Arcus Biosciences, Inc. (RCUS) FY 2021 MD&A

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

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

Overview

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

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

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

We currently have six investigational products in clinical development:

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

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

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

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

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

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

COVID-19 Pandemic

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

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

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

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

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

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Financial Overview

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

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

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

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

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

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

Gilead Collaboration

Summary

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

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

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

Collaboration Agreement

Pursuant to the terms of the Gilead Collaboration Agreement, as amended (the Amended Gilead Collaboration Agreement), Gilead obtained exclusive licenses to zimberelimab, domvanalimab, AB308, etrumadenant, and quemliclustat, and time-limited exclusive options to all of our current and future clinical programs during the 10-year collaboration term and, for those programs that enter clinical development prior to the end of the collaboration term, for up to an additional three years thereafter. Gilead’s option rights to future programs are contingent upon Gilead's payments of up to $300 million in option continuation payments. Gilead may exercise its option, on a program-by-program basis, at any time prior to the expiration of the option and upon payment of an option fee of $150 million per program. With respect to domvanalimab, we are also eligible to receive up to $500 million in potential U.S. regulatory approval milestones.

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

In addition, the parties agreed to collaborate on two research programs for which we will lead discovery and early development activities. With respect to these two research programs, Gilead has the right to exercise its option, on a program-by-program basis, either (i) upon our completion of certain IND-enabling activities for an option payment of $60 million or (ii) following the achievement of a clinical development milestone for an option payment of $150 million.

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

Stock Purchase Agreement and Investor Rights Agreement

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

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

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

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

Taiho Agreement

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

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

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

Other Licenses, Collaborations, and R&D Arrangements

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

Components of Operating Results

Collaboration and License Revenue

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

Operating Expenses

Research and Development Expenses

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

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

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

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

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

General and Administrative Expenses

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

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

Other Non-Operating Income, net

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

Critical Accounting Judgments and Estimates

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

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

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Revenue Recognition

At the inception of an arrangement, we evaluate if a counterparty to a contract is a customer, if the arrangement is within the scope of revenue from contracts with customers guidance, and the term of the contract. We recognize revenue when our customer obtains control of promised goods or services in a contract for an amount that reflects the consideration we expect to receive in exchange for those goods or services. For contracts with customers, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy each performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. As part of the accounting for contracts with customers, we must develop assumptions that require judgment to determine the standalone selling price of each performance obligation identified in the contract. We then allocate the total transaction price to each performance obligation based on their estimated standalone selling prices. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

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

Results of Operations

Comparison of the Years Ended December 31, 2021 and 2020

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

* Not meaningful

Collaboration and License Revenue

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

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Research and Development Expenses

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

General and Administrative Expenses

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

Non-Operating Income, Net

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

Income Tax Expense

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

Comparison of the Years Ended December 31, 2020 and 2019

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

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Collaboration and License Revenue

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

Research and Development Expenses

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

General and Administrative Expenses

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

Non-Operating Income, Net

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

Liquidity and Capital Resources

Sources of Liquidity

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

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

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

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

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

Summary Consolidated Statement of Cash Flows

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

Cash Provided by (Used in) Operating Activities

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

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

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Cash Provided by (Used in) Investing Activities

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

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

Cash Provided by Financing Activities

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

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

Contractual Obligations and Commitments

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

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

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

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

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

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

Off-Balance Sheet Arrangements

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

Recent Accounting Pronouncements

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