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 “Item 6. Selected Financial Data” and 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. Our initial focus has been on well-characterized biological pathways with significant scientific data supporting their importance. We have built a robust and highly efficient drug discovery capability to create highly differentiated small molecules, which we have the ability to develop in combinations with our monoclonal antibodies through rationally designed, indication-specific clinical trial designs. Our vision is to create, develop and commercialize highly differentiated combination cancer therapies.

We currently have four investigational products in clinical development. In 2020, we entered into an Option, License and Collaboration Agreement (Gilead Collaboration Agreement) with Gilead Sciences, Inc. (Gilead), whereby Gilead obtained rights to zimberelimab and a time-limited exclusive option to all of our current and future programs during the 10-year collaboration term. For each program to which Gilead exercises their option, the parties will co-develop globally and co-commercialize 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 to 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 a time-limited option to exclusively license the development and commercialization rights to each of our programs for Japan and certain other territories in Asia (excluding China). To date, Taiho has exercised their option rights to our adenosine receptor antagonist program (including etrumadenant) and our anti-PD-1 program (including zimberelimab).

Domvanalimab (formerly referred to as AB154), our anti-TIGIT monoclonal antibody, is being evaluated in combination with zimberelimab with or without etrumadenant vs. zimberelimab monotherapy in ARC-7, our randomized Phase 2 trial in first-line metastatic PD-L1≥50% non-small cell lung cancer. In February 2021, we initiated ARC-10, our first registrational trial evaluating domvanalimab in combination with zimberelimab and zimberelimab monotherapy vs. chemotherapy in this same setting.

Etrumadenant (formerly referred to as AB928), our small molecule dual A2a/A2badenosine receptor antagonist, is being evaluated by us in several randomized or Phase 2 trials across major tumor types, including in our ARC-4, ARC-6, ARC-7, and ARC-9 studies, as well as in two randomized Phase 1b/2 trials being conducted by Genentech (the Morpheus trials).

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).

Zimberelimab (formerly 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 recently initiated registrational trial which is designed to support the approval of zimberelimab.

COVID-19 Pandemic

The degree to which COVID-19 impacts our business operations, research and development programs and financial condition will depend on future developments, including the ultimate duration and/or severity of the outbreak, the impact of any resurgences and new strains that emerge, actions by government authorities to contain the spread of the virus, the timing, availability and effectiveness of any vaccines, 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 across our ongoing Arcus-sponsored studies,

we expect to see volatility as local governments respond to resurgences and the emergence of new strains, each of which may result in the prolonged reinstitution, extension or enhancement of shelter-in-place measures. The American Cancer Society has also reported that the pandemic has led to declines in screening, diagnosis and treatment for cancer patients, which will impact the enrollment of patients in clinical trials targeting early stage cancers and retention of patients overall in our trials. 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 full impact of this pandemic on our clinical programs.

With respect to manufacturing and supply, we believe we currently have sufficient drug supply for our ongoing clinical studies. Our third-party contract manufacturers continue to operate at or near normal levels and, at this time and subject to further COVID-19 implications, we do not anticipate any disruptions to our drug supply chain.

Our discovery programs were impacted by the suspension in our laboratory-based operations from mid-March to late June. Despite the return of our laboratory-based personnel back into our facilities, our laboratories are operating at reduced capacity due to employee safety measures, such as social distancing requirements and shift work. This has delayed the advancement of one of two preclinical programs that we had expected would enter the clinic in the first quarter of 2021. We expect a clinical trial for the first of these programs, AB308, our FcR-enabled anti-TIGIT antibody, to begin shortly; however, the pandemic has delayed the second of these programs until the second half of 2021.

The full impact of the COVID-19 outbreak remains highly uncertain and subject to change. In connection with our resumption of laboratory operations, we instituted regular COVID-19 testing services in order to minimize the risk to our employees. These additional operating costs, along with the absence of any furlough or measures to reduce personnel costs despite reduced laboratory capacity, will have a negative impact on our operations and financial condition. We do not expect the forward impact will be material due to adjustments in operations that we have made. However, there are many uncertainties around the COVID pandemic and future developments, which are unpredictable, may result in a material, negative impact to our operations and financial condition.

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 option and license agreements we entered into with Taiho Pharmaceutical Co., Ltd. (the Taiho Agreement) and Gilead Sciences, Inc. (the Gilead Agreements). We have not generated any revenue from product sales and we have never had a profitable fiscal year. We have incurred net losses since the commencement of our operations. As of December 31, 2020, we had an accumulated deficit of $328.2 million. We incurred a net loss of $122.9 million during the year ended December 31, 2020. 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, 2020, we have financed our operations primarily through net proceeds of approximately $677 million from equity offerings and proceeds of approximately $421 million from our collaboration agreements. As of December 31, 2020, we had $735.1 million of cash, cash equivalents and investments. In February 2021 we raised an additional $220.4 million from the sale to Gilead of 5,650,000 shares of our common stock. We believe our cash, cash equivalents and investments will be sufficient to fund our planned operations through 2023. 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.

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

On May 27, 2020, we entered into the Gilead Collaboration Agreement, a Common Stock Purchase Agreement (the Stock Purchase Agreement), and an Investor Rights Agreement, (collectively, the Gilead Agreements), each with Gilead. The transaction closed on July 13, 2020 following expiration of the antitrust waiting period. Upon closing, Gilead made an upfront payment of $175 million pursuant to the Gilead Collaboration Agreement, Gilead made an equity investment of approximately $200 million in 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. We also appointed Gilead’s designees, Merdad Parsey, M.D., Ph.D. and Michael Quigley, Ph.D., to our Board of Directors pursuant to the Investor Rights Agreement.

Pursuant to the terms of the Gilead Collaboration Agreement, Gilead has an exclusive license to develop and commercialize zimberelimab in certain markets and obtained exclusive options to acquire an exclusive license to develop and commercialize all of our current and future clinical programs during the 10-year collaboration term, contingent upon Gilead’s payment of $400 million, with the first payment of $100 million in 2022 and an additional $100 million payment due at Gilead’s option on each of the fourth, sixth, and eighth anniversaries of the agreement. For those programs that enter clinical development prior to the end of the collaboration term, Gilead’s option rights will extend for up to an additional three years thereafter. Gilead may exercise its option, on a program-by-program basis, upon payment of an option fee that ranges from $200 million to $275 million per program for our clinical programs in existence at the date of the agreement, and $150 million per program for all other programs that enter clinical development thereafter. If Gilead exercises its option with respect to our TIGIT program, we are also eligible to receive up to $500 million in potential U.S. regulatory approval milestones with respect to domvanalimab.

Upon Gilead’s exercise of its option to a program, the two companies will co-develop and equally share global development costs, subject to certain of our opt-out rights, and expense caps on our spending and related subsequent adjustments. For each optioned program, provided we have not exercised our opt-out rights, 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 ranging from the high teens to the low twenties.

Pursuant to the Stock Purchase Agreement and the Investor Rights 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 the next five years, at a purchase price equal to the greater of a 20% premium to market (based on a trailing five-day average closing price) at the time Gilead exercises such option, and the $33.54 initial purchase price. The Investor Rights Agreement also includes a three-year standstill and a two-year lockup and provides Gilead with registration rights commencing at the end of the lockup period, pro rata participation rights in certain future financings and the right to designate two individuals to be appointed to our Board of Directors.

On January 31, 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.

AstraZeneca Agreement

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

Consistent with the terms of the recently completed Gilead Agreements, Gilead maintains an option to co-develop and co-commercialize domvanalimab. If Gilead exercises its option to domvanalimab, the trial from this AstraZeneca collaboration is expected to form part of the Arcus and Gilead joint development program and Arcus’s portion of the trial costs would be shared with Gilead.

Other Licenses and Collaborations

We in-licensed rights to zimberelimab 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 a co-development and collaboration agreement with Strata Oncology, Inc. (Strata).

Components of Operating Results

Collaboration and License Revenue

Our collaboration and license revenue consists of revenue recognized from the upfront and periodic payments received from Taiho and Gilead, for 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 or to 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 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.

We expect our research and development expenses to increase substantially during the next few years due to our Gilead collaboration and as we seek to complete existing clinical trials and advance our programs into later-stage clinical trials, pursue regulatory approval for our investigational products, and advance other programs into the clinic. Later-stage clinical trials 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. Moreover, in order to maximize the potential of our collaboration with Gilead, we believe it will be important to grow our discovery capabilities and pipeline. 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 clinical outcomes from our ongoing clinical trials, whether our collaborators opt into any of our programs, the amount of opt-in and milestone payments we receive from our collaborators, and the breadth of any joint development program agreed to with Gilead for programs they opt into. In addition, under our license

agreements with WuXi Biologics and Abmuno, and our co-development and collaboration agreements with Strata, and AstraZeneca, we may be required to pay additional clinical and regulatory milestone payments based on the development progress of our investigational products. 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 as well as 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 Policies, Significant Judgments and Use of 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.

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 the estimated standalone selling prices of each performance obligation. 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.

Research and Development Expenses

We expense research and development costs as incurred. We estimate preclinical and clinical study and research expenses based on services performed, pursuant to contracts with third-party research organizations that conduct and manage preclinical and clinical studies and research services on our behalf. We estimate these expenses based on communications with internal 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, we will adjust the accrual accordingly. Payments associated with licensing agreements to acquire exclusive 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 are recorded as prepaid expenses until the services are rendered.

Stock-Based Compensation Expense

We account for stock-based compensation arrangements in accordance with ASC 718, Stock Compensation. Prior to January 1, 2019, we accounted for equity instruments issued to non-employees in accordance with ASC 505-50 Equity Based Paymentsto Non-Employees. Based on this guidance, we recorded awards at their fair value on the measurement date subject to periodic adjustments as the underlying equity instruments vest. We expensed the fair value of options granted to consultants when vested. On January 1, 2019, we adopted ASU No. 2018-07 (Topic 718), Compensation – Stock Compensation, which expanded the scope of Topic 718 to include share-based payment transactions with non-employees.

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. Our 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 our 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 grant.

Leases

Subsequent to the adoption of the new leasing standard effective as of January 1, 2020, we recognize a lease asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation. We determine whether an arrangement is or contains a lease at contract inception. We recognize operating lease right-of-use assets and liabilities 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, we use an incremental borrowing rate based on the information available at the lease commencement date. The incremental borrowing rate represents the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. We consider 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 we 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.

Income Taxes

We provide for income taxes under the asset and liability method. Current income tax expense or benefit represents the amount of income taxes expected to be payable or refundable for the current year. We determine deferred

income tax assets and liabilities based on differences between the financial statement reporting and tax bases of assets and liabilities and net operating loss and credit carryforwards, and measure them using the enacted tax rates and laws that will be in effect when such items are expected to reverse. We reduce deferred income tax, 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.

Results of Operations

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 Ended December 31, $ Change % Change

Revenues:

Operating expenses:

* Not meaningful

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, 2019 to $159.3 million for the year ended December 31, 2020. 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.

Comparison of the Years Ended December 31, 2019 and 2018

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

Year Ended December 31, $ Change % Change

Revenues:

As described in Note 2 of the accompanying consolidated financial statements, in January 1, 2019, we adopted ASC 606. ASC 606 supersedes the guidance in ASC 605, Revenue Recognition. We adopted ASC 606 on a modified retrospective basis under which we recognized the $2.2 million cumulative effect of adoption as a reduction to opening accumulated deficit. We recorded revenue for the year ended December 31, 2018 under ASC 605, while we recorded revenue for year ended December 31, 2019 under ASC 606. Had we recognized revenue for the year ended December 31, 2019 using ASC 605, revenue would have been $14.7 million as compared to the $15.0 million recorded under ASC 606.

Collaboration and License Revenue

Collaboration and license revenue increased $6.6 million or 80%, from $8.4 million for the year ended December 31, 2018 to $15.0 million for the year ended December 31, 2019. The increase in collaboration and license revenue was due to an additional $1.6 million of revenue recognized resulting from a higher initial transaction price for the Taiho Agreement that we remeasured upon adoption of ASC 606 during 2019 and $8.0 million recognized following Taiho’s exercise of its option for our anti-PD-1 antibody program, including zimberelimab, partially offset by $3.0 million recognized in 2018 from Taiho’s exercise of its option for our adenosine receptor antagonist program, including etrumadenant.

Research and Development Expenses

Research and development expenses increased $28.9 million, or 58%, from $49.6 million for the year ended December 31, 2018 to $78.5 million for the year ended December 31, 2019. The increase in expenses included an increase of $14.3 million in clinical study costs and an increase of $1.3 million in clinical consulting costs related to all four of our programs in clinical development. Also contributing to the increase in 2019 was the achievement of certain development milestones which resulted in expenses of $8.7 million pursuant to the terms of our WuXi Agreement and $2.5 million pursuant to the terms of our Strata Agreement, compared to a $2.0 million

product licensing expense pursuant to our Abmuno Agreement that was recorded in the prior year. Additional expenses in 2019 included an increase of $5.2 million in employee compensation, an increase of $2.0 million in stock-based compensation and an increase of $0.7 million in facilities and office expenses, primarily driven by growth in our headcount. Those increases were partially offset by a decrease of $4.2 million in manufacturing costs primarily due to the completion of certain manufacturing activities for domvanalimab in 2018.

General and Administrative Expenses

General and administrative expenses increased $11.6 million, or 86%, from $13.6 million for the year ended December 31, 2018 to $25.2 million for the year ended December 31, 2019. The increase in expenses was primarily due to an increase of $4.0 million in employee compensation, an increase of $3.2 million in stock-based compensation and an increase of $2.0 million in facilities and office expenses, primarily due to growth in headcount. General and administrative expenses further increased due to increases of $1.3 million in consulting and $0.7 million in legal and accounting fees, supporting the expansion of our research and development activities and on-going public company regulatory compliance costs.

Non-Operating Income, Net

Non-operating income, net decreased $1.3 million or 24%, from $5.3 million for the year ended December 31, 2018 to $4.0 million for the year ended December 31, 2019. The decrease was primarily due to a gain on deemed sale recorded in conjunction with PACT Pharma’s Series B convertible preferred financing in 2018 without a similar gain in 2019.

Liquidity and Capital Resources

To date, we have financed our operations primarily through net proceeds of approximately $677 million from equity offerings and proceeds of approximately $421 million from our collaboration agreements. As of December 31, 2020, we had $735.1 million of cash, cash equivalents and investments in marketable securities. In February 2021 we raised an additional $220.4 million from the sale to Gilead of 5,650,000 shares of our common stock. Our cash and investments are held in a variety of interest-bearing instruments, including money market funds, and investments in corporate notes, other debt securities, commercial papers and government agency obligations.

Based on our existing business plan, we believe that our existing cash, cash equivalents and investments will be sufficient to fund our anticipated level of operations through 2023.

We may require additional capital to complete the development and any commercialization of our investigational products. Our future capital requirements will depend on many factors, including:

• the number and scope of clinical programs we decide to pursue;

• the costs associated with being a public company; and

If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Any future debt financing into which we enter may impose upon us additional covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. If we are unable to raise additional funds when needed, we may be required to delay, reduce, or terminate some or all of our development programs and clinical trials. We may also be required to sell or license to others rights to our investigational products in certain territories or indications that we would prefer to develop and commercialize ourselves.

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 provided by operating activities for the year ended December 31, 2020 increased by $184.7 million to $111.2 million provided by operating activities as compared to $73.5 million cash used in operating activities for the prior year. The 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.

Net cash used in operating activities for the year ended December 31, 2019 increased by $30.5 million to $73.5 million as compared to $43.0 million for the prior year. The increase in cash used is primarily due to the $35.1 million increase in our net loss to $84.7 million. The change in our net loss is primarily a result of our expanded clinical development activities and general and administrative costs incurred to support our operations. The overall increase in cash used is partially offset by year-over-year changes in non-cash items, including increased expense from stock-based compensation. Additional increase in cash used resulted from changes in our asset and liability balances due to the timing of payments to or from our vendors and collaborators.

Cash Provided by (Used in) Investing Activities

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 investing activities was $59.2 million for the year ended December 31, 2019 compared to $113.4 million cash used in the prior year. The change in cash flow was primarily due to year-over-year changes in the timing of purchases and maturities of our investments in fixed-income marketable securities.

Cash Provided by Financing Activities

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.

Cash provided by financing activities was $1.1 million for the year ended December 31, 2019 compared to $129.1 million in the prior year. The decrease in cash provided is primarily due to a decrease in funds received in 2019 for issuance of common stock as compared to net proceeds received from our IPO in March 2018.

Contractual Obligations and Commitments

The following table summarizes our non-cancelable contractual obligations as of December 31, 2020 (in thousands):

Payments due by period

Total Less than 1 year 1 to 3 years 3 to 5 years After 5 years

As of December 31, 2020, 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 $112.6 million in undiscounted minimum lease payments through 2031.

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.

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.

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, “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements for a discussion of recently adopted accounting pronouncements and accounting pronouncements not yet adopted, and their expected impact on our financial position and results of operations.

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, 2020, we had cash, cash equivalents and investments of $735.1 million, consisting of interest-bearing money market accounts and 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 $5.3 million AUD to our Australian vendors during the year ended December 31, 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.

Item 8. Financial Statements and Supplementary Data

ARCUS BIOSCIENCES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

Report of Independent Registered Public Accounting Firm 86

Audited Consolidated Financial Statements

Consolidated Balance Sheets 88

Consolidated Statements of Operations and Comprehensive Loss 89

Consolidated Statements of Cash Flows 91

Notes to Consolidated Financial Statements 92

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Arcus Biosciences, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Arcus Biosciences, Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive loss, convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, 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, 2020, 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 24, 2021 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.

/s/ Ernst & Young LLP

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

Redwood City, California

February 24, 2021

ARCUS BIOSCIENCES, INC.

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

As of December 31,

ASSETS

Current assets:

Accrued interest receivable 649 251

Prepaid expenses and other current assets 5,471 4,052

Long-term investments 6,440 -

Right-of-use assets 12,781 -

LIABILITIES

Current liabilities:

Accrued research and development expenses 18,307 4,572

Operating lease liabilities, noncurrent 15,243 -

Deferred rent, non-current - 3,734

Other long-term liabilities ($9,703 and $0 to a related party) 10,246 806

Commitments (Note 12)

Stockholders’ equity:

Accumulated other comprehensive income 44 64

Total liabilities and stockholders’ equity $ 772,292 $ 203,110

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

ARCUS BIOSCIENCES, INC.

Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share amounts)

Years Ended December 31,

Revenues:

Operating expenses:

Non-operating income (expense):

Gain on deemed sale from equity method investee 613 - 1,229

Share of loss from equity method investee (613 ) (1,202 ) (886 )

Other comprehensive income (loss) (20 ) 171 (65 )

Net loss per share, basic and diluted $ (2.24 ) $ (1.93 ) $ (1.43 )

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

ARCUS BIOSCIENCES, INC.

Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(In thousands, except share amounts)

Shares Amount Shares Amount Capital Deficit Income (Loss) Equity(Deficit)

Issuance of common stock upon exercise of stock options - - 67,349 - 95 - - 95

Stock-based compensation - - - - 3,874 - - 3,874

Other comprehensive loss - - - - - (65 ) (65 )

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 )

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

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:

Amortization of right-of-use assets 1,042 - -

Amortization of premiums on investments (46 ) (2,638 ) (1,752 )

Other non-operating income - - (177 )

Changes in operating assets and liabilities:

Amounts owed by PACT Pharma - 83 (58 )

Prepaid expenses and other current assets (838 ) (1,982 ) (1,180 )

Other current liabilities - 57 43

Operating lease liabilities (993 ) - -

Other long-term liabilities ($9,703, $0 and $0 to a related party) 10,201 - -

Cash flow from investing activities

Sales of short-term investments 1,003 - -

Purchases of property and equipment (3,055 ) (1,925 ) (3,743 )

Cash flow from financing activities

Proceeds from initial public offering, net of issuance costs - - 125,111

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

Payment of preferred stock issuance costs - - (135 )

Supplemental disclosures:

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

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. The Company’s initial focus has been on well-characterized biological pathways with significant scientific data supporting their importance. Since its inception in 2015, the Company has built a robust and highly efficient drug discovery capability to create highly differentiated small molecules, which the Company is developing in combination with its in-licensed monoclonal antibodies through rationally designed, indication-specific clinical trial designs. The Company currently has four investigational products in clinical development: domvanalimab (formerly referred to as AB154), etrumadenant (formerly referred to as AB928), AB680, and zimberelimab (formerly referred to as AB122).

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.

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, and uncertain tax positions. Actual results could differ materially from the Company’s estimates.

Risk 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 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 less than twelve months at the time of purchase. Long-term investments have maturities greater than 12 months at the time of purchase. Collectively, cash equivalents, short-term and long-term investments are considered available-for-sale and are recorded at fair value. Unrealized gains and losses are recorded in accumulated other comprehensive loss. 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, 2020 and 2019 represents cash balances held as security in connection with the Company’s facility lease agreements. The following table provides a reconciliation of cash, cash equivalents, and restricted cash within the consolidated balance sheets to the total shown in the consolidated statements of cash flows (in thousands):

Cash, cash equivalents and restricted cash $ 173,618 $ 58,140

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 and accrued expenses and other current liabilities 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.

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, 2020, 2019 and 2018.

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 the estimated standalone selling prices of each performance obligation. 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 estimation of the stand-alone selling price may include such estimates 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 they can be satisfied at a point in time or over time, and the Company measures the services delivered to the customer, which are periodically reviewed 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.

The Company enters into collaborative arrangements that typically include one of more of the following: (i) license fees; (ii) milestone payments related to the achievement of developmental, regulatory, or commercial goals; (iii) royalties on net sales of licensed products; (iv) fees attributable to options to intellectual property; and (v) cost-sharing or research and development (R&D) funding arrangements. When a portion of non‐refundable upfront fees or other payments received are allocated to continuing performance obligations under the terms of a collaborative arrangement, they are recorded as deferred revenue and recognized as revenue when (or as) the underlying performance obligation is satisfied. Fees attributable to options are deferred until the option expires or is exercised. The Company classifies contract liabilities 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. When an option is exercised, the performance obligations associated with the option are identified, which will determine the accounting for the transaction price attributable to the option.

As part of the accounting for these arrangements, the Company must develop estimates and assumptions that require judgment to determine the underlying stand-alone selling price for each performance obligation which determines how the transaction price is allocated among the performance obligation. To determine the stand-alone selling price, the Company may consider items such as forecasted revenues, development timelines, discount rates, and probabilities of technical and regulatory success. The Company evaluates each performance obligation to determine if it can be satisfied at a point in time or over time. In addition, variable consideration must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price.

License Fees

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.

Cost-Sharing or R&D Funding Arrangements

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

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.

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 under collaborative arrangements, including up-front and milestone payments, license and option fees and expense reimbursements to the collaboration partners, as well as non-personnel costs such as professional fees payable to third parties for preclinical and clinical studies and research services, laboratory supplies and equipment maintenance, product licenses, and other consulting costs.

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

The Company leases laboratory and office space in an office park in Hayward, California under a non-cancelable operating lease with terms that expire from 2025 to 2029, subject to options for the Company to extend the lease term. The Company also leases space in Brisbane, California under a non-cancelable operating lease that is expected to commence in 2021 and extend through 2031. 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 leases are included in operating lease right-of-use assets, other accrued liabilities, and operating lease liabilities, noncurrent in our consolidated balance sheet at December 31, 2020. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the net present value of lease payments, the Company uses its incremental borrowing rate based on the information available at the lease commencement date. The incremental borrowing rate represents the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The Company considers a lease term to be the noncancelable period that it has the right to use the underlying asset, including any periods where it is reasonably assured the Company will exercise the option to extend the contract. Periods covered by an option to extend are included in the lease term if the lessor controls the exercise of that option.

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

Stock-Based Compensation

The Company accounts for stock-based compensation arrangements in accordance with ASC 718, Stock Compensation. Prior to January 1, 2019, equity instruments issued to non-employees were accounted for in accordance with ASC 505-50 Equity Based Paymentsto Non-Employees. Based on this guidance, awards were recorded at their fair value on the measurement date subject to periodic adjustments as the underlying equity instruments vest. The fair value of options granted to consultants was expensed when vested. On January 1, 2019, the Company adopted ASU No. 2018-07 (Topic 718), Compensation – Stock Compensation, which expanded the scope of Topic 718 to include share-based payment transactions with non-employees.

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.

On March 18, 2020, the Families First Coronavirus Response act (FFCR Act), and on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) were each enacted in response to the COVID-19 pandemic. The FFCR Act and the CARES Act contain numerous tax-related provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. On June 29, 2020 California State Assembly Bill 85 (the Trailer Bill) was enacted which suspends the use of California net operating loss (NOL) deductions and limits the use of certain tax credits, including research and development tax credits, for the 2020, 2021, and 2022 tax years.

The FFCR Act, CARES Act and Trailer Bill did not have a material impact on the Company’s consolidated financial statements as of December 31, 2020; however, the Company continues to examine the impacts the FFCR Act, CARES Act and Trailer Bill may have on its business, results of operations, financial condition and liquidity.

Comprehensive Loss

Comprehensive loss includes net 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 Loss per Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net 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 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, 2019 and 2018, 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 all periods.

Recently Adopted Accounting Standards

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 reduces costs and complexity of applying accounting standards while maintaining the usefulness of the information provided to users of financial statements. While not required to be adopted until 2021 for most calendar year public business entities, early adoption is permitted for any financial statements not yet issued. The Company early adopted this ASU as of January 1, 2020, with an immaterial impact on its financial statements.

In November 2018, the FASB issued ASU No. 2018-18 (Topic 808), Collaborative Arrangements. ASU 2018-18 clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606, Revenue from Contracts with Customers, (Topic 606) when the collaborative arrangement participant is a customer in the context of a unit of account and precludes recognizing as revenue consideration received from a collaborative arrangement participant if the participant is not a customer. The Company adopted this ASU as of January 1, 2020, with an immaterial impact on its financial statements.

In August 2018, the FASB issued ASU No.2018-13 (Topic 820), Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements on fair value measurement in Topic 820. The Company adopted this ASU as of January 1, 2020 with an immaterial impact on its financial statements.

In August 2018, the FASB issued ASU No.2018-15 (Subtopic 350-40), Intangibles – Goodwill and Other – Internal-Use Software. ASU 2018-15 requires an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to internal-use software. The Company adopted this ASU as of January 1, 2020 with an immaterial impact on its financial statements.

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 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.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326):Measurement of Credit Losses on Financial Instruments, which modifies the measurement and recognition of credit losses for most financial assets and certain other instruments. The ASU updates the guidance for measuring and recording of current expected credit losses on financial assets measured at amortized cost by replacing the “incurred loss” model with an “expected loss” model. Accordingly, these financial assets will be presented at the net amount expected to be collected. The ASU also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through net income rather than reducing the carrying amount under the current, other-than-temporary-impairment model. The Company adopted this standard on January 1, 2020 using the modified retrospective

approach. The Company adopted this ASU as of January 1, 2020 with an immaterial impact on its financial statements.

Note 3. Fair Value Measurements

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

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

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

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

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

During the periods presented, the Company has not changed the manner in which it values assets and liabilities that are measured at fair value. The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers within the hierarchy during the years ended December 31, 2020 and 2019. 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

U.S. government agency obligations 25,001 - 25,001 -

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

Total Level 1 Level 2 Level 3

Corporate securities and commercial paper 67,918 - 67,918 -

Classified as (with contractual maturities):

Year Ended December 31,

Long-term investments (due between one and two years) 6,440 -

The investments are classified as available-for-sale marketable securities. At December 31, 2020 and 2019, the balance in the Company’s accumulated other comprehensive loss comprised activity related to the Company’s available-for-sale marketable securities. There were immaterial realized gains recognized on the sale of available-for-sale marketable securities during the year ended December 31, 2020 and none during the years ended December 31, 2019 and 2018, respectively. As a result, the Company did not reclassify any amounts out of accumulated other comprehensive loss for the periods then ended. The Company has a limited number of available-for-sale marketable securities in loss positions as of December 31, 2020, which the Company does not intend to sell and has concluded it will not be required to sell before recovery of the amortized cost for the investment at maturity. The fair value and amortized cost of investments in marketable securities by major security type as of December 31, 2020 and 2019 are presented in the tables that follow (in thousands):

Amortized Cost Unrealized Gain Unrealized Loss Fair Value

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 (14,288 ) (11,221 )

Other Accrued Liabilities

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

As of December 31,

Total other accrued liabilities $ 9,543 $ 4,950

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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 funded, early-stage biopharmaceutical company focused on adoptive cell therapy. This interest in PACT Pharma is accounted for as an equity method investment, and as a result the Company records its share of PACT Pharma’s operating results in interest and other income, net, in its condensed consolidated statements of operations and comprehensive income (loss). The investment balance was zero at December 31, 2020 and December 31, 2019. Since the Company has no obligation to provide cash financing to PACT Pharma, the Company is not required to record losses beyond the carrying amount of the investment.

In January and June 2020, PACT Pharma issued shares in its Series C and Series C-1 preferred stock financings. The Company did not participate in these financings. The decrease in the Company’s equity ownership percentage and an increase in PACT Pharma’s estimated fair value per share resulted in gains on dilution totaling $2.0 million during the year ended December 31, 2020. After applying $1.4 million in losses accumulated in prior periods when the equity investment balance was zero, the Company recorded a gain of $0.6 million for the year ended December 31, 2020. There were no gains recorded by the Company for the year ended December 31, 2019.

The Company’s share of PACT Pharma’s losses for the year ended December 31, 2020 exceeded gains for the same period. The Company recorded $0.6 million and $1.2 million for its share of PACT Pharma’s operating losses for the years ended December 31, 2020 and 2019, respectively. The unrecognized equity method losses in excess of the Company’s investment was $1.3 million as of December 31, 2020.

For the years ended December 31, 2020 and 2019, the Company determined the fair value of the warrants to be insignificant to the consolidated financial statements.

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 from 2025 to 2029, subject to options by the Company to extend the lease term. The Company also leases space in Brisbane, California under a non-cancelable operating lease that is expected to commence in 2021 and extend through 2031.

In June 2020, the Company entered into a lease amendment for 36,303 square feet of additional space in Hayward, California, that is expected to commence during 2021 for an eight-year term with undiscounted minimum lease payments totaling approximately $10.1 million. The new lease is subject to an option to extend the lease term for eight years. The lease amendment includes an allowance of approximately $1.0 million for tenant improvements. The space was delivered to the Company in August 2020, as a result the Company has recognized a right-of-use asset and a lease liability for the building on its balance sheet at December 31, 2020.

In December 2020, the Company entered into a lease agreement for 109,237 square feet of space in Brisbane, California, that is expected to commence in the second half of 2021 for a term of approximately ten years with undiscounted minimum lease payments totaling approximately $90.3 million. The lease is subject to two options to extend the lease term for a period of eight years each. The lease agreement includes an allowance of approximately $12.6 million for tenant improvements with an option to increase the allowance by $5.5 million. The space was under construction at December 31, 2020 and has not been delivered to the Company.

At December 31, 2020 the Company’s lease portfolio had a weighted average remaining term of 6.2 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 Company cannot determine the implicit rate in its leases, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of 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 within a particular currency environment. The Company used an incremental borrowing rate of 10% as of the date of adoption for leases that commenced prior to January 1, 2020. The weighted average discount rate for the Company’s lease portfolio at December 31, 2020 was 7.3%.

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For the year ended December 31, 2020, the Company incurred $2.7 million of lease costs included in operating expenses in the consolidated statements of income and comprehensive income in relation to its operating lease, a portion of which was variable rent expense and not included within the measurement of the Company’s operating ROU assets and lease liabilities. The variable rent expense 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 $0.2 million for the year ended December 31, 2020. At December 31, 2020, the Company’s operating lease right-of-use asset totaled $12.8 million, and the operating lease liability totaled $18.1 million. The short-term portion of the operating lease liability was $2.9 million and is contained within other current liabilities on the balance sheet, with the remaining $15.2 million liability reported on the balance sheet as operating lease liability, noncurrent.

Rent expense was $1.6 million for each of the years ended December 31, 2019 and 2018.

As of December 31, 2020, the Company’s future minimum lease payments were as follows (in thousands):

Year Ended December 31,

Total undiscounted future minimum lease payments 22,263 13,391

Less: Imputed interest (4,153 ) N/A

Total operating lease liabilities 18,110 N/A

Operating lease liabilities, noncurrent 15,243 N/A

(1) Presented in accordance with ASC 842.

(2) Presented in accordance with ASC 840. N/A items not required under ASC 840.

Total undiscounted future minimum lease payments do not include approximately $90.3 million related to the Company’s Brisbane lease that has not yet commenced. This lease is expected to commence during 2021 with a lease term of approximately 10 years. Total minimum lease payments have not been reduced by minimum sublease rent income of approximately $0.1 million under a noncancelable sublease.

The Company has provided deposits for letters of credit totaling $0.2 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, 2020.

Note 7. License and Collaboration Agreements

The following table summarizes the revenues received as a result of the Company’s collaboration agreements with Gilead Sciences, Inc. (Gilead) and Taiho Pharmaceutical Co., Ltd. (Taiho):

Year Ended December 31,

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The following table summarizes details of revenues by collaboration and by category of revenue:

Year Ended December 31,

Gilead license to zimberelimab * $ 55,096 $ - $ -

Taiho license to zimberelimab * - 8,000 -

Taiho license to etrumadenant * - - 3,000

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 previous period - - -

The Company received $175 million in upfront payments from Gilead in connection with the Option, License and Collaboration Agreement and identified $100 million in unconstrained consideration to be received in 2022. In addition, the Company received $200 million from Gilead in connection with the Stock Purchase Agreement, of which approximately $109.4 million represented the fair value of stock purchased at the transaction closing date in July 2020 with the remaining premium of $90.6 million allocated to the transaction price.

At the transaction closing date, these payments were allocated to the performance obligations identified as follows:

Amount

Allocation of transaction price

Upfront cash consideration $ 175,000

Premium from Stock Purchase Agreement 90,600

Total transaction price allocated to revenue $ 365,600

Allocation to performance obligations

Zimberelimab license $ 55,096

Domvanalimab option 36,728

Access rights related to the Company's research and development pipeline 137,113

Development and commercialization services for zimberelimab 9,703

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Gilead Sciences, Inc.

On May 27, 2020, the Company entered into an Option, License and Collaboration Agreement (Gilead Collaboration Agreement), Common Stock Purchase Agreement (the Stock Purchase Agreement), and Investor Rights Agreement, (collectively, the Gilead Agreements), each with Gilead Sciences, Inc. (Gilead). The transaction closed on July 13, 2020 following expiration of the antitrust waiting period. Upon closing, Gilead made an upfront payment of $175 million pursuant to the Gilead Collaboration Agreement, and made an equity investment of approximately $200 million in the Company by purchasing 5,963,029 shares of Arcus common stock at a per share price of $33.54 pursuant to the Stock Purchase Agreement, and the Company appointed Gilead’s designee, Merdad Parsey, M.D., Ph.D. and Michael Quigley, Ph.D., to the Company’s Board of Directors pursuant to the Investor Rights Agreement.

Pursuant to the terms of the Gilead Collaboration Agreement, Gilead has an exclusive license to develop and commercialize zimberelimab in certain markets and obtained exclusive options to acquire an exclusive license to develop and commercialize all of the Company’s current and future clinical programs during the 10-year collaboration term, contingent upon Gilead’s access rights payments of up to $400 million and, for those programs that enter clinical development prior to the end of the collaboration term, for up to an additional three years thereafter. Gilead may exercise its option, on a program-by-program basis, upon payment of an option fee that ranges from $200 million to $275 million per program for the Company’s clinical programs in existence at the date of the agreement, and $150 million per program for all other programs that enter clinical development thereafter should Gilead elect to exercise its options.

Upon Gilead’s exercise of its option to a program, the two companies will co-develop and equally share global development costs, subject to certain opt-out rights of the Company, and expense caps on the Company’s spending and related subsequent adjustments. For each optioned program, provided the Company has not exercised its opt-out rights, the Company has an option to co-promote in the United States with equal sharing of related profits and losses. Gilead has the right to exclusively commercialize any optioned programs outside of the U.S., subject to the rights of the Company’s existing partners to any territories, and Gilead will pay to the Company tiered royalties as a percentage of revenues ranging from the high teens to the low twenties. Gilead will further provide ongoing research and development support in the form of research and development pipeline access rights payments of up to $400 million over the collaboration term.

Pursuant to the Stock Purchase Agreement and the Investor Rights Agreement, Gilead has the right, at its option, to purchase additional shares from the Company, up to a maximum of 35% of the Company’s then-outstanding voting common stock, from time to time over the next five years, at a purchase price equal to the greater of a 20% premium to market (based on a trailing five-day average closing price) at the time Gilead exercises such option, and the $33.54 initial purchase price. Based on the value of the Company’s common stock at the contract closing, the right to purchase additional shares had no value. The Investor Rights Agreement also includes a three-year standstill and a two-year lockup and provides Gilead with registration rights commencing at the end of the lockup period, pro rata participation rights in certain future financings and the right to designate two individuals to be appointed to the Company’s Board of Directors.

The Company’s assessment of the transaction price included an analysis of amounts it expected to receive, which at contract inception consisted of the upfront cash payment of $175.0 million due upon contract closing in July 2020, the $100.0 million payment related to the research and development access rights due in 2022, and the $90.6 million premium resulting from Gilead’s purchase of common stock. All payments to date have been made by Gilead as they became due and payable so given this successful collection history, the Company considers the entire $365.6 million outlined above to be the initial transaction price.

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

Zimberelimab license

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

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Etrumadenant option

Gilead has the right to exercise an option for exclusive rights to etrumadenant, the Company’s adenosine receptor program, in exchange for an option payment of $250.0 million, that expires after a proscribed period following the Company’s achievement of certain development milestones. The Company calculated the standalone selling price of this program using a discounted cash flow method and concluded that it exceeded the price of the option, creating a material right and a distinct performance obligation. If the option is exercised, the performance obligations associated with the option will be identified and will determine the accounting for the option’s transaction price. If the option is allowed to lapse after development milestones trigger the start of the opt-in period, the Company will recognize any deferred revenue allocated to the option at the time of the lapse.

At December 31, 2020, the Company had $127.0 million of deferred revenue on its consolidated balance sheets related to this performance obligation. The Company has evaluated the program’s status as of the balance sheet date and believes that some or all of the revenue associated with the opt-in will be recognized within the minimum four-year term of the Gilead Collaboration Agreement.

Domvanalimab option

Gilead has the right to exercise an option for exclusive rights to domvanalimab, the Company’s anti-TIGIT monoclonal antibody, in exchange for an option payment of $275.0 million, that expires after a proscribed period following the Company’s achievement of certain development milestones. The Company calculated the standalone selling price of this program using a discounted cash flow method and concluded that it exceeded the price of the option, creating a material right and a distinct performance obligation. If the option is exercised, the performance obligations associated with the option will be identified and will determine the accounting for the option’s transaction price. If the option is allowed to lapse after development milestones trigger the start of the opt-in period, the Company will recognize any deferred revenue allocated to the option at the time of the lapse.

At December 31, 2020, the Company had $36.7 million of deferred revenue on its consolidated balance sheets related to this performance obligation. The Company has evaluated the program’s status and believes that revenue associated with the opt-in will be recognized within one year.

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

Gilead receives exclusive access to the Company’s current programs as well as the future programs for a period of ten years, contingent upon Gilead’s payment of $400 million, with the first payment of $100.0 million in 2022, and an additional $100 million payment due at Gilead’s option on each of the fourth, sixth, and eighth anniversaries of the agreement. The standalone selling price of this ongoing research and development pipeline access was determined using an expected cost-plus margin approach. The Company evaluated its rights and obligations in the Gilead Collaboration Agreement and determined that Gilead is contractually obligated to make the $100.0 million payment due in 2022 resulting in a minimum term of four years for this performance obligation. As a result, the amount was included in the transaction price. The Company uses a time-elapsed input method to measure progress toward satisfying this obligation, which is the method the Company believes most faithfully depicts the Company’s performance in transferring the promised services during the time period in which Gilead has access to the Company’s research and development pipeline. Accordingly, the revenue allocated to the performance obligation is being recognized using this input method over the minimum four-year period. The Company further determined that Gilead is not obligated to pay the remaining $300.0 million due over the remainder of the term. Failure to pay the non-obligatory payments will result in Gilead’s loss of certain rights to access and obtain licenses to the programs arising from the Company’s research and development pipeline.

At December 31, 2020 the Company had $121.7 million of deferred revenue on its consolidated balance sheets related to this performance obligation, classified between current and noncurrent based on the amortization of the revenue.

Development and commercialization services for zimberelimab

In conjunction with the license, the Company determined there existed a separate obligation to perform further development and commercialization services for Gilead. The standalone selling price of this obligation was determined using an expected cost-plus margin approach. This obligation includes a 50/50 share of the costs associated with all future development and commercialization of zimberelimab. The portion of the transaction price

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allocated to this performance obligation has been allocated in accordance with the total costs forecast for the development and commercialization of zimberelimab. The Company will recognize the amounts allocated to these services as the performance obligation is satisfied. Any additional payments received from or payments made to Gilead for the 50/50 cost share will be recognized as a reduction or an increase to R&D expense, respectively.

Gilead was also granted option rights to programs not yet in development. These programs were not determined to be performance obligations at contract inception, as there are no identified programs, revenues, or costs to compare against the option price.

At December 31, 2020 the Company had $9.7 million of contract liabilities on its consolidated balance sheets related to this performance obligation. The Company has evaluated the program’s status and believes that revenue associated with these services will be recognized over the full term of the contract, beginning in 2021.

Prepaid expenses and contract liabilities

The Company incurred $7.3 million in expenses to obtain the contract, which consisted of consultant and legal fees that were directly connected to the successful completion of the Gilead Agreements. The Company determined that $1.9 million of these expenses were related to the Stock Purchase Agreement and recorded them as offering costs. The Company allocated the remaining expenses between the various performance obligations, to be recognized when the underlying revenue is recognized. The portion allocated to the delivery of zimberelimab was recognized immediately, and the portion allocated to the remaining performance obligations will be recognized with timing consistent with the associated performance obligation. During the year ended December 31, 2020, the Company recognized $0.2 million in expense from the amortization of these assets. As of December 31, 2020, the Company had $4.2 million in prepaid expenses from costs to obtain the Gilead Agreements, of which $1.0 million was recorded in prepaid expenses and other current assets and $3.2 million was recorded in other long-term assets. The Company also recognized $9.7 million in contract liabilities for future development and commercialization services which Gilead prepaid, recorded in other non-current liabilities on the consolidated balance sheets.

Taiho Pharmaceutical Co., Ltd

In September 2017, the Company and Taiho entered into an option and license agreement (the Taiho Agreement) to collaborate on the potential development and commercialization of certain investigational products from the Company’s portfolio in Japan and certain other territories in Asia (excluding China) (the Taiho Territory). The Taiho Agreement provides Taiho with exclusive options, over a five-year period (the Option Period), to obtain an exclusive development and commercialization license to clinical stage investigational products from the Company’s programs (each, an Arcus Program).

In consideration for the exclusive options and other rights contained in the Taiho Agreement, Taiho agreed to make non-refundable, non-creditable cash payments to the Company totaling $35.0 million, of which the Company received $25.0 million during 2017. An additional $5.0 million was received in 2018 and the remaining $5.0 million was received in 2019.

In the event that the Company has not initiated IND enabling studies for at least five Arcus Programs prior to the expiration of the Option Period, Taiho may elect to extend the Option Period, up to a maximum of seven years, subject to an extension fee. For each option that Taiho elects to exercise, they will be obligated to make an option exercise payment of between $3.0 million to $15.0 million, depending on the development stage of the applicable Arcus Program for which the option is exercised. In addition, the Taiho Agreement provides that the Company is eligible to receive additional clinical and regulatory milestones totaling up to $130.0 million per Arcus Program, and it will be eligible to receive contingent payments of up to $145.0 million per Arcus Program associated with the achievement of specified levels of Taiho net sales in the Taiho Territory.

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

The Company evaluated the Taiho Agreement under ASC 606 and determined that the current performance obligations consist of (1) the research and development services, in which the Company will use commercially reasonable efforts to initiate IND enabling studies for at least five Arcus Programs, as well as further develop such

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Arcus Programs during the term of the Agreement, and (2) the obligation to participate on the joint steering committee. These deliverables are non-contingent in nature. The Company determined that the obligation to participate in the joint steering committee does not have stand-alone value to Taiho because the committee’s primary purpose is to monitor and govern the research and development activities and, hence, it is inseparable from the research and development services.

The Company’s assessment of the transaction price included an analysis of amounts it expected to receive, which at contract inception consisted of the upfront cash payment of $20.0 million due upon contract execution in September 2017, a $5.0 million payment due within 30 days of contract execution, an anniversary payment of $5.0 million due in 2018, and a final anniversary payment of $5.0 million due in 2019. All payments were made by Taiho as they became due and payable so given this successful collection history, the Company considers the entire $35.0 million in non-refundable fees to be the initial transaction price.

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

The Company also concluded that, at the inception of the agreement, Taiho’s exclusive options are not considered material rights as the options do not contain a significant and incremental discount. The Company therefore excludes the exclusive options from the initial transaction price and accounts for them as separate contracts. In 2018, Taiho exercised its option to the Company’s adenosine receptor antagonist program, including etrumadenant, for a fee of $3.0 million, which was recognized by the Company as revenue during the year ended December 31, 2018 under Topic 605. The adoption of Topic 606 in 2019 had no effect on the revenue recognized for this fee. In 2019, Taiho exercised its option to the Company’s anti-PD-1 antibody program, including zimberelimab for a fee of $8.0 million. The Company identified one performance obligation comprised of the delivery of the license, which was completed in 2019. The transaction price was determined to be the payment of $8.0 million, which was recognized by the Company as licensing revenue during the year ended December 31, 2019 under Topic 606. Upon the option exercises, Taiho gained sole responsibility for the development and commercialization of the licensed products from within the programs in the Taiho Territory.

The Company also determined that the clinical and regulatory milestone payments under the Taiho Agreement are variable consideration under Topic 606 which need to be added to the transaction price when it is probable that a significant revenue reversal will not occur. Based on the nature of the clinical and regulatory milestones, such as the regulatory approvals which are not within the Company’s control, the Company will not consider achievement of such milestones to be probable until the uncertainty associated with the milestones has been resolved. When it is probable that a significant reversal of revenue will not occur, the milestone payment will be added to the transaction price, which will then be allocated to each performance obligation, on a relative standalone selling price basis, for which the Company recognizes revenue. As of December 31, 2020, no clinical or regulatory milestones had been achieved under the Taiho Agreement.

The Company also considers the contingent payments due from Taiho upon the achievement of specified sales volumes to be similar to royalty payments. The Company considers the license to be the predominant item to which the royalties relate. The Company will recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). As of December 31, 2020, no sales milestone or royalty revenue has been recognized.

The Taiho Agreement shall remain in effect until expiry of all Royalty Terms for the licensed products, in each case subject to certain exceptions.

During the years ended December 31, 2020 and 2019, the Company recognized a total of $7.0 million and $15.0 million of revenue, respectively, under the Taiho Agreement in accordance with Topic 606. During the year ended December 31, 2018, the Company recognized a total of $8.3 million in revenue in accordance with Topic 605. Revenues for each of these years consisted of revenue recognized for the option exercised and the non-refundable upfront research and development fees. As of December 31, 2020, the Company recorded deferred revenue, current and deferred revenue, noncurrent of $7.0 million and $5.0 million, respectively, in its consolidated balance sheet. As

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of December 31, 2019, the Company recorded deferred revenue, current and deferred revenue, noncurrent of $7.0 million and $12.0million, respectively, in 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 June 2019, in which it obtained an exclusive license to develop, use, manufacture, and commercialize products including an anti-PD-1 antibody worldwide except for Greater China and Thailand.

During the years ended December 31, 2020 and 2019, the Company made milestone payments of $5.0 million and $7.5 million, respectively, and incurred sub-license fees of $10.1 million and $1.2 million, respectively, under the WuXi PD-1 Agreement. 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 year ended December 31, 2018, the Company incurred zero expense for milestone payments and incurred zero expense for sub-license fees. 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 CD-39 Agreement) with WuXi 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. Upon signing the agreement, the Company incurred and paid a $0.5 million upfront payment which was recorded in R&D expense, as the products are still in research stage. The WuXi CD-39 Agreement provides for clinical and regulatory milestone payments totaling $16.5 million, and royalty payments in the low single digits of net sales by the Company of licensed products.

Abmuno License Agreement

In December 2016, the Company entered into a license agreement (the Abmuno Agreement) with Abmuno Therapeutics LLC (Abmuno) in which it obtained a worldwide exclusive license to develop, use, manufacture, and commercialize products that include an anti-TIGIT antibody. During the years ended December 31, 2020 and 2018, the Company made milestone payments of $3.0 million and $2.8 million, respectively. No expense was incurred during the year ended December 31, 2019. Milestone payments were recorded as research and development expense, as the products have not reached technological feasibility and do not have alternative future use. The Abmuno Agreement also provides for additional clinical, regulatory and commercialization milestone remaining payments of up to $98.0 million as of December 31, 2020.

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. For the years ended December 31, 2020 and 2019, the Company incurred $0.5 million and no expense, respectively, under the collaboration.

Strata Collaboration Agreement

On April 30, 2019, the Company and Strata Oncology, Inc. (Strata) entered into a Co-Development and Collaboration Agreement (the Co-Development and Collaboration Agreement) to pursue a clinical development collaboration utilizing Strata’s precision drug development platform and proprietary biomarkers to evaluate zimberelimab, the Company’s clinical-stage anti-PD-1 antibody, in patients in a tumor-agnostic fashion.

Under the terms of the Co-Development and Collaboration Agreement, the parties will share a portion of development costs for the clinical collaboration under specified terms. Strata is eligible to receive $2.5 million upon the achievement of a development milestone, as well as regulatory and commercial milestones of up to $125.0

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million and up to double-digit royalties on U.S. net sales of zimberelimab in the biomarker-identified indication. For the years ended December 31, 2020 and 2019, the Company mademilestone payments to Strata ofzero and $2.5 million, respectively, which was recorded as a research and development expense.For the year ended December 31, 2020, the Company incurred expenses of $1.7 million, of which $0.3 million had been reimbursed by Strata as development cost sharing. For the year ended December 31, 2019, the Company incurred expenses of $1.0 million, of which $0.2 million had been reimbursed by Strata as development cost sharing. Net expenses related to this co-development agreement were recorded within research and development expenses. As further consideration in connection with the Co-Development and Collaboration Agreement, the Company issued to Strata 1,257,651 restricted shares of its common stock with an initial measured fair value of $15.0 million, which are subject to vesting based upon the achievement of specified regulatory milestones within certain timelines. Expense relating to the restricted shares subject to these milestones is recognized if it is considered probable that the associated shares will vest. The probability of achievement is assessed at the end of each quarterly period. As of December 31, 2020, the Company determined that none of the restricted shares were probable of vesting and, as a result, no compensation expense related to the restricted shares has been recognized to date.

AstraZeneca Agreement

On October 29, 2020 the Company announced a collaboration with AstraZeneca to evaluate domvanalimab, the Company’s investigational anti-TIGIT antibody, in combination with AstraZeneca’s Imfinzi (durvalumab) in a registrational Phase 3 clinical trial in patients with unresectable Stage III non-small cell lung cancer (NSCLC). Under the terms of the agreement, each company will retain existing rights to their respective molecules and any future commercial economics. AstraZeneca will conduct the trial, and each company will supply its respective anti-cancer agent to support the trial. Under the terms of the agreement and subject to the parties’ approval of a final budget for the clinical trial, the Company may be obligated to reimburse AstraZeneca for a portion of the costs incurred.

Consistent with the terms of the recently completed Arcus-Gilead partnership, Gilead maintains an option to co-develop and co-commercialize domvanalimab. If Gilead exercises its option to domvanalimab, the trial from this AstraZeneca collaboration is expected to form part of the Arcus and Gilead joint development program and Arcus’s portion of the trial costs would be shared with Gilead.

Note 8: Convertible Preferred Stock and Stockholders’ Equity (Deficit)

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.

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

In July 2020, the Company closed the Gilead Collaboration Agreement, Common Stock Purchase Agreement, and the Investor Rights Agreement, each signed with Gilead in May 2020. The transaction closed on July 13, 2020 following expiration of the antitrust waiting period. Upon closing, Gilead made an equity investment of approximately $200 million in the Company by purchasing 5,963,029 shares of Arcus common stock at a per share price of $33.54 pursuant to the Stock Purchase Agreement. Of the $200 million equity investment, approximately $90.6 million was determined to be a premium on the purchase of common stock and allocated to the performance obligations created by the Gilead Collaboration Agreement. See Note 7 and Note 13 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.

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As of December 31, 2020 and 2019, the Company had no outstanding convertible preferred stock.

Note 9: 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 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 165,133 and 455,158 shares had not vested and were subject to repurchase as of December 31, 2020 and 2019, 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, 2020 and 2019, the Company included cash received for the early exercise of unvested options of $0.7 million and $1.7 million, respectively, allocated to other current and long-term liabilities based on the timing of their expected vesting. 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 our 2018 Plan will automatically increase on January 1 of each year beginning January 1, 2019 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 our board of directors. As of December 31, 2020, there were 1,106,209 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 2,604,587 shares on January 1, 2021.

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. In November 2020, the Company’s Board of Directors authorized an increase of 1,000,000 shares reserved for issuance under the 2020 Plan. As of December 31, 2020 there were 784,975 shares available for grant under the 2020 Plan.

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

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During the years ended December 31, 2020, 2019 and 2018, the intrinsic value of shares exercised was $6.8 million, $0.2 million and $0.6 million, respectively, and the fair value of shares vested during the same period was $16.8 million, $7.8 million and $3.0 million, respectively.

Restricted Stock Units and Restricted Stock Awards

In 2015, in conjunction with the incorporation of the Company, the Company issued a total of 2,777,776 shares of common stock at $0.0004 per share to its two founders, the Chief Executive Officer and the President, under restricted stock agreements. At the date of grant, the shares had an estimated fair value of $0.0004 per share. Under the terms of the restricted stock agreements, shares vested monthly over four years. There were no shares granted under restricted stock agreements during the years ended December 31, 2020, 2019, and 2018. The total grant date fair value of shares vested during the same periods was immaterial. All shares were vested as of December 31, 2020.

The Company granted 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 Weighted Average Grant Date Fair Value

Nonvested at December 31, 2019 - $ -

During the year ended December 31, 2020, the total grant date fair value of shares granted under RSUs was $21.1 million. The total grant date fair value of shares vested during the same period was $0.1 million. There were no RSUs granted or vested during the years ended December 31, 2019 or 2018.

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 our 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 our board of directors.

As of December 31, 2020, there were 1,190,422 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 651,146 shares on January 1, 2021.

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Non-employee stock-based compensation

As of December 31, 2020, 2019 and 2018, 31,986, 372,774 and 14,918 respectively, of vested stock options and 21,165, 308,596, and 31,388, 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, 2020, 2019 and 2018 was $0.7 million, $0.9 million and $0.3 million, respectively.

Stock-based compensation expense

The following table summarizes employee and non-employee stock-based compensation expense for the years ended December 31, 2020, 2019 and 2018, and also the allocation within the consolidated statements of operations and comprehensive loss (in thousands):

Year Ended December 31,

As of December 31, 2020, unrecognized employee and nonemployee compensation costs related to non-vested stock option awards and RSUs totaled $88.9 million, and is expected to be recognized over a weighted average period of 2.9 years.

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 our 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, 2020, 2019, and 2018:

Stock Options

Year Ended December 31,

Dividend yield 0% 0% 0%

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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 10. Net Loss per Share

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

Year Ended December 31,

Numerator:

Denominator:

Net loss per share, basic and diluted $ (2.24 ) $ (1.93 ) $ (1.43 )

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

At December 31,

Unvested restricted stock units 738,650 - -

Employee Stock Purchase Plan shares 18,219 - -

Unvested restricted common stock - - 289,352

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Note 11: Provision for Income Taxes

The provision for income taxes differs from the amount expected by applying the federal statutory rate to the loss before taxes as follows:

Year Ended December 31,

Research and development credits 3.10 % 0.00 % 0.00 %

Non-deductible expenses and other (0.90 )% (1.35 )% (1.54 )%

As of December 31, 2020 and 2019, the components of the Company’s deferred tax assets are as follows (in thousands):

Year Ended December 31,

Deferred tax assets:

Federal and state net operating loss carryforwards $ 54,526 $ 30,049

Research and development credits carryforwards 11,209 8,077

Lease liability 3,831 -

Deferred tax liabilities:

Right-of-use assets (2,704 ) -

Total deferred tax liabilities (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. 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 increased by approximately $33.8 million, $19.7 million and $12.2 million, respectively, for the years ended December 31, 2020, 2019 and 2018.

At December 31, 2020, the Company has total net operating loss carryforwards (NOLs) of $253.3 million for federal income tax purposes, of which approximately $47.4 million begin to expire in 2035 and approximately $205.9 million that have no expiration date and federal research tax credits of approximately $9.9 million that begin to expire in 2035. The Company also has state NOLs of approximately $15.9 million that begin to expire in 2035, and state research tax credits of approximately $5.1 million that have no expiration date. Use of the NOLs and credit carryforwards may be subject to a substantial annual limitation due to the ownership change provisions of U.S. tax law, as defined in Section 382 and 383 of the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of NOLs and credits before use. The Company

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determined that an ownership change, as defined under IRC Section 382, occurred in the current and previous years. While the Company does not expect these ownership changes to result in the expiration of net operating loss and credit carryforwards prior to utilization, the Company is subject to an annual limitation on the use of its tax attributes. The limitation on the Company's use of net operating loss and credit carryforwards could reduce the Company's ability to use a portion of the tax attributes to offset future taxable income.

The Company has not been audited by the Internal Revenue Service, any state or foreign tax authority. The Company is subject to taxation in the United States and also beginning in 2017, in Australia. Because of the net operating loss and research credit carryforwards, all of the Company’s tax years, from 2015 to 2019, remain open to U.S. federal and California state tax examinations. In addition, the Company’s tax years from 2017 to 2019 are open to examination in Australia. There were no interest or penalties accrued at December 31, 2020, 2019 or 2018.

Uncertain Tax Positions

The Company follows the provisions of FASB Accounting Standards Codification (ASC 740-10), Accounting for Uncertainty in Income Taxes. ASC 740-10 prescribes a comprehensive model for the recognition, measurement, presentation and disclosure in financial statements of uncertain tax positions that have been taken or expected to be taken on a tax return. No liability related to uncertain tax positions is recorded in the consolidated financial statements. The Company’s reserve for unrecognized tax benefits is approximately $3.2 million, $2.2 million and $1.1 million at December 31, 2020, 2019 and 2018, respectively.

Due to the full valuation allowance at December 31, 2020 and 2019, current adjustments to the unrecognized tax benefit will have no impact on the Company’s effective income tax rate; any adjustments made after the valuation allowance is released will have an impact on the tax rate.

The following table summarizes the activity related to our unrecognized tax benefits (in thousands):

Year Ended December 31,

Additions (decreases) for tax positions taken in a prior year (258 ) (7 ) 8

Additions for tax positions taken in current year 1,246 1,088 454

The Company does not anticipate material changes to its uncertain tax positions through the next 12 months.

Note 12: Commitments

Purchase Commitments

The Company has contractual arrangements with research and development organizations and suppliers; however, these contracts are generally cancelable on 30 days’ notice and the obligations under these contracts are largely based on services performed.

Indemnification

As permitted under Delaware law and in accordance with the Company’s bylaws, the Company is required to indemnify its officers and directors for certain events or occurrences while the officer or director is or was serving in such capacity. The Company is also party to indemnification agreements with its directors and officers. The Company believes the fair value of the indemnification rights and agreements is minimal. Accordingly, the Company has not recorded any liabilities for these indemnification rights and agreements as of December 31, 2020 and 2019.

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Note 13. Related parties

Relationship and transactions with Gilead Sciences, Inc. (Gilead)

As of December 31, 2020, Gilead held approximately 13% of the Company’s outstanding common stock. These holdings resulted from Gilead’s investment in the Company of approximately $56.7 million, net of offering costs, by purchasing 2,200,000 shares of common stock at a per share price of $27.50 in the May 2020 Public Offering as well as Gilead’s acquisition of 5,963,029 shares under the Stock Purchase Agreement. Gilead has the right, at its option, to purchase up to a maximum of 35% of the Company’s then-outstanding voting common stock, from time to time over the next five years. Gilead also has the right under the Investor Rights Agreement to designate two individuals to be appointed to the Company’s board of directors. The Company appointed the first Gilead designee, Merdad Parsey, M.D., Ph.D. and Michael Quigley, Ph.D., to its board of directors pursuant to the Investor Rights Agreement. See Note 7 for further discussion of the agreements with Gilead.

At December 31, 2020, the Company had a $0.9 million cost sharing receivable recorded on the consolidated balance sheets under receivable from collaboration partners, to be invoiced the following quarter. The Company also had $185.4 million in deferred revenue at December 31, 2020, of which $117.8 million represented the long-term portion of deferred revenue allocated to performance obligations not expected to be completed within one year of the balance sheet date, which was recorded in deferred revenue, noncurrent on the consolidated balance sheets. The Company also recognized $9.7 million in contract liabilities for future development and commercialization services which Gilead prepaid, all of which was recorded in other long-term liabilities on the consolidated balance sheets.

For the year ended December 31, 2020, the Company recognized $70.5 million in revenue under the Gilead Collaboration Agreement. The Company also recognized a $3.4 million reduction in research and development expense related to its cost-sharing provisions of the agreement.

RCUS US Equity

RCUS · 10-K · period ended 2020-12-31

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

RCUS US Equity☆

RCUS · 10-K · period ended 2020-12-31

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

RCUS US Equity