Absci Corp 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (PCAOB ID: 42) 94 Consolidated Balance Sheet s as of December 31, 2021 and 2020 95 Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2021 and 2020 96 Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Units and Other Stockholders’ and Members' Deficit for the years ended December 31, 2021 and 2020 97 Consolidated Statement s of Cash Flows for the years ended December 31, 2021 and 2020 98 Notes to the Consolidated Financial Statements 99 93 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Absci Corporation Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Absci Corporation and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, changes in redeemable convertible preferred stock and units and other stockholders’ and members’ deficit, and cash flows for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2021 Seattle, Washington March 22, 2022 94 Table of Contents ABSCI CORPORATION CONSOLIDATED BALANCE SHEETS December 31, December 31, (In thousands, except for share and per share data) 2021 2020 ASSETS Current assets: Cash and cash equivalents $ 252,569 $ 69,867 Restricted cash 10,513 — Receivables under development arrangements 1,425 1,594 Prepaid expenses and other current assets 8,572 1,773 Total current assets 273,079 73,234 Operating lease right-of-use assets 6,538 4,476 Property and equipment, net 52,114 8,909 Intangibles, net 54,992 — Goodwill 21,335 — Restricted cash, long-term 16,844 1,841 Other long-term assets 1,293 109 TOTAL ASSETS $ 426,195 $ 88,569 LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND OTHER STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable $ 8,385 $ 2,116 Accrued expenses 17,434 1,569 Loans payable — 632 Long-term debt, current 2,400 903 Operating lease obligations, current 1,502 770 Financing lease obligations, current 2,785 1,475 Deferred revenue, current 1,353 2,630 Total current liabilities 33,859 10,095 Long-term debt - net of current portion 1,124 4,141 Operating lease obligations - net of current portion 8,969 3,813 Finance lease obligations - net of current portion 3,231 2,766 Deferred tax, net 743 — Other long-term liabilities 12,162 749 TOTAL LIABILITIES 60,088 21,564 Commitments (See Note 8) Redeemable convertible preferred stock, $ 0.0001 par value; 0 and 13,845,050 shares authorized as of December 31, 2021 and December 31, 2020, respectively; 0 and 13,752,043 issued and outstanding as of December 31, 2021 and December 31, 2020 respectively; liquidation preference of $ 203,095 as of December 31, 2020; — 156,433 STOCKHOLDERS' DEFICIT Preferred stock, $ 0.0001 par value; 10,000,000 and 0 shares authorized as of December 31, 2021 and December 31, 2020, respectively; 0 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively — — Common stock, $ 0.0001 par value; 500,000,000 and 72,668,200 shares authorized as of December 31, 2021 and December 31, 2020, respectively; 92,648,036 and 17,887,631 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively 9 2 Additional paid-in capital 557,136 635 Accumulated deficit ( 191,025 ) ( 90,065 ) Accumulated other comprehensive loss ( 13 ) — TOTAL OTHER STOCKHOLDERS' DEFICIT 366,107 ( 89,428 ) TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND OTHER STOCKHOLDERS' DEFICIT $ 426,195 $ 88,569 The accompanying notes are an integral part of these consolidated financial statements. 95 Table of Contents ABSCI CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS For the Years Ended December 31, (In thousands, except for share and per share data) 2021 2020 Revenues Technology development revenue $ 4,009 $ 4,117 Collaboration revenue 773 663 Total revenues 4,782 4,780 Operating expenses Research and development 44,586 11,448 Selling, general and administrative 28,780 5,502 Depreciation and amortization 6,654 1,131 Total operating expenses 80,020 18,081 Operating loss ( 75,238 ) ( 13,301 ) Other expense Interest expense ( 3,432 ) ( 634 ) Other expense, net ( 31,189 ) ( 418 ) Total other expense, net ( 34,621 ) ( 1,052 ) Loss before income taxes ( 109,859 ) ( 14,353 ) Income tax benefit 8,899 — Net loss ( 100,960 ) ( 14,353 ) Adjustment of redeemable preferred units and stock — ( 34,336 ) Cumulative undeclared preferred stock dividends ( 2,284 ) ( 780 ) Net loss applicable to common stockholders and unitholders $ ( 103,244 ) $ ( 49,469 ) Net loss per share attributable to common stockholders and unitholders: Basic and diluted $ ( 2.08 ) $ ( 3.19 ) Weighted-average common shares and units outstanding: Basic and diluted 49,685,194 15,494,908 Comprehensive loss: Net loss $ ( 100,960 ) $ ( 14,353 ) Foreign currency translation adjustments ( 13 ) — Comprehensive loss $ ( 100,973 ) $ ( 14,353 ) The accompanying notes are an integral part of these consolidated financial statements 96 ABSCI CORPORATION STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND UNITS AND OTHER STOCKHOLDERS’ AND MEMBERS’ DEFICIT (In thousands, except for unit, share, per unit, and per share data) Redeemable Convertible Preferred Units Redeemable Convertible Preferred Stock Common Units Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Stockholders’ and Members' Deficit Units Amount Shares Amount Units Amount Shares Amount December 31, 2019 9,964,572 $ 52,763 — $ — 15,215,724 $ 2 — $ — $ 215 $ ( 41,376 ) $ — $ ( 41,159 ) Issuance of Class D preferred units, net of issuance costs 473,952 4,625 — — — — — — — — — — Increase in preferred unit redemption value — 34,336 — — — — — — — ( 34,336 ) — ( 34,336 ) Conversion of preferred and common units to shares ( 10,438,524 ) ( 91,724 ) 10,438,524 91,724 ( 15,215,724 ) ( 2 ) 15,215,724 2 — — — — Issuance of Class E preferred stock, net of issuance costs — — 3,313,519 64,709 — — — — — — — — Issuance of Restricted stock — — — — — — 2,671,907 — — — — — Stock-based compensation — — — — — — — — 420 — — 420 Net loss — — — — — — — — — ( 14,353 ) — ( 14,353 ) December 31, 2020 — $ — 13,752,043 $ 156,433 — $ — 17,887,631 $ 2 $ 635 $ ( 90,065 ) $ — $ ( 89,428 ) Issuance of Series E preferred stock, net of issuance costs — — 254,886 4,944 — — — — — — — — Issuance of restricted stock — — — — — — 703,425 — — — — — Issuance of shares upon option exercise — — — — — — 153,416 — 169 — — 169 Stock-based compensation — — — — — — — — 9,932 — — 9,932 Issuance of shares in acquisitions — — — — — — 3,222,504 — 14,259 — — 14,259 Issuance of common shares upon initial public offering, net of issuance costs of $ 3,766 — — — — — — 14,375,000 1 210,133 — — 210,134 Conversion of convertible note — — — — — — 9,732,593 1 155,721 — — 155,722 Conversion of redeemable convertible preferred stock — — ( 14,006,929 ) ( 161,377 ) — — 46,266,256 5 161,372 — — 161,377 Conversion of warrant liability — — — — — — — — 4,822 — — 4,822 Issuance of shares upon warrant exercise — — — — — — 307,211 — 93 — — 93 Foreign currency translation adjustments — — — — — — — — — — ( 13 ) ( 13 ) Net loss — — — — — — — — — ( 100,960 ) — ( 100,960 ) December 31, 2021 — $ — — $ — — $ — 92,648,036 $ 9 $ 557,136 $ ( 191,025 ) $ ( 13 ) $ 366,107 The accompanying notes are an integral part of these consolidated financial statements. 97 Table of Contents ABSCI CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, (In thousands) 2021 2020 Cash Flows From Operating Activities Net loss ( 100,960 ) ( 14,353 ) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 6,654 1,131 Deferred income taxes ( 8,901 ) — Share-based compensation 10,608 420 Change in fair value of convertible promissory notes 30,722 — Gain on extinguishment of loan payable ( 636 ) — Loss on disposal and impairment of assets 948 363 Foreign exchange transaction losses (gains) ( 11 ) — Preferred stock warrant liability expense 4,124 461 Changes in operating assets and liabilities: Receivables under development arrangements 230 ( 1,372 ) Prepaid expenses and other current assets ( 7,636 ) ( 1,434 ) Operating lease right-of-use assets and liabilities 3,256 93 Other long-term assets 126 ( 85 ) Accounts payable 1,574 903 Accrued expenses and other liabilities 581 1,053 Deferred revenue ( 1,277 ) 1,850 Net cash used in operating activities ( 60,598 ) ( 10,970 ) Cash Flows From Investing Activities Purchases of property and equipment ( 38,047 ) ( 2,181 ) Acquisitions, net of cash acquired ( 28,130 ) — Investment in equity securities ( 1,200 ) — Proceeds from sales of property and equipment — 10 Net cash used in investing activities ( 67,377 ) ( 2,171 ) Cash Flows From Financing Activities Proceeds from issuance of redeemable convertible preferred units and stock, net of issuance costs 4,944 69,334 Proceeds from issuance of long-term debt — 2,598 Proceeds from notes payable — 632 Principal payments on long-term debt ( 1,600 ) ( 500 ) Principal payments on finance lease obligations ( 2,547 ) ( 1,091 ) Proceeds from issuance of common stock, net of issuance costs 210,396 — Proceeds from issuance of convertible promissory notes 125,000 — Net cash provided by financing activities 336,193 70,973 Net increase (decrease) in cash, cash equivalents, and restricted cash 208,218 57,832 Cash, cash equivalents and restricted cash - Beginning of year 71,708 13,876 Cash, cash equivalents, and restricted cash - End of period $ 279,926 $ 71,708 Supplemental Disclosure of Cash Flow Information Cash paid during the period for interest $ 652 $ 508 Supplemental Disclosure of Non-Cash Investing and Financing Activities Property and equipment purchased under finance lease $ 4,313 $ 3,988 Right-of-use assets obtained in exchange for operating lease obligation 3,330 3,114 Cash paid for amounts included in the measurement of operating lease liabilities 1,631 422 Property and equipment purchases included in accounts payable 5,565 945 Increase in redemption value of convertible preferred stock — 34,336 The accompanying notes are an integral part of these consolidated financial statements. 98 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and nature of operations Absci Corporation (the “Company”) has developed an integrated drug creation platform (the “Integrated Drug Creation Platform”) by merging deep learning artificial intelligence and synthetic biology. The Integrated Drug Creation Platform enables the creation of biologics by unifying the drug discovery and cell line development processes into one process. The Company was organized in the State of Oregon in August 2011 as a limited liability company and converted to a limited liability company (“LLC”) in Delaware in April 2016. In October 2020, the Company converted from a Delaware LLC to a Delaware corporation (the “LLC Conversion”). The Company’s headquarters are located in Vancouver, Washington. Authorized shares of common stock In June 2021, the Company’s board of directors (the “Board”) and stockholders increased the number of authorized shares of common stock to 78,320,000 . Initial Public Offering In July 2021, we completed our initial public offering (IPO) and issued 14.4 million shares of our common stock, including 1.9 million shares pursuant to the full exercise of the underwriters’ option to purchase additional shares, at a price of $ 16.00 per share and received net proceeds of $ 210.1 million from the IPO. Immediately prior to the completion of the IPO, all shares of redeemable convertible preferred stock then outstanding were converted into 46.3 million shares of common stock and all convertible notes issued in March 2021 were converted into 9.7 million shares of common stock. Amendments to Certificate of Incorporation or Bylaws In connection with the consummation of the IPO, the Company filed an amended and restated certificate of incorporation (the “Restated Certificate”) with the Secretary of State of the State of Delaware. The Board and stockholders previously approved the Restated Certificate to be filed in connection with, and to be effective upon, the consummation of the IPO. The Restated Certificate amended and restated the Company’s existing amended and restated certificate of incorporation, as amended, in its entirety to, among other things: (i) authorize 500,000,000 shares of common stock; (ii) eliminate all references to the previously-existing series of preferred stock; (iii) authorize 10,000,000 shares of undesignated preferred stock that may be issued from time to time by the Board in one or more series; (iv) establish a classified board divided into three classes, with each class serving staggered three-year terms and (v) require the approval of holders of at least 75% of the voting power of the Company’s outstanding shares of voting stock to amend or repeal certain provisions of the Restated Certificate. Stock split On July 16, 2021, the Board and stockholders approved an amendment to the Company’s amended and restated certificate of incorporation to effect a forward stock split of the Company’s issued and outstanding common stock at a 3.3031 -to-1 ratio, which was effected on July 19, 2021. The par value and convertible preferred stock were not adjusted as a result of the forward stock split. All issued and outstanding common stock, options to purchase common stock and units, and per share and unit amounts contained in the financial statements have been retroactively adjusted to reflect the forward stock split for all periods presented. The financial statements have also been retroactively adjusted to reflect a proportional adjustment to the conversion ratio for each series of preferred stock that was effected in connection with the forward stock split. LLC Conversion In conjunction with the LLC Conversion as of October 15, 2020, (i) all of the Company’s outstanding common units converted on a 1 -for-1 basis into shares of common stock, par value $ 0.0001 ; and (ii) all of the Company’s outstanding redeemable preferred units converted on a 1 -for-1 basis into shares of redeemable convertible preferred stock, par value $ 0.0001 . Prior to the LLC Conversion, the Company had issued incentive units to certain employees, directors, and consultants. The outstanding vested incentive units converted on a net issuance basis into shares of common stock and the outstanding unvested incentive units converted on a net issuance basis into restricted common stock. All vesting provisions remained the same following the LLC 99 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Conversion. See Note 10: Stock-based compensation for further discussion of the LLC Conversion’s impact on the Company’s stock-based compensation plans. 2. Summary of significant accounting policies Basis of presentation The consolidated financial statements are prepared in accordance with US GAAP as defined by the Financial Accounting Standards Board (“FASB”). The consolidated financial statements include the Company’s wholly-owned subsidiaries and entities under its control. The Company has eliminated all intercompany transactions and accounts. Emerging growth company The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the independent registered public accounting firm attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. Business combinations The Company utilizes the acquisition method of accounting for business combinations and allocates the purchase price of an acquisition to the various tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The Company primarily establishes fair value using the replacement cost approach or the income approach based upon a discounted cash flow model. The replacement cost approach measures the value of an asset by the cost to reconstruct or replace it with another of like utility. The income approach requires the use of many assumptions and estimates including future revenues and expenses, as well as discount factors and income tax rates. Other estimates include: • The use of carrying value as a proxy for fair values of fixed assets and liabilities assumed from the target; and • Fair values of intangible assets and contingent consideration. While the Company uses best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the business acquisition date, these estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the purchase price measurement period, which is no more than one year from the business acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Business combinations also require the Company to estimate the useful life of certain intangible assets acquired and this estimate requires significant judgment. Use of estimates The preparation of financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include, but are not limited to, revenue recognition including estimated timing of the satisfaction of performance obligations, purchase price allocations in conjunction with business combinations, and the fair value of stock-based compensation awards. The Company bases its estimates on historical experiences, and other relevant factors that it believes to be reasonable under the circumstances. Actual results could differ from those estimates. 100 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Segment information The Company operates as a single operating segment. The Company’s chief operating decision maker, its Chief Executive Officer, manages the Company’s operations on a consolidated basis for the purposes of allocating resources, making operating decisions and evaluating performance. Cash, cash equivalents and restricted cash The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Restricted cash represents amounts pledged as collateral for future property lease payments via standby letters of credit (see Note 8: Commitments and contingencies) and amounts held in escrow related to acquisitions by the Company (see Note 3: Acquisitions). Accounts receivable Accounts receivable consists of amounts due from partners for services performed. The Company reviews accounts receivable for credit impairment and regularly analyzes the status of significant past due receivables to determine if any will potentially be uncollectible to estimate the amount of allowance necessary to reduce accounts receivable to its estimated net realizable value. To date, no allowance has been necessary. See contract asset discussion below regarding unbilled receivables. Fair value of financial instruments Certain assets and liabilities are carried at fair value under US GAAP and consist principally of a fee in-lieu of warrant issuance, a warrant to purchase convertible preferred stock and convertible promissory notes. The carrying amounts of cash equivalents, accounts payable, and accrued liabilities approximate their related fair values due to the short-term nature of these instruments. None of the Company’s non-financial assets or liabilities are recorded at fair value on a recurring basis. As permitted under Accounting Standards Codification (“ASC”) 825, Financial Instruments, (“ASC 825”), the Company has elected the fair value option to account for its convertible promissory notes issued during the year ended December 31, 2021. In accordance with ASC 825, the Company records these convertible promissory notes at fair value on its consolidated balance sheet. Changes in fair value of the warrant to purchase convertible preferred stock and the convertible promissory notes are recorded in the consolidated statements of operations and comprehensive loss. As a result of applying the fair value option, direct costs and fees related to the convertible promissory notes were recognized as incurred and not deferred. There are significant judgments and estimates inherent in the determination of the fair value of these liabilities. If the Company had made different assumptions including, among others, those related to the timing and probability of various corporate scenarios, discount rates, volatilities and exit valuations, the carrying values of the fee in lieu of warrant, warrant liability, and net loss and net loss per common share could have been significantly different. Concentration risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, restricted cash, and receivables under development arrangements. The Company maintains its cash and cash equivalents and restricted cash in bank accounts, which at times may exceed federally insured limits. The Company has not experienced any losses on these accounts. For the years ended December 31, 2021 and 2020, two partners represented approximately 73 % and 77 % of technology development revenue, respectively. As of December 31, 2021, four partners represented approximately 84 % of total receivables under technology development arrangements. As of December 31, 2020, one partner represented approximately 93 % of total receivables under technology development arrangements. The Company purchases from and relies on two vendors for specific equipment and consumables which are critical to its operations. While there are alternative types of equipment that could be used, switching vendors would require significant capital investment, long lead times and significant training and validation. 101 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Supplies Supplies, comprised principally of supplies and other materials used in the lab, are stated at the lower of cost or net realizable value and using the first-in, first-out method, applied on a consistent basis. The supplies inventory is included in prepaid expenses and other current assets on the consolidated balance sheet. Property and equipment, net Property and equipment are stated at cost less accumulated depreciation and amortization. Additions and improvements to property and equipment are capitalized. The costs of maintenance and repairs are expensed as incurred. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the underlying assets, which vary from 3 to 7 years. Leasehold improvements are amortized over the shorter of the term of the lease or the estimated useful lives of the assets. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from their respective accounts, and the resulting gain or loss is reported as income or expense in the consolidated statements of operations and comprehensive loss. Impairment of long-lived assets Management reviews long-lived assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability is measured by comparison of the carrying amount to the future undiscounted net cash flows expected to result from the use of the asset and its eventual disposition. If these estimated cash flows were less than the carrying amount of the asset, an impairment loss would be recognized in order to write down the asset to its estimated fair value. During the year ended December 31, 2021, the Company recognized $ 0.6 million in impairment expense of certain operating lease right-of-use assets and $ 0.3 million in impairment of leasehold improvements, resulting from the discontinued use of certain leased facilities. There were no such impairments of long-lived assets during the year ended December 31, 2020. Goodwill Goodwill is evaluated for impairment on an annual basis as of October 1, or more frequently if an indicator of impairment is present. As part of the impairment evaluation, the Company may elect to perform an assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value of the reporting unit that includes the goodwill is less than its carrying value, then a quantitative impairment test would be prepared to compare this fair value to the carrying value and record an impairment charge if the carrying value exceeds the fair value. Redeemable convertible preferred units and stock warrant liability Outstanding warrants that were related to the Company’s redeemable convertible preferred units and redeemable convertible preferred stock were classified as liabilities on the consolidated balance sheets. As the warrants were exercisable for redeemable convertible preferred units and redeemable convertible preferred stock, the Company has recognized a liability for the fair value of its warrants on the consolidated balance sheets upon issuance and subsequently remeasures the liability to fair value at the end of each reporting period until the earlier of the expiration or exercise of the warrants. See Note 9: Redeemable convertible preferred stock for further discussion. Revenue recognition The Company recognizes revenue as control of its products and services are transferred to its customers in an amount that reflects the consideration expected to be received in exchange for those products and services. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when or as the performance obligations are satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. The Company considers a performance obligation satisfied once control of a good or service has been transferred to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service. Technology development revenue includes revenue 102 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS associated to the development and technology readiness phases of technology development agreements. The Company refers to its customers as “partners” when describing their relationship in an agreement. Technology development revenue The Company’s Technology Development Agreements (“TDAs”) generally include multiple phases of drug discovery and/or Cell Line Development (“CLD”) such as library design, assay development, strain screening, fermentation optimization, purification, and analytics that all represent a single performance obligation. These agreements may include options for additional goods and services such as readying the technology to transfer to the partner and licensing terms. The transaction prices for these arrangements include fixed and variable consideration for the single performance obligation as well as variable consideration for success-based achievements. Any variable consideration is constrained to the extent that it is probable that a significant reversal of cumulative revenue will not occur. Depending on the specific terms of the arrangement, the Company either recognizes revenue over time or at a point in time. While there is no alternative use to the Company for the asset created, the agreement’s terms vary as to whether an enforceable right to payment exists for performance completed as of that date. Primarily all of the Company’s contracts with its partners include an enforceable right to payment. The Company measures progress toward the completion of the performance obligations satisfied over time using an input method based on an overall estimate of the effort incurred to date at each reporting period to satisfy a performance obligation. This method provides an appropriate depiction of completed progress toward fulfilling its performance obligations for each respective arrangement. In certain technology development agreements that require a portion of the contract consideration to be received in advance at the commencement of the contract, such advance payment is initially recorded as a contract liability. KBI BioPharma, Inc. Collaboration agreement In December 2019, the Company executed a four-year Joint Marketing Agreement (“JMA”) with KBI BioPharma, Inc. (“KBI”) to co-promote technologies through joint marketing efforts. The JMA provides for a non-refundable upfront payment of $ 0.8 million and milestone payments of $ 2.8 million in the aggregate, of which $ 2.3 million had been received as of December 31, 2021, upon the achievement of specific milestones. Upfront payments that relate to ongoing collaboration efforts required throughout the contract term such as joint marketing are recognized ratably throughout the contract term. The Company fully constrains revenue associated with the milestone payments until the specified milestones are probable of achievement. Additionally, KBI is obligated to make royalty payments to the Company during the fourth year of the JMA representing a percentage of its sales generated through the arrangement. Any costs incurred to KBI through the duration of the JMA are recognized as a reduction to collaboration revenue in the period in which they are incurred. In September 2021, the JMA was amended to shorten the term to approximately three years , while all remaining payments, including potential royalty payments, were replaced with a one-time fee due from KBI in the amount of $ 0.3 million. The Company determined the remaining services were distinct from those provided prior to the modification and therefore recognizes the total remaining transaction price prospectively over the remaining contractual term. As of December 31, 2021 and December 31, 2020, deferred revenue related to the JMA was $ 1.2 million and $ 1.8 million, respectively. Contract balances Contract assets are generated when contractual billing schedules differ from revenue recognition timing and the Company records a contract receivable when it has an unconditional right to consideration. As of December 31, 2021 and December 31, 2020, contract assets were $ 0.6 million and $ 0.1 million, respectively. Contract liabilities are recorded in deferred revenue when cash payments are received or due in advance of the satisfaction of performance obligations. As of December 31, 2021 and December 31, 2020, contract liabilities were $ 1.4 million and $ 2.6 million, respectively. During the years ended December 31, 2021 and 2020, the Company recognized $ 1.5 million and $ 0.2 million, respectively, as revenue that had been included in deferred revenue at the beginning of the period. 103 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Income taxes Prior to the LLC Conversion, all income tax effects of the Company's operations were passed through to its members individually. Accordingly, the accompanying financial statements do not include any income tax effects for the Company prior to the LLC Conversion date, and the Company had no unrecognized income tax benefits, nor any interest or penalties associated with unrecognized income tax benefits, accrued or expensed as of and for the period from January 1, 2020 through October 15, 2020. Following the LLC Conversion, the Company accounts for income taxes using the asset and liability method whereby deferred tax asset and liability accounts are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are currently in effect. Valuation allowances are established where necessary to reduce deferred tax assets to the amounts expected to be realized. The Company files income tax returns in the federal and various state tax jurisdictions. The Company recognizes interest and penalties related to income tax matters as a component of tax expense. The Company did not record any interest or penalties related to income tax during the years ended December 31, 2021 and 2020. Leases At the inception of a contractual arrangement, the Company determines whether the contract contains a lease by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset in exchange for consideration over a period of time. If both criteria are met, the Company records the associated lease liability and corresponding right-of-use asset upon commencement of the lease using the implicit rate or a discount rate based on a credit adjusted secured borrowing rate commensurate with the term of the lease. The Company additionally evaluates leases at their inception to determine if they are to be accounted for as an operating lease or a finance lease. Operating lease assets represent a right to use an underlying asset for the lease term and operating lease liabilities represent an obligation to make lease payments arising from the lease. Operating lease obligations with a term greater than one year and their corresponding right-of-use assets are recognized on the consolidated balance sheet at the commencement date of the lease based on the present value of lease payments over the expected lease term. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received. As the Company’s operating leases do not typically provide an implicit rate, the Company utilizes the appropriate incremental borrowing rate, determined as the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term and in a similar economic environment. The lease cost is recognized on a straight-line basis over the lease term and variable lease payments are recognized as operating expenses in the period in which the obligation for those payments is incurred. Variable lease payments primarily include common area maintenance, utilities, real estate taxes, insurance and other operating costs that are passed on from the lessor in proportion to the space leased by the Company. The Company accounts for its finance leases by calculating an implied interest rate in the lease contract and recognizing a finance lease right of use asset and lease liability. The right of use asset is recognized in property and equipment, net, in the asset category in which the underlying asset relates. The lease liability is recognized in the consolidated balance sheet as a finance lease obligation. Research and development expenses Research and development expenses include the cost of materials, personnel-related costs (comprised of salaries, benefits and share-based compensation), consulting fees and allocated facility costs associated with both the Company’s execution of technology development agreements and collaboration agreements, as well as ongoing development of the Integrated Drug Creation Platform and other technologies. Allocated facility costs include facility occupancy and information technology costs. The Company derives improvements to its platform from both types of activities. The Company has not historically tracked its research and development expenses on a partner-by-partner basis or on a program-by-program basis. 104 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock-based compensation Stock-based compensation includes compensation expense for incentive units, restricted stock, and stock option grants to employees and is measured on the grant date based on the fair value of the award and recognized on a straight-line basis over the requisite service period. The fair value of options to purchase common stock are measured using the Black-Scholes option-pricing model. The Company accounts for forfeitures as they occur. Prior to the LLC Conversion, the Company also granted phantom units which due to the presence of an exercise condition contingent upon a liquidity event, the Company determined that it was not probable that the phantom units would become exercisable. Net Loss Per Share Attributable to Common Stockholders and Unitholders Basic and diluted net loss per common share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period, without consideration for common stock equivalents. The Company was in a loss position for all periods presented, therefore basic net loss per share and diluted net loss per share are the same for all periods as the inclusion of all potential common securities outstanding would have been anti-dilutive. Recently adopted accounting pronouncements In August 2020, the FASB issued ASU No. 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU No. 2020-06”). The new guidance eliminates two of the three models in ASC 470-20 that require separating embedded conversion features from convertible instruments. As a result, only conversion features accounted for under the substantial premium model in ASC 470-20 and those that require bifurcation in accordance with ASC 815-15 will be accounted for separately. For contracts in an entity’s own equity, the new guidance eliminates some of the requirements in ASC 815-40 for equity classification. The guidance also addresses how convertible instruments are accounted for in the diluted earnings per share calculation and requires enhanced disclosures about the terms of convertible instruments and contracts in an entity’s own equity. ASU 2020-06 is effective for the Company after December 15, 2023. Early adoption is permitted for fiscal periods beginning after December 15, 2020. The Company adopted this standard as of January 1, 2021, and the adoption of this standard did not have a material impact on its consolidated financial statements. Recently issued accounting pronouncements, not yet adopted In December 2019, the FASB issued amended guidance on the accounting and reporting of income taxes. The guidance is intended to simplify the accounting for income taxes by removing exceptions related to certain intraperiod tax allocations and deferred tax liabilities; clarifying guidance primarily related to evaluating the step-up tax basis for goodwill in a business combination; and reflecting enacted changes in tax laws or rates in the annual effective tax rate. The amended guidance is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted. The application of the amendments in the new guidance are to be applied on a retrospective basis, on a modified retrospective basis through a cumulative-effect adjustment to retained earnings or prospectively, depending on the amendment. The Company is currently evaluating the impact of the potential adoption of this guidance on its consolidated financial statements. 3. Acquisitions Acquisition of Denovium In January 2021, the Company completed its acquisition of the common stock of Denovium, Inc. (“Denovium”), an artificial intelligence deep learning company focused on protein discovery and design. The Company is integrating Denovium’s technology into its Integrated Drug Creation Platform. The acquisition has been accounted for as a business combination. 105 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Pursuant to the terms of the agreement, the Company acquired all outstanding equity of Denovium for estimated total consideration of $ 3.0 million, which consists of (in thousands): Cash consideration $ 2,670 Equity consideration 368 Total purchase consideration $ 3,038 Cash consideration includes a $ 2.5 million upfront payment and a payment for working capital adjustments. In addition to the $ 2.5 million paid upfront, $ 2.5 million was placed into escrow subject to the continued service and/or employment of Denovium’s co-founders over a one-year period. This amount is not included in the total consideration and is accounted for as compensation expense over the one-year service period, and is included in current restricted cash and accrued expenses on the consolidated balance sheet as of December 31, 2021. The Company issued 1,010,296 shares of its common stock to the Denovium co-founders, of which 80 % or 808,238 shares is subject to a Stock Restriction Agreement and vests monthly over a four-year term subject to a service condition. The fair value of these shares of $ 1.5 million will be recognized as compensation cost over the four-year service period. The remaining 20 %, or 202,058 shares, vested immediately and is included in the total consideration. The following table summarizes the allocation of the purchase consideration to the fair value of the assets acquired and liabilities assumed (in thousands): Cash and cash equivalents $ 158 Accounts receivable 59 Other current assets 1 Intangible assets 2,507 Goodwill 1,055 TOTAL ASSETS 3,780 Accounts payable and accrued expenses 109 Deferred tax liability 633 TOTAL LIABILITIES 742 Fair value of net assets acquired and liabilities assumed $ 3,038 Goodwill arising from the acquisition of $ 1.1 million was attributable to the assembled workforce and expected synergies between the Integrated Drug Creation Platform and the Denovium Engine. The goodwill is not deductible for tax purposes. As of December 31, 2021, the Company had fully completed the analysis to assign fair values to all assets acquired and liabilities assumed. The following table reflects the fair values of the identified intangible assets of Denovium and their respective weighted-average estimated amortization periods. Estimated Fair Value (in thousands) Estimated Amortization Period (years) Denovium Engine $ 2,507 5 $ 2,507 106 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Acquisition of Totient On June 4, 2021, the Company entered into a merger agreement with Totient, Inc. (“Totient”), under which, at the effective time, a wholly owned entity, or Merger Sub, merged with Totient, with Merger Sub surviving as a wholly owned subsidiary of the Company. Pursuant to the merger agreement, at closing, Totient shareholders became eligible to receive an aggregate payment of $ 55.0 million in cash, of which $ 40.0 million in cash was paid at closing, subject to customary purchase price adjustments and escrow restrictions, and $ 15.0 million in cash shall be paid upon the achievement of expected milestones, and 2,212,208 shares of the Company’s common stock. The $ 40.0 million cash consideration includes $ 8.0 million of deferred cash payment, due in one year , which is held in escrow and included in current restricted cash and accrued expenses on the consolidated balance sheet as of December 31, 2021. All common stock issued is unrestricted, except for those shares granted to certain members of Totient’s management, of which 25 % of the shares issued were vested upon the closing of the transaction and the remaining 75 % will vest over 2.5 years, in six month installments subject to their continuing service relationships with the Company. The following table summarizes the preliminary purchase price (in thousands): Estimated cash payment to Totient stockholders $ 35,368 (i) Estimated stock payment to Totient stockholders 13,891 (ii) Estimated cash payment contingent on achieving specified milestone 12,000 (iii) Total $ 61,259 (i) Pursuant to the merger agreement, the initial purchase price includes $ 40.0 million of cash adjusted for the agreed upon working capital value which includes the payment of Totient’s transaction and other expenses as well as payments to Totient stock option holders for the cancellation and extinguishment of Totient stock options. (ii) Pursuant to the merger agreement, 2,212,208 shares of common stock issued in payment to Totient stockholders with 1,282,747 vesting immediately and therefore included in the purchase price consideration. The remaining 929,461 shares will vest ratably, every six months over 5 equal installments of a 2.5 years service period and will be expensed over the service period. These shares are subject to a stock restriction agreement that requires certain key Totient executives to maintain a continued service relationship throughout the service period. (iii) Represents the estimated fair value of the contingent consideration that is payable upon the achievement of the milestone of (i) Absci’s entering into one or more definitive commercialization agreements, or technology partnering or licensing agreements, or collaboration agreements, with third parties using, or related to, Totient’s technology, a target discovered or identified by using Totient’s technology, or a peptide, protein complex or amino acid sequence assembled using Totient’s technology, including any Totient product or enabled product, pursuant to which (a) Absci is entitled to receive at least $ 2.0 million in aggregate upfront cash or equity payments (provided, that the minimum upfront payment under any individual agreement shall be $ 1.0 million and (b) an option for a license or a license or similar right is granted to the third party; or (ii) first commercial sale of a Totient product or enabled product. The fair value estimate is based on a probability-weighted approach and will be updated as we obtain more information. The $ 12.0 million of contingent consideration is included in Other long-term liabilities on the consolidated balance sheet as of December 31, 2021. 107 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the allocation of the estimated consideration to the identifiable assets and liabilities acquired by us as of June 4, 2021 (in thousands). Current assets: Cash and cash equivalents $ 1,751 Prepaid expenses and other current assets 189 Total current assets 1,940 Operating lease right-of-use assets 266 Property and equipment, net 118 Goodwill 20,280 (i) Intangible assets 54,600 (ii) Other long-term assets 23 TOTAL ASSETS 77,227 Current liabilities: Accounts payable 78 Accrued expenses 6,588 Operating lease obligations, current 122 Total current liabilities 6,788 Operating lease obligations - net of current portion 144 Deferred tax, net 9,012 Other long-term liabilities 24 TOTAL LIABILITIES 15,968 Fair value of net assets acquired and liabilities assumed $ 61,259 (i) Goodwill represents the excess of the estimated purchase price over the estimated fair value of Totient’s identifiable assets acquired and liabilities assumed. Goodwill also reflects the requirement to record deferred tax balances for the difference between the assigned values and the tax bases of assets acquired and liabilities assumed in the business combination. Goodwill is not deductible for tax purposes. (ii) The estimated fair value of and useful lives of the intangible assets acquired is as follows: Estimated fair value (in thousands) (i) Estimated useful lives (in years) (ii) Monoclonal antibody library $ 46,300 20 Developed software platform and the related methods patents 8,300 15 Total $ 54,600 (i) The estimated fair values were categorized within Level 3 of the fair value hierarchy and were determined using an income-based approach, which was based on the present value of the future estimated after-tax cash flows attributable to each intangible asset. The significant assumptions inherent in the development of the values, from the perspective of a market participant, include the amount and timing of projected future cash flows (including revenue, regulatory success and profitability), and the discount rate selected to measure the risks inherent in the future cash flows, which was between 18 %- 23 %. These fair values are based on the most recent estimate of the fair value available and will be updated as we obtain more information. (ii) The estimate of the useful life was based on an analysis of the expected use of the asset by us, any legal, regulatory or contractual provisions that may limit the useful life, the effects of obsolescence, competition and other relevant economic factors, and consideration of the expected cash flows used to measure the fair value of the intangible asset. Until finalization, the Company’s analysis to assign fair values to all assets acquired and liabilities assumed is preliminary. The remaining items include the finalization of working capital adjustments, income taxes and contingent consideration liability, and the resulting impact to goodwill. The preliminary purchase price allocation will be subject to further refinement as the Company continues to refine its estimates and assumptions based on information available at the acquisition date. These refinements may result in material changes to the estimated fair value of assets acquired and liabilities assumed. The purchase price allocation adjustments can be made throughout the end of the Company’s measurement period, which is not to exceed one year from the acquisition date. The effect of measurement period adjustments to the estimated amounts 108 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS will be reflected on a prospective basis. During the year ended December 31, 2021, the Company recorded adjustments to goodwill of $ 1.6 million primarily related to deferred taxes. Acquisition costs of $ 0.9 million were included in the consolidated statement of operations and comprehensive loss as selling, general and administrative. The Company’s results of operations for the year ended December 31, 2021 include the operating results of Totient since the date of acquisition, within the consolidated statement of operations and comprehensive loss. The unaudited financial information in the table below summarizes the combined results of operations of the Company and Totient on a pro forma basis, as though the companies had been combined as of January 1, 2020. These pro forma results were based on estimates and assumptions, which we believe are reasonable. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of our fiscal year 2020. The pro forma financial information includes adjustments to share-based compensation expense, amortization for acquired intangible assets, interest expense, and transaction costs, and related tax effects. The pro forma financial information for the years ended December 31, 2021 and 2020 combines our results, which include the results of Totient subsequent to June 4, 2021, and the historical results for Totient for the periods prior to acquisition. The pro forma results for the year ended December 31, 2020 also include material nonrecurring adjustments for $ 0.9 million of acquisition related costs incurred and $ 1.6 million of costs related to the acceleration of stock appreciation right (“SAR”) and Employee Stock Ownership Plan awards due to preexisting change in control provisions. The following table summarizes the pro forma financial information (in thousands): For the Years Ended December 31, 2021 2020 Net loss applicable to common stockholders and unitholders $ ( 113,119 ) $ ( 60,701 ) 4. Property and equipment, net Property and equipment as of December 31, 2021 and 2020 consists of the following (in thousands): December 31, December 31, 2021 2020 Construction in progress $ 933 $ — Lab Equipment 27,776 8,578 Software 311 188 Furniture, Fixtures and Other 4,804 472 Leasehold Improvements 24,671 2,016 Total Cost 58,495 11,254 Less accumulated depreciation and amortization ( 6,381 ) ( 2,345 ) Property and equipment, net $ 52,114 $ 8,909 Depreciation expense was $ 4.5 million and $ 1.1 million for the years ended December 31, 2021 and 2020, respectively. 109 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. Goodwill and Intangibles, net The roll forward of goodwill was as follows (in thousands): Balance, December 31, 2020 $ — Goodwill acquired related to acquisition of Denovium 1,055 Goodwill acquired related to acquisition of Totient 20,280 Balance, December 31, 2021 $ 21,335 The Company performed its annual goodwill impairment test on October 1, 2021 utilizing the qualitative assessment allowable under ASC 350 Intangibles – Goodwill and Other to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. This qualitative assessment may include, but is not limited to, reviewing factors such as macroeconomic considerations, industry and market trends, cost factors, entity-specific financial performance and other events, such as changes in the Company’s management, strategy and primary user base. If based on a review of qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying value, a quantitative impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. Based on our review of the qualitative factors, the Company determined that a quantitative impairment analysis was not necessary. Based on the results of the Company’s annual impairment test, we concluded that goodwill was not impaired. There were no impairment losses netted against the goodwill balance at any date. Intangible assets consisted of the following: December 31, 2021 Gross Assets Accumulated Amortization Net Denovium Engine 2,507 ( 473 ) 2,034 Monoclonal antibody library 46,300 ( 1,325 ) 44,975 Developed software platform and the related methods patents 8,300 ( 317 ) 7,983 Intangible assets, net $ 57,107 $ ( 2,115 ) $ 54,992 There was no balance of intangible assets, or related amortization expense, for the year ended December 31, 2020. Amortization expense related to intangible assets was $ 2.1 million for the year ended December 31, 2021 and is reflected within depreciation and amortization expense on the consolidated statement of operations and comprehensive loss. At December 31, 2021, amortization expense on intangible assets is estimated to be as follows for each of the next five years: Years Ending December 31: 2022 $ 3,370 2023 3,370 2024 3,370 2025 3,370 2026 2,897 Thereafter 38,615 $ 54,992 6. Long-term debt and other borrowings In June 2018, the Company signed a Loan and Security Agreement (“LSA”) with Bridge Bank (“Bank”), a di vision of Western Alliance Bank. The purpose of the LSA was to provide long-term financing to the 110 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Company through term loans available for borrowing in three tranches up to a maximum of $ 3.0 million through December 2019 upon the attainment of certain milestones as delineated in the LSA. The first tranche of $ 0.3 million was borrowed in 2018. The Company was obligated to make interest-only payments until the amortization date of June 28, 2019 and after that date to make principal and interest payments. Interest on outstanding borrowings under the LSA is charged at a rate of 6 % per annum. This loan was scheduled to originally matured in May 2022, at which time all outstanding principal and accrued and unpaid interest is due and payable. This loan is secured by substantially all tangible assets of the Company; intellectual property is excluded from the secured collateral but is subject to a negative pledge in favor of the Bank. In March 2019, the Company entered into a first amendment to the LSA that increased total borrowings to $ 3.0 million and added a financial liquidity covenant. The amendment was accounted for as a debt modification and no gain or loss was recognized in the Company’s financial statements. In May 2020, the Company entered into a second amendment to the LSA that increased total borrowings to $ 5.0 million. The amortization date was extended to May 1, 2021 except, if a certain revenue and new contract bo okings milestone is achieved, the amortization date is extended to November 1, 2021. The maturity date of the loan was extended to May 11, 2024. The amendment was accounted for as a debt modification and no gain or loss was recognized in the Company’s financial statements. In August 2020, the Company entered into a third amendment to the LSA that waived an event of default due to failure to meet a financial covenant. The amendment also expanded the definition of permitted indebtedness to include Payroll Protection Plan (“PPP”) loans, and modified financial and restrictive covenants. In February 2021, the Company entered into a fourth amendment to the LSA. This amendment gave effect to the Company’s conversion to a corporation and its purchase of Denovium, including permitting certain cash and equity consideration linked to continued employment and service requirements, and adding Denovium as co-borrower to the LSA. In June 2021, the Company entered into a fifth amendment to the LSA. This amendment modified the term loan’s maturity date to June 16, 2023. The Company may prepay all, but not less than all, of the term loans at any time upon 10 days written notice, with a prepayment premium beginning at 1.0 % initially and declining to 0 % after May 11, 2022. The Company is also required to pay a final payment equal to 3 % of the principal amount funded, which is payable upon the earliest to occur of (i) the maturity date, (ii) acceleration and (iii) the prepayment of the loan. As part of the second amendment, the Company paid a one-time amendment fee and a pro-rated final payment in connection with the amendment. The final payment represents an additional principal payment and is accounted for as a debt discount that will be accreted through the maturity date of the loan based on the effective interest method. In connection with entering into the LSA in June 2018, the Company entered into an agreement whereby the Company is required to pay a fee of 3.5 % of the aggregate amount of term loans funded by Bank under the LSA within three business days of a sale or other disposition of substantially all of the Company’s assets, a merger or consolidation, a change in control or an initial public offering. Concurrent with the second amendment, the Company and the Bank entered into an amended agreement which extended the term of the fee to May 11, 2030. This fee became payable upon completion of the Company’s IPO on July 26, 2021 and was paid during the year ended December 31, 2021. Under the LSA (as amended), the Company is subject to a financial covenant. The covenant, as amended, requires that the Company maintain at all times either (a) unrestricted cash and cash equivalents in an amount equal to or greater than the Company’s monthly cash burn or (b) trailing 6-month revenue of at least 80 % of the Company’s revenue projections (over the same 6-month period) determined using the lender’s measurement method. As of December 31, 2021, the Company was in compliance with this financial covenant. As of December 31, 2021, the outstanding principal balance under the LSA was $ 3.4 million . 111 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Future maturities of the amounts outstanding under the LSA as of December 31, 2021 are as follows (in thousands): Years ending December 31: 2022 $ 2,400 2023 1,150 2024 — 2025 — 2026 — Total principal, including final fee 3,550 Less: amount representing debt discounts and issuance costs ( 26 ) Total long-term debt $ 3,524 The carrying amount of the long-term debt approximates fair value. In May 2020, the Company received a PPP loan pursuant to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) in the amount of $ 0.6 million. The loan had a two-year term and bore a fixed interest rate of 1 %. Under the terms of the CARES Act, the loan was eligible to be forgiven, in part or whole, if the proceeds were used to retain and pay employees and for other qualifying expenditures. In February 2021, the Company received notification from the Small Business Administration that they approved the forgiveness of the full $ 0.6 million PPP loan and a gain on extinguishment in this amount was recorded as other income in the consolidated statement of operations and comprehensive loss. In March 2021, the Company entered into a Note Purchase Agreement to issue and sell $ 125.0 million convertible promissory notes (the “2021 Notes”) to certain investors. The 2021 Notes accrued interest at 6 % per annum. Due to certain embedded features within the 2021 Notes, the Company elected to account for these notes, including all of their embedded features, under the fair value option. The Company has elected to recognize interest expense based on the 6 % per annum coupon rate of the Notes, which was included in other long-term liabilities on the consolidated balance sheet through the date of the IPO. Based on the terms of the agreement, the 2021 Notes converted at an 18 % discount from the offering price to the public in the IPO. Prior to the conversion, the Company recorded a final fair value adjustment of the 2021 Notes using the Company's common stock price at the IPO. Immediately prior to the completion of the IPO, all outstanding principal under the 2021 Notes and the related accrued interest expense were converted into an aggregate of 9,732,593 shares of our common stock based on an initial public offering price of $ 16.00 per share. 7. Leases In December 2020, the Company entered into a lease agreement for a new 61,607 square foot facility in Vancouver, Washington. The lease term commenced in December 2020 and initially was set to end in April 2026, with the Company’s option to renew through April 2031. The lease agreement provides for annual base rent of approximately $ 1.2 million in the first year of the lease term which increases on an annual basis to approximately $ 1.5 million in the final year of the initial lease term. As part of the lease agreement, the lessor provided tenant incentives in the amount of $ 2.5 million. In March 2021, the Company entered into an amendment to its lease agreement with respect to its new facility currently under construction. The amendment made certain changes to the original lease, including (i) the addition of 16,367 square feet of office and laboratory space at the same site (“Expansion Premises”) and (ii) an extension of the expiration date of the original lease by 24 months following the rent commencement date of April 1, 2021. The amendment provides for annual base rent for the Expansion Premises of approximately $ 0.3 million in the first year of the lease term, which increases on an annual basis to approximately $ 0.4 million in the final year of the lease term. The amendment also provides for additional tenant incentives in the amount of $ 0.7 million. Additionally, with the execution of this amendment, the Company obtained a one-time option to terminate the lease for the original premises and Expansion Premises after five years . All other terms of the lease amendment for the Expansion Premises are consistent with the 112 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS existing new facility lease agreement. Under the amendment, the Company retains its original option to renew the lease for an additional five-year term, at then-current market rates. In conjunction with the new facility lease and lease amendment, the Company entered into an agreement with a construction company for purposes of building out the facility and customizations for a total estimated cost of approximately $ 24.5 million. The Company moved into its new facility in May 2021 and has completed its move out of its prior office and laboratory facility, for which the Company’s lease continues through August 2024. During the fourth quarter of 2021, the Company determined it would no longer utilize the prior office and facility and is currently evaluating different options with the lessor. As a result, during the year ended December 31, 2021, the Company recognized $ 0.6 million in impairment expense of certain operating lease right-of-use assets and $ 0.3 million in impairment of leasehold improvements. For each of the Company’s facility lease agreements, the Company is responsible for taxes, insurance and maintenance costs. The Company leases certain laboratory equipment under finance leases. Property and equipment includes approximately $ 8.8 million and $ 4.3 million of assets under finance leases as of December 31, 2021 and 2020, respectively. Accumulated depreciation related to assets under finance leases was approximately $ 1.8 million and $ 0.9 million as of December 31, 2021 and 2020, respectively. The components of lease expense were as follows (in thousands): For the Years Ended December 31, 2021 2020 Operating lease cost 1,780 526 Variable lease cost 425 166 Short-term lease cost 155 18 $ 2,360 $ 710 Future undiscounted lease payments for the Company’s lease liabilities as of December 31, 2021 are as follows (in thousands): Operating leases Finance leases 2022 $ 2,294 $ 3,127 2023 2,285 2,477 2024 2,135 968 2025 1,873 86 2026 1,929 — Thereafter 2,821 — Total future lease payments 13,337 6,658 Less: Imputed interest ( 2,832 ) ( 642 ) Less: Lease incentive ( 34 ) — Present value of lease liabilities $ 10,471 $ 6,016 113 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Additional information related to the Company’s leases as of December 31, 2021 and 2020 is as follows: December 31, 2021 December 31, 2020 Weighted average remaining lease term (in years) Operating leases 6 4.9 Finance leases 2.2 3.0 Weighted average discount rate Operating leases 8 % 8 % Finance leases 7 % 7 % 8. Commitments and contingencies As of December 31, 2021, future lease payments are secured by irrevocable standby letters of credit totaling $ 1.8 million. The irrevocable standby letters of credit are expected to be pledged for the full lease terms which extend through 2024 and 2028 for each of the Company’s facility leases. The Company is not currently party to any material claims or legal proceedings. At each reporting date, the Company evaluates whether or not a potential loss or a potential range of loss is both probable and reasonably estimable. 9. Redeemable convertible preferred stock Redeemable Convertible Preferred Stock Prior to its conversion to common stock in connection with the Company’s IPO, the convertible preferred stock was classified as temporary equity on the accompanying consolidated balance sheets since the shares contained certain redemption features that were not solely within the control of the Company. The Company had not previously accreted the convertible preferred stock to its redemption value since the shares were not redeemable and redemption was not deemed to be probable. The following table summarizes the authorized, issued, and outstanding redeemable convertible preferred stock of the Company as of December 31, 2020 (in thousands, except share and per share data): December 31, 2020 Shares Authorized Shares Issued and Outstanding Issuance Price per Share Net Proceeds Liquidation Preference Convertible Preferred Stock: Junior 1,573,547 1,573,547 $ 1.00 $ 1,462 $ 1,989 Series A-1 2,793,007 2,700,000 1.00 2,700 3,453 Series A-2 1,500,000 1,500,000 1.00 1,500 1,885 Series B 1,372,549 1,372,549 1.53 2,065 2,526 Series C 1,760,252 1,760,252 6.95 11,979 14,110 Series D 1,532,176 1,532,176 9.79 14,951 15,852 Series E 3,313,519 3,313,519 19.62 64,709 163,280 Total convertible preferred stock 13,845,050 13,752,043 $ 99,366 $ 203,095 Immediately prior to the completion of the IPO, all shares of redeemable convertible preferred stock then outstanding were converted into 46,266,256 shares of common stock. 114 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Preferred stock warrants As part of the Class A-1 funding in 2016, a warrant for the purchase of 93,007 Class A-1 Preferred Units at an exercise price of $ 1 per unit and exercisable at any time before April 2026 was granted to an investor. This warrant was exchanged for a warrant to purchase Class A-1 preferred stock at equivalent terms in October 2020. Because the underlying shares are redeemable for conditions outside of the Company’s control, the warrant was classified within other long-term liabilities on the consolidated balance sheets and recognized at fair value at each reporting period with the change in fair value recorded in other expense on the consolidated statement of operations and comprehensive loss prior to the IPO. The balance was included in other long-term liabilities on the consolidated balance sheet prior to the IPO. The warrant was converted into a warrant to purchase 307,211 shares of the Company’s common stock upon the closing of the IPO. The warrant holder fully exercised the warrant to purchase common stock for cash during the year ended December 31, 2021 following the IPO. 10. Stock-based compensation Prior to the LLC Conversion, the Company granted incentive units and phantom units under its 2015 Equity-Based Incentive Plan (“2015 Plan”) to employees and non-employee service providers. In October 2020, in conjunction with the LLC Conversion, the Company adopted the 2020 Stock Option and Grant Plan (“2020 Plan”) under which it granted stock options, restricted shares, and SARs as replacement awards for outstanding awards under the 2015 Plan and as new awards to incentivize employee service. Upon completion of the IPO, the Company adopted the 2021 Stock Option and Incentive Plan (“2021 Plan”). Total stock-based compensation expense related to all of the Company’s stock-based awards was recorded in the consolidated statements of operations and comprehensive loss as follows (in thousands): For the Years Ended December 31, 2021 2020 Research and development 4,637 188 Selling, general and administrative 5,971 232 Total stock-based compensation expense $ 10,608 $ 420 Restricted Stock Upon the LLC Conversion, the outstanding 3,329,707 incentive units were exchanged for 2,671,907 restricted shares of common stock granted under the 2020 Plan based on a ratio determined by their threshold amount and the fair value of the restricted stock. The exchange was accounted for as a probable-to-probable modification (Type I modification), and the fair value of the restricted shares did not exceed the fair value of the incentive units on the date of exchange. Accordingly, the restricted shares are measured at the grant date fair value of the incentive units. Shares of restricted stock that do not vest are subject to our right of repurchase or forfeiture. In connection with its acquisitions of Denovium and Totient, the Company issued restricted shares of common stock that vest over time subject to continued service. Activity for the restricted shares is shown below: Number of shares Unvested as of December 31, 2020 1,111,642 Granted 2,441,129 Vested ( 967,101 ) Unvested as of December 31, 2021 2,585,670 As of December 31, 2021, there was $ 11.5 million of unrecognized compensation expense related to the restricted shares expected to be recognized over a remaining weighted-average period of 2.6 years. 115 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Phantom Units Phantom units generally vested at 25 % after one-year with the remainder vesting quarterly over the following three-year period. Upon the occurrence of a liquidity event, 100 % of phantom units would vest. A liquidity event for purposes of the phantom units meant either of the following events: (i) a person or persons acting as a group (other than a person or group that currently owns more than 50% of the voting power of the Company) acquires ownership of common units that, together with the common units held by such person or group, constitutes more than 50% of the voting power of all common units of the Company or (ii) a person or persons acting as a group acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from the Company that have a total gross fair market value of more than 60% of the total gross fair market value of all of the assets of the Company immediately before such acquisition or acquisitions. Upon a liquidity event, the phantom unit holders were entitled to a payment equal to the fair value of common units less a strike price. The payment was to be made in the same form of consideration as received by other unit holders as a result of the liquidity event. Other than this payment upon a liquidity event, phantom units provided no economic value and they provided no voting rights. Due to the presence of an exercise condition that was contingent upon a liquidity event, the Company determined that it was not probable that the phantom units would become exercisable and no compensation expense has been recognized. Activity for the phantom units is shown below: Number of Units Weighted Average Strike Price Unvested as of December 31, 2020 1,202,435 $ 0.47 Granted — — Vested — — Exchange of Phantom Units for Cash Payment Rights, SARs, and/or Stock Options ( 1,202,435 ) $ 0.47 Unvested as of December 31, 2021 — $ — Following the LLC Conversion, the holders of phantom units were offered to exchange their awards for a combination of cash payment rights, SARs and/or stock options granted under the 2020 Plan. The exchange was accounted for as short-term inducement, with no accounting recognition prior to offer expiration in January 2021 as the exchange offer participants were able to modify their election through the expiration date. In January 2021, all participants accepted the offer. The exercisability of the SARs is contingent upon a liquidity event that is not probable of occurrence; accordingly, no compensation expense has been recognized for these awards. The stock options vest based on a service condition, generally over a 4-year term beginning with the vesting commencement date of the exchanged phantom units. The aggregate intrinsic value of the 394,736 SARs outstanding as of December 31, 2021 is $ 3.2 million based on the estimated fair value of common stock of $ 8.20 . 116 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock Options Stock options generally vest 25 % after one-year from the date of the grant with the remainder vesting monthly over the following three-year period. Certain options have alternative vesting schedules including ratably over 2 - 4 years and immediate vesting. The Company recognizes forfeitures as they occur, and uses the straight-line expense recognition method. Activity for stock options is shown below: Number of Options Weighted Average Exercise Price per Share Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands $) Outstanding at December 31, 2020 1,706,339 $ 1.10 9.8 $ 780 Granted 7,386,667 4.01 — Exercised ( 153,416 ) 1.10 Canceled/ Forfeited ( 1,182,189 ) 2.14 — Outstanding at December 31, 2021 7,757,401 3.72 9.2 40,939 Exercisable at December 31, 2021 1,675,979 $ 1.13 9.0 $ 11,851 Vested and expected to vest as of December 31, 2021 7,757,401 9.2 $ 40,939 The aggregate intrinsic value was calculated based on the estimated fair value of common stock of $ 8.20 per share. The weighted-average grant date fair value of stock options granted during the years ended December 31, 2021 and 2020 was $ 4.28 and $ 0.83 , respectively. The fair value of options vested during the years ended December 31, 2021 and 2020 was $ 2.4 million and $ 0.1 million, respectively. The intrinsic value of options exercised, which represents the value of the Company’s common stock at the time of exercise in excess of the exercise price, was $ 1.4 million during the year ended December 31, 2021. As of December 31, 2021, total unrecognized stock-based compensation related to stock options was $ 24.6 million, which the Company expects to recognize over a remaining weighted average period of 3.4 years. Under the 2020 Plan and 2021 Plan, the Company has also granted a limited quantity of cash-settled stock appreciation rights to certain international-based employees and consultants. As of December 31, 2021, 100,881 of these stock appreciation rights were outstanding with a weighted average exercise price of $ 4.97 . As of December 31, 2021, the Company had recognized a liability of $ 0.1 million classified within other long-term liabilities on the consolidated balance sheets and total unrecognized stock-based compensation related to these cash-settled stock appreciation rights was $ 0.7 million, which the Company expects to recognize over a remaining weighted average period of 3.5 years. Determination of Fair Value The estimated grant-date fair value of all the Company’s stock options was calculated using the Black-Scholes option pricing model, based on the following assumptions: For the Years Ended December 31, 2021 2020 Expected term (in years) 3.5 - 6.1 2.0 - 6.0 Volatility 45 %- 47 % 45 %- 85 % Risk-free interest rate 0.3 %- 1.5 % 0.1 %- 1.6 % Dividend Yield — % — % 117 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The fair value of each stock option was determined by the Company using the methods and assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment and estimation by management. Expected Term—The expected term represents the period that stock-based awards are expected to be outstanding. The Company’s stock options do not have a contractual term. However, there is a constructive maturity of each stock option based on the expected exit or liquidity scenarios for the Company. The Company’s historical option exercise data is limited and did not provide a reasonable basis upon which to estimate an expected term. The expected term for options was derived by using the simplified method which uses the midpoint between the average vesting term and the contractual expiration period of the stock-based award. Expected Volatility—As we do not have sufficient trading history for our common stock, the expected volatility was derived from the historical stock volatilities of comparable peer public companies within the Company’s industry. These companies are considered to be comparable to the Company’s business over a period equivalent to the expected term of the stock-based awards. Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant for zero-coupon U.S. Treasury notes with maturities approximately equal to the stock options’ expected term. Expected Dividend Rate—The expected dividend is zero as the Company has not paid nor does it anticipate paying any dividends on its common stock underlying its stock options in the foreseeable future. The Company estimated the fair value of its common stock underlying the stock-based awards when performing fair value calculations using the Black-Scholes option pricing model. Because the Company’s common stock was not publicly traded during the periods prior to the IPO, the fair value of its common stock underlying the stock-based awards was determined on each grant date by management and approved by the Board, considering the most recently available third-party valuation of the Company’s common stock for those periods. For all grants subsequent to the IPO, the fair value of common stock was determined by using the closing price per share of common stock as reported on the Nasdaq Global Select Market. All options to purchase shares of the Company’s common stock are intended to be granted with an exercise price per share no less than the fair value per share of the common stock underlying those options on the date of grant, based on the information known to the Company on the date of grant. The Company’s determination of the value of its common stock was performed using methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants (“AICPA”), Audit and Accounting Practice Aid Series: Valuation of Privately Held Company Equity Securities Issued as Compensation (“AICPA Practice Aid”). In addition, the Board considered various objective and subjective factors to determine the fair value of the common stock, including: • valuations of the Company’s common stock performed by third-party valuation specialists; • the anticipated capital structure that will directly impact the value of the currently outstanding securities; • the Company’s results of operations and financial position; • the composition of, and changes to, the management team and board of directors; • the lack of liquidity of the Company’s common stock as a private company; • the Company’s stage of development and business strategy and the material risks related to its business and industry; • external market conditions affecting the life sciences and biotechnology industry sectors; • U.S. and global economic conditions; • the likelihood of achieving a liquidity event for the holders of the Company’s common stock, given prevailing market conditions; and 118 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS • the market value and volatility of comparable companies. The AICPA Practice Aid prescribes several valuation approaches for setting the value of an enterprise, such as the cost, income and market approaches, and various methodologies for allocating the value of an enterprise to its common stock. The cost approach establishes the value of an enterprise based on the cost of reproducing or replacing the property less depreciation and functional or economic obsolescence, if present. The income approach establishes the value of an enterprise based on the present value of future cash flows that are reasonably reflective of our future operations, discounting to the present value with an appropriate risk adjusted discount rate or capitalization rate. The market approach is based on the assumption that the value of an asset is equal to the value of a substitute asset with the same characteristics. In accordance with the AICPA Practice Aid, the Company considered the various methods for allocating the enterprise value to determine the fair value of its common stock at the valuation date. Under the option pricing method (“OPM”), shares are valued by creating a series of call options with exercise prices based on the liquidation preferences and conversion terms of each equity class. The value of the common stock is inferred by analyzing these options. The probability weighted expected return method (“PWERM”) is a scenario-based analysis that estimates the value per share based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to us, as well as the economic and control rights of each share class. Starting in 2020 and until the IPO in July 2021, the Company used a hybrid method to determine the estimated fair value of its common stock, which included both the OPM and PWERM models. In June 2021, the Company increased the number of shares of common stock reserved for future issuance under the 2020 Plan to 11,980,029 . In July 2021, upon the completion of IPO, the Company adopted the 2021 Plan. The number of shares of common stock initially reserved for future issuance under the 2021 Plan is 8,133,750 . As of December 31, 2021, 7,473,403 shares were available for issuance under the 2021 Plan. Employee Stock Purchase Plan In July 2021, the Company’s board of directors adopted the 2021 Employee Stock Purchase Plan (“2021 ESPP”), which was subsequently approved by the Company’s stockholders and became effective in connection with the IPO. A total of 903,750 shares of common stock were reserved for issuance under the 2021 ESPP. The first offering period has not commenced as of December 31, 2021 and there is no stock-based compensation related to the 2021 ESPP for the period ended December 31, 2021. 11. Fair Value Measurements US GAAP defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: Level 1: Observable inputs such as quoted prices in active markets. Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly. Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. When quoted market prices are available in active markets, the fair value of assets and liabilities is estimated within Level 1 of the valuation hierarchy. If quoted prices are not available, then fair values are estimated by using pricing models, quoted prices of assets and liabilities with similar characteristics, or discounted cash flows, within Level 2 of the valuation 119 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS hierarchy. In cases where Level 1 or Level 2 inputs are not available, the fair values are estimated by using inputs within Level 3 of the hierarchy. As part of the Class A-1 funding in 2016, a warrant for the purchase of 93,007 Class A-1 Preferred Units at an exercise price of $ 1 per unit and exercisable at any time before April 2026 was granted to an investor. This warrant was exchanged for a warrant to purchase Series A-1 preferred stock at equivalent terms in October 2020 (Note 9: Redeemable convertible preferred stock). Because the underlying shares are redeemable for conditions outside of the Company’s control, the warrant was classified within other long-term liabilities on the consolidated balance sheets and recognized at fair value at each reporting period with the change in fair value recorded in other expense on the consolidated statement of operations and comprehensive loss through the date of the IPO. The value for the warrant was based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. During 2018, the Company entered into an agreement whereby the Company is required to pay a fee of 3.5 % of the aggregate amount of term loans funded by Bank under the LSA within three business days of a sale or other disposition of substantially all of the Company’s assets, a merger or consolidation, a change in control or an initial public offering (Note 6: Long-term debt and other borrowings). This agreement has been accounted for as a freestanding derivative under ASC 815, Derivatives and is remeasured to its fair value at the end of each reporting period. The value for the fee (“Fee in lieu of warrant”) is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. Except for short-term investments, the 2021 Notes and the warrant, none of the Company’s assets or liabilities are recorded at fair value on a recurring basis. The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2021 and December 31, 2020 (in thousands): December 31, 2021 Level 1 Level 2 Level 3 Total Assets: Equity securities without RDFV $ — $ — $ 1,200 $ 1,200 Total assets $ — $ — $ 1,200 $ 1,200 Liabilities: Contingent consideration $ — $ — $ 12,000 $ 12,000 Total liabilities $ — $ — $ 12,000 $ 12,000 December 31, 2020 Level 1 Level 2 Level 3 Total Liabilities: Fee in-lieu of warrant $ — $ — $ 22 $ 22 Preferred stock warrant liability — — 698 698 Total liabilities $ — $ — $ 720 $ 720 120 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table provides reconciliation for all liabilities measured at fair value using significant unobservable inputs (Level 3) for the year ended December 31, 2021 (in thousands): Fee in-lieu of warrant Convertible promissory notes Preferred stock warrant liability Contingent consideration Total liabilities Balance at December 31, 2020 $ 22 $ — $ 698 $ — $ 720 Fair value at issuance — 125,000 — 12,000 137,000 Change in fair value during 2021 174 30,722 4,124 — 35,020 Conversion or payment at IPO ( 196 ) ( 155,722 ) ( 4,822 ) — ( 160,740 ) Balance at December 31, 2021 $ — $ — $ — $ 12,000 $ 12,000 Based on the probability of a liquidity event, the Company primarily utilized the expected IPO price to estimate the fair value of the preferred stock warrant liability through the IPO date. The warrant was converted into a warrant to purchase 307,211 shares of the Company’s common stock upon the closing of the IPO and was exercised to purchase common stock during the period ended December 31, 2021 following the IPO. The fee-in-lieu of warrant liability is measured based on management’s estimate of the probability of a liquidity event, the estimated timing thereof, and a discount rate. The fee-in-lieu of warrant was paid during the period ended December 31, 2021 following the IPO. The Company measured the fair value of the 2021 Notes at issuance using the transaction price. For the period from the issuance date through the IPO date, the Company increased the estimated fair value based on the increased probability of an IPO. The 2021 Notes converted to common stock during the period ended December 31, 2021 immediately prior to the IPO. The contingent consideration liability is related to the Totient acquisition and is included in Other long-term liabilities on the consolidated balance sheet as of December 31, 2021. Refer to Note 3: Acquisitions for further information. The fair value of equity securities without readily determinable fair market values (“RDFV”) is determined based on cost, less any impairment, plus or minus changes in fair value resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. These securities are classified as Level 3 in the fair value hierarchy outlined above. There are significant judgments, assumptions and estimates inherent in the determination of the fair value of each of the instruments described above. These include determination of a valuation method and selection of the possible outcomes available to the Company, including the determination of timing and expected future investment returns for such scenarios. Prior to the IPO, the Company considered the equity value of an initial public offering using market transactions and determined the expected value of a stay private scenario using the income approach, which was based on assumptions regarding the Company’s future operating performance. The related judgments, assumptions and estimates are highly interrelated and changes in any one assumption could necessitate changes in another. In particular, any changes in the probability of a particular outcome would require a related change to the probability of another outcome. In addition, the fair value of the 2021 Notes is derived using assumptions that are consistent with the assumptions used to value the Company’s common stock, the fee in-lieu of warrant and the warrant. In the future, depending on the valuation approaches used and the expected timing and weighting of each, the inputs described above, or other inputs, may have a greater or lesser impact on the Company’s estimates of fair value. 12. Employee benefit plan The Company sponsors a 401(k) tax-deferred savings plan for all employees who meet certain eligibility requirements. Participants may contribute, on a pre-tax or post-tax basis, a percentage of their annual compensation, not to exceed a maximum contribution amount pursuant to Section 401(k) of the Internal Revenue Code. The Company match is 100 % of the employees’ first contribution of 3 %, plus 50 % of the next 2 % of eligible compensation contributed by the employee, up to a maximum Company match of 4 % of 121 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS compensation for each employee. The Company contributed $ 0.6 million and $ 0.2 million for the years ended December 31, 2021 and 2020, respectively. 13. Related party transactions The Company is party to a joint development agreement with AGC, Inc., the parent company of the employer of one of the Company’s former directors (resignation effective April 2021) . No revenue was recognized under the agreement during 2021 through April 2021. Revenue recognized under the agreement f or the year ended December 31, 2020 was $ 0.2 million. Th e Company has the opportunity to earn additional revenues under the agreement if pre-determined milestones are achieved. During the period ended December 31, 2021, the employer of one of the Company’s board members exercised a warrant to purchase 307,211 shares of the Company’s common stock. The Company’s total cash proceeds from the warrant’s exercise was $ 0.1 million. 14. Net loss per share attributable to common stockholders and unitholders Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. The following table sets forth the computation of the Company’s basic and diluted net loss per share attributable to common unitholders and stockholders (in thousands, except share and per share amounts): 2021 2020 Numerator: Net loss $ ( 100,960 ) $ ( 14,353 ) Adjustment of redeemable convertible preferred stock and units — ( 34,336 ) Cumulative undeclared preferred stock dividends ( 2,284 ) ( 780 ) Net loss available to common stockholder and unitholders $ ( 103,244 ) $ ( 49,469 ) Denominator: Weighted-average common shares and units outstanding 49,685,194 15,494,908 Net loss per share, basic and diluted $ ( 2.08 ) $ ( 3.19 ) The common stock issuable upon the conversion or exercise of the following dilutive securities has been excluded from the diluted net loss per share calculation because their effect would have been anti-dilutive. Diluted net loss per share, therefore, does not differ from basic net loss per share for the periods presented. Potentially dilutive securities not included in the calculation of diluted net loss per share because to do so would be anti-dilutive are as follows (in common stock equivalent shares): 2021 2020 Redeemable convertible preferred stock and units outstanding 25,489,573 45,424,373 Redeemable convertible preferred stock and unit warrants 189,377 307,211 Stock options 6,379,236 1,645,237 Unvested restricted stock 2,616,641 1,111,642 for information regarding 122 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. Income Taxes Provision for Income Taxes: The Company was classified as a partnership, and was therefore a pass-through entity, for U.S. income tax purposes through the LLC Conversion on October 15, 2020. The Company incurred net losses for the years ended December 31, 2021 and 2020. The significant components of income tax for the years ended December 31 are as follows (in thousands): 2021 2020 Current Federal $ — $ — State 2 2 Total current 2 2 Deferred expense/(benefit) Federal ( 7,254 ) — State ( 1,647 ) — Total deferred ( 8,901 ) — Total $ ( 8,899 ) $ 2 The provision for income taxes results in effective tax rates which are different than the federal income tax statutory rate. The nature of the differences for the years ended December 31, 2021 and 2020 were as follows: 2021 2020 Expected federal income tax 21.0 % 21.0 % State income taxes after credits 4.8 4.2 Tax-effect of change in entity status 0.3 ( 3.7 ) Change in valuation allowance ( 9.1 ) ( 3.3 ) Research and development credits 0.6 0.1 Stock-based compensation ( 0.9 ) ( 0.4 ) Revaluation of warrant liability ( 1.0 ) ( 0.2 ) Change in fair value of convertible promissory notes ( 6.6 ) — Loss allocable to pre-incorporation period — ( 17.7 ) Other ( 1.0 ) — Effective tax rate 8.1 % — % 123 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and amounts used for income tax purposes. Significant components of the Company’s deferred income tax assets and liabilities are as follows at December 31, 2021 and 2020 (in thousands): 2021 2020 Deferred tax assets: Net operating losses $ 22,508 $ 941 Research and development credits 698 7 Stock-based compensation 1,342 19 Lease liability 2,651 1,157 Accrued expenses 300 3 Gross deferred tax assets 27,499 2,127 Less valuation allowance ( 10,481 ) ( 477 ) Total deferred tax assets 17,018 1,650 Deferred tax liabilities: Depreciation and amortization ( 15,221 ) ( 520 ) Right-of-Use Lease ( 2,540 ) ( 1,130 ) Gross deferred tax liabilities ( 17,761 ) ( 1,650 ) Deferred tax liabilities, net $ ( 743 ) $ — As of December 31, 2021, the Company has remaining federal net operating losses of $ 86.3 million and has state net operating loss carryforwards of approximately $ 74.9 million to offset against future taxable income for state tax purposes. Under the Tax Cuts and Jobs Act of 2017 (“TCJA”), federal net operating losses incurred in 2018 and future years may be carried forward indefinitely, but the deductibility of such federal NOLs is subject to an annual limitation. NOLs generated prior to 2018 are eligible to be carried forward up to 20 years. State net operating losses can be carried forward for 5 to 20 years depending on the jurisdiction and will begin to expire in years 2025 to 2040. The company also has Federal research credit carryforwards of approximately $ 1.4 million that will begin to expire in 2040. We file federal and certain state income tax returns, which provide varying statutes of limitations on assessments. However, because of NOL carryforwards, substantially all tax years since the Company’s incorporation remain open to federal and state tax examination. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred assets will be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Evaluating the need for a valuation allowance for deferred tax assets often requires judgment and analysis of all the positive and negative evidence available, including cumulative losses in recent years and projected future taxable income, to determine whether all or some portion of the deferred tax assets will not be realized. As of December 31, 2021, the Company has utilized a full valuation allowance to offset the net deferred tax assets as the Company believes it is not more likely than not that the net deferred tax assets will be fully realizable. The valuation allowance increased $ 10.0 million during the year ended December 31, 2021 and $ 0.5 million during the year ended December 31, 2020. Under the provisions of the Internal Revenue Code, certain substantial changes in the company's ownership may result in a limitation on the amount of net operating loss carryforwards and research and development credit carryforwards which could be utilized annually to offset future taxable income and taxes payable. A formal Section 382 study was not performed through December 31, 2021. 124 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. We had unrecognized tax benefits of $ 0.7 million as of December 31, 2021 and no unrecognized tax benefits as of December 31, 2020. We recognize penalties and interest related to unrecognized tax benefits as a component of income tax expense. As of December 31, 2021 and December 31, 2020, there are no accrued penalties or interest recorded in the financial statements. All unrecognized tax benefits would currently not have an impact on the effective rate if recognized. The following is a reconciliation of our unrecognized tax benefits: 2021 Balance at January 1 $ — Additions Based On Tax Positions Related to Current Year 698 Balance at December 31 $ 698 125 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures None.