10-Q 1 rcus-10q_20200331.htm 10-Q rcus-10q_20200331.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____________to _______________

Commission File Number: 001-38419

 

Arcus Biosciences, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

47-3898435

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

3928 Point Eden Way

Hayward, CA 94545

 

(Address of principal executive offices)

 

Registrant’s telephone number, including area code: (510) 694-6200

 

Securities registered pursuant to Section 12(b) of the Act:

 

Titles of Each Class

 

Trading Symbol(s)

 

Name of Each Exchange on which Registered

Common Stock, Par Value $0.0001 Per Share

 

RCUS

 

The New York Stock Exchange

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

 

 

 

 

As of April 30, 2020, the registrant had 46,046,026 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 


Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements

1

 

Condensed Consolidated Balance Sheets

1

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

2

 

Condensed Consolidated Statement of Stockholder's Equity

3

 

Condensed Consolidated Statements of Cash Flows

4

 

Notes to Condensed Consolidated Financial Statements

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

19

Item 4.

Controls and Procedures

19

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

20

Item 1A.

Risk Factors

20

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

49

Item 3.

Defaults Upon Senior Securities

49

Item 4.

Mine Safety Disclosures

50

Item 5.

Other Information

50

Item 6.

Exhibits

51

Signatures

52

 

 

 

 

 

i


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

ARCUS BIOSCIENCES, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019*

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

67,326

 

 

$

57,937

 

Short-term investments

 

 

90,540

 

 

 

130,333

 

Receivable from collaboration partners

 

 

344

 

 

 

132

 

Prepaid expenses and other current assets

 

 

8,007

 

 

 

4,303

 

Total current assets

 

 

166,217

 

 

 

192,705

 

Property and equipment, net

 

 

8,761

 

 

 

9,330

 

Restricted cash

 

 

203

 

 

 

203

 

Other long-term assets

 

 

963

 

 

 

872

 

Total assets

 

$

176,144

 

 

$

203,110

 

LIABILITIES

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,426

 

 

$

4,704

 

Accrued liabilities

 

 

10,170

 

 

 

9,522

 

Deferred revenue, current

 

 

7,000

 

 

 

7,000

 

Other current liabilities

 

 

1,408

 

 

 

1,480

 

Total current liabilities

 

 

21,004

 

 

 

22,706

 

Deferred revenue, noncurrent

 

 

10,272

 

 

 

12,022

 

Deferred rent

 

 

3,590

 

 

 

3,734

 

Other long-term liabilities

 

 

640

 

 

 

806

 

Total liabilities

 

 

35,506

 

 

 

39,268

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value, 10,000,000 shares authorized as of March 31, 2020 and December 31, 2019; no shares issued and outstanding as of March 31, 2020 and December 31, 2019

 

 

-

 

 

 

-

 

Common stock, $0.0001 par value, 400,000,000 shares authorized as of March 31, 2020 and December 31, 2019; 45,982,788 and 45,925,004 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively

 

 

4

 

 

 

4

 

Additional paid-in capital

 

 

373,425

 

 

 

369,100

 

Accumulated deficit

 

 

(233,079

)

 

 

(205,326

)

Accumulated other comprehensive income

 

 

288

 

 

 

64

 

Total stockholders’ equity

 

 

140,638

 

 

 

163,842

 

Total liabilities, convertible preferred stock and stockholders’ equity

 

$

176,144

 

 

$

203,110

 

 

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

*

The Condensed Consolidated Balance Sheet as of December 31, 2019 has been derived from the audited financial statements as of that date.

1


ARCUS BIOSCIENCES, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share amounts)

(unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Collaboration and license revenue

 

$

1,750

 

 

$

1,750

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

23,142

 

 

 

15,554

 

General and administrative

 

 

7,008

 

 

 

4,969

 

Total operating expenses

 

 

30,150

 

 

 

20,523

 

Loss from operations

 

 

(28,400

)

 

 

(18,773

)

Non-operating income (expense):

 

 

 

 

 

 

 

 

Interest and other income, net

 

 

647

 

 

 

1,534

 

Gain on deemed sale from equity method investee

 

 

482

 

 

 

-

 

Share of loss from equity method investee

 

 

(482

)

 

 

(431

)

Total non-operating income, net

 

 

647

 

 

 

1,103

 

Net loss

 

 

(27,753

)

 

 

(17,670

)

Other comprehensive income

 

 

224

 

 

 

136

 

Comprehensive loss

 

$

(27,529

)

 

$

(17,534

)

Net loss per share, basic and diluted

 

$

(0.63

)

 

$

(0.41

)

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

 

 

44,282,607

 

 

 

43,508,592

 

 

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

2


ARCUS BIOSCIENCES, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands, except share and per share amounts)

(unaudited)

 

 

 

 

 

 

 

Common stock

 

 

Additional

Paid-In

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income (Loss)

 

 

Equity

 

Balance at December 31, 2018 *

 

 

43,610,823

 

 

$

4

 

 

$

357,873

 

 

$

(122,828

)

 

$

(107

)

 

$

234,942

 

Cumulative effect adjustment upon adoption of ASC 606

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,212

 

 

 

-

 

 

 

2,212

 

Issuance of common stock upon exercise of stock options

 

 

69

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Vesting of early exercised stock options and restricted stock

 

 

114,934

 

 

 

-

 

 

 

273

 

 

 

-

 

 

 

-

 

 

 

273

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

1,674

 

 

 

-

 

 

 

-

 

 

 

1,674

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

136

 

 

 

136

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(17,670

)

 

 

 

 

 

 

(17,670

)

Balance at March 31, 2019

 

 

43,725,826

 

 

$

4

 

 

$

359,820

 

 

$

(138,286

)

 

$

29

 

 

$

221,567

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019 *

 

 

44,212,195

 

 

$

4

 

 

$

369,100

 

 

$

(205,326

)

 

$

64

 

 

$

163,842

 

Issuance of common stock upon exercise of stock options

 

 

59,939

 

 

 

-

 

 

 

643

 

 

 

-

 

 

 

-

 

 

 

643

 

Vesting of early exercised stock options and restricted stock

 

 

77,388

 

 

 

-

 

 

 

220

 

 

 

-

 

 

 

-

 

 

 

220

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

3,462

 

 

 

-

 

 

 

-

 

 

 

3,462

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

224

 

 

 

224

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(27,753

)

 

 

-

 

 

 

(27,753

)

Balance at March 31, 2020

 

 

44,349,522

 

 

$

4

 

 

$

373,425

 

 

$

(233,079

)

 

$

288

 

 

$

140,638

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

*

The balances as of December 31, 2019 and 2018 have been derived from the audited financial statements as of that date.

3


ARCUS BIOSCIENCES, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Cash flow from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(27,753

)

 

$

(17,670

)

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

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

3,462

 

 

 

1,674

 

Depreciation and amortization

 

 

842

 

 

 

953

 

Share of loss from equity method investee

 

 

482

 

 

 

431

 

Gain on deemed sale from equity method investee

 

 

(482

)

 

 

-

 

Amortization of premiums on investments

 

 

(248

)

 

 

(747

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivable from collaboration partners

 

 

(212

)

 

 

-

 

Amounts owed by a related party

 

 

-

 

 

 

83

 

Prepaid expenses and other current assets

 

 

(3,704

)

 

 

(759

)

Other long-term assets

 

 

(91

)

 

 

(30

)

Accounts payable

 

 

(2,342

)

 

 

(517

)

Accrued liabilities

 

 

648

 

 

 

1,606

 

Other current liabilities

 

 

-

 

 

 

14

 

Deferred revenue

 

 

(1,750

)

 

 

(1,750

)

Deferred rent

 

 

(129

)

 

 

(127

)

Net cash used in operating activities

 

 

(31,277

)

 

 

(16,839

)

Cash flow from investing activities

 

 

 

 

 

 

 

 

Purchases of short-term and long-term investments

 

 

(8,885

)

 

 

(72,407

)

Proceeds from maturities of short-term and long-term investments

 

 

49,150

 

 

 

87,314

 

Purchases of property and equipment

 

 

(209

)

 

 

(628

)

Net cash provided by investing activities

 

 

40,056

 

 

 

14,279

 

Cash flow from financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

643

 

 

 

-

 

Repurchase of unvested shares of stock

 

 

(33

)

 

 

(5

)

Net cash provided by (used in) financing activities

 

 

610

 

 

 

(5

)

Net increase (decrease) in cash and cash equivalents

 

 

9,389

 

 

 

(2,565

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

58,140

 

 

 

71,267

 

Cash, cash equivalents and restricted cash at end of period

 

$

67,529

 

 

$

68,702

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

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

 

$

76

 

 

$

380

 

Vesting of early exercised stock options and restricted stock

 

$

220

 

 

$

273

 

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

 

4


 

ARCUS BIOSCIENCES, INC.

Notes to Condensed Consolidated Financial Statements

Note 1. Organization

Description of Business

Arcus Biosciences, Inc. (the Company) is a clinical-stage biopharmaceutical company focused on creating best-in-class cancer therapies. The Company’s initial focus has been on well-characterized biological pathways with significant scientific data supporting their importance. Since its inception in 2015, the Company has built a robust and highly efficient drug discovery capability to create highly differentiated small molecules, which the Company is developing in combination with its in-licensed monoclonal antibodies through rationally designed, indication-specific, adaptive clinical trial designs.

Liquidity and Capital Resources

As of March 31, 2020, the Company had cash and investments of $157.9 million, which are cash, cash equivalents, and investments in marketable securities, which the Company believes will be sufficient to fund its planned operations for a period of at least twelve months following the filing date of this report.

Note 2. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and pursuant to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the Company’s opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the results of operations and cash flows for the periods presented have been included.

Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 or for any future period. The balance sheet as of December 31, 2019 has been derived from audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements.

The accompanying condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 5, 2020.

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB), or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s condensed consolidated financial statements upon adoption. Under the Jumpstart Our Business Startups Act of 2012, as amended (the JOBS Act), the Company meets the definition of an emerging growth company and has elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. The Company will remain an emerging growth company until the earliest of (1) the last day of its first fiscal year (a) following the fifth anniversary of the completion of its initial public offering, (b) in which the Company has a total annual gross revenue of at least $1.07 billion, or (c) in which the Company is deemed to be a large accelerated filer, which means the market value of the common stock that is held by non-affiliates exceeds $700.0 million of the prior June 30th or (2) the date on which the Company has issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

Principles of Consolidation

The Company established a wholly-owned subsidiary in Australia in 2017 and a wholly-owned subsidiary in Ireland in 2019. The condensed consolidated financial statements include the Company’s accounts and those of its wholly-owned subsidiaries. All intercompany accounts, transactions and balances have been eliminated.

5


 

Use of Estimates

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

Cash Equivalents and Short-Term Investments

Cash equivalents include marketable securities having an original maturity of three months or less at the time of purchase. Short-term investments have maturities of greater than three months and up to twelve months at the time of purchase. 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 condensed consolidated statements of operations and comprehensive income or loss. The basis on which the cost of a security that is sold or an amount that is reclassified out of accumulated other comprehensive income or loss into earnings is determined using the specific identification method.

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

Restricted cash at March 31, 2020 and December 31, 2019 represents cash balances held as security in connection with the Company’s facility lease agreements. The following table provides a reconciliation of cash, cash equivalents, and restricted cash within the condensed consolidated balance sheets to the total shown in the condensed consolidated statements of cash flows (in thousands):

 

 

March 31,

2020

 

 

December 31,

2019

 

Cash and cash equivalents

 

$

67,326

 

 

$

57,937

 

Restricted cash

 

 

203

 

 

 

203

 

Cash, cash equivalents and restricted cash

 

$

67,529

 

 

$

58,140

 

 

Concentration of Credit Risk

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

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, product license fees, consulting and other related expenses.

The Company estimates research, preclinical and clinical study expenses 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. 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.

6


 

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 has decided to early adopt this ASU as of January 1, 2020, with an immaterial impact on the financial statements.

Recently Issued Accounting Standards or Updates Not Yet Effective

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. For public entities, ASU 2016-02 became effective for fiscal years beginning after December 15, 2018. As a result of the Company having elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, ASU 2016-02 is effective for the Company for the year ended December 31, 2021, and all interim periods within that fiscal year. Early adoption is permitted. The Company is assessing the impact of Topic 842 and believes it will likely have a material impact on its condensed consolidated balance sheet when adopted. The Company is still evaluating the impact that the statement will have on its condensed consolidated statement of operations.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, an amendment which modifies the measurement and recognition of credit losses for most financial assets and certain other instruments. The amendment 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 amendment 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. As a result of the Company having elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, ASU 2016-13 is effective for the Company for the year ended December 31, 2023, and all interim periods within that fiscal year. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s condensed consolidated 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. For public entities, ASU 2018-013 is effective for fiscal years beginning after December 15, 2019. As a result of the Company having elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, ASU 2018-13 is effective for the Company for the year ended December 31, 2021, and all interim periods within that fiscal year. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s condensed consolidated financial statements.

In August 2018, the FASB issued ASU No.2018-15 (Subtopic 350-40), Intangible – 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. For public entities, ASU 2018-15 is effective for fiscal years beginning after December 15, 2019. As a result of the Company having elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, ASU 2018-15 is effective for the Company for the year ended December 31, 2022, and all interim periods within that fiscal year. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s condensed consolidated financial statements.

In November 2018, the FASB issued ASU No. 2018-18 (Topic 808), Collaborative Arrangements. ASU 2018-18 clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606 when the collaborative arrangement participant is a customer in the context of a unit of account and precludes recognizing as revenue consideration received from a collaborative arrangement participant if the participant is not a customer. For public entities, ASU 2018-18 is effective for fiscal years beginning after December 15, 2019. As a result of the Company having elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, ASU 2018-18 is effective for the Company for the year ended December 31, 2021, and all interim periods within that fiscal year. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s condensed consolidated 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

7


 

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 as of March 31, 2020 and December 31, 2019. The following tables set forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):

 

 

 

March 31, 2020

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Money market funds

 

$

67,326

 

 

$

67,326

 

 

$

-

 

 

$

-

 

U.S. government treasury and agency securities

 

 

55,969

 

 

 

-

 

 

 

55,969

 

 

 

-

 

Corporate securities and commercial paper

 

 

34,571

 

 

 

-

 

 

 

34,571

 

 

 

-

 

Total assets measured at fair value

 

$

157,866

 

 

$

67,326

 

 

$

90,540

 

 

$

-

 

 

 

 

December 31, 2019

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Money market funds

 

$

45,498

 

 

$

45,498

 

 

$

-

 

 

$

-

 

U.S. government treasury and agency securities

 

 

74,854

 

 

 

-

 

 

 

74,854

 

 

 

-

 

Corporate securities and commercial paper

 

 

67,918

 

 

 

-

 

 

 

67,918

 

 

 

-

 

Total assets measured at fair value

 

$

188,270

 

 

$

45,498

 

 

$

142,772

 

 

$

-

 

 

Classified as (with contractual maturities):

 

 

March 31, 2020

 

 

December 31, 2019

 

Cash and cash equivalents

 

$

67,326

 

 

$

57,937

 

Short-term investments (due within one year)

 

 

90,540

 

 

 

130,333

 

Total cash, cash equivalents and investments in marketable securities

 

$

157,866

 

 

$

188,270

 

 

Investments in marketable securities are classified as available-for-sale. At March 31, 2020 and December 31, 2019, the balance in the Company’s accumulated other comprehensive loss comprised activity related to the Company’s available-for-sale marketable securities. There were no realized gains or losses recognized on the sale or maturity of available-for-sale marketable securities as of March 31, 2020 and December 31, 2019, and 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 March 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 March 31, 2020 and December 31, 2019 are presented in the tables that follow (in thousands):

 

 

 

Amortized

Cost

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Fair

Value

 

As of March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

67,326

 

 

$

-

 

 

$

-

 

 

$

67,326

 

U.S. government treasury and agency securities

 

 

55,663

 

 

 

306

 

 

 

-

 

 

 

55,969

 

Corporate securities and commercial paper

 

 

34,589

 

 

 

9

 

 

 

(27

)

 

 

34,571

 

Total

 

$

157,578

 

 

$

315

 

 

$

(27

)

 

$

157,866

 

8


 

 

 

 

Amortized

Cost

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Fair

Value

 

As of December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

45,498

 

 

$

-

 

 

$

-

 

 

$

45,498

 

U.S. government treasury and agency securities

 

 

74,854

 

 

 

12

 

 

 

(1

)

 

 

74,865

 

Corporate securities and commercial paper

 

 

67,918

 

 

 

55

 

 

 

(2

)

 

 

67,971

 

Total

 

$

188,270

 

 

$

67

 

 

$

(3

)

 

$

188,334

 

 

Note 4: Equity Investment

In 2016, the Company purchased approximately 3.6 million shares of common stock of PACT Pharma, Inc. (PACT Pharma), a privately funded, early-stage biopharmaceutical company focused on adoptive cell therapy, and 1.0 million shares of Series A preferred stock. The Company determined the fair value of such investment to be insignificant to the Company’s 2016 financial statements given the start-up nature of operations of PACT Pharma, and it was recorded at a nominal amount. The Company also received certain warrants to purchase PACT Pharma common stock exercisable upon PACT Pharma’s achievement of certain valuation thresholds pursuant to a Master Services Agreement between the Company and PACT Pharma (the PACT Agreement), which agreement has since expired. The Company determined PACT Pharma to be a variable interest entity, and that the Company has a variable interest in PACT. However, because the Company is not the primary beneficiary of PACT Pharma, it is not required to consolidate the results of operations of PACT Pharma within its condensed consolidated financial statements.

The Company’s investment in PACT Pharma is accounted for as an equity method investment, and as a result the Company records its share of PACT Pharma’s operating results in interest and other income, net, in its condensed consolidated statements of operations and comprehensive loss. The investment balance was zero at March 31, 2020 and December 31, 2019.

In January 2020, PACT Pharma closed its Series C convertible preferred stock financing. The Company did not participate in this financing and therefore its equity ownership percentage in PACT Pharma decreased. As a result of the dilution in its equity ownership percentage and an increase in PACT Pharma’s estimated fair value per share, the Company realized a $1.3 million gain on deemed sale from equity method investee during the quarter ended March 31, 2020. After applying the $0.8 million in losses accumulated in prior periods when the equity investment balance was zero, the Company recorded a gain of $0.5 million and an increase to the fair value of the investment balance in the consolidated balance sheet as of March 31, 2020 by the same amount.

The Company’s share of PACT Pharma’s losses for the three months ended March 31, 2020 exceeded the gains on deemed sale recognized as a result of the Series C financing. Since the Company has no obligation to provide cash financing to PACT Pharma, no additional losses are being recorded beyond the investment’s carrying amount. For the three months ended March 31, 2020, the Company recorded $0.5 million for its share of PACT Pharma’s operating losses. No losses were recognized during the three months ended March 31, 2019 because the value of the investment at that date was zero. The unrecognized equity method losses in excess of the Company’s investment was $0.1 million as of March 31, 2020.

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

Note 5. License and Collaboration Agreements

 

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, Taiho 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.

9


 

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 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 AB928, for a fee of $3.0 million, which was recognized by the Company as revenue during the year ended December 31, 2018 under Topic 605. The adoption of Topic 606 in 2019 had no effect on the revenue recognized for this fee. In 2019, Taiho exercised its option to the Company’s anti-PD-1 antibody program, including zimberelimab (formerly referred to as AB122) for a fee of $8.0 million. The Company identified one performance obligation, the delivery of the license, which was completed in 2019. The transaction price was determined to be the payment of $8.0 million, which was recognized by the Company as licensing revenue during the year ended December 31, 2019 under Topic 606. 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 March 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 March 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 each of the three months ended March 31, 2020 and 2019, the Company recognized a total of $1.8 million of revenue under the Taiho Agreement, consisting of revenue recognized for the non-refundable upfront research and development fees. As of March 31, 2020, the Company recorded deferred revenue, current and deferred revenue, noncurrent of $7.0 million and $10.3 million, respectively, in its condensed consolidated balance sheet.

10


 

Changes in Deferred Revenue Balances

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

 

 

Three Months Ended March 31,

 

Revenue recognized in the period from:

 

2020

 

2019

 

Amounts included in deferred revenue at the beginning of the period

 

$

1,750

 

$

1,750

 

Performance obligations satisfied in previous period

 

 

-

 

 

-

 

WuXi Biologics License Agreement

The Company entered into a license agreement (the WuXi Agreement) with WuXi Biologics (Cayman) Inc. (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. From the inception of the WuXi Agreement through March 31, 2020, the Company has made upfront and milestone payments of $26.0 million and incurred a sub-license fee of $1.2 million. The sub-license fee was incurred in the fourth quarter of 2019 and paid in the first quarter of 2020. These payments were recorded as research and development expense, as the products had not reached technological feasibility and do not have an alternative future use. The WuXi Agreement also provides for clinical and regulatory milestone payments, commercialization milestone payments of up to $375.0 million, and tiered royalty payments to be made to WuXi Biologics that range from the high single-digits to low teens of net sales by the Company of licensed products.

The Company incurred no expense on the WuXi Agreement during the three months ended March 31, 2020.

Abmuno License Agreement

In December 2016, the Company entered into a license agreement (the Abmuno Agreement) with Abmuno Therapeutics LLC (Abmuno) for a worldwide exclusive license to develop, use, manufacture, and commercialize products that include an anti-TIGIT antibody, including AB154. Under the Abmuno Agreement, the Company has made upfront and milestone payments totaling $6.6 million as of December 31, 2019. The Abmuno Agreement also provides for additional clinical, regulatory and commercialization milestone remaining payments of up to $101.0 million as of March 31, 2020.

No upfront or milestone payments were made under the Abmuno Agreement during the three months ended March 31, 2020 or 2019, respectively.

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 (TECENTRIQ®) and the Company’s investigational products. Pursuant to the Genentech Agreement, the parties entered into Trial Supplements for the evaluation of AB928 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.

No expense was incurred on this collaboration for the quarter ended March 31, 2020.

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 million and up to double-digit royalties on U.S. net sales of zimberelimab in the biomarker-identified indication. From the inception of the Agreement through March 31, 2020, the Company has made a milestone payment of $2.5 million and has incurred expenses of $1.4 million, of which $0.3 million had been reimbursed by Strata as development cost sharing. These payments were recorded as research and development expense.

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

11


 

assessed at the end of each quarterly period. As of March 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.

For the three months ended March 31, 2020, the Company incurred expenses of $0.4 million, of which $0.1 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.

Note 6: Stock-Based Compensation

In March 2018, the Company adopted the 2018 Equity Incentive Plan (2018 Plan). The 2018 Plan replaced the Company’s 2015 Stock Plan (2015 Plan) and 3,570,000 shares were reserved under the 2018 Plan, along with any shares remaining available for issuance under the Company’s 2015 Plan or outstanding awards under its 2015 Plan that subsequently expire, lapse unexercised or are forfeited to or repurchased by the Company.

In January 2020, the Company adopted the 2020 Inducement Plan (2020 Plan). Under the 2020 Plan, 3,000,000 shares were reserved for issuance.

 

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

 

 

 

Three months ended March 31,

 

 

 

2020

 

 

2019

 

Research and development

 

$

1,736

 

 

$

847

 

General and administrative

 

 

1,726

 

 

 

827

 

Total stock-based compensation

 

$

3,462

 

 

$

1,674

 

 

Note 7. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

 

 

 

As of March 31, 2020

 

 

As of December 31, 2019

 

Accrued personnel expenses

 

$

2,566

 

 

$

4,571

 

Accrued research and development expenses

 

 

6,798

 

 

 

4,572

 

Professional fees

 

 

323

 

 

 

183

 

Other

 

 

483

 

 

 

196

 

Total

 

$

10,170

 

 

$

9,522

 

 

 

Note 8. Net Loss per Share

 

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

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Numerator:

 

 

 

 

 

 

 

 

Net loss

 

$

(27,753

)

 

$

(17,670

)

Denominator:

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

45,953,213

 

 

 

44,532,073

 

Less: weighted-average common shares subject to vesting

 

 

(1,670,606

)

 

 

(1,023,481

)

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

 

 

44,282,607

 

 

 

43,508,592

 

Net loss per share: basic and diluted

 

$

(0.63

)

 

$

(0.41

)

12


 

 

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

 

 

 

As of March 31,

 

 

 

2020

 

 

2019

 

Common stock options issued and outstanding

 

 

6,725,835

 

 

 

3,222,103

 

Unvested restricted common stock issued as part of

  collaboration agreement

 

 

1,257,651

 

 

 

-

 

Unvested early exercised common stock options

 

 

375,615

 

 

 

811,300

 

Unvested restricted common stock

 

 

-

 

 

 

115,741

 

Total

 

 

8,359,101

 

 

 

4,149,144

 

 

13


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and notes thereto in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and notes thereto for the year ended December 31, 2019, included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (SEC) on March 5, 2020. 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 entitled “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, adaptive clinical trial designs. Our vision is to create, develop and commercialize highly differentiated combination cancer therapies that have the potential to cure.

We currently have four investigational products in clinical development. We hold worldwide development and commercialization rights to each of these investigational products with the exception of zimberelimab, for which we hold rights outside of China and Thailand. Taiho Pharmaceutical Co., Ltd. (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), which they have exercised with respect to our adenosine receptor antagonist program (including AB928) and our anti-PD-1 program (including zimberelimab).

Our clinical development program for AB928, our dual A2a/A2b adenosine receptor antagonist, includes four Phase 1b expansion studies in specific cancer indications: advanced colorectal cancer, triple negative breast cancer, EGFR-mutated lung cancer, prostate cancer, and renal cancer; two collaboration studies with Genentech utilizing their MORPHEUS Phase 1b/2 platform in third-line metastatic colorectal cancer and first-line metastatic pancreatic cancer; a Phase 1b/2 multi-cohort platform trial in participants with metastatic castrate resistant prostate cancer; and a Phase 1b trial in participants with colorectal cancer.

AB680, our small-molecule CD73 inhibitor, is in a Phase 1/1b study for the treatment of first-line metastatic pancreatic cancer. This study consists of a safety dose-escalation portion, followed by an enrollment expansion to evaluate the combination of AB680, zimberelimab (our anti-PD-1 antibody) and the standard-of-care chemotherapies gemcitabine and nab-paclitaxel.

AB154, our in-licensed anti-TIGIT monoclonal antibody, is in Phase 2 development for the treatment of first-line metastatic non-small cell lung cancer in combination with zimberelimab and AB928.

Zimberelimab (formerly referred to as AB122), our in-licensed anti-PD-1 monoclonal antibody, is the cornerstone of our combination strategy. In addition to the combination studies with zimberelimab described above, we are also evaluating zimberelimab as monotherapy in a tumor-agnostic, biomarker-selected Phase 1b trial.

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 new information which may emerge concerning the duration and/or severity of the outbreak, actions by government authorities to contain the spread of the virus, and how quickly and to what extent normal economic and operating conditions can resume. Our management is actively monitoring this health crisis and its effects on our operations, key vendors and workforce.

In mid-March, we voluntarily transitioned our employees, including our laboratory-based personnel, to work-from-home prior to the institution of state and local shelter-in-place orders. Most of our non-laboratory operations, including the conduct and management of our clinical trials and the contract manufacturing organizations engaged in CMC activities on our behalf, were easily and quickly transitioned to remote work arrangements. However, we are not able to transition our laboratory operations to work-from-home and have only arranged for limited outsourcing of our discovery activities to third-party research organizations; most of our scientific staff have been engaged remotely in non-laboratory activities such as the evaluation and planning for future discovery efforts and writing of regulatory reports and other documents.

Entering into 2020, we anticipated that our discovery-stage programs would lead to the advancement of two new molecules into the clinic in the first quarter of 2021. Based upon current timelines, the first program that we were looking to advance into the clinic in this timeframe continues in preclinical development, with no delays anticipated thus far. Our inability to conduct laboratory operations, however, may delay the advancement of the second of these two discovery-stage programs into the clinic; the magnitude

14


 

of this delay will not be known until the duration of the current shelter-in-place and any additional public health orders are known. Currently, the shelter-in-place order imposed by the State of California has no specified expiration date, and the local shelter in place order has been extended to the end of May 2020 and may be extended further. Prolonged imposition of the shelter-in-place and other public health orders will also have an adverse impact on our financial condition. Since we have not taken any measures to furlough or reduce our personnel costs, we will continue to incur costs for overhead and employees for the duration of the shelter-in-place, despite reduced productivity for some of our employees. We also expect that our ability to resume our laboratory and other on-site business operations, when permissible, will be limited by employee safety measures, such as social distancing requirements, shift work and our ability to procure sufficient amounts of protective equipment for our employees.

Despite the public health and mandatory self-quarantine measures, we continue to see relatively robust enrollment across our ongoing Arcus-sponsored studies. However, we expect that this pandemic may result in delays to some of our clinical programs, particularly in initiating new trials and/or new investigational sites due to diversion of their resources away from necessary start-up activities, and by limiting the ability of investigational sites to conduct all activities associated with our ongoing trials. For example, the circumstances may hinder their ability to screen patients for enrollment. We are collaborating with our investigational sites to implement measures to minimize disruptions to patients and ensure continued access to treatment, in accordance with health authority guidance.

With respect to manufacturing and supply, 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.

Components of Operating Results

Collaboration and License Revenue

Under the Taiho Agreement, we recognize revenue from the upfront and annual payments for research and development services performed by us to develop our product candidates and from option exercise payments upon Taiho’s exercise of options during the Option Period.

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 payroll and personnel expenses, including stock-based compensation for our employees, laboratory supplies, product licenses, consulting costs, contract research, pre-clinical and clinical expenses, and depreciation. 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 as we seek to complete existing and initiate additional clinical trials, pursue regulatory approval for our investigational products, and advance other programs into the clinic. Over the next few years, we expect our preclinical, clinical, and contract manufacturing expenses to increase significantly relative to what we have incurred to date. In addition, under our license agreements with WuXi Biologics (Cayman) Inc. (WuXi Biologics) and Abmuno Therapeutics LLC (Abmuno), and our co-development and collaboration agreement with Strata Oncology, Inc. (Strata), we may be required to pay additional clinical and regulatory milestone payments based on the development progress of zimberelimab and AB154. Predicting the timing or the final cost to complete our clinical programs or validation of our manufacturing and supply processes is difficult 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 “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. 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.

15


 

We anticipate that our general and administrative expenses will increase substantially during the next few years as a result of staff expansion, additional occupancy costs, and other costs associated with operating as a growing company.

Interest and Other Income, Net

Interest and other income, net consists primarily of interest earned on our investments in fixed-income marketable securities.

Gain on Deemed Sale from Equity Method Investee

Gain on deemed sale from equity method investee consists of a gain related to the dilution of our investment in PACT Pharma, Inc. (PACT Pharma) typically occurring upon PACT Pharma’s new issuances of equity securities in which we do not participate on a pro rata basis or at all.

Share of Loss from Equity Method Investee

Share of loss from equity method investee consists of our share of loss recorded in connection with our equity method investment in PACT Pharma, Inc. (PACT Pharma).

Critical Accounting Policies, Significant Judgments and Use of Estimates

Our condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these condensed 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 condensed 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 relating to revenue recognition, clinical trial accruals and stock-based compensation reflect the more significant estimates and assumptions used in the preparation of our condensed consolidated financial statements.

There have been no significant changes in our critical accounting policies and estimates during the three months ended March 31, 2020, as compared to the critical accounting policies and estimates disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2019 and more fully described in Note 2 of the accompanying condensed consolidated financial statements.

Results of Operations

Three Months Ended March 31, 2020 and 2019

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

 

 

Three months ended March 31,

 

 

Change

 

 

 

2020

 

 

2019

 

 

$

 

 

%

 

Collaboration and license revenue

 

$

1,750

 

 

$

1,750

 

 

$

-

 

 

*

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

23,142

 

 

 

15,554

 

 

 

7,588

 

 

 

49

%

General and administrative

 

 

7,008

 

 

 

4,969

 

 

 

2,039

 

 

 

41

%

Loss from operations

 

 

(28,400

)

 

 

(18,773

)

 

 

(9,627

)

 

 

51

%

Non-operating income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income, net

 

 

647

 

 

 

1,534

 

 

 

(887

)

 

 

-58

%

Gain on deemed sale from equity method investee

 

 

482

 

 

 

-

 

 

 

482

 

 

*

 

Share of loss from equity method investee

 

 

(482

)

 

 

(431

)

 

 

(51

)

 

 

12

%

Total non-operating income, net

 

 

647

 

 

 

1,103

 

 

 

(456

)

 

 

-41

%

Net loss

 

$

(27,753

)

 

$

(17,670

)

 

$

(10,083

)

 

 

57

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Not meaningful

Collaboration and License Revenue

Collaboration and license revenue was $1.8 million for the three months ended March 31, 2020 and 2019. We recognized the revenue from non-refundable upfront payments previously received under the Taiho Agreement.

16


 

Research and Development Expenses

Research and development expenses increased $7.5 million, or 49%, from $15.6 million for the three months ended March 31, 2019 to $23.1 million for the three months ended March 31, 2020. The increase in research and development expenses was due to an increase of $4.7 million in clinical costs for our ongoing clinical trials, an increase of $3.1 million in employee compensation costs primarily due to additional headcount, approximately $0.9 million of which consists of stock-based compensation, and a $0.6 million increase in consulting expense. Those increases were partially offset by a decrease of $0.8 million in certain manufacturing costs.

General and Administrative Expenses

General and administrative expenses increased $2.0 million, or 41%, from $5.0 million for the three months ended March 31, 2019 to $7.0 million for the three months ended March 31, 2020. The increase in general and administrative expenses was primarily due to an increase of $1.4 million in employee compensation costs primarily due to additional headcount, approximately $0.9 million of which consists of stock-based compensation, a $0.5 million increase in consulting expenses, and a $0.4 million increase in expenses driven by investments in software and telecommunication supplies.

Interest and Other Income, Net

Interest and other income, net decreased $0.9 million or 58%, from $1.5 million for the three months ended March 31, 2019 to $0.6 million for the three months ended March 31, 2020. The decrease was primarily due to lower interest income resulting from lower investment yields on our portfolio of marketable fixed-income securities and lower average cash and investment balances in the three months ended March 31, 2020 as compared to the previous period.

Gain on Deemed Sale from Equity Method Investee

Gain on deemed sale from equity method investee was $0.5 million for the three months ended March 31, 2020 due to a gain recorded in connection with PACT Pharma’s Series C convertible preferred financing in January 2020 in which we did not participate.

Share of Loss from Equity Method Investee

Share of loss from equity method investee increased $0.1 million, from $0.4 million for the three months ended March 31, 2019 to $0.5 million for the three months ended March 31, 2020. The increase was largely due to PACT’s increasing losses resulting from its expanding operations.

Liquidity and Capital Resources

To date, we have financed our operations primarily through net proceeds of $226.2 million from private placements of convertible preferred stock, $46.0 million in proceeds from the Taiho Agreement, and net proceeds of $124.7 million from our initial public offering of our common stock in March 2018. As of March 31, 2020, we had $157.9 million of cash, cash equivalents, and investments in marketable securities. Our cash and investments are held in a variety of interest-bearing instruments, including money market funds, U.S. government treasury obligations, U.S. government agency securities, and investments in corporate securities.

Based on our existing business plan, we believe that our existing cash, cash investments, and short-term investments will be sufficient to fund our planned level of operations through at least the next 12 months following the filing date of this report.

We will continue to require additional capital to develop our product candidates and fund operations for the foreseeable future. We may seek to raise capital through private or public equity or debt financings, collaborative or other arrangements with other companies, or through other sources of financing. Adequate additional funding may not be available to us on acceptable terms or at all. Our failure to raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue our business strategies. We anticipate that we will need to raise substantial additional capital, the requirements of which will depend on many factors, including:

 

the scope, rate of progress and costs of our drug discovery, preclinical development activities, laboratory testing and clinical trials for our investigational products;

 

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

 

the scope and costs of manufacturing development and commercial manufacturing activities;

 

the timing and amount of milestone payments we receive under the Taiho Agreement;

 

the extent to which we acquire or in-license other product candidates and technologies;

 

the cost, timing and outcome of regulatory review of our product candidates;

17


 

 

the cost and timing of establishing sales and marketing capabilities, if any of our investigational products receive marketing approval;

 

the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;

 

our ability to establish and maintain collaborations on favorable terms, if at all;

 

our efforts to enhance operational systems and our ability to attract, hire and retain qualified personnel, including personnel to support the development of our investigational products;

 

the costs associated with being a public company; and

 

the cost associated with commercializing our product candidates, if they receive marketing approval.

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 product candidates 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 Condensed Consolidated Statement of Cash Flows

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

 

 

 

Three Months Ended March 31,

 

Net cash (used in) provided by:

 

2020

 

 

2019

 

Operating activities

 

$

(31,277

)

 

$

(16,839

)

Investing activities

 

 

40,056

 

 

 

14,279

 

Financing activities

 

 

610

 

 

 

(5

)

Net increase in cash, cash equivalents and restricted cash