in income tax expense was due to taxes incurred on our net income for the year ended December 31, 2021, resulting from Gilead's exercise of its option to three of our programs in 2021.

Comparison of the Years Ended December 31, 2020 and 2019

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

Year EndedDecember 31, $Change %Change

Revenues:

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Collaboration and License Revenue

Collaboration and license revenue increased $62.5 million, from $15.0 million for the year ended December 31, 2019 to $77.5 million for the year ended December 31, 2020. The increase in collaboration and license revenue was primarily due to the recognition of $55.1 million in revenue from the zimberelimab license granted to Gilead and $15.4 million related to Gilead’s ongoing rights to access our intellectual property in accordance with the Gilead Collaboration Agreement, partially offset by the recognition in 2019 of $8.0 million in revenue from Taiho’s exercise of its option for our anti-PD-1 antibody program, including zimberelimab.

Research and Development Expenses

Research and development expenses increased $80.8 million, or 103%, from $78.5 million for the year ended December 31, 2018 to $159.3 million for the year ended December 31, 2019. The increase in research and development expenses was primarily due to an increase of $27.8 million in manufacturing costs required to supply our clinical studies, an increase of $24.2 million in clinical costs for our ongoing clinical studies, and an increase of $20.1 million in employee compensation costs primarily due to additional headcount, approximately $7.1 million of which consists of non-cash stock-based compensation. Expenses related to sublicense fees and milestone payments also increased $7.4 million, from $11.2 million for the year ended December 31, 2019 to $18.6 million for the year ended December 31, 2020, largely as a result of sublicense fees paid to WuXi. We incurred a $1.5 million additional increase on telecommunications and remote work infrastructure due to shelter-in-place orders amid the COVID pandemic, partially offset by a decrease of $1.3 million in lab supplies and equipment due to decreased lab activities for the same reason.

General and Administrative Expenses

General and administrative expenses increased $17.2 million, or 68%, from $25.2 million for the year ended December 31, 2019 to $42.4 million for the year ended December 31, 2020. The increase in general and administrative expenses was due primarily to $7.6 million in employee compensation costs primarily due to additional headcount, approximately $5.8 million of which consists of non-cash stock-based compensation. We also incurred increased expense of $3.8 million in consulting expenses incurred in corporate development activities and $3.8 million in legal and accounting expenses incurred to support our expanding operations and ongoing compliance with public company requirements. We further incurred a $1.5 million additional increase on telecommunications and remote work infrastructure due to shelter-in-place orders amid the COVID pandemic.

Non-Operating Income, Net

Non-operating income, net decreased $2.6 million or 66%, from $4.0 million for the year ended December 31, 2019 to $1.4 million for the year ended December 31, 2020. The decrease was primarily due to lower interest income resulting from lower investment yields on our portfolio of marketable fixed-income securities during the year ended December 31, 2020 as compared to the same period in the prior year.

Liquidity and Capital Resources

Sources of Liquidity

To date, we have financed our operations primarily through net proceeds of approximately $677.1 million from equity offerings and proceeds of approximately $656.4 million from our collaboration and stock purchase agreements, excluding the receipt of $725 million in option exercise payments from Gilead in January 2022.

We also receive cost-sharing reimbursements from Gilead for certain shared expenses incurred on optioned programs. For the years ended December 31, 2021 and 2020, we recognized reductions of research and development expense due to reimbursements of $24.9 million and $3.4 million, respectively, for shared expenses incurred on optioned programs. We expect these reimbursements to increase in the short term due to Gilead's opt-in on three additional programs in 2021.

As of December 31, 2021, we had $681.3 million of cash, cash equivalents and investments in marketable securities. Upon the receipt of $725 million in option exercise payments from Gilead in January 2022, our cash, cash equivalents and investments totaled approximately $1.4 billion, which we believe will be sufficient to fund our planned operations into 2026. Our cash and investments are held in a variety of interest-bearing instruments, including money market funds, U.S. government treasury obligations, and investments in corporate securities.

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Our cash flow and financing requirements are determined by analyses of operating and capital spending budgets. It is challenging to predict the nature, timing and estimated long-range costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our investigational products. This is made more challenging by events outside of our control, such as the recent COVID-19 pandemic. Accordingly, our operating plan may change, including as a result of factors currently unknown to us, and we may need to seek additional funds sooner than planned. Such financing may result in dilution to stockholders, imposition of debt covenants and repayment obligations, or other restrictions that may adversely affect our business. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans.

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

Summary Consolidated Statement of Cash Flows

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

Year Ended December 31,

Net cash provided by (used in):

Cash Provided by (Used in) Operating Activities

Net cash used in operating activities for the year ended December 31, 2021 was $256.2 million as compared to $111.2 million cash provided by operating activities for the prior year. The change in cash flow from operating activities is primarily due to the expenses incurred to support our expanded clinical development activities and general and administrative costs incurred to support our operations, partially offset by our net income of $52.8 million and the timing of payments from Gilead. The increase in expenses incurred for development activities is partially offset by year-over-year changes in non-cash items, including $32.7 million increased expense from stock-based compensation, and changes in our asset and liability balances due to the timing of payments to or from our vendors and collaborators.

Net cash provided by operating activities for the year ended December 31, 2020 was $111.2 million as compared to a use of $73.5 million for the prior year. The net $184.7 increase in cash provided is primarily due to $265.6 million in cash received at the close of the Gilead Collaboration Agreement in July 2020. The overall increase in net cash provided is partially offset by the $38.1 million increase in our net loss to $122.9 million and changes in non-cash items, including $12.8 million of increased expense from stock-based compensation, and changes in our asset and liability balances due to the timing of payments to or from our vendors and collaborators.

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Cash Provided by (Used in) Investing Activities

Cash used in investing activities was $3.9 million for the year ended December 31, 2021 compared to $434.4 million cash provided in the prior year. The change in cash flow was primarily due to net maturities of our investments in fixed-income marketable securities, partially offset by purchases of property and equipment.

Cash used in investing activities was $434.4 million for the year ended December 31, 2020 compared to $59.2 million cash provided in the prior year. The change in cash flow was primarily due to net purchases of our investments in fixed-income marketable securities, as we invested proceeds received from our May 2020 public offering, the Gilead Collaboration Agreement, and the Stock Purchase Agreement.

Cash Provided by Financing Activities

Cash provided by financing activities was $237.3 million for the year ended December 31, 2021 compared to $438.7 million in the prior year. In February 2021 we received $220.4 million from Gilead pursuant to the terms of the Amended and Restated Stock Purchase Agreement. In 2020, we received $326.2 million, net of direct offering costs, from our May 2020 public offering, as well as $107.5 million, net of direct offering costs, from the Gilead Stock Purchase Agreement.

Cash provided by financing activities was $438.7 million for the year ended December 31, 2020 compared to $1.1 million in the prior year. The increase in cash provided is primarily due to $326.2 million in net cash received from our May 2020 public offering, $107.5 million in net cash received under the Stock Purchase Agreement with Gilead, and funds received during the year for issuance of common stock pursuant to equity award plans.

Contractual Obligations and Commitments

The following table summarizes our current and noncurrent anticipated cash requirements under contractual obligations as of December 31, 2021 (in thousands):

Total Current Noncurrent

Liability for sale of future royalties (2) 5,260 - 5,260

(1) Consists of cash payments due to landlord for our leased office and laboratory space. As of December 31, 2021, we had obligations consisting of operating leases for our operating facilities for approximately 245,530 square feet. Under the terms of the agreements, we have lease obligations consisting of $158.5 million in undiscounted minimum lease payments through 2031.

(2) Consists of current balance of estimated contingent milestone and royalty payments under the BVF Agreement (see Note 7 to our consolidated financial statements in Item 8 for further discussion).

(3) We have not included contingent milestone or royalty payments or other contractual payment obligations in the table to the extent the timing and amount of such obligations are unknown or uncertain.

We enter into contracts in the normal course of business with third parties for clinical trial management and execution, non-clinical studies and testing, manufacturing, and other services and products for operating purposes. These contracts are generally cancelable on 30 days’ notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.

See "Liquidity" above for further discussion of our cash requirements.

Off-Balance Sheet Arrangements

Since our inception, we have not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

Recent Accounting Pronouncements

See “Recent Accounting Pronouncements” in Note 2 to our consolidated financial statements in Item 8 for a discussion of recently adopted accounting pronouncements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The market risk inherent in our financial instruments and in our financial position represents the potential loss arising from adverse changes in interest rates or exchange rates. As of December 31, 2021, we had cash, cash equivalents and investments of $681.3 million, consisting of interest-bearing money market accounts and

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investments in corporate notes and U.S. government securities, for which the fair market value would be affected by changes in the general level of United States interest rates. However, due to the short-term maturities and the low-risk profile of our investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of our cash, cash equivalents and investments.

In addition, we are also exposed to foreign currency exchange rate risk inherent in our contracts with research institutions, contract research organizations, and contract manufacturing organizations as certain services are performed by them outside the United States. We made payments in the aggregate amount of $6.9 million AUD and $5.3 million AUD to our Australian vendors during the years ended December 31, 2021 and 2020. We are subject to exposure due to fluctuations in foreign exchange rates in connection with these agreements and with our cash balance denominated in Australian dollars.

We do not believe that inflation, interest rate changes, or exchange rate fluctuations had a significant impact on our results of operations for any periods presented herein.

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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) 85

Audited Consolidated Financial Statements

Consolidated Balance Sheets 87

Consolidated Statements of Operations and Comprehensive Income (Loss) 88

Consolidated Statements of Stockholders’ Equity 89

Consolidated Statements of Cash Flows 90

Notes to Consolidated Financial Statements 91

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Report of Independent Registered Public Accounting Firm

To the Stockholders and 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, 2021 and 2020, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, 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, 2021, 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 23, 2022 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.

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Accounting for license and collaboration agreements with Gilead Sciences, Inc.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2016.

Redwood City, California

February 23, 2022

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ARCUS BIOSCIENCES, INC.

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

As of December 31,

ASSETS

Current assets:

Accrued interest receivable 2,227 649

Prepaid expenses and other current assets 15,620 5,471

LIABILITIES

Current liabilities:

Other current liabilities 52 3,566

Other long-term liabilities 5,260 543

Commitments (Note 13)

Stockholders’ equity:

Accumulated other comprehensive income (loss) (1,261 ) 44

The accompanying notes are an integral part of these Consolidated Financial Statements

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ARCUS BIOSCIENCES, INC.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(In thousands, except share and per share amounts)

Years Ended December 31,

Revenues:

License and development services revenue ($1,135 from a related party) 1,135 - -

Operating expenses:

Non-operating income (expense):

Effective interest on liability for sale of future royalties (260 ) - -

Gain on deemed sale from equity method investee - 613 -

Share of loss from equity method investee - (613 ) (1,202 )

Income tax expense (1,815 ) - -

Other comprehensive income (loss) (1,305 ) (20 ) 171

Net income (loss) per share, basic $ 0.76 $ (2.24 ) $ (1.93 )

Net income (loss) per share, diluted $ 0.71 $ (2.24 ) $ (1.93 )

The accompanying notes are an integral part of these Consolidated Financial Statements

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ARCUS BIOSCIENCES, INC.

Consolidated Statements of Stockholders’ Equity

(In thousands, except share amounts)

Shares Amount Capital Deficit Income (Loss) Equity

Cumulative effect adjustment upon adoption of ASC 606 - - - 2,212 - 2,212

Issuance of common stock upon exercise of stock options 34,780 - 188 - - 188

Stock-based compensation - - 8,981 - - 8,981

Other comprehensive income - - - - 171 171

Vesting of early exercised stock options 258,824 - 848 - - 848

Other comprehensive loss - - - - (20 ) (20 )

Vesting of early exercised stock options 153,877 - 686 - - 686

Other comprehensive loss - - - - (1,305 ) (1,305 )

The accompanying notes are an integral part of these Consolidated Financial Statements

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ARCUS BIOSCIENCES, INC.

Consolidated Statements of Cash Flows

(In thousands)

Years Ended December 31,

Cash flow from operating activities

Adjustments to reconcile net loss to net cash used in operating activities:

Share of loss from equity method investee, net - - 1,202

Amortization of premiums on investments 4,772 (46 ) (2,638 )

Effective interest on liability for sale of future royalties 260 - -

Changes in operating assets and liabilities:

Amounts owed by PACT Pharma - - 83

Prepaid expenses and other current assets (5,944 ) (838 ) (1,982 )

Other current liabilities - - 57

Operating lease liabilities (1,288 ) (993 ) -

Deferred rent - - (538 )

Other long-term liabilities (498 ) 498 -

Cash flow from investing activities

Sales of short-term and long-term investments 51,001 1,003 -

Net cash provided by (used in) investing activities (3,868 ) (434,367 ) 59,212

Cash flow from financing activities

Proceeds from sale of future royalties 5,000 - -

Repurchase of unvested shares of stock (6 ) (54 ) (94 )

Non-cash investing and financing activities:

Unpaid portion of financing costs included in accounts payable $ - $ 61 $ -

The accompanying notes are an integral part of these Consolidated Financial Statements

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ARCUS BIOSCIENCES, INC.

Notes to Consolidated Financial Statements

Note 1. Organization

Description of Business

Arcus Biosciences, Inc. (the Company) is a clinical-stage biopharmaceutical company focused on creating best-in-class cancer therapies. Using its robust and highly efficient drug discovery capability, the Company has now advanced six investigational products into clinical development, with its most advanced molecule, an anti-TIGIT antibody, now in two Phase 3 registrational studies. The Company’s deep portfolio of novel small molecules and enabling antibodies allows it to create highly differentiated combination therapies, which the Company is developing to treat multiple large tumor types including lung, colorectal, prostate and pancreatic cancers. The Company expects its clinical-stage portfolio to continue to expand and to include molecules targeting both immuno-oncology and cancer cell-intrinsic pathways. The Company’s vision is to create, develop and commercialize highly differentiated combination cancer therapies that have a meaningful impact on patients. The Company currently has six investigational products in clinical development: domvanalimab (previously referred to as AB154), etrumadenant (previously referred to as AB928), quemliclustat (previously referred to as AB680), and zimberelimab (previously referred to as AB122), AB308 and AB521.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements and accompanying notes have been prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP) and include all adjustments necessary for the fair presentation of the Company’s financial position for the periods presented. Prior year amounts on our consolidated balance sheets related to long-term contract liabilities under the Gilead contract have been reclassed to deferred revenues to conform to the current year presentation.

Principles of Consolidation

The accompanying consolidated financial statements are comprised of Arcus Biosciences, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the Company’s consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as related disclosure of contingent assets and liabilities. Estimates were used to determine the standalone selling price of performance obligations and the timing of revenue recognition, the value of stock-based awards and other issuances, accruals for research and development costs, useful lives of long-lived assets, uncertain tax positions, and valuation allowance for deferred tax assets. Actual results could differ materially from the Company’s estimates.

Risks and Uncertainties

The Company’s future results of operations involve a number of risks and uncertainties. Factors that could affect the Company’s future operating results and cause actual results to vary materially from expectations include, but are not limited to, uncertainty of clinical trial results and achievement of milestones, uncertainty of regulatory approval of the Company’s potential drug candidates, uncertainty of market acceptance of the Company’s product candidates, competition from substitute products and larger companies, securing and protecting proprietary technology, strategic relationships and dependence on key individuals and sole source suppliers.

The Company’s investigational products require approval from the U.S. Food and Drug Administration (FDA) and comparable foreign regulatory agencies prior to commercial sales in their respective jurisdictions. There can be no assurance that any investigational products will receive the necessary approvals. If the Company does not obtain

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regulatory approval and does not successfully commercialize any of its investigational products, it would have a materially adverse impact on the Company.

Segments

The Company operates and manages its business as one reportable and operating segment, which is the business of developing and commercializing cancer therapies. The Company’s chief executive officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for purposes of allocating and evaluating financial performance. All long-lived assets are maintained in the United States of America.

Cash Equivalents and Investments

Cash equivalents consist of marketable securities having an original maturity of three months or less at the time of purchase. Short-term investments have maturities of greater than three months and up to 12 months at the time of purchase. Long-term investments have maturities greater than 12 months at the time of purchase. Collectively, cash equivalents, short-term and long-term investments are considered available-for-sale and are recorded at fair value. Unrealized gains and losses are recorded in accumulated other comprehensive loss. Realized gains and losses are included in interest and other income, net in the consolidated statements of operations and comprehensive loss. The basis on which the cost of a security sold or amount reclassified out of accumulated other comprehensive income into earnings is determined using the specific identification method.

Reconciliation of Cash, Cash Equivalents, and Restricted Cash as Reported in Consolidated Statements of Cash Flows

Restricted cash at December 31, 2021 and 2020 represents cash balances held as security in connection with the Company’s facility lease agreements. The following table provides a reconciliation of cash, cash equivalents, and restricted cash within the consolidated balance sheets to the total shown in the consolidated statements of cash flows (in thousands):

Cash, cash equivalents and restricted cash $ 150,919 $ 173,618

Fair Value Measurements

Fair value accounting is applied for all financial assets and liabilities, including short-term and long-term investments, and non-financial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis (at least annually). The carrying amount of the Company’s financial instruments, including receivable from a related party, accounts payable, accrued expenses, other current liabilities and the liability for sale of future royalties approximate fair value due to their short-term maturities.

Concentration of Credit Risk

Cash equivalents, short-term and long-term investments are financial instruments that potentially subject the Company to concentrations of credit risk. The Company invests in money market funds, treasury bills and notes, government bonds, commercial paper and corporate notes. The Company limits its credit risk associated with cash equivalents, short-term and long-term investments by placing them with banks and institutions it believes are highly credit worthy and in highly rated investments.

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Property and Equipment

Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets, ranging from one to five years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease term. Upon retirement or sale, the cost and related accumulated depreciation are removed from the consolidated balance sheet and the resulting gain or loss is reflected in the consolidated statement of operations and comprehensive loss.

Impairment of Long-Lived Assets

The Company reviews long-lived assets, including 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. An impairment charge would be recorded when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Impairment, if any, is assessed using discounted cash flows or other appropriate measures of fair value. The Company did not recognize any impairment charges for the years ended December 31, 2021, 2020 and 2019.

Collaborative Arrangements and Contracts with Customers

The Company assesses whether its collaboration agreements are subject to Accounting Standards Codification (ASC) Topic 808, Collaborative Arrangements (ASC 808) based on whether they involve joint operating activities and whether both parties have active participation in the arrangement and are exposed to significant risks and rewards. To the extent that the arrangement falls within the scope of ASC 808, the Company applies the unit of account guidance under ASC Topic 606, Revenue from Contracts with Customers (ASC 606), to identify distinct performance obligations, and then determine whether a customer relationship exists for each distinct performance obligation. If the Company determines a performance obligation within the arrangement is with a customer, it applies the guidance in ASC 606. If a portion of a distinct bundle of goods or services within an arrangement is not with a customer, then the unit of account is not within the scope of ASC 606, and the recognition and measurement of that unit of account shall be based on analogy to authoritative accounting literature or, if there is no appropriate analogy, a reasonable, rational, and consistently applied accounting policy election.

The Company recognizes revenue when its customer obtains control of promised goods or services in a contract for an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. For contracts with customers, the Company performs 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) the Company satisfies each performance obligation. The Company only applies the five-step model to contracts when it is probable that Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. As part of the accounting for contracts with customers, the Company must develop assumptions that require judgment to determine the standalone selling price of each performance obligation identified in the contract. The Company then allocates the total transaction price to each performance obligation based on their estimated standalone selling prices. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

The accounting for these arrangements requires the Company to develop estimates and assumptions that require judgment to determine the underlying stand-alone selling price for each performance obligation which determines how the transaction price is allocated among the performance obligation. These estimates may include items such as forecasted revenues or costs, development timelines, discount rates, and probabilities of technical and regulatory success. The Company evaluates each performance obligation to determine if it can be satisfied at a point in time or over time, and measures the services delivered to the customer. The effect of any change made to an estimated input and, therefore, a change to revenue or expense recognized, would be recorded as a change in estimate. In addition, variable consideration such as milestone payments must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price.

The Company enters into collaborative arrangements that typically include one of more of the following: (i) license fees; (ii) milestone payments related to the achievement of developmental, regulatory, or commercial goals; (iii) royalties on net sales of licensed products; (iv) fees attributable to options to intellectual property; and (v) cost-sharing or research and development (R&D) funding arrangements. When a portion of non‐refundable upfront fees

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or other payments received are allocated to continuing performance obligations under the terms of a collaborative arrangement, they are recorded as deferred revenue and recognized as revenue when (or as) the underlying performance obligation is satisfied. Fees attributable to options are deferred until the option expires or is exercised. The Company classifies contract liabilities, including deferred revenue, as current when it expects to satisfy its performance obligations within one year, and noncurrent when the Company expects to satisfy those performance obligations in greater than one year.

Upfront Payments and License Fees

When an option is exercised, the performance obligations associated with the option are identified, which will determine the accounting for the transaction price attributable to the option. If a license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from non-refundable, upfront fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

Milestone Payments and Variable Consideration

At the inception of each arrangement that includes milestone payments or variable consideration, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated value is included in the transaction price. Milestone payments that are not within the control of the Company or the Company’s collaboration partner, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect license, collaboration or other revenues and earnings in the period of adjustment.

Royalties

For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and for which the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized any royalty revenue resulting from any of its collaborative arrangements.

Cost-Sharing Arrangements

Under certain collaborative arrangements, the Company is reimbursed for a portion of the research and development expenses, including costs of drug supplies. When these R&D expenses are incurred under a reimbursement or cost sharing model with a collaboration partner, the Company records the related reimbursements as a reduction of R&D expense in its consolidated statements of operations.

Research and Development Expenses

Research and development costs are expensed as incurred. Research and development expenses consist primarily of personnel costs for the Company’s research and development employees, costs incurred to third-party service providers for the conduct of research, preclinical and clinical studies, laboratory supplies and equipment maintenance costs, consulting and other related expenses. Also included are payments we make under license and collaborative arrangements, including up-front and milestone payments, license and option fees and expense reimbursements to collaboration partners, as well as non-personnel costs such as professional fees payable to third

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parties for preclinical and clinical studies and research services, laboratory supplies and equipment maintenance, product licenses, and other consulting costs. We recognize reimbursement for shared costs incurred by us and reimbursed by our partners as a reduction in research and development expense.

The Company estimates research, preclinical and clinical service organizations, based on services performed, pursuant to contracts with third-party research and development organizations that conduct and manage research, preclinical and clinical activities on its behalf. Most of the Company’s clinical studies are performed by third-party contract research organizations (CROs), and as a result clinical study costs are a significant component of research and development expenses. The Company estimates these expenses based on discussions with internal management personnel and external service providers as to the progress or stage of completion of services and the contracted fees to be paid for such services. If the actual timing of the performance of services or the level of effort varies from the original estimates, the Company will adjust the accrual accordingly. Payments associated with licensing agreements to acquire licenses to develop, use, manufacture and commercialize products that have not reached technological feasibility and do not have alternative future use are expensed as incurred. Payments made to third parties under these arrangements in advance of the performance of the related services by the third parties are recorded as prepaid expenses until the services are rendered.

Leases and Rent Expense

As of December 31, 2021, the Company's corporate headquarters, which includes executive offices and research and development and business operations, consist of approximately 136,293 square feet of leased office and laboratory space in an office park in Hayward, California. The Company also leases approximately 109,237 square feet of office space in Brisbane, California. The lease terms for both facilities expire in 2031, subject to options for the Company to extend the lease term. Prior to January 1, 2020, the Company recognized related rent expense on a straight-line basis over the term of the lease. Incentives granted under the Company’s facilities lease, including allowances for leasehold improvements and rent holidays, were recognized as reductions to rental expense on a straight-line basis over the term of the lease. Deferred rent consisted of the difference between cash payments and the rent expense recognized.

Subsequent to the adoption of the new leasing standard on January 1, 2020, the Company recognizes a lease asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation. The Company determines whether an arrangement is or contains a lease at contract inception. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the net present value of lease payments, the Company uses its incremental borrowing rate based on the information available at the lease commencement date. The incremental borrowing rate represents the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The Company considers a lease to have commenced when the lessor has made the underlying asset available for use, a determination made after considering whether the asset is complete and whether the Company has the right to enter the property, among other factors. The Company considers a lease term to be the noncancelable period that it has the right to use the underlying asset, including any periods where it is reasonably assured the Company will exercise the option to extend the contract. Periods covered by an option to extend are included in the lease term if the lessor controls the exercise of that option. Operating leases are included in operating lease right-of-use assets, other accrued liabilities, and operating lease liabilities, noncurrent in the Company's consolidated balance sheet at December 31, 2021 and 2020.

The Company elected to not apply the recognition requirements of the new leasing standard to short-term leases with terms of 12 months or less which do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise. For short-term leases, lease payments are recognized as operating expenses on a straight-line basis over the lease term.

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Stock-Based Compensation

The Company accounts for stock-based compensation arrangements in accordance with ASC 718, Stock Compensation. Stock-based awards granted include stock options and restricted stock units (RSUs). Accounting standards require the recognition of compensation expense, using a fair value-based method, for costs related to all stock-based payments. The Company’s determination of the fair value of stock options with time-based vesting on the date of grant utilizes the Black-Scholes option-pricing model, and is impacted by the Company’s common stock price as well as other variables including, but not limited to, expected term that options will remain outstanding, expected common stock price volatility over the term of the option awards, risk-free interest rates and expected dividends. Compensation expense associated with restricted stock units is based on the fair value of common stock on the date of the grant.

The fair value of a stock-based award is recognized over the period during which an optionee is required to provide services in exchange for the option award, known as the requisite service period (usually the vesting period) on a straight-line basis. Stock-based compensation expense is recognized based on the fair value determined on the date of grant and is reduced for forfeitures as they occur. Non-employee stock-based compensation expense was not material for all periods presented.

Estimating the fair value of equity-settled awards as of the grant date using valuation models, such as the Black-Scholes option pricing model, is affected by assumptions regarding a number of complex variables. Changes in the assumptions can materially affect the fair value and ultimately how much stock-based compensation expense is recognized. These inputs are subjective and generally require significant analysis and judgment to develop.

Income Taxes

The Company provides 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, and are 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 management determines it is more likely than not that some or all of the tax benefits will not be realized.

The Company accounts for uncertain tax positions in accordance with ASC 740-10, Accounting for Uncertainty in Income Taxes. The Company assesses 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. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and the Company will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available.

The Company includes any penalties and interest expense related to income taxes as a component of other expense and interest income, net, as necessary.

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On March 18, 2020, the Families First Coronavirus Response act (FFCR Act), and on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) were each enacted in response to the COVID-19 pandemic. The FFCR Act and the CARES Act contain numerous tax-related provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. On June 29, 2020 California State Assembly Bill 85 (the Trailer Bill) was enacted which suspended the use of California net operating loss (NOL) deductions and limited the use of certain tax credits, including research and development tax credits, for the 2020 and 2021 tax years.

The FFCR Act, CARES Act and Trailer Bill did not have a material impact on the Company’s consolidated financial statements as of December 31, 2021; however, the Company continues to examine the impacts the FFCR Act, CARES Act and Trailer Bill may have on its business, results of operations, financial condition and liquidity.

Comprehensive Income (Loss)

Comprehensive income (loss) includes net income (loss) and net unrealized income and losses on available-for-sale securities, which are presented in a single continuous statement. Other comprehensive income (loss) is also disclosed in the consolidated balance sheets and statements of stockholders’ equity in accumulated other comprehensive income (loss), and is stated net of related tax effects, if any.

Net Income (Loss) per Share

Basic net income (loss) per share is calculated by dividing the net income (loss) by the weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net income (loss) per share is computed by dividing the net income (loss) by the weighted-average number of common shares and potentially dilutive securities outstanding for the period. The Company excludes the weighted-average shares subject to repurchase from its calculation of weighted average of common shares outstanding. For purposes of the diluted net income (loss) per share calculation, outstanding common stock options are considered to be potentially dilutive securities. Because the Company reported a net loss for the years ended December 31, 2020 and 2019, and the inclusion of the potentially dilutive securities would be antidilutive, diluted net loss per share is the same as basic net loss per share for those periods.

Recently Adopted Accounting Standards

In February 2016, the FASB issued ASU No. 2016-02 (Topic 842), Leases (ASU 2016-02).ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases. The ASU will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which offers a practical expedient for transitioning at the adoption date.

The Company adopted this standard on January 1, 2020 using the modified retrospective approach and elected the package of practical expedients permitted under transition guidance, which allowed the Company to carry forward its historical assessments of: 1) whether contracts are or contain leases, 2) lease classification and 3) initial direct costs. The Company did not elect the practical expedient allowing the use-of-hindsight which would require the Company to reassess the lease term of its leases based on all facts and circumstances through the effective date and did not elect the practical expedient pertaining to land easements as this is not applicable to the current contract portfolio. The Company elected the post-transition practical expedient to not separate lease components from nonlease components for all existing lease classes. The Company also elected a policy of not recording leases on its consolidated balance sheets when the leases have a term of 12 months or less and the Company is not reasonably certain to elect an option to purchase the leased asset.

The adoption of this standard resulted in the recognition of a right-of-use (ROU) asset of $5.8 million and lease liabilities of $10.1 million, comprised of $1.2 million and $8.9 million of current and noncurrent liabilities, respectively. The adoption also resulted in the derecognition of the deferred rent balance of $4.3 million as of January 1, 2020. The adoption of the standard had no impact on the Company’s consolidated statements of operations and comprehensive loss or to its cash flows from or used in operating, financing, or investing activities

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on its consolidated statements of cash flows. No cumulative-effect adjustment within accumulated deficit was required to be recorded as a result of adopting this standard.

Note 3. Fair Value Measurements

Financial assets and liabilities are recorded at fair value. The accounting guidance for fair value provides a framework for measuring fair value, clarifies the definition of fair value and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2—Inputs (other than quoted market prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level 3—Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.

During the periods presented, the Company has not changed the manner in which it values assets and liabilities that are measured at fair value. The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers within the hierarchy during the years ended December 31, 2021 and 2020. The following tables set forth the Company’s financial instruments (excluding restricted cash) that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):

Total Level 1 Level 2 Level 3

Corporate securities and commercial paper 421,214 - 421,214 -

Total Level 1 Level 2 Level 3

Corporate securities and commercial paper 262,505 - 262,505 -

As of December 31, 2021, the fair value of the liability for sale of future royalties is based on the Company's current estimates of future contingent milestones and royalties expected to be paid to BVF over the term of the BVF Agreement. These estimates are considered Level 3 fair value inputs. See Note 7 for further discussion of the liability and related estimates.

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The Company's investments are classified as (with contractual maturities):

Year Ended December 31,

Long-term investments (due between one and three years) 181,990 6,440

All the Company's investments in marketable securities are classified as available-for-sale. At December 31, 2021 and 2020, the balance in the Company’s accumulated other comprehensive income (loss) related to the Company’s available-for-sale marketable securities. There were no realized gains recognized on the sale of available-for-sale marketable securities during the years ended December 31, 2021, 2020 and 2019 and as a result, the Company did not reclassify any amounts out of accumulated other comprehensive income (loss) for the periods then ended. The Company has not recognized any allowances for credit losses given the nature of its receivables and investment portfolio and the immaterial amount of unrealized losses on available for sale securities. No credit related losses have been recognized for any of the periods presented. The fair value and amortized cost of investments in marketable securities by major security type as of December 31, 2021 and 2020 are presented in the tables that follow (in thousands):

AmortizedCost UnrealizedGain UnrealizedLoss FairValue

AmortizedCost UnrealizedGain UnrealizedLoss FairValue

Note 4. Consolidated Balance Sheet Components

Property and Equipment

Property and equipment, net consisted of the following (in thousands):

As of December 31,

Less: Accumulated depreciation and amortization (17,728 ) (14,288 )

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Other Accrued Liabilities

Other accrued liabilities consisted of the following (in thousands):

As of December 31,

Income taxes payable 1,815 -

Total other accrued liabilities $ 24,181 $ 9,543

Note 5: Equity Investment in PACT Pharma

The Company owns approximately 3.6 million shares of common stock, 1.0 million shares of Series A preferred stock, and warrants to purchase additional stock of PACT Pharma, Inc. (PACT Pharma), a privately-held clinical-stage biopharmaceutical company. This interest in PACT Pharma is accounted for as an equity method investment, and as a result the Company records its share of PACT Pharma’s operating results in interest and other income, net, in its consolidated statements of operations and comprehensive income (loss). The investment balance was zero at December 31, 2021 and 2020 and the Company is not required to record losses beyond the carrying amount of the investment as it has no obligation to provide further cash financing to PACT Pharma. The investment and related warrants had an immaterial impact on the consolidated financial statements, for each of the years ended December 31, 2021, 2020 and 2019.

Note 6. Leases

The Company leases its corporate headquarters, which includes approximately 136,293 square feet of executive offices and research and development and business operations, in an office park in Hayward, California under a non-cancelable operating lease with terms that expire in 2031. The Company also leases space in Brisbane, California under a non-cancelable operating lease that expires in 2031. Both leases are subject to options by the Company to extend the lease terms.

In April 2021, the Company amended the non-cancelable operating lease for its corporate headquarters, which includes approximately 136,293 square feet of executive offices and research and development and business operations, in an office park in Hayward, California. The amended lease added 14,460 square feet of additional space in a new lease expected to commence in 2022, and extended the term of the existing leases through at least December 31, 2031. Once the lease of additional space commences, the Company’s leased space in Hayward will total 150,753 square feet. Any extension periods defined under previous amendments were cancelled under the lease amendment and replaced by two options to extend the lease term for the entire 150,753 square feet then under lease in the Hayward premises for a period of eight years each.

The Company's lease of its space in an office park in Brisbane, California commenced in November 2021. Under this lease, the Company received 109,237 square feet of space in an office building in Brisbane, California. The lease granted the Company certain incentives such as a three-month rent abatement period, a tenant improvement allowance dedicated for the building's initial construction, and an additional tenant improvement allowance to be used at the Company's option. The Company utilized a portion of the additional tenant improvement allowance during the building's construction, which will be repaid with interest through adjustments to base rent during the lease term. The term of the lease will extend through December 31, 2031. The Company has two options to extend the lease term for the space for a period of eight years each.

At December 31, 2021 the Company’s lease portfolio had a weighted average remaining term of 10.0 years. The leases require monthly lease payments that are subject to annual increases throughout the lease term. The optional period has not been considered in the determination of the right-of-use assets or lease liabilities associated with this lease as the Company did not consider it reasonably certain it would exercise the option.

The weighted average discount rate for the Company’s lease portfolio at December 31, 2021 was 5.1%.

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Lease expense is included in operating expenses in the consolidated statements of operations and comprehensive income (loss). For the years ended December 31, 2021 and 2020, the Company incurred lease expense of $7.1 million and $2.7 million, respectively. Lease costs include variable rent expense, which consists primarily of the Company's proportionate share of operating expenses, property taxes, and insurance and is classified as lease expense due to the Company’s election to not separate lease and non-lease components.Short-term lease costs were $0.3 million and $0.2 million for the years ended December 31, 2021 and 2020, respectively.

At December 31, 2021, the Company’s operating lease right-of-use asset totaled $105.0 million, and the operating lease liability totaled $113.6 million. The difference between the amount of the right-of-use asset and the lease liabilities relates to the incentives the Company received upon signing the original leases and its most recent amendment, of which approximately $8.4 million is expected to be received within one year and is recorded in prepaid expenses and other current assets, net of the $5.1 million short-term portion of the operating lease liability. The long term portion of the lease liability was $116.9 million at December 31, 2021 and is reported on the consolidated balance sheet as operating lease liability, noncurrent.

Rent expense was $1.6 million for the year ended December 31, 2019.

The following table summarizes supplemental cash flow disclosures and non-cash financing activities related to our operating leases (in thousands):

Year Ended December 31,

Cash received from tenant improvement allowances $ 2,967 $ -

As of December 31, 2021, the Company’s future minimum lease payments were as follows (in thousands):

Year Ending December 31, Operating Leases

Total undiscounted future minimum lease payments 158,498

Less: Imputed interest (36,562 )

Less: Tenant improvement allowance receivable (8,381 )

Total operating lease liabilities 113,555

Operating lease liabilities, noncurrent $ 116,887

Total undiscounted future minimum lease payments do not include approximately $5.3 million related to the Company’s lease of additional space lease in Hayward that has not yet commenced. This lease is expected to commence during 2022 with a lease term through at least December 31, 2031.

The Company has provided deposits for letters of credit totaling $3.0 million to secure its obligations under its lease, which have been classified as long-term assets on the Company’s consolidated balance sheet as of December 31, 2021.

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Note 7. Liability for Sale of Future Royalties

In October 2021, the Company and BVF Partners L.P. (BVF) entered into an agreement (the BVF Agreement), under which BVF will fund the discovery and development of compounds for the treatment of inflammatory diseases (the Program) by providing the Company with $15 million in three non-refundable payments. Consistent with the terms of the Gilead Collaboration Agreement, Gilead has an option to the Program. The Company received $5 million from BVF in the fourth quarter of 2021 and an additional $5 million in the first quarter of 2022. The Company expects to receive the third $5 million payment in 2022. In return, the Company is obligated to perform research and development activities in the Program, to make contingent payments upon the achievement of certain clinical and regulatory milestones of up to $72.5 million or $160.0 million depending on whether the program is solely developed by Arcus or as part of the collaboration with Gilead. The Company also must pay mid- to high-single digit royalties based on net sales of products generated by the Program. The agreement also provides BVF with the option to provide an additional $10 million in funding for the Program in exchange for an increase in the royalty rate.

The Company accounts for the BVF Agreement as a liability primarily because it has significant continuing involvement in generating the cash flows due to BVF. If the Program achieves certain development and regulatory milestones and commercial sales, the Company will recognize the portion of milestone payments and royalties paid to BVF as a decrease to the accumulated liability with a corresponding reduction in cash.

The carrying amount of the liability for sale of future royalties is based on management's estimate of the future contingent milestones and royalties to be paid to BVF over the life of the arrangement as discounted using an imputed rate of interest. The excess of future estimated contingent milestone and royalty payments over the $15 million of allocated proceeds is recognized as non-cash interest expense using the effective interest method. The balance associated with the liability was $5.3 million at December 31, 2021 and is reported on the consolidated balance sheets in other long-term liabilities. The imputed effective rate of interest on the unamortized portion of the liability was approximately 20.6% as of December 31, 2021.

The Company periodically reassess the amount and timing of expected payments. To the extent such payments are greater or less than the Company's initial estimates or the timing of such payments is materially different than those estimates, the Company will adjust the liability and the effective interest rate using a retrospective method, catch-up method, or prospective method, subject to an accounting policy election applied on a consistent basis. As of December 31, 2021, there have been no changes to the estimated effective interest rate.

There are a number of factors that could materially affect the amount and timing of contingent milestone and royalty payments, most of which are not within the Company's control. The liability is recognized using significant unobservable inputs. These inputs are derived using internal management estimates, based in part on external data when available, and reflect management’s judgements and forecasts. The significant unobservable inputs include the forecasted revenues, the probability and timing of clinical and regulatory milestones, the expected term of the royalty stream, and the royalty rate as well as the overall probability of success. These estimates are considered Level 3 fair value inputs. A significant change in unobservable inputs could result in a material increase or decrease to the effective interest rate of the liability.

Changes to the liability for sale of future royalties were as follows for the year ended December 31 (in thousands):

Beginning balance, January 1 $ -

Cash received from BVF 5,000

Interest accretion 260

Ending balance, December 31 $ 5,260

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Note 8. License and Collaboration Agreements

The following table summarizes the revenues recognized from the Company’s collaboration agreements with Gilead Sciences, Inc. (Gilead) and Taiho Pharmaceutical Co., Ltd. (Taiho) (in thousands):

Year Ended December 31,

License and development services revenue 1,135 - -

The following table summarizes revenues by collaboration, category of revenue, and the method of recognition (in thousands):

Year Ended December 31,

Gilead license to domvanalimab * $ 328,838 $ - $ -

Gilead license to zimberelimab * - 55,096 -

Development services for all Gilead programs * 1,135 - -

Taiho license to domvanalimab * 15,000 - -

Taiho license to zimberelimab * - - 8,000

The Company recognized the following revenue as a result of changes in the deferred revenue balance during the period below (in thousands):

Year Ended December 31,

Performance obligations satisfied in a previous period - - -

Gilead Sciences, Inc.

Summary

In May 2020, the Company entered into an Option, License and Collaboration Agreement (Gilead Collaboration Agreement), Common Stock Purchase Agreement (the Stock Purchase Agreement), and Investor Rights Agreement, (collectively, the Gilead Agreements), each with Gilead Sciences, Inc. (Gilead). Upon closing in July 2020, Gilead made an upfront payment of $175 million pursuant to the Gilead Collaboration Agreement and made an equity investment of approximately $200 million in the Company by purchasing 5,963,029 shares of Arcus common stock at a per share price of $33.54 pursuant to the Stock Purchase Agreement.

In November 2021, the Company and Gilead entered into an amendment to the Gilead Collaboration Agreement (the Amended Gilead Collaboration Agreement), under which Gilead exercised its options to three programs for a total option payment of $725 million that was received in January 2022. In connection with Gilead’s exercise of its options to the three programs, the parties agreed to (i) slightly reduce the royalties for these programs, such that Gilead will pay the Company tiered royalties as a percentage of revenues ranging from the mid-teens to the low twenties and (ii) remove the $100 million option continuation payment that was otherwise due on the second anniversary of the Gilead Collaboration Agreement.

As of December 31, 2021, Gilead had obtained licenses to the following investigational products: zimberelimab (in 2020), domvanalimab, AB308, etrumadenant, and quemliclustat (the latter four in 2021).

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Pursuant to the terms of the Gilead Collaboration Agreement, as amended, Gilead obtained exclusive licenses to zimberelimab, domvanalimab, AB308, etrumadenant, and quemliclustat, and time-limited exclusive options to all of the Company’s current and future clinical programs during the 10-year collaboration term and, for those programs that enter clinical development prior to the end of the collaboration term, for up to an additional three years thereafter. Gilead's option rights to future programs are contingent upon Gilead’s payments of up to $300 million in option continuation payments, consisting of a $100 million payment due at Gilead's option on each of the fourth, sixth, and eighth anniversaries of the 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 the Company's 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 the Company an option fee of $150 million per program. Gilead has exercised its option to all of the clinical programs in existence at the date of the 2020 agreement, and the Company may not exercise its opt-out rights for any of these programs. With respect to domvanalimab, the Company is also eligible to receive up to $500 million in potential U.S. regulatory approval milestones.

Gilead was also granted option rights to two research programs for which the Company 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 the Company's 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 and the amounts of the option payments.

The Company’s assessment of the transaction price upon the signing of the Amended Gilead Collaboration Agreement included an analysis of amounts it expected to receive, which at contract inception consisted of the upfront cash payment of $725 million committed upon contract closing following expiration of the antitrust waiting period in December 2021, as well as amounts totaling $165.1 million deferred from the original Gilead transaction, which excludes the $100 million option continuation payment that would otherwise have been due on the second anniversary of the Gilead Collaboration Agreement. The Company considers the entire $890.1 million to be the allocable transaction price as of the amendment closing date, due to the Company's history of timely payments from Gilead and receipt of the full $725 million in January 2022 per the terms of the amendment.

The Company determined that the Amended Gilead Collaboration Agreement represented a contract modification under the application of ASC 606. At the amendment closing date, the Company allocated the transaction price to the new and remaining performance obligations identified as follows:

Amount

Allocation of transaction price

Option payment for Domvanalimab 275,000

Option payment for Etrumadenant 250,000

Option payment for Quemliclustat 200,000

Total transaction price allocated to performance obligations $ 890,086

Allocation to performance obligations Distinct Combined Amount

Domvanalimab license * $ 328,838

Etrumadenant license and R&D activities * 218,722

Quemliclustat license and R&D activities * 175,618

Domvanalimab R&D activities * 34,528

Zimberelimab R&D and commercial services * 11,243

Access rights related to the Company's researchand development pipeline * 84,076

Material rights to option continuation periods * 37,061

Upon closing of Gilead’s exercise of its option to a program, the two companies will co-develop and equally share global development costs for the joint development program, subject to opt-out rights of the Company applicable to certain programs, and expense caps on the Company’s spending and related subsequent adjustments. For each

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optioned program, provided the Company has not exercised its opt-out rights (if applicable), the Company has an option to co-promote in the United States with equal sharing of related profits and losses. Gilead has the right to exclusively commercialize any optioned programs outside of the U.S., subject to the rights of the Company’s existing partners to any territories, and Gilead will pay to the Company tiered royalties as a percentage of revenues ranging from (i) the mid-teens to the low twenties for the three 2021 optioned programs, (ii) high single digits to low double digits for research programs if Gilead exercises its option rights at the IND stage, and (iii) the high teens to the low twenties for all other programs.

Stock Purchase Agreement and Investor Rights Agreement

Pursuant to the Stock Purchase Agreement, Gilead has the right, at its option, to purchase additional shares from the Company, up to a maximum of 35% of the Company’s then-outstanding voting common stock, from time to time over five years from closing of the initial transaction, at a purchase price equal to the greater of a 20% premium to market (based on a trailing five-day average closing price) at the time Gilead exercises such option, and the $33.54 initial purchase price. The Investor Rights Agreement also includes a three-year standstill and a two-year lockup and provides Gilead with registration rights commencing at the end of the lockup period, pro rata participation rights in certain future financings and the right to designate two individuals to be appointed to the Company’s Board of Directors.

In the year ended December 31, 2020, Gilead made an equity investment of approximately $200 million in the Company by purchasing 5,963,029 shares of the Company's common stock at a per share price of $33.54 pursuant to the Stock Purchase Agreement. Of the $200 million equity investment, approximately $90.6 million was determined to be a premium on the purchase of common stock and allocated to the performance obligations created by the Gilead Collaboration Agreement. Gilead made an additional equity investment in the Company of approximately $56.7 million, net of offering costs, by purchasing 2,200,000 shares of its common stock at a per share price of $27.50 in the May 2020 public offering. In January 2021, the Company and Gilead entered into an Amended and Restated Common Stock Purchase Agreement, which amended and restated in its entirety the Common Stock Purchase Agreement, pursuant to which Gilead purchased from the Company 5,650,000 shares of its common stock at a purchase price of $39.00 per share, for a total of $220.3 million, net of offering costs. All other terms of the original Common Stock Purchase Agreement, including Gilead's option to purchase additional shares from the Company, up to a maximum ownership of 35% of its then-outstanding common stock, remain unchanged.

Pursuant to the Investor Rights Agreement, the Company appointed Gilead's two designees to the Company’s Board of Directors. Based on the value of the Company’s common stock at the contract closing, the right to purchase additional shares had no value. See Note 14 for further discussion of the agreements with Gilead.

The Company evaluated the agreements with Gilead under ASC 808 and ASC 606 and determined that the licenses to zimberelimab and domvanalimab, and access rights related to the Company's research and development pipeline, were within the scope of ASC 606 because Gilead meets the definition of a customer with respect to those performance obligations.

The Company accounted for each performance obligation as follows:

Zimberelimab license

Effective on the July 2020 closing of the Gilead Collaboration Agreement, Gilead obtained an exclusive license to zimberelimab. The standalone selling price of this license was determined using a discounted cash flow method. The Company recognized the full amount associated with this distinct performance obligation in license revenue on the date the transaction closed.

Domvanalimab option and license

Gilead obtained the right in the Gilead Collaboration Agreement to exercise an option for exclusive rights to the Company’s anti-TIGIT monoclonal antibody program, including domvanalimab and AB308, in exchange for an option payment of $275 million. Prior to the closing of the Amended Gilead Collaboration Agreement, the Company had $36.7 million of deferred revenue on its consolidated balance sheets related to this performance obligation.

Effective on the December 2021 closing of the Amended Gilead Collaboration Agreement, Gilead obtained an exclusive license to domvanalimab. The standalone selling price of this license was determined using a discounted cash flow method. The Company further evaluated the delivery of the license, noting that the program was in later

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stages of development and it met the criteria for being distinct from the research and development services required under the Gilead Collaboration Agreement (as amended). As the license had been made available in the fourth quarter of 2021, the Company recognized the full $328.8 million of transaction price allocated to this performance obligation as license revenue in December 2021.

Etrumadenant option, license and R&D activities

Gilead obtained the right in the Gilead Collaboration Agreement to exercise an option for exclusive rights to the Company’s adenosine receptor program, etrumadenant, in exchange for an option payment of $250 million. Prior to the closing of the Amended Gilead Collaboration Agreement, the Company had $127.0 million of deferred revenue on its consolidated balance sheets related to this performance obligation.

Effective on the December 2021 closing of the Amended Gilead Collaboration Agreement, Gilead obtained an exclusive license to etrumadenant. The standalone selling price of this license was determined using a discounted cash flow method. The Company further evaluated the delivery of the license, noting that it was combined with the research and development services required under the agreements due to the early stage of the technology and the specialized nature of the Company's know-how. The Company determined that it retains obligations to perform further development services for Gilead related to etrumadenant. The standalone selling price of this obligation was determined using an expected cost-plus margin approach. The Company will 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 full-time employee expense for the program.

Due to the combined nature of the performance obligation, the Company determined that the revenue from the license would be recognized at the same rate and using the same input-driven methodology as the revenue from the research and development services. As performance of the R&D activities had not commenced, the Company recognized no license and development services revenue associated with this combined obligation in December 2021. At December 31, 2021, the Company had $218.7 million of deferred revenue remaining on its consolidated balance sheets related to this performance obligation, allocated between current and noncurrent based on the expected timing of future recognition.

Quemliclustat option, license and R&D activities

Gilead obtained the right in the Gilead Collaboration Agreement to exercise an option for exclusive rights to the Company's CD73 program, quemliclustat, in exchange for an option payment of $200 million. Prior to the closing of the Amended Gilead Collaboration Agreement, the Company had no deferred revenue on its consolidated balance sheets related to this performance obligation. The Company determined that it retains obligations to perform further development services for Gilead related to quemliclustat. The standalone selling price of this obligation was determined using an expected cost-plus margin approach. The Company will 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 full-time employee expense for the program.

Effective on the December 2021 closing of the Amended Gilead Collaboration Agreement, Gilead obtained an exclusive license to quemliclustat. The standalone selling price of this license was determined using a discounted cash flow method. The Company further evaluated the delivery of the license, noting that it was combined with the research and development services required under the agreements due to the expertise and the know-how developed by the Company.

Due to the combined nature of the performance obligation, the Company determined that the revenue from the license would be recognized at the same rate and using the same input-driven methodology as the revenue from the research and development services. As performance of the R&D activities had not commenced, the Company recognized no license and development services revenue associated with this obligation in December 2021. At December 31, 2021, the Company had $175.6 million of deferred revenue remaining on its consolidated balance sheets related to this performance obligation, allocated between current and noncurrent based on the expected timing of future recognition.

R&D activities for domvanalimab

The Company determined that it retains separate obligations to perform further development services for Gilead related to domvanalimab. The standalone selling price of this obligation was determined using an expected cost-plus margin approach. The Company will recognize the amounts allocated to these services as the performance

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obligation is satisfied, calculated as an estimated percentage of completion based on management's estimated full-time employee expense for the program. As performance of the R&D activities had not commenced, the Company recognized no license and development services revenue associated with these obligations in December 2021. At December 31, 2021, the Company had $34.5 million of deferred revenue remaining on its consolidated balance sheets related to this performance obligation, allocated between current and noncurrent based on the expected timing of future recognition.

R&D and commercialization activities for zimberelimab monotherapy

The Company determined that it retains an obligation to perform further development and commercialization services for Gilead related to zimberelimab monotherapy. Prior to the closing of the Amended Gilead Collaboration Agreement, the Company had $9.7 million deferred revenue on its consolidated balance sheets, related to the two performance obligations. The standalone selling price of this obligation was determined using an expected cost-plus margin approach. The Company will 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 full-time employee expense for the program.

The Company determined that its performance of the R&D activities had commenced as of December 31, 2021 and accordingly the Company recognized $1.1 million in license and development services revenue associated with these obligations. At December 31, 2021, the Company had $10.1 million deferred revenue remaining on its consolidated balance sheets related to this performance obligation, allocated between current and noncurrent based on the expected timing of future recognition.

Access rights related to the Company’s research and development pipeline and material rights to option continuation periods

Gilead receives exclusive access to the Company’s current programs as well as the future programs for a period of ten years, contingent upon Gilead’s payment of $300 million, consisting of three $100 million option continuation payments due at Gilead’s option on each of the fourth, sixth, and eighth anniversaries of the agreement. The standalone selling price of this ongoing research and development pipeline access was determined using an expected cost-plus margin approach. The Company uses a time-elapsed input method to measure progress toward satisfying this obligation, which is the method the Company believes most faithfully depicts the Company’s performance in transferring the promised services during the time period in which Gilead has access to the Company’s research and development pipeline. Accordingly, the revenue allocated to the performance obligation is being recognized using this input method over the minimum four-year period. The Company determined that Gilead is not obligated to pay the remaining $300 million due over the remainder of the term. Failure to pay the non-obligatory option continuation payments will result in Gilead’s loss of certain rights to access and obtain licenses to the programs arising from the Company’s research and development pipeline. Prior to the closing of the Amended Gilead Collaboration Agreement, the Company had $91.7 million deferred revenue on its consolidated balance sheets related to this performance obligation.

The Company recognized $30.9 million and $15.4 million in other collaboration revenues associated with these obligations in the years ended December 31, 2021 and 2020, respectively. At December 31, 2021, the Company had $120.2 million of deferred revenue on its consolidated balance sheets related to this performance obligation, classified between current and noncurrent based on the amortization of the revenue.

Cost-sharing reimbursements

The Company's research and development obligations under the Gilead Collaboration Agreement includes a 50/50 share of the joint development costs associated with optioned programs. Payments received from Gilead for their share of costs incurred will be recognized as a reduction of R&D expense. Payments made to Gilead for the Company's share of costs incurred will be recognized as an increase to R&D expense. The Company recognized

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reductions of R&D expense totaling $24.9 million and $3.4 million during the years ended December 31, 2021 and 2020, respectively, as a result of this cost-sharing provision.

Capitalized costs to obtain contract

The Company incurred $7.3 million in costs to obtain the contract in 2020, which consisted of consultant and legal fees that were directly connected to the successful completion of the Gilead Agreements. The Company determined that $1.9 million of these expenses were related to the Stock Purchase Agreement which were recognized as offering costs. The Company allocated the remaining costs between the various performance obligations, to be recognized when the underlying revenue is recognized. The Company incurred an additional $4.5 million in fees to a third party as part of entering into the Amended Gilead Collaboration Agreement in 2021. These fees were combined with the $3.8 million of capitalized fees that remained from the original agreement at the date of closing, and the total $8.3 million was allocated among the performance obligations identified under the Amended Gilead Collaboration Agreement and deferred or recognized accordingly.

The Company recognized $3.8 million and $1.2 million in expense related to these capitalized costs during the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, the Company had $4.9 million in capitalized costs to obtain the contract, of which $0.9 million was recorded in prepaid expenses and other current assets and $4.0 million was recorded in other long-term assets.

Taiho Pharmaceutical Co., Ltd

In September 2017, the Company and Taiho entered into an option and license agreement (the Taiho Agreement) under which Taiho obtained exclusive options to Arcus programs arising over a five-year period ending September 2022 (the Option Period). If Taiho timely exercises its option, Taiho obtains exclusive development and commercialization rights to investigational products from such Arcus Program for Japan and certain other territories in Asia (excluding China) (the Taiho Territory). In consideration for the exclusive options and other rights contained in the Taiho Agreement, Taiho paid non-refundable, non-creditable cash payments to the Company totaling $35.0 million.

For each option that Taiho elects to exercise, it will be obligated to make an option exercise payment of between $3.0 million to $15.0 million, depending on the development stage of the applicable Arcus Program for which the option is exercised. Upon exercise Taiho is solely responsible for continued development and commercialization in the Taiho Territory. In addition, the Taiho Agreement provides that the Company is eligible to receive additional clinical and regulatory milestones totaling up to $130.0 million per Arcus Program, and it will be eligible to receive contingent payments of up to $145.0 million per Arcus Program associated with the achievement of specified levels of Taiho net sales in the Taiho Territory.

In addition, the Company will receive royalties ranging from high single-digits to mid-teens on net sales of licensed products in the Taiho Territory. Royalties will be payable on a licensed product-by-licensed product and country-by-country basis during the period of time commencing on the first commercial sale of a licensed product in a country and ending upon the later of: (a) ten (10) years from the date of first commercial sale of such licensed product in such country; and (b) expiration of the last-to-expire valid claim of the Company’s patents covering the manufacture, use or sale or exploitation of such licensed product in such country (the Royalty Term).

The Company determined that the identified performance obligations for the Taiho Agreement, which include the combined performance obligation of the research and development services and the obligation to participate on the joint steering committee, are satisfied over time. The Company uses a time-elapsed input method to measure progress toward satisfying its performance obligation, which is the method the Company believes most faithfully depicts the Company’s performance in transferring the promised services during the time period in which Taiho has access to the Company’s research and development activities. Accordingly, the transaction price of $35.0 million is being recognized in other collaboration revenues using this input method over the estimated performance period of five years.

From the inception of the Taiho Agreement through December 31, 2021, Taiho has exercised its option to the Company's adenosine receptor antagonist program (including etrumadenant), its anti-PD-1 program (including zimberelimab), and its anti-TIGIT program (including domvanalimab and AB308) for option payments totaling $26.0 million. The Taiho Agreement will remain in effect until the expiry of all royalty terms for the licensed products. As of December 31, 2021, no clinical or regulatory milestones had been achieved under the Taiho Agreement. As of December 31, 2021, no sales milestone or royalty revenue has been recognized.

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In November 2021, Taiho exercised its option under the Taiho Agreement to the Company's anti-TIGIT program, including domvanalimab and AB308, in exchange for a $15.0 million option exercise fee. In November 2019, Taiho exercised its option to the Company's anti-PD-1 antibody program, including zimberelimab, for a fee of $8.0 million. For each of these exercises, the Company identified one performance obligation comprised of the delivery of the license, which was recognized by the Company as license revenue during the years ended December 31, 2021 and 2019, respectively. Upon the option exercises, Taiho gained sole responsibility for the development and commercialization of the licensed products within the Taiho Territory.

As of December 31, 2021, the Company recorded deferred revenue, current of $5.0 million on its consolidated balance sheet. As of December 31, 2020, the Company recorded deferred revenue, current and deferred revenue, noncurrent of $7.0 million and $5.0 million, respectively, on its consolidated balance sheet.

WuXi Biologics License Agreements

The Company entered into a license agreement (the WuXi PD-1 Agreement) with WuXi Biologics in August 2017, as subsequently amended, in which it obtained an exclusive license to develop, use, manufacture, and commercialize products including an anti-PD-1 antibody worldwide except for Greater China.

From the inception of the WuXi PD-1 Agreement through December 31, 2021, the Company has made upfront and milestone payments of $41.0 million and incurred sub-license fees of $11.3 million. These milestone payments and sub-license fees were recorded as research and development expense, as the products had not reached technological feasibility and did not have alternative future use. During the years ended December 31, 2021, 2020 and 2019, the Company made milestone payments of $10.0 million, $5.0 million and $7.5 million, respectively, and incurred sub-license fees of zero, $10.1 million and $1.2 million, respectively, under the WuXi PD-1 Agreement. The WuXi PD-1 Agreement also provides for clinical and regulatory milestone payments, commercialization milestone payments of up to $375.0 million and tiered royalty payments to be made to WuXi Biologics that range from the high single-digits to low teens of net sales by the Company of licensed products.

In December 2020, the Company entered into a separate license agreement (the WuXi CD39 Agreement) with WuXi Biologics to develop anti-CD39 antibodies. Under the agreement, the Company was granted exclusive worldwide rights to anti-CD39 antibodies discovered under the collaboration and will be responsible for the further development and commercialization of those antibodies. The WuXi CD39 Agreement provides for clinical and regulatory milestone payments totaling $16.5 million, and royalty payments in the low single digits of net sales by the Company of licensed products. From the inception of the WuXi CD39 Agreement through December 31, 2021, the Company paid $0.5 million in upfront payments which was recorded in research and development expense, as the products are still in research stage. The Company incurred no development milestone expense during the years ended December 31, 2021 and 2020. The Company incurred a $1.5 million development milestone in the first quarter of 2022.

Abmuno License Agreement

In December 2016, the Company entered into a license agreement (the Abmuno Agreement) with Abmuno Therapeutics LLC (Abmuno) in which it obtained a worldwide exclusive license to develop, use, manufacture, and commercialize products that include an anti-TIGIT antibody, including domvanalimab. Under the Abmuno Agreement, the Company has made upfront and milestone payments totaling $14.6 million as of December 31, 2021. The Abmuno Agreement also provides for additional clinical, regulatory and commercialization milestone remaining payments of up to $93.0 million as of December 31, 2021.

The Company incurred $5.0 million, $3.0 million, and no development milestone expense for the years ended December 31, 2021, 2020, and 2019, respectively.

AstraZeneca Agreement

On October 29, 2020 the Company announced a collaboration with AstraZeneca to evaluate domvanalimab, the Company’s investigational anti-TIGIT antibody, in combination with AstraZeneca’s Imfinzi (durvalumab) in a registrational Phase 3 clinical trial in patients with unresectable Stage III non-small cell lung cancer (NSCLC), which study the parties refer to as PACIFIC-8. Under the terms of the agreement, each company will retain existing rights to their respective molecules and any future commercial economics. AstraZeneca will conduct the trial, and each company will supply its respective anti-cancer agent to support the trial. Under the terms of the agreement and

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subject to the parties’ approval of a final budget for the clinical trial, the Company may be obligated to reimburse AstraZeneca for a portion of the costs incurred.

This PACIFIC-8 trial forms part of the Arcus and Gilead joint development program for domvanalimab and Arcus’s portion of the trial costs will be shared with Gilead.

For the years ended December 31, 2021 and 2020, the Company incurred expenses pursuant to the AstraZeneca Agreement of $1.0 million and zero, respectively. Expenses from this co-development agreement are recorded within research and development expenses.

Genentech Collaboration Agreement

In December 2019, the Company and Genentech, through F. Hoffmann-La Roche Ltd (collectively, Genentech) entered into a Master Clinical Collaboration Agreement (the Genentech Agreement) pursuant to which the parties may conduct combination clinical studies involving Genentech’s monoclonal antibody, atezolizumab and the Company’s investigational products. Pursuant to the Genentech Agreement, the parties entered into Trial Supplements for the evaluation of etrumadenant and atezolizumab utilizing the MORPHEUS platform in two separate study indications: second and third line metastatic colorectal cancer and first line metastatic pancreatic cancer.

The Company and Genentech will each supply their respective investigational products for use in the collaboration studies and will share a portion of the development costs under specific terms as set forth in the agreement. The Company incurred $1.0 million, $0.5 million and no expense, respectively, under the collaboration for the years ended December 31, 2021, 2020, and 2019, respectively.

Note 9: Stockholders’ Equity

The Company’s Certificate of Incorporation, as amended and restated, authorizes the Company to issue 410,000,000 shares of capital stock consisting of 400,000,000 shares common stock and 10,000,000 shares of preferred stock, both par value of $0.0001. As of December 31, 2021 and 2020, the Company had no outstanding convertible preferred stock.

In June 2020, pursuant to a shelf registration statement on Form S-3 that was filed in May 2020, the Company issued 12,650,000 shares of its common stock at $27.50 per share in an underwritten public offering. The total number of shares sold consisted of 11,000,000 base shares and an additional 1,650,000 shares sold pursuant to the underwriters’ option exercise. Net proceeds from the public offering were approximately $326.2 million after deducting underwriting discounts, commissions and other offering expenses.

In July 2020, the Company closed the Gilead Collaboration Agreement, Common Stock Purchase Agreement, and the Investor Rights Agreement, each signed with Gilead in May 2020. Upon closing, Gilead made an equity investment of approximately $200 million in the Company by purchasing 5,963,029 shares of Arcus common stock at a per share price of $33.54 pursuant to the Stock Purchase Agreement. Of the $200 million equity investment, approximately $90.6 million was determined to be a premium on the purchase of common stock and allocated to the performance obligations created by the Gilead Collaboration Agreement. See Note 8 and Note 14 for further discussion of the agreements with Gilead. Net proceeds from Gilead’s equity investment were approximately $107.5 million after allocating the premium and deducting direct offering expenses of $1.9 million.

In February 2021, the Company closed the Amended and Restated Common Stock Purchase Agreement with Gilead, pursuant to which Gilead made an equity investment of approximately $220.4 million in the Company by purchasing 5,650,000 shares of the Company's common stock at a price of $39.00 per share.

Note 10: Stock Plans and Stock-Based Compensation

Stock Plans

The Company grants awards to employees and nonemployees under a series of equity incentive plans, (collectively, the Stock Plans).

In May 2015, the Company adopted the 2015 Stock Plan, which was amended and restated in November 2015 (as amended from time to time, the 2015 Plan).

The terms of the 2015 Plan permitted option holders to exercise stock options before they vest, subject to certain limitations. Such unvested shares are subject to repurchase by the Company at the original exercise price in the

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event the option holder’s service to the Company is terminated either voluntarily or involuntarily. As a result of early exercises under the 2015 Plan, approximately 9,946 shares and 165,133 shares had not vested and were subject to repurchase as of December 31, 2021 and 2020, respectively. The Company treats cash received from the exercise of unvested options as a refundable deposit and classifies such amounts as a liability in its consolidated balance sheets. As of December 31, 2021 and 2020, the Company included cash received for the early exercise of unvested options of $0.1 million and $0.7 million, respectively, allocated to other current liabilities. Amounts included in liabilities are transferred into common stock and additional paid-in capital as the shares vest, which is generally over a period of 48 months.

In March 2018, the Company adopted the 2018 Equity Incentive Plan (2018 Plan), which replaced the 2015 Plan upon completion of the IPO. 3,570,000 shares were reserved under the 2018 Plan plus 709,558 shares remaining available for issuance under the Company’s 2015 Plan and outstanding awards under its 2015 Plan that subsequently expire, lapse unexercised or are forfeited to or repurchased by the Company. In addition, the number of shares reserved for issuance under the Company's 2018 Plan will automatically increase on January 1 of each year by a number equal to the smallest of (i) 3,570,000 shares, (ii) 4% of the shares of common stock outstanding on the last business day of the prior fiscal year or (iii) the number of shares determined by the Company's board of directors. As of December 31, 2021, there were 2,226,271 shares available for grant under the 2018 plan.

In accordance with the provisions of the 2018 Plan, the number of shares available for issuance under the Plan automatically increased by 2,831,269 shares on January 1, 2022.

In January 2020, the Company’s Board of Directors adopted the 2020 Inducement Plan (2020 Plan), pursuant to which it reserved and authorized 3,000,000 shares of the Company’s common stock in order to award non-statutory stock options and other equity-based awards as a material inducement to eligible individuals to enter into employment with the Company. During the years ended December 31, 2021 and 2020, the Company’s Board of Directors authorized an increase of 5,000,000 shares and 1,000,000 shares, respectively, reserved for issuance under the 2020 Plan. As of December 31, 2021, 2,288,000 shares have been issued, and there were 3,743,219 shares available for grant under the 2020 Plan.

The following table, which includes options granted under the Company’s Stock Plans, summarizes option activity:

The weighted-average grant date fair value of the stock options granted was $22.05 per share for 2021, $11.57 per share for 2020, and $6.33 per share for 2019. During the years ended December 31, 2021, 2020 and 2019, the intrinsic value of shares exercised was $17.4 million, $6.8 million, and $0.2 million, respectively, and the fair value of shares vested during the same period was $52.4 million, $16.8 million, and $7.8 million, respectively.

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Restricted Stock Units

The Company grants restricted stock units (RSUs) to its employees and directors under the 2018 Plan. The shares subject to the RSUs vest annually or quarterly over four years for employees and annually for directors.

Total Restricted Stock Units WeightedAverageGrant Date Fair Value

The weighted-average grant date fair value of the RSUs granted was $34.05 per share for 2021 and $27.77 per share for 2020. The total grant date fair value of shares vested during the same periods was $12.1 million and $0.1 million, respectively. There were no RSUs granted or vested during the year ended December 31, 2019.

Employee Stock Purchase Plan

In March 2018, the Company adopted the 2018 Employee Stock Purchase Plan (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 the fair market value per share on the applicable purchase date, provided that no more than 3,000 shares of common stock may be purchased by an employee on any purchase date. Also, the value of the shares purchased in any calendar year may not exceed $25,000. The 2018 ESPP is intended to constitute an “employee stock purchase plan” under Section 423(b) of the Internal Revenue Code of 1986, as amended. The 2018 ESPP may be terminated by the Company’s board of directors at any time. A total of 714,000 shares of common stock were initially reserved for issuance under the 2018 ESPP, and the number of shares reserved for issuance under the 2018 ESPP will automatically increase on January 1 of each year beginning on January 1, 2019 by a number of shares equal to the least of (i) 1% of the Company's outstanding shares of common stock on the last day of the prior fiscal year, (ii) 1,071,000 shares or (iii) a number of shares determined by the Company's board of directors.

As of December 31, 2021, there were 1,610,979 shares available for purchase under the 2018 ESPP. In accordance with the provisions of the 2018 ESPP, the number of shares available for purchase under the Plan automatically increased by 707,817 shares on January 1, 2022.

Non-employee stock-based compensation

As of December 31, 2021, 2020 and 2019, 37,250, 31,986, and 372,774, respectively, of vested stock options and 1,291, 21,165, and 308,596, respectively, of unvested stock options were held by non-employees. The amount of stock-based compensation expense related to non-employees recognized in the consolidated financial statements for the years ended December 31, 2021, 2020 and 2019 was $0.2 million, $0.7 million and $0.9 million, respectively.

Stock-based compensation expense

The following table summarizes employee and non-employee stock-based compensation expense for the years ended December 31, 2021, 2020 and 2019, and also the allocation within the consolidated statements of operations and comprehensive loss (in thousands):

Year Ended December 31,

As of December 31, 2021, unrecognized employee and nonemployee compensation costs related to non-vested stock option awards and RSUs totaled $102.9 million and $31.6 million, respectively, and is expected to be recognized over a weighted average period of 2.5 years and 2.7 years, respectively.

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Valuation Assumptions

Prior to the Company’s IPO, the fair value of the shares of common stock underlying stock-based awards was determined by the board of directors, with input from management. Because there was no public market for the Company’s common stock, the board of directors determined the fair value of the common stock on the grant-date of the stock-based award by considering a number of objective and subjective factors, including enterprise valuations of the Company’s common stock performed by an unrelated third-party specialist, valuations of comparable companies, sales of the Company’s convertible preferred stock to unrelated third parties, operating and financial performance, the lack of liquidity of the Company’s capital stock, and general and industry-specific economic outlook. The board of directors intended all options granted to be exercisable at a price per share not less than the estimated per share fair value of common stock underlying those options on the date of grant.

Following the Company’s IPO, the market traded price of the shares of common stock underlying the stock-based awards is the fair value of the Company's stock as reported on the New York Stock Exchange on the grant date.

Company estimates the fair value of options and ESPP shares utilizing the Black-Scholes option pricing model, which is dependent upon several variables, such as expected term, volatility, risk-free interest rate, and expected dividends. Each of these inputs is subjective and generally requires significant judgment to determine. The following assumptions were used to calculate the fair value of stock-based compensation for the years ended December 31, 2021, 2020, and 2019:

Stock Options

Year Ended December 31,

Dividend yield 0% 0% 0%

ESPP

Year Ended December 31,

Dividend yield 0% 0% 0%

Expected Term — The Company has opted to 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).

Expected Volatility — Due to the Company’s limited operating history and a lack of company specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. 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.

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 the Company’s stock options.

Expected Dividend — The Company has not issued any dividends in its history and does not expect to issue dividends over the life of the options and therefore has estimated the dividend yield to be zero.

Note 11. Net Income (Loss) per Share

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

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

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

Year Ended December 31,

Numerator:

Denominator:

Dilutive effect of stock options 4,054,142 - -

Dilutive effect of restricted stock units 566,635 - -

Net income (loss) per share, basic $ 0.76 $ (2.24 ) $ (1.93 )

Net income (loss) per share, diluted $ 0.71 $ (2.24 ) $ (1.93 )

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

At December 31,

Restricted stock units issued - 738,650 -

Unvested early exercised common stock options - 165,133 455,158

The Company also excluded the effect of Gilead's right to purchase additional shares of the Company's common stock from its calculation as these rights had no intrinsic value at December 31, 2021.

Note 12: Provision for Income Taxes

The Company's loss before provision for income taxes includes the following components (in thousands):

Year Ended December 31,

The components of the provision for income taxes are as follows (in thousands):

Year Ended December 31,

Current

Federal $ 1,252 $ - $ -

Total income tax expense $ 1,815 $ - $ -

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The effective tax rate of the Company's provision for income taxes differs from the federal statutory rate as follows:

Year Ended December 31,

State taxes, net of federal benefit 0.81 % 0.00 % 0.00 %

Research and development credits -11.91 % 3.10 % 0.00 %

Stock based compensation -0.75 % -0.18 % -1.28 %

Non-deductible expenses and other 0.79 % -0.72 % -0.07 %

Provision for income taxes 3.32 % 0.00 % 0.00 %

Deferred income taxes reflect the net tax effects of loss and credit carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets for federal and state income taxes are as follows as of December 31 (in thousands):

Year Ended December 31,

Deferred tax assets:

Federal and state net operating loss carryforwards $ 24,183 $ 54,526

Research and development credits carryforwards 13,288 11,209

Deferred tax liabilities:

Total deferred tax liabilities (22,800 ) (2,704 )

Net deferred tax assets $ - $ -

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.

The Company’s accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of its net deferred tax assets. The Company considered factors such as its history of operating losses, the nature of the Company’s 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 agreement with Gilead entered into in 2020 and the 2021 program opt-ins. As a result of the Company's evaluation of these factors, including the uncertainty that exists with respect to the option fees and milestone payments, the Company does 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 decreased by approximately $1.1 million for the year ended December 31, 2021. The valuation allowance increased by approximately $33.8 million and $19.7 million, respectively, for the years ended December 31, 2020 and 2019.