Absci Corp 10-K

Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm (PCAOB ID: 42) 84 Consolidated Balance Sheets as of December 31, 202 2 and 202 1 85 Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 202 2 and 202 1 86 Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the years ended December 31, 2022 and 2021 87 Consolidated Statements of Cash Flows for the years ended December 31, 202 2 and 202 1 88 Notes to the Consolidated Financial Statements 89 83 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 (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive loss, changes in redeemable convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the two years in the period ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, 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 30, 2023 84 Table of Contents ABSCI CORPORATION CONSOLIDATED BALANCE SHEETS December 31, December 31, (In thousands, except for share and per share data) 2022 2021 ASSETS Current assets: Cash and cash equivalents $ 59,955 $ 252,569 Restricted cash 15,023 10,513 Short-term investments 104,476 — Receivables under development arrangements, net 1,550 1,425 Prepaid expenses and other current assets 5,859 8,572 Total current assets 186,863 273,079 Operating lease right-of-use assets 5,319 6,538 Property and equipment, net 52,723 52,114 Intangibles, net 51,622 54,992 Goodwill 21,335 21,335 Restricted cash, long-term 1,864 16,844 Other long-term assets 1,282 1,293 TOTAL ASSETS $ 321,008 $ 426,195 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,412 $ 8,385 Accrued expenses 20,481 17,434 Long-term debt 2,946 2,400 Operating lease obligations 1,690 1,502 Financing lease obligations 2,296 2,785 Deferred revenue 445 1,353 Total current liabilities 30,270 33,859 Long-term debt - net of current portion 7,984 1,124 Operating lease obligations - net of current portion 7,317 8,969 Finance lease obligations - net of current portion 750 3,231 Deferred tax, net 238 743 Other long-term liabilities 35 12,162 TOTAL LIABILITIES 46,594 60,088 Commitments (See Note 10) STOCKHOLDERS' EQUITY Preferred stock, $ 0.0001 par value; 10,000,000 shares authorized as of December 31, 2022 and December 31, 2021; 0 shares issued and outstanding as of December 31, 2022 and December 31, 2021 — — Common stock, $ 0.0001 par value; 500,000,000 shares authorized as of December 31, 2022 and December 31, 2021; 92,411,103 and 92,648,036 shares issued and outstanding as of December 31, 2022 and December 31, 2021, respectively 9 9 Additional paid-in capital 570,454 557,136 Accumulated deficit ( 295,929 ) ( 191,025 ) Accumulated other comprehensive loss ( 120 ) ( 13 ) TOTAL STOCKHOLDERS' EQUITY 274,414 366,107 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 321,008 $ 426,195 The accompanying notes are an integral part of these consolidated financial statements. 85 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) 2022 2021 Revenues Technology development revenue $ 4,529 $ 4,009 Collaboration revenue 1,218 773 Total revenues 5,747 4,782 Operating expenses Research and development 58,908 44,586 Selling, general and administrative 40,552 28,780 Depreciation and amortization 13,037 6,654 Total operating expenses 112,497 80,020 Operating loss ( 106,750 ) ( 75,238 ) Other income (expense) Interest expense ( 972 ) ( 3,432 ) Other income (expense), net 2,357 ( 31,189 ) Total other income (expense), net 1,385 ( 34,621 ) Loss before income taxes ( 105,365 ) ( 109,859 ) Income tax benefit 461 8,899 Net loss ( 104,904 ) ( 100,960 ) Cumulative undeclared preferred stock dividends — ( 2,284 ) Net loss applicable to common stockholders $ ( 104,904 ) $ ( 103,244 ) Net loss per share attributable to common stockholders: Basic and diluted $ ( 1.15 ) $ ( 2.08 ) Weighted-average common shares outstanding: Basic and diluted 90,845,629 49,685,194 Comprehensive loss: Net loss $ ( 104,904 ) $ ( 100,960 ) Foreign currency translation adjustments ( 66 ) ( 13 ) Unrealized loss on investments ( 41 ) — Comprehensive loss $ ( 105,011 ) $ ( 100,973 ) The accompanying notes are an integral part of these consolidated financial statements. 86 Table of Contents ABSCI CORPORATION STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) (In thousands, except for share and per share data) Redeemable Convertible Preferred Stock Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Stockholders’ Equity (Deficit) Shares Amount Shares Amount Balances - 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 — — 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 Foreign currency translation adjustments — — — — — — ( 13 ) ( 13 ) Issuance of shares upon warrant exercise — — 307,211 — 93 — — 93 Net loss — — — — — ( 100,960 ) — ( 100,960 ) Balances - December 31, 2021 — — 92,648,036 $ 9 $ 557,136 $ ( 191,025 ) $ ( 13 ) $ 366,107 Issuance of shares under stock plans, net of shares withheld for tax payments — — 552,913 — 656 — — 656 Stock-based compensation — — — — 12,662 — — 12,662 Repurchase and forfeiture of common stock — — ( 789,846 ) — — — — — Foreign currency translation adjustments — — — — — — ( 66 ) ( 66 ) Unrealized loss on investments — — — — — — ( 41 ) ( 41 ) Net loss — — — — — ( 104,904 ) — ( 104,904 ) Balances - December 31, 2022 — — 92,411,103 $ 9 $ 570,454 $ ( 295,929 ) $ ( 120 ) $ 274,414 The accompanying notes are an integral part of these consolidated financial statements. 87 Table of Contents ABSCI CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, (In thousands) 2022 2021 Cash Flows From Operating Activities Net loss ( 104,904 ) ( 100,960 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 13,037 6,654 Deferred income taxes ( 505 ) ( 8,901 ) Stock-based compensation 12,540 10,608 Change in fair value of convertible promissory notes — 30,722 Accretion of discount on short-term investments ( 688 ) — Other 721 301 Preferred stock warrant liability expense — 4,124 Changes in operating assets and liabilities: Receivables under development arrangements ( 148 ) 230 Prepaid expenses and other current assets 2,382 ( 7,636 ) Operating lease right-of-use assets and liabilities ( 640 ) 3,256 Other long-term assets 13 126 Accounts payable ( 533 ) 1,574 Accrued expenses and other liabilities ( 1,707 ) 581 Deferred revenue ( 907 ) ( 1,277 ) Net cash used in operating activities ( 81,339 ) ( 60,598 ) Cash Flows From Investing Activities Purchases of property and equipment ( 16,175 ) ( 38,047 ) Acquisitions, net of cash acquired ( 8,000 ) ( 28,130 ) Investment in equity securities — ( 1,200 ) Investment in short-term investments ( 108,590 ) — Proceeds from maturities of short-term investments 5,000 — Proceeds from sales of property and equipment 133 — Proceeds from property insurance settlements 650 — Net cash used in investing activities ( 126,982 ) ( 67,377 ) Cash Flows From Financing Activities Proceeds from issuance of redeemable convertible preferred units and stock, net of issuance costs — 4,944 Proceeds from issuance of long-term debt 12,031 — Principal payments on long-term debt ( 4,651 ) ( 1,600 ) Principal payments on finance lease obligations ( 2,799 ) ( 2,547 ) Proceeds from issuance of common stock, net of issuance costs 656 210,396 Proceeds from issuance of convertible promissory notes — 125,000 Net cash provided by financing activities 5,237 336,193 Net (decrease) increase in cash, cash equivalents, and restricted cash ( 203,084 ) 208,218 Cash, cash equivalents and restricted cash - Beginning of year 279,926 71,708 Cash, cash equivalents, and restricted cash - End of period $ 76,842 $ 279,926 Supplemental Disclosure of Cash Flow Information Cash paid during the period for interest $ 895 $ 652 Supplemental Disclosure of Non-Cash Investing and Financing Activities Property and equipment purchased under finance lease — 4,313 Right-of-use assets obtained in exchange for operating lease obligation 111 3,330 Cash paid for amounts included in the measurement of operating lease liabilities 2,299 1,631 Property and equipment purchases included in accounts payable 123 5,565 The accompanying notes are an integral part of these consolidated financial statements. 88 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and nature of operations Absci Corporation (the “Company”) is a generative AI drug creation company harnessing deep learning and synthetic biology to expand the therapeutic potential of proteins. Absci leverages its integrated drug creation platform (the “Integrated Drug Creation Platform”) to identify novel drug targets and create promising biotherapeutic candidates. 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, the Company completed its initial public offering (the “IPO”) and issued 14.4 million shares of its 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. 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. 89 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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. Cash and cash equivalents consist of deposits with commercial banks in checking and interest-bearing accounts, highly liquid money market funds, and U.S. Treasury securities. Restricted cash represents amounts pledged as collateral for future property lease payments via standby letters of credit (see Note 10: Commitments and contingencies) and amounts held in escrow related to acquisitions by the Company (see Note 4: Acquisitions). 90 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Investments The Company’s short-term investments may include funds invested in highly liquid money market funds, U.S. Treasury securities and corporate debt securities with original maturities at the date of purchase greater than three months but less than one year. These investments are classified as available-for-sale debt securities, which are recorded at fair value based on quoted prices in active markets. If the estimated fair value of a debt security is below its amortized cost basis, the Company evaluates whether it is more likely than not that the Company will be required to sell the security before its anticipated recovery in market value and whether credit losses exist for the related securities. A credit loss exists if the present value of expected cash flows is less than the amortized cost basis of the security. Credit-related losses are recognized as an allowance for credit losses on the balance sheet with a corresponding adjustment to earnings. Unrealized gains and losses that are unrelated to credit deterioration are reported in accumulated other comprehensive loss. Purchase premiums and discounts are recognized as interest income using the interest method over the terms of the securities. Realized gains and losses, and declines in fair value deemed to be other than temporary, are reflected in our consolidated statements of operations and comprehensive loss. The Company uses the specific identification method to compute gains and losses on investments. Receivables under development arrangements and allowances for credit losses Receivables under development arrangements consist of amounts due from partners for services performed, net of estimates for credit allowance. 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. Credit losses are included in selling, general and administrative expenses on the consolidated statements of operations and comprehensive loss. See contract asset discussion in Note 3: Revenue Recognition regarding unbilled receivables. Fair value of financial instruments Certain assets and liabilities are carried at fair value under US GAAP. 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. The Company measures certain financial assets at fair value on a recurring basis, including available-for-sale debt securities, which are recorded at fair value based on quoted prices in active markets. 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 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 recorded 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 were 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 certain 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. 91 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Prior to its IPO, the Company primarily utilized the probability of a liquidity event and the expected IPO price to estimate fair value of the fee-in-lieu of warrant liability, the convertible note, and the preferred stock warrant liability. 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, 2022 and 2021, three partners represented approximately 98 % and two partners represented approximately 73 % of technology development revenue, respectively. As of December 31, 2022, two partners represented approximately 100 % of total receivables under technology development arrangements. As of December 31, 2021, four partners represented approximately 84 % of total receivables under technology development arrangements. Supplies Supplies, comprised principally of supplies and other materials used in the Company’s laboratory, 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 operating 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 and reported as operating expense in the consolidated statements of operations and comprehensive loss. 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 stock warrant liability Outstanding warrants that were related to the Company’s redeemable convertible preferred stock were classified as liabilities on the consolidated balance sheets. As the warrants were exercisable for redeemable convertible preferred stock, prior to its IPO, the Company recognized a liability for the fair value of its warrants on the consolidated balance sheets upon issuance and subsequently remeasured the liability to fair 92 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS value at the end of each reporting period until the earlier of the expiration or exercise of the warrants. See Note 11: 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 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. Primarily all of the Company’s contracts with its partners include an enforceable right to payment. 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. 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. Contract assets are included in receivables under development arrangements on the consolidated balance sheets. Income taxes 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 federal, state and various foreign 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, 2022 and 2021. 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 93 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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) for personnel performing research and development functions, consulting fees, equipment and allocated facility costs (including occupancy and information technology). These expenses are exclusive of depreciation and amortization. Research and development activities consist of continued development of the Company’s Integrated Drug Creation Platform, internal pipeline, target discovery and technology development for partners. The Company derives improvements to its platform from each type of activity. Research and development efforts apply to the Company’s platform broadly and across programs. 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 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 94 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes. The amended guidance is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company adopted this standard in 2022 on a prospective basis. The adoption did not have a material impact on its consolidated financial statements. 3. Revenue recognition Contract balances Contract assets are generated when contractual billing schedules differ from revenue recognition timing and the Company records a contract asset when it has an unconditional right to consideration. As of December 31, 2022 and December 31, 2021, contract assets were $ 1.1 million and $ 0.6 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, 2022 and December 31, 2021, contract liabilities were $ 0.4 million and $ 1.4 million, respectively. During the years ended December 31, 2022 and 2021, the Company recognized $ 1.4 million and $ 1.5 million, respectively, as revenue that had been included in deferred revenue at the beginning of the period. 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. In September 2021, the JMA was amended to shorten the term to approximately three years , ending in October 2022. Pursuant to the JMA, the Company received a non-refundable upfront payment of $ 0.8 million and milestone and other payments of $ 2.6 million in the aggregate upon the achievement of specific milestones. 4. 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 integrated Denovium’s technology into its Integrated Drug Creation Platform. The acquisition has been accounted for as a business combination. Pursuant to the terms of the agreement, the Company acquired all outstanding equity of Denovium for estimated total consideration of $ 3.0 million, which consisted of (in thousands): Cash consideration $ 2,670 Equity consideration 368 Total purchase consideration $ 3,038 Cash consideration included 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 was included in current restricted cash and accrued expenses on the consolidated balance sheet as of December 31, 2021. The $ 2.5 million deferred payment was disbursed from escrow in January 2022. 95 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 Acquisition of Totient On June 4, 2021, the Company entered into a merger agreement with Totient, Inc. (“Totient”), a discovery company harnessing human immune responses to identify novel antibodies and their therapeutic targets. 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 specified milestones, and 2,212,208 shares of the Company’s common stock. The $ 40.0 million cash consideration included $ 8.0 million of deferred cash payment, due in one year . This amount was included in current restricted cash and accrued expenses on the consolidated balance sheet as of December 31, 2021. The $ 8.0 million of deferred cash payment was disbursed from escrow in June 2022. 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 respective continuing service relationships with the Company. In October 2022, 540,229 restricted shares were forfeited back to the Company due to certain former members of Totient’s management’s service relationship ceasing. 96 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the 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. (iii) Represents the estimated fair value of the contingent consideration that is payable upon the achievement of the milestone of (A) 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 (I) 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 (II) an option for a license or a license or similar right is granted to the third party; or (B) 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 originally measured was adjusted to reflect the increased probability of achievement. As of December 31, 2022 the fair value is $ 12.8 million and is included in accrued expenses on the consolidated balance sheet. Changes in the contingent consideration liability fair value are reflected within research and development expenses on the consolidated statement of operations and comprehensive loss. 97 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 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. As of March 31, 2022, the Company had fully completed the analysis to assign fair values to all assets acquired and liabilities assumed and recorded no adjustments to the preliminary purchase price allocation in the year ended December 31, 2022. During the year ended December 31, 2021, the Company recorded adjustments to goodwill of $ 1.6 million primarily related to deferred taxes. The Company’s results of operations for the year ended December 31, 2022 include the operating results of Totient within the consolidated statement of operations and comprehensive loss. The operating results of 98 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Totient are included within the consolidated statement of operations and comprehensive loss from June 4, 2021 through December 31, 2021 for the year ended December 31, 2021. Acquisition costs of $ 0.9 million were included in the consolidated statement of operations and comprehensive loss as selling, general and administrative for the year ended December 31, 2021. The 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 year ended December 31, 2021 combines the Company’s 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 following table summarizes the pro forma financial information (in thousands): For the year ended December 31, 2021 Net loss applicable to common stockholders $ ( 113,119 ) 5. Investments Cash equivalents, marketable securities and deposits are classified as available-for-sale and are, therefore, recorded at fair value on the consolidated balance sheet, with any unrealized gains and losses reported in accumulated other comprehensive income (loss), which is reflected as a separate component of stockholders’ equity in the Company’s consolidated balance sheet, until realized. The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The amortized cost and fair value of investments are as follows (in thousands): December 31, 2022 Amortized cost Gross unrealized gains Gross unrealized losses Fair market value Assets Money market funds $ 5,050 $ — $ — $ 5,050 Certificates of deposit 27,740 — — 27,740 U.S. treasury bills 76,777 2 ( 43 ) 76,736 Total $ 109,567 $ 2 $ ( 43 ) $ 109,526 Classified as: Cash equivalents $ 5,050 Short-term investments 104,476 Long-term investments — Total $ 109,526 Investments held as of December 31, 2022 consist of cash equivalents with contractual maturities of three months or less and U.S. treasury bills with original maturities between four and six months. Proceeds and interest income from maturities of U.S. treasury bills were $ 85.0 million and $ 0.4 million, respectively, for the year ended December 31, 2022. Unrealized gains and losses on securities were primarily due to changes in interest rates. There are no investments in a continuous unrealized loss position for more than twelve months as of December 31, 2022. The Company does not intend to sell securities that are in an unrealized loss 99 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS position and believes that it is not more likely than not that it will be required to sell these securities before recovery of amortized cost. The Company held no investments as of December 31, 2021. 6. Property and equipment, net Property and equipment consists of the following (in thousands): December 31, December 31, 2022 2021 Construction in progress $ 293 $ 933 Lab Equipment 34,168 27,776 Software 298 311 Furniture, Fixtures and Other 6,307 4,804 Leasehold Improvements 26,860 24,671 Total Cost 67,926 58,495 Less accumulated depreciation and amortization ( 15,203 ) ( 6,381 ) Property and equipment, net $ 52,723 $ 52,114 Depreciation expense was $ 9.7 million and $ 4.5 million for the years ended December 31, 2022 and 2021, respectively. 7. Goodwill and Intangibles, net 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 integrated Denovium’s technology into its Integrated Drug Creation Platform. Goodwill arising from the acquisition was attributable to the assembled workforce and expected synergies between the Integrated Drug Creation Platform and the Denovium Engine (“AI Engine”). In June 2021, the Company entered into a merger agreement with Totient, Inc. (“Totient”), a discovery company harnessing human immune responses to identify novel antibodies and their therapeutic targets, surviving as a wholly owned subsidiary of the Company. Goodwill represents the excess of the estimated purchase price over the estimated fair value of Totient’s identifiable assets acquired and liabilities assumed. Refer to Note 4: Acquisitions for further information. Goodwill is as follows (in thousands): December 31, December 31, 2022 2021 Denovium $ 1,055 $ 1,055 Totient 20,280 20,280 Goodwill $ 21,335 $ 21,335 Goodwill is tested for impairment on an annual basis in the fourth quarter, or sooner if an indicator of impairment exists. The Company may elect to first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of goodwill at the reporting unit level is less than the carrying amount. The qualitative assessment includes consideration of relevant events and circumstances that would affect the Company’s single reporting unit, including macroeconomic, industry and market conditions, overall financial performance, and trends in the market price of the Company’s common stock. The Company performed its annual goodwill impairment test on October 1, 2022 utilizing the qualitative assessment allowable under ASC 350 Intangibles – Goodwill and Other at the reporting unit level. This analysis included comparing the entity’s carrying amount to its estimated fair value, including an estimated control premium. The Company’s annual qualitative assessment determined that a quantitative analysis was 100 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS not necessary. There were no impairment losses netted against the goodwill balance for the years ended December 31, 2022 and 2021. Intangible assets are as follows (in thousands): December 31, 2022 December 31, 2021 Gross Assets Accumulated Amortization Net Gross Assets Accumulated Amortization Net Denovium Engine 2,507 ( 975 ) 1,532 2,507 ( 473 ) 2,034 Monoclonal antibody library 46,300 ( 3,640 ) 42,660 46,300 ( 1,325 ) 44,975 Developed software platform and the related methods patents 8,300 ( 870 ) 7,430 8,300 ( 317 ) 7,983 Intangible assets, net $ 57,107 $ ( 5,485 ) $ 51,622 $ 57,107 $ ( 2,115 ) $ 54,992 Amortization expense related to intangible assets was $ 3.4 million and $ 2.1 million for the years ended December 31, 2022 and 2021, respectively, and is reflected within depreciation and amortization expense on the consolidated statement of operations and comprehensive loss. Future amortization expense for the Company’s intangible assets as of December 31, 2022 are estimated as follows (in thousands): Years Ending December 31: 2023 $ 3,370 2024 3,370 2025 3,370 2026 2,897 2027 2,868 8. Long-term debt and other borrowings Loan and Security Agreement (“LSA”) 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 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. Interest on outstanding borrowings under the LSA was charged at a rate of 6 % per annum. This loan was secured by substantially all tangible assets of the Company; intellectual property was excluded from the secured collateral but was subject to a negative pledge in favor of the Bank. The Company was permitted to 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 was required to pay a final payment equal to 3 % of the principal amount funded, which was payable upon the earliest to occur of (i) the maturity date, (ii) acceleration and (iii) the prepayment of the loan. The Company was 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. 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. This loan was scheduled to originally mature in May 2022, at which time all outstanding principal and accrued and unpaid interest was due and payable. Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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. 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. The second amendment extended the term of the fee to May 11, 2030. 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. In February 2022, the Company entered into a sixth amendment to the LSA. This amendment modified various definitions and terms within the agreement, with no adjustments to the financial terms. In June 2022, the Company paid off the remaining $ 2.4 million outstanding balance of the LSA. Con vertible Notes 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. Equipment Financing In 2022, the Company received a total of $ 12.0 million of proceeds from equipment financing arrangements. Terms of the agreements require monthly payments over 42 - 48 month maturities with imputed interest rates ranging 8 %- 10 %. All outstanding principal and accrued and unpaid interest are due and payable at maturity. These loans are secured by certain tangible assets of the Company and include certain financial liquidity covenants. The Company was in compliance with all applicable financial covenants as of December 31, 2022. The carrying amount of the long-term debt approximates fair value. Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Future undiscounted payments for the Company’s financing liabilities as of December 31, 2022 are as follows (in thousands): Years ending December 31: 2023 $ 3,759 2024 3,827 2025 3,425 2026 1,593 2027 — Total future payments 12,604 Less: Imputed interest ( 1,674 ) Total long-term debt $ 10,930 9. Leases Facility leases The Company leases its corporate headquarters and primary research and development facility located in Vancouver, Washington in a 77,974 square foot facility that includes general administrative office and laboratory space. The corporate headquarters lease commenced in December 2020 and ends in April 2028, with an option to renew the lease for an additional five-year term, at then-current market rates. The lease agreement provides for annual base rent of approximately $ 1.4 million in the first year of the lease term which increases on an annual basis to approximately $ 2.0 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 $ 3.1 million. The Company has a one-time option to terminate the lease after five years . The Company moved from its former office and laboratory facility during the second quarter of 2021, for which the Company’s lease continues through August 2024. The Company determined it would no longer utilize the space and during the years ended December 31, 2022 and 2021, the Company recognized $ 0.4 million and $ 0.9 million, respectively, in impairment expense of certain operating lease right-of-use assets and related leasehold improvements resulting from the discontinued use. For each of the Company’s facility lease agreements, the Company is responsible for taxes, insurance and maintenance costs. The components of lease expense are as follows (in thousands): For the Years Ended December 31, 2022 2021 Operating lease cost 1,626 1,780 Variable lease cost 434 425 Short-term lease cost 489 155 $ 2,549 $ 2,360 Equipment leases The Company leases certain laboratory equipment under finance leases. Property and equipment includes approximately $ 7.0 million and $ 8.8 million of assets under finance leases as of December 31, 2022 and December 31, 2021, respectively. Accumulated depreciation related to assets under finance leases was approximately $ 3.1 million and $ 1.8 million as of December 31, 2022 and December 31, 2021, respectively. Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Future undiscounted lease payments for the Company’s lease liabilities as of December 31, 2022 are as follows (in thousands): Operating leases Finance leases 2023 $ 2,353 $ 2,443 2024 2,195 704 2025 1,873 86 2026 1,929 — 2027 1,987 — Thereafter 672 — Total future lease payments 11,009 3,233 Less: Imputed interest ( 2,002 ) ( 187 ) Present value of lease liabilities $ 9,007 $ 3,046 Additional information related to the Company’s leases is as follows: December 31, 2022 December 31, 2021 Weighted average remaining lease term (in years) Operating leases 4.9 6.0 Finance leases 1.6 2.2 Weighted average discount rate Operating leases 8 % 8 % Finance leases 8 % 7 % 10. Commitments and contingencies As of December 31, 2022, future lease payments are secured by irrevocable standby letters of credit totaling $ 1.9 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. 11. 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. 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. 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 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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. 12. 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 stock appreciation rights (“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, 2022 2021 Research and development $ 4,734 $ 4,637 Selling, general and administrative 7,924 5,971 Total stock-based compensation expense $ 12,658 $ 10,608 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 the Company’s 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, 2021 2,585,670 Repurchased ( 789,846 ) Vested ( 782,516 ) Unvested as of December 31, 2022 1,013,308 As of December 31, 2022, there was $ 2.3 million of unrecognized compensation expense related to the restricted shares expected to be recognized over a remaining weighted-average period of 2.0 years. During the year ended December 31, 2022, the Company granted 68,175 shares of restricted stock units to certain employees and consultants under the 2021 Plan. As of December 31, 2022, 36,129 shares of these restricted stock units were outstanding and unvested. As of December 31, 2022, total unrecognized stock-based compensation related to these restricted stock units was $ 0.3 million, which the Company expects to recognize over a remaining weighted average period of 2.6 years. 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 Company recognizes expense associated with the cash payment rights within stock-based compensation and began to make payments in February 2022 for vested rights. As cash payment rights continue to vest, payments are made monthly. The aggregate intrinsic value of the 394,736 SARs outstanding as of December 31, 2022 is $ 0.8 million based on the Company’s closing stock price of $ 2.10 per share as reported on the Nasdaq Global Select Market on such date. 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 1 - 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, 2021 7,757,401 $ 3.72 9.2 $ 40,939 Granted 7,679,043 5.40 Exercised ( 537,078 ) 1.26 Canceled/ Forfeited ( 3,192,316 ) 5.22 Expired ( 277,651 ) 5.84 Outstanding at December 31, 2022 11,429,399 4.49 8.4 2,949 Exercisable at December 31, 2022 3,008,380 $ 3.03 6.9 $ 2,058 Vested and expected to vest as of December 31, 2022 11,429,399 8.4 $ 2,949 The aggregate intrinsic value was calculated based on the estimated fair value of common stock of $ 2.10 per share. The weighted-average grant date fair value of stock options granted during the years ended December 31, 2022 and 2021 was $ 3.18 and $ 4.28 , respectively. The grant date fair value of options vested during the years ended December 31, 2022 and 2021 was $ 9.6 million and $ 2.4 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 $ 2.1 million during the year ended December 31, 2022. As of December 31, 2022, total unrecognized stock-based compensation related to stock options was $ 24.9 million, which the Company expects to recognize over a remaining weighted average period of 2.9 years. Under the 2020 Plan and 2021 Plan, the Company has also granted a limited quantity of cash-settled SARs to certain employees and consultants based outside the United States. As of December 31, 2022, 127,846 of these SARs were outstanding with a weighted average exercise price of $ 5.72 per share. The fair value is remeasured at the end of each reporting period based on the Company’s stock price, with remeasurements reflected as an adjustment to compensation expense in the consolidated statements of operations and comprehensive loss. As of December 31, 2022 and December 31, 2021, the Company had recognized $ 0.0 million and $ 0.1 million, respectively, classified within other long-term liabilities on the consolidated balance sheets. 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, 2022 2021 Expected term (in years) 5.5 - 6.1 3.5 - 6.1 Volatility 63 %- 65 % 45 %- 47 % Risk-free interest rate 1.6 %- 4.2 % 0.3 %- 1.5 % Dividend Yield — % — % 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. 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. During the periods prior to the IPO, 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; • US and global economic conditions; Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS • the likelihood of achieving a liquidity event for the holders of the Company’s common stock, given prevailing market conditions; and • 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 established the value of an enterprise based on the present value of future cash flows that were reasonably reflective of our future operations, discounting to the present value with an appropriate risk adjusted discount rate or capitalization rate. The market approach was 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 were 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 was inferred by analyzing these options. The probability weighted expected return method (“PWERM”) was a scenario-based analysis that estimated the value per share based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available, as well as the economic and control rights of each share class. 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 was 8,133,750 . On January 1, 2022, the number of shares of common stock reserved for future issuance under the 2021 Plan was increased by 4,632,401 shares pursuant to an automatic annual increase. As of December 31, 2022, 8,874,295 shares were available for issuance under the 2021 Plan. Employee Stock Purchase Plan In July 2021, the Board 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 ESPP allows eligible employees to purchase shares of the Company’s common stock through payroll deductions of up to 15 % of their regular compensation at a discount of 85 % of the fair market value of the Company’s common stock on the first day or last day, whichever is less, of the applicable offering period, subject to any plan limitations. The first offering period commenced in October 2022, and, as of December 31, 2022, no shares of common stock had been issued under the 2021 ESPP. 13. Fair Value Measurements The Financial Accounting Standards Board (“FASB”) has defined fair value to establish 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. Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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. The following tables summarize the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2022 and December 31, 2021 (in thousands): December 31, 2022 Level 1 Level 2 Level 3 Total Assets: Debt Securities: Money market funds $ 5,050 $ — $ — $ 5,050 Certificates of deposit 27,740 — — 27,740 U.S. treasury bills 76,736 — — 76,736 Equity Securities: Equity securities without RDFV — — 1,200 1,200 Total assets $ 109,526 $ — $ 1,200 $ 110,726 Liabilities: Contingent consideration $ — $ — $ 12,750 $ 12,750 Total liabilities $ — $ — $ 12,750 $ 12,750 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 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, 2022 (in thousands): Contingent consideration Total liabilities Balance at December 31, 2021 $ 12,000 $ 12,000 Change in fair value during 2022 750 750 Balance at December 31, 2022 $ 12,750 $ 12,750 We review trading activity and pricing for our available-for-sale securities as of the measurement date. 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. The contingent consideration liability is related to the Totient acquisition and is included in accrued expenses on the consolidated balance sheet as of December 31, 2022. The change in fair value of the contingent consideration liability is included within research and development expense on the consolidated statement of operations for the year ended December 31, 2022. Refer to Note 4: Acquisitions for further information. There are significant judgments, assumptions and estimates inherent in the determination of the fair value of each of the instruments described above. 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. 14. 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 compensation for each employee. The Company contributed $ 1.0 million and $ 0.6 million for the years ended December 31, 2022 and 2021, respectively. 15. Related Party Transactions During the year ended December 31, 2021, Phoenix Venture Partners II, L.P. exercised a warrant to purchase 307,211 shares of the Company’s common stock at an exercise price of $ 0.3027 per share, resulting in total cash proceeds to the Company of $ 0.1 million. Zachariah Jonasson, a member of the Board, is a principal of Phoenix Venture Partners II, L.P. Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. Net loss per share attributable to common stockholders Basic net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock 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 stockholders (in thousands, except share and per share amounts): For the Years Ended December 31, 2022 2021 Numerator: Net loss $ ( 104,904 ) $ ( 100,960 ) Cumulative undeclared preferred stock dividends — ( 2,284 ) Net loss available to common stockholder $ ( 104,904 ) $ ( 103,244 ) Denominator: Weighted-average common shares outstanding 90,845,629 49,685,194 Net loss per share, basic and diluted $ ( 1.15 ) $ ( 2.08 ) 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): For the Years Ended December 31, 2022 2021 Redeemable convertible preferred stock — 25,489,573 Redeemable convertible preferred stock warrants — 189,377 Stock options 10,751,992 6,379,236 Restricted stock units 47,086 — Unvested restricted stock 1,859,446 2,616,641 Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. Income Taxes Provision for Income Taxes: The Company was classified as a partnership, and was therefore a pass-through entity, for US income tax purposes through the LLC Conversion on October 15, 2020. The Company incurred net losses for the years ended December 31, 2022 and 2021. The significant components of income tax benefit are as follows (in thousands): Years Ended December 31, 2022 2021 Current Federal $ — $ — State 3 2 Foreign 41 — Total current 44 2 Deferred expense/(benefit) Federal ( 505 ) ( 7,254 ) State — ( 1,647 ) Total deferred ( 505 ) ( 8,901 ) Total $ ( 461 ) $ ( 8,899 ) The income tax benefit for the years ended December 31, 2022 and 2021 primarily relate to change in valuation allowance offset by state taxes and taxes in foreign jurisdictions. The provision for income taxes results in effective tax rates which are different than the federal income tax statutory rate. The following include the nature of the differences for the years ended December 31, 2022 and 2021: 2022 2021 Statutory federal income tax rate 21.0 % 21.0 % State income taxes, net of federal benefits 5.9 4.8 Tax contingencies, net of reversals ( 0.6 ) — Section 162(m) limitation ( 0.2 ) — Stock-based compensation ( 0.5 ) ( 0.9 ) Research and development credits 2.4 0.6 Return-to-provision 0.6 — Change in valuation allowance ( 27.1 ) ( 9.1 ) Change in fair value of convertible promissory notes — ( 6.6 ) Tax-effect of change in entity status — 0.3 Revaluation of warrant liability — ( 1.0 ) Other ( 1.1 ) ( 1.0 ) Effective tax rate 0.4 % 8.1 % 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 as of December 31, 2022 and 2021 are as follows (in thousands): 2022 2021 Deferred tax assets: Net operating losses $ 32,588 $ 22,508 Research and development credits 3,835 698 Capitalized research and development expenses 13,350 — Stock-based compensation 3,498 1,342 Lease liability 2,424 2,651 Accrued expenses 970 300 Gross deferred tax assets 56,665 27,499 Less valuation allowance ( 39,007 ) ( 10,481 ) Total deferred tax assets 17,658 17,018 Deferred tax liabilities: Property and equipment ( 1,971 ) ( 1,054 ) Intangibles ( 13,800 ) ( 14,167 ) Right-of-use lease asset ( 2,125 ) ( 2,540 ) Gross deferred tax liabilities ( 17,896 ) ( 17,761 ) Deferred tax liabilities, net $ ( 238 ) $ ( 743 ) As of December 31, 2022, the Company has remaining federal net operating losses of $ 126.9 million and has state net operating loss carryforwards of approximately $ 103.4 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 2035-2042. The company also has Federal research credit carryforwards of approximately $ 3.8 million that will begin to expire in 2039. 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, 2022, the Company has recorded 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 $ 28.5 million during the year ended December 31, 2022 and $ 10.0 million during the year ended December 31, 2021. 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, 2022. The Company has not recognized withholding tax accrual for the undistributed earnings of its foreign operations as the Company considers these earning to be indefinitely reinvested. Table of Contents ABSCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. The Company had unrecognized tax benefits of $ 1.4 million as of December 31, 2022 and $ 0.7 million unrecognized tax benefits as of December 31, 2021. The Company recognizes penalties and interest related to unrecognized tax benefits as a component of income tax expense. As of December 31, 2022 and December 31, 2021, 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 the Company’s unrecognized tax benefits (in thousands): 2022 2021 Balance at January 1 $ 698 $ — Additions Based On Tax Positions Related to Current Year 641 698 Additions Based On Prior Tax Positions 51 — Reductions For Tax Positions In Prior Years — — Settlements — Balance at December 31 $ 1,390 $ 698 The Company does not anticipate any significant increases or decreases in its uncertain tax positions within the next twelve months. As of December 31, 2022 the Company’s statutes of limitations are open for all federal and state years filed after the years ended December 31, 2019 and 2018, respectively. Net operating loss and credit carryforwards from all years are subject to examination and adjustments for the three years following the year in which the carryforwards are utilized. The Company is not currently under Internal Revenue Service or state examination. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures None.