Arcus Biosciences(RCUS) - 2019 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements This section presents the unaudited condensed consolidated financial statements for Arcus Biosciences, Inc. as of June 30, 2019, and for the three and six-month periods then ended, including balance sheets, statements of operations, changes in stockholders' equity, cash flows, and accompanying notes Condensed Consolidated Balance Sheets As of June 30, 2019, total assets decreased to $239.0 million from $274.9 million, primarily due to reduced short-term investments, while total liabilities increased to $42.3 million and stockholders' equity decreased to $196.6 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $76,068 | $71,064 | | Short-term investments | $148,330 | $185,480 | | Total current assets | $227,733 | $258,948 | | Total assets | $238,974 | $274,925 | | Liabilities & Stockholders' Equity | | | | Accrued liabilities | $15,552 | $6,023 | | Total liabilities | $42,328 | $39,983 | | Total stockholders' equity | $196,646 | $234,942 | Condensed Consolidated Statements of Operations and Comprehensive Loss For the six months ended June 30, 2019, the company reported a net loss of $45.8 million, an increase from $26.5 million in 2018, driven by higher R&D and G&A expenses, partially offset by increased collaboration revenue Statement of Operations Summary (in thousands) | Metric | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | | Collaboration and license revenue | $3,500 | $2,500 | | Research and development expenses | $40,553 | $25,352 | | General and administrative expenses | $10,879 | $6,379 | | Loss from operations | ($47,932) | ($29,231) | | Net loss | ($45,760) | ($26,488) | | Net loss per share, basic and diluted | ($1.05) | ($1.01) | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2019, net cash used in operating activities was $36.6 million, offset by $41.0 million from investing activities, resulting in a $5.0 million net increase in cash, ending at $76.3 million Cash Flow Summary (in thousands) | Activity | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | ($36,592) | ($24,124) | | Net cash provided by (used in) investing activities | $40,952 | ($32,614) | | Net cash provided by financing activities | $644 | $128,310 | | Net increase in cash, cash equivalents and restricted cash | $5,004 | $71,572 | Notes to Condensed Consolidated Financial Statements The notes detail the company's business as a clinical-stage biopharmaceutical firm, its liquidity, adoption of ASC 606 for revenue recognition, and specifics on key collaboration agreements with Taiho, WuXi Biologics, and Strata Oncology - The company is a clinical-stage biopharmaceutical company focused on creating innovative cancer immunotherapies. As of June 30, 2019, it had $224.4 million in cash and investments, believed to be sufficient to fund operations for at least the next twelve months[21][22] - Effective January 1, 2019, the company adopted revenue recognition standard ASC 606, resulting in a cumulative-effect adjustment that reduced the opening accumulated deficit by $2.2 million. This primarily impacted the recognition of revenue from the Taiho Agreement[33][44] - The company has several key collaboration agreements, including an option and license agreement with Taiho, a license agreement with WuXi Biologics for an anti-PD-1 antibody (AB122), and a co-development agreement with Strata Oncology[66][79][81] - In June 2019, a $7.5 million development milestone was reached and recorded as R&D expense under the WuXi Biologics agreement[79] - In connection with the Strata agreement, Arcus issued 1,257,651 restricted shares valued at $15.0 million, which are subject to vesting upon achievement of regulatory milestones. As of June 30, 2019, none were considered probable of vesting[82] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses increased operating expenses, with R&D rising 60% to $40.6 million for the first six months of 2019, driven by milestone payments and clinical trial costs, noting $224.4 million in cash and investments are expected to fund operations for at least 12 months, with future capital needs anticipated Comparison of Results of Operations (in thousands) | Metric | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | Change (%) | | :--- | :--- | :--- | :--- | | Collaboration and license revenue | $3,500 | $2,500 | 40% | | Research and development | $40,553 | $25,352 | 60% | | General and administrative | $10,879 | $6,379 | 71% | | Net loss | ($45,760) | ($26,488) | 73% | - The increase in R&D expenses for the first six months of 2019 was primarily due to a $7.5 million milestone payment under the WuXi Agreement, a $7.3 million increase in clinical costs for its four clinical-stage programs, and a $2.3 million increase in employee compensation[114] - As of June 30, 2019, the company had $224.4 million in cash and investments, which management believes is sufficient to fund operations for at least the next 12 months[119][120] - The company will require substantial additional capital to develop its product candidates and fund future operations, with needs dependent on factors like clinical trial costs, manufacturing, and potential milestone payments[121][124] Quantitative and Qualitative Disclosures About Market Risk The company states its market risks, primarily from interest and exchange rates, have not materially changed from its 2018 Annual Report, with no significant impact from inflation, interest rate changes, or exchange rate fluctuations - The company's market risks related to interest rates and exchange rates have not materially changed since the last annual report[136] Controls and Procedures Management, including the CEO and CFO, concluded the company's disclosure controls and procedures were effective as of June 30, 2019, with no material changes in internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[139] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[140] PART II. OTHER INFORMATION Legal Proceedings The company reports it is not currently a party to any material legal proceedings but acknowledges potential future involvement in ordinary course of business matters - Arcus Biosciences is not currently involved in any material legal proceedings[143] Risk Factors This section outlines numerous risks, including limited operating history, history of net losses, need for substantial additional funding, high development risks for early-stage product candidates, reliance on third parties, intellectual property protection challenges, intense competition, and complex regulatory and legal environments - Financial Risks: The company is an early-stage entity with a history of net losses ($45.8 million for the six months ended June 30, 2019) and will require substantial additional funding to continue operations[145][147] - Development Risks: All product candidates are in early development stages. The success of its intra-portfolio combination strategy (e.g., AB928 with AB122) is unproven and faces high risk of failure[154][161][162] - Third-Party Reliance: The company relies on third parties for manufacturing (e.g., WuXi Biologics for AB122) and conducting clinical trials, which introduces risks related to quality, supply interruptions, and regulatory compliance (cGMP, GCP)[186][189] - Competition Risk: The company faces substantial competition from large pharmaceutical companies like Bristol-Myers Squibb, Merck, and AstraZeneca, which have approved products and greater resources, particularly in the anti-PD-1 space[259][260][261] - Intellectual Property Risk: The company's success depends on obtaining and maintaining patent protection. It faces risks of patent challenges, infringement lawsuits from third parties (e.g., potential issues with BMS patents on anti-PD-1 antibodies), and the difficulty of protecting trade secrets[224][233][234] - Regulatory and Legal Risks: The business is subject to extensive regulation by the FDA and foreign agencies, potential product liability lawsuits, and complex healthcare laws (e.g., Anti-Kickback Statute, Affordable Care Act), which are subject to change and strict enforcement[272][275][296] Unregistered Sales of Equity Securities and Use of Proceeds On April 30, 2019, the company issued 1,257,651 restricted shares to Strata Oncology, Inc. as part of a collaboration agreement, and confirms no material change in the planned use of IPO proceeds - Issued 1,257,651 restricted shares to Strata Oncology, Inc. on April 30, 2019, in a private placement as part of a collaboration agreement[323] - There has been no material change in the planned use of proceeds from the company's Initial Public Offering (IPO)[324] Defaults Upon Senior Securities None reported Mine Safety Disclosures None reported Other Information None reported Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate documents, an offer letter, an amendment to the WuXi Biologics license agreement, and CEO/CFO certifications