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Item 7. Management’s Discussion and Analysis

2023-02-28 compared with 2022-02-24 · 227 added, 216 removed, 390 unchanged (53% of the section changed)

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Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties.

The following discussion and analysis of our financial condition and results of operations covers fiscal 2022 and fiscal 2021 items and year-over-year comparisons between fiscal 2022 and fiscal 2021.

Discussions of fiscal 2020 items and year-over-year comparisons between fiscal 2021 and 2020 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, that was filed with the SEC on February 24, 2022.

As a result of many factors, including those factors set forth in “Risk Factors” of this Annual Report, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

For further information regarding our forward-looking statements, see “Cautionary Note Regarding Forward-Looking Statements” in this Annual Report.

For further information regarding our forward-looking statements, see “Cautionary Note Regarding Forward-Looking Statements and Industry Data” in this Annual Report.

We are transforming the way therapeutics and materials are discovered.

Our differentiated, physics-based software platform enables discovery of high-quality, novel molecules for drug development and materials applications more rapidly, at lower cost, and with, we believe, a higher likelihood of success compared to traditional methods.

Our software platform is used by biopharmaceutical and industrial companies, academic institutions, and government laboratories around the world.

Our multidisciplinary drug discovery team also leverages our software platform to advance collaborative drug discovery and development programs and our own pipeline of novel therapeutics to address unmet medical needs.

Since our founding, we have been primarily focused on developing our computational platform, which is capable of predicting critical properties of molecules with a high degree of accuracy, as well as advancing drug discovery programs both with our collaborators and internally.

Our differentiated, physics-based computational platform enables discovery of high-quality, novel molecules for drug development and materials applications more rapidly and at a lower cost, compared to traditional methods.

Our software platform is licensed by biopharmaceutical and industrial companies, academic institutions, and government laboratories around the world.

We are applying our computational platform to discover and advance a broad pipeline of development programs in collaboration with leading biopharmaceutical companies.

In addition, we use our platform to advance a pipeline of partnered and wholly-owned drug discovery programs, which we refer to collectively as our proprietary drug discovery programs.

We have devoted substantially all of our resources to introducing new capabilities and refining our software, conducting research and development activities, recruiting skilled personnel, and providing general and administrative support for these operations.

We are using our computational platform for both collaborative and internal drug discovery programs.

Over the last decade, we have entered into a number of collaborations with biopharmaceutical companies that have provided us with significant income and have the potential to produce additional milestone payments, option fees, and future royalties.

Furthermore, in mid-2018, we launched a pipeline of internal, wholly-owned programs.

We continue to advance multiple internal programs through investigational new drug, or IND, -enabling studies.

We expect to submit an IND application to the U.S.

Food and Drug Administration, or FDA, for our MALT1 program in the first half of 2022, subject to receiving regulatory clearance, we expect to initiate a Phase 1 clinical trial of our MALT1 inhibitor in patients with relapsed and resistant lymphoma in the second half of 2022.

We also plan to submit IND applications to the FDA for our CDC7 program in early 2023 and our WEE1 program in 2023, subject to favorable data from IND-enabling studies.

In addition, we plan to initiate a Phase 1 clinical trial of our CDC7 inhibitor in 2023, subject to receipt of regulatory clearance.

In 2018, we began to develop a pipeline of wholly-owned drug discovery programs with the goal of using our platform to produce a portfolio of novel, high value therapeutics.

We submitted an investigational new drug

application, or IND, for our MALT1 inhibitor, which we refer to as SGR-1505, and the U.S.

Food and Drug Administration, or FDA, cleared the IND in June 2022.

We recently initiated a Phase 1 clinical trial of SGR-1505 in patients with relapsed or refractory B-cell lymphomas and currently have clinical trial sites open for screening and enrollment, but we have not yet dosed any patients with SGR-1505.

In addition, we continue to advance other wholly-owned programs through IND-enabling studies.

We expect to submit an IND application to the FDA for our CDC7 inhibitor, which we refer to as SGR-2921, in the first half of 2023 and an IND application to the FDA for our WEE1 inhibitor, which we refer to as SGR-3515, in 2024, subject to favorable data from IND-enabling studies.

In addition, we plan to initiate a Phase 1 clinical trial of SGR-2921 in the second half of 2023, subject to receipt of regulatory clearance.

We have funded our operations to date principally from the sale of our equity securities, including our initial public offering and our follow-on public offering, and to a lesser extent, from sales of our software solutions and from upfront payments, research funding and milestone payments from our drug discovery collaborations, and from distributions on account of, or proceeds from the sale of, our equity stakes in our collaborators.

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In the future, we may also derive drug discovery revenue from our collaborations from option fees, the achievement of commercial milestones, and royalties on commercial drug sales.

In addition to revenue from our

collaborations, we may also derive drug discovery revenue from collaborating on or out-licensing our internal drug discovery programs when we believe it will help maximize the commercial potential of the program.

In addition to revenue from our collaborations, we may also derive drug discovery revenue from collaborating on or out-licensing our wholly-owned drug discovery programs when we believe it will help maximize clinical and commercial opportunity for the program.

In November 2020, we entered into an exclusive, worldwide collaboration and license agreement with Bristol-Myers Squibb Company, or BMS, pursuant to which we and BMS agreed to collaborate in the discovery, research and development of small molecule compounds for biological targets in the oncology, neurology and immunology therapeutic areas.

The initial collaboration targets include d HIF-2 alpha and SOS1/KRAS, which we re two of our internal pipeline programs.

The initial collaboration targets included HIF-2 alpha and SOS1/KRAS, which were two of our wholly-owned pipeline programs.

In November 2021, we and BMS mutually agreed to replace the HIF-2 alpha target with another precision oncology target.

Following the replacement election, all rights to the HIF-2 alpha target program reverted to us.

Under the terms of the agreement, we received an upfront payment of $55.0 million, and we are eligible to receive up to $2.7 billion in total milestone payments across all potential targets, as well as a tiered percentage royalty on net sales of each product commercialized by BMS ranging from mid-single digits to low-double digits, subject to certain specified reductions.

See “Business—Collaboration Agreement with Bristol-Myers Squibb Company” for additional information relating to this agreement.

In September 2022, BMS elected not to proceed with further development of another target and all rights to this program reverted to us.

In December 2022, we and BMS entered into an amendment to the agreement to include an additional target in neurology on terms similar to the original agreement.

Under the terms of the agreement, as amended, we received an upfront payment of $55.0 million from BMS in November 2020 and an additional upfront payment in December 2022, and we are eligible to receive up to $2.7 billion in total milestone payments across all potential targets, as well as a tiered percentage royalty on net sales of each product commercialized by BMS ranging from mid-single digits to low-double digits, subject to certain specified reductions.

See “Collaboration and License Agreement” in Note 3 to our consolidated financial statements for additional information relating to this agreement.

In August 2021, we entered into a global discovery, development and commercialization collaboration with Zai Lab Limited focused on a novel program in oncology targeting DNA damage response.

Under the terms of the agreement, we are entitled to receive an upfront payment to help fund our share of research costs, and if we elect to co-fund clinical development of a product candidate under the collaboration, we will be entitled to receive 50% of any profits from the commercialization of an approved therapeutic in the United States.

Under the terms of the agreement, we received an upfront payment to help fund our share of research costs, and if we elect to co-fund clinical development of a product candidate under the collaboration, we will be entitled to receive 50% of any profits from the commercialization of an approved therapeutic in the United States.

We are also eligible to receive up to approximately $338.0 million in preclinical, clinical, regulatory and sales-based milestone payments from Zai Lab Limited for any product candidate developed under the collaboration, and we are entitled to receive tiered royalties on net sales outside the United States.

We generated revenue of $137.9 million, $108.1 million, and $85.5 million in 2021, 2020, and 2019, respectively, representing year-over-year growth of 28% and 26%, respectively.

Our net loss was $101.2 million, $26.6 million, and $25.7 million for the years ended December 31, 2021, 2020, and 2019, respectively.

In January 2022, we acquired XTAL BioStructures, Inc., or XTAL, a company that provides structural biology services, including biophysical methods, protein production and purification, and X-ray crystallography, which we believe will augment our ability to produce high quality target structures for our drug discovery programs.

See “Business Acquisition” in Note 5 to our consolidated financial statements for additional information relating to this acquisition.

In September 2022, we entered into a collaboration with Eli Lilly and Company, or Lilly, under which we are responsible for the discovery and optimization of small molecule compounds addressing a specific target.

Lilly will be responsible for the completion of preclinical development, clinical development and commercialization.

Under the terms of the agreement we received an upfront payment and we are eligible to receive up to $425 million in discovery, development and commercial milestone payments.

We are also eligible to receive low single- to low double-digit royalties on net sales of any products emerging from the collaboration in all markets.

We generated revenue of $181.0 million and $137.9 million in 2022 and 2021, respectively, representing year-over-year growth of 31%.

Our net losses were $149.2 million and $101.2 million for the years ended December 31, 2022 and 2021, respectively.

Business Impact of COVID-19 Pandemic

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Beginning in June 2020, we began limited re-openings of certain of our offices in the United States and abroad.

Our re-openings are being conducted on a limited basis and are voluntary for all of our employees.

We have continued to phase-in the re-opening of our offices as our management and federal, state, or local authorities advise, and we may take further actions that alter our operations as may be required by federal, state, or local authorities, or which we determine are in our best interests.

All of our offices are currently open, though we may take future actions that alter our operations as may be required by federal, state, or local authorities, or which we determine are in our best interests.

We did not see material impacts to our business from the COVID-19 pandemic during 2022.

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For instance, with respect to our software business, some of our customers may experience increasing budgetary pressures as a result of downturns or uncertainty in their respective businesses, which may cause them to delay or reduce purchases.

In addition, due to the restrictions related to COVID-19, our sales force has limited in-person interactions, and their ability to attend events that promote and expand knowledge of our company and platform, including industry conferences and events, has been hampered.

Relative to our and our collaborators’ drug discovery programs, the COVID-19 pandemic could delay the progress of certain programs, particularly ones that are in preclinical studies and clinical trials.

Such COVID-19-related delays may result in disruptions in current and future IND-enabling studies and clinical trials, manufacturing disruptions, trial site disruptions and impact the ability to obtain necessary institutional review board, or IRB, institutional biosafety committee, or IBC, or other necessary site approvals.

For example, our contract manufacturing organizations, or CMOs, and our contract research organizations, or CROs, have experienced reductions in the capacity to undertake research-scale production and delays in executing some preclinical studies, including our IND-enabling studies for our CDC7 program.

We now expect to submit the IND application to the FDA for our CDC7 program in early 2023 and to initiate a Phase 1 clinical trial in 2023.

Such reductions could cause disruptions related to our current and future IND-enabling studies and clinical trials arising from delays in preclinical studies, manufacturing disruptions, and the ability to obtain necessary institutional review board, or IRB, institutional biosafety committee, or IBC, or other necessary site approvals, as well as other delays at clinical trial sites.

We, together with our CMOs and CROs, are closely monitoring the impact of the COVID-19 pandemic on these operations.

Furthermore, if our collaborators experience similar delays with their drug discovery and development programs, that could delay our achievement of milestones and related revenue.

Relative to our and our collaborators’ drug discovery programs, the COVID-19 pandemic has resulted in, and may in the future result in, disruptions in current and future IND-enabling studies and clinical trials, manufacturing disruptions, trial site disruptions and impact the ability to obtain necessary institutional review board, institutional biosafety committee, or other necessary site approvals.

These disruptions have caused, and may in the future cause, delays in certain of our and our collaborators’ drug discovery programs.

We expect to submit the IND application to the FDA for SGR-2921 in the first half of 2023 and to initiate a Phase 1 clinical trial in the second half of 2023, subject to regulatory clearance.

In addition, the recent resurgence of COVID-19 in certain cities in China, and related subsequent lockdowns, have also reduced the capacity of a number of CROs that we work with in those affected areas.

We, together with our CMOs and CROs, are closely monitoring the impact of the COVID-19 pandemic on these operations, and we are actively working to add supplemental or substitute capacity to minimize the impact of these reduced operations.

Furthermore, if our collaborators experience similar delays with their drug discovery and development programs, that could cause additional delays in our achievement of milestones and related revenue.

While there remains uncertainty about the extent of the effect of the COVID-19 pandemic, we do not envision a long-term impact from the COVID-19 pandemic on our ability to execute on our strategy.

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In response to the COVID-19 pandemic, we have joined a multi-company philanthropic effort to discover and develop novel small-molecule antiviral therapeutics to address COVID-19.

The intent of the alliance, which to date also includes Takeda Pharmaceutical Company Limited, Novartis AG, Alphabet, Inc., Gilead Sciences, Inc., and WuXi AppTec, Inc., is to make any discoveries from this alliance available to the public.

The intent of the alliance, which to date also includes Takeda Pharmaceutical Company Limited, Novartis AG, Alphabet, Inc., Gilead Sciences, Inc., and WuXi

AppTec, Inc., is to make any discoveries from this alliance available to the public.

There is no expectation that this effort will generate revenue for any of the companies involved in the alliance, including us.

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In addition, we had 18 and 15 customers with an ACV of over $1.0 million for the years ended December 31, 2022 and 2021, respectively.

We also had four customers with an ACV in excess of $5.0 million for the year ended December 31, 2022, compared to two such customers for the year ended December 31, 2021.

With respect to contracts that have a duration of one year or less, or contracts of more than one year in duration that are billed annually, we define ACV as the contract value billed during the applicable period.

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ACV is not intended to be a replacement for, or forecast of, revenue.

Our ACV was $112.1 million, $92.1 million, and $75.6 million for the years ended December 31, 2021, 2020, and 2019, respectively.

Our ACV was $140.6 million and $112.1 million for the years ended December 31, 2022 and 2021, respectively.

Another important driver of our ability to expand our customer relationships is the retention of our customers with an ACV over $100,000.

For the year ended December 31, 2021, our year-over-year customer retention rate for such customers was 98% and was 96% or higher for each of the previous eight fiscal years.

For the year ended December 31, 2022, our year-over-year customer retention rate for such customers was 96% and was 96% or higher for each of the previous nine fiscal years.

We calculate year-over-year customer retention for our customers with an ACV over $100,000 by starting with the number of such customers we had in the previous fiscal year.

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We then divide this number by the number of customers with an ACV over $100,000 we had in the previous fiscal year to arrive at the year-over-year customer retention rate for such customers.

We intend to leverage our existing relationships with our customers to drive larger-scale adoption of our software solutions.

If we are unable to continue to increase revenue from existing customers, our financial performance will be adversely impacted.

We aim to continue to grow our software sales by increasing the adoption of our software by our existing customers and identifying and adding new customers.

If we are unable to continue to increase revenue from existing customers or identify new customers, our financial performance will be adversely impacted.

Ability to increase our customer base for our software solutions

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We sell our software solutions to a growing number of materials science customers, and we believe materials science industries are only beginning to recognize the potential of computational methods.

We continue to promote the education and recognition of our computational platform across industries.

As part of our strategy, we have driven the adoption of our software by researchers, and we had more than 1, 714 academic institutions across the world using our software in 2021 .

We continue to provide education and information to increase the awareness of our computational platform across different industries.

As part of our strategy, we have driven the adoption of our software by researchers, and we had more than 1,720 academic institutions

across the world using our software in 2022.

We believe that by introducing the benefits of our computational software at the academic stage, we will drive brand awareness and expand the use of our platform to industries that have historically relied on traditional methods for discovery of molecules.

Our ability to continue to grow our customer base is dependent upon our ability to educate the market and support the business through investment in our sales and marketing efforts and the ongoing enhancement of our software solutions.

Advancement of our collaborations

Advancement of our collaborative programs

We have entered into a number of collaborations with various biopharmaceutical companies to advance drug discovery.

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Our ability to continue to derive value from our collaborations will be driven by both our capability to make progress in these programs as well as whether our collaborators successfully advance such programs beyond the discovery stage.

Ability to develop and expand our internal proprietary drug discovery pipeline

We are advancing our pipeline of internal drug discovery programs through extensive application of our software platform.

Our initial programs are focused on discovering and developing inhibitors for targets in DNA damage response pathways and genetically defined cancers.

We track the aggregate number of collaborative and partnered programs for which we are eligible to receive any amount of royalties on sales and as of December 31, 2022, we had an aggregate of 15 collaborative and partnered programs for which we are eligible to receive future royalties compared to 13 collaborative and partnered programs as of December 31, 2021.

Ability to progress our proprietary drug discovery programs

We are advancing our pipeline of proprietary drug discovery programs through extensive application of our software platform.

Our initial programs were focused on discovering and developing inhibitors for targets in DNA damage response pathways and genetically defined cancers.

Since then, we have expanded into other therapeutic areas, including in the areas of immunology and neurology.

We continue to advance multiple internal programs through investigational new drug, or IND, -enabling studies.

We expect to submit an IND application for our MALT1 program in the first half of 2022, and subject to receiving regulatory clearance, we expect to initiate a Phase 1 clinical trial of our MALT1 inhibitor in patients with relapsed and resistant lymphoma in the second half of 2022.

We also plan to submit IND applications to the FDA for our CDC7 program in early 2023 and our WEE1 program in 2023, subject to favorable data from IND-enabling studies.

In addition, we plan to initiate a Phase 1 clinical trial of our CDC7 inhibitor in 2023, subject to receipt of regulatory clearance.

As we progress these programs, we will strategically evaluate on a program-by-program basis entering into preclinical and clinical development ourselves, entering into collaborations, or out-licensing programs to maximize commercial opportunities.

As part of this strategy, in November 2020, we entered into an exclusive, worldwide collaboration and license agreement with BMS pursuant to which we and BMS agreed to collaborate in the discovery, research and development of small molecule compounds for biological targets in the oncology, neurology and immunology therapeutic areas.

Furthermore, in August 2021, we entered into a global discovery, development and commercialization collaboration with Zai Lab Limited focused on a novel program in oncology targeting DNA damage response.

We will need to continue to devote substantial resources to develop and expand our internal pipeline.

Our ability to advance and build value in our internal drug discovery programs will impact our financial performance, especially as we increasingly shift our focus to these programs.

In addition, we continue to advance other wholly-owned programs through IND-enabling studies.

We expect to submit an IND application to the FDA for SGR-2921 in the first half of 2023 and for SGR-3515 in 2024, subject to favorable data from IND-enabling studies.

In addition, we plan to initiate a Phase 1 clinical trial of SGR-2921 in the second half of 2023, subject to receipt of regulatory clearance.

As we progress these programs, we will strategically evaluate on a program-by-program basis advancing them into preclinical and clinical development ourselves, entering into collaborations to co-develop them with leading industry partners, or out-licensing them to maximize their probability of clinical and commercial success.

As part of this strategy, we entered into an exclusive, worldwide collaboration and license agreement with BMS in November 2020, as well as collaboration agreements with Zai Lab Limited in August 2021 and Lilly in September 2022.

We will need to continue to devote substantial resources to develop and expand our proprietary drug discovery programs.

Our ability to advance and build value in our proprietary drug discovery programs will impact our financial performance, especially as we increasingly shift our focus to these programs.

Components of Results of Operations

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Hosted software revenue consists primarily of fees to provide our customers with hosted licenses, which allows these customers to access our cloud-based software solution on their own hardware without taking control of the licenses, and is recognized ratably over the term of the arrangement, which is typically one year.

When a customer enters into a hosted arrangement for which revenue is recognized over time, the amount paid upfront that is not recognized in the current period is included in deferred revenue in our statement of financial position until the period in which it is recognized.

customer enters into a hosted arrangement for which revenue is recognized over time, the amount paid upfront that is not recognized in the current period is included in deferred revenue in our statement of financial position until the period in which it is recognized.

Software maintenance.

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Professional services.

Professional services, such as training, technical setup, installation or modeling services, where we use our software to perform tasks such as virtual screening and homology modeling on behalf of our customers, generally are not related to the core functionality of our software and are recognized as revenue when resources are consumed.

Professional services include training, technical setup, installation or assisting customers with modeling and structural biology services, where we use our software to perform tasks such as virtual screening and homology modeling on behalf of our customers.

These services are generally not related to the core functionality of our software and are recognized as revenue when resources are consumed.

Since each professional services agreement represents a unique, ad hoc engagement, professional services revenue may fluctuate from period to period.

Software contribution revenue .

Contribution revenue consists of funds received under a non-reciprocal agreement with Gates Ventures, LLC entered into June 2020.

The agreement is an unconditional non-exchange contribution without restrictions and the initial contribution was invoiced upon execution of the agreement.

Software contribution revenue consists of funds received under a non-reciprocal agreement with Gates Ventures, LLC entered into in June 2020.

The agreement is an unconditional non-exchange contribution without restrictions.

Revenue was recognized upon execution of the agreement and on the first anniversary of the agreement when invoiced, in accordance with Accounting Standard Codification, or ASC Topic 958 , Not-for-Profit Entities as the agreement is not an exchange transaction.

Additional revenue is expected to be recognized on the second anniversary of the agreement.

Drug Discovery Revenue

Drug discovery services.

We currently generate drug discovery revenue from discovery collaboration arrangements, including research funding payments and discovery and development milestones.

We currently generate drug discovery revenue from discovery collaboration arrangements, including research and development payments and discovery and development milestones.

We expect our drug discovery revenue to trend higher over time as collaboration arrangements advance and we receive additional revenue from research funding payments, the achievement of discovery, development, and commercial milestones, option fees, and royalties on commercial drug sales.

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Milestone payments typically increase in magnitude as a program advances.

In addition to revenue from our collaborations, we may also derive drug discovery revenue from entering into collaborations or out-licensing our internal drug discovery programs when we believe it will help maximize the commercial potential of the program.

For example, in November 2020, we entered into an exclusive, worldwide collaboration and license agreement with BMS, pursuant to which we received an upfront payment of $55.0 million from BMS, of which approximately $13.7 million and $1.0 million were included in our drug discovery revenue for the years ended December 31, 2021 and 2020, respectively.

However, we expect that our revenue will fluctuate from period to period due to the inherently uncertain nature of the timing of milestone achievement and our dependence on the program decisions of our collaborators.

In addition to revenue from our collaborations, we may also derive drug discovery revenue from out-licensing our wholly-owned drug discovery programs when we believe it will help maximize the probability of clinical and commercial success of the program.

Accordingly, in November 2020, we entered into an exclusive, worldwide collaboration and license agreement with BMS, pursuant to which we received an upfront payment of $55.0 million from BMS, of which approximately $22.1 million and $13.7 million were included in our drug discovery revenue for the years ended December 31, 2022 and 2021, respectively.

Overall, we expect that our drug discovery revenue will fluctuate from period to period due to the inherently uncertain nature of the timing of milestone achievement and our dependence on the program decisions of our collaborators.

Drug discovery contribution revenue.

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Drug discovery.

Costs of revenue for drug discovery includes personnel-related expenses and costs of third-party contract research organizations, or CROs, that support discovery activities in our collaborations, royalties paid for services performed using third-party licensed software functionality, and allocated compute capacity and overhead costs.

While we have incurred costs associated with discovery efforts since late 2017, we have recognized and expect to continue to recognize revenues in the future if and when milestones are achieved.

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For example, the cost of royalties due for sales of our hosted software arrangements are recognized upfront, whereas the associated revenue is recognized over the term of the underlying agreement.

Currently, gross margin is not meaningful for measuring the operating results of our drug discovery business.

Currently, gross margin is less meaningful for measuring the operating results of our drug discovery business.

Research and Development Expense

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We recognize research and development expense as incurred.

Research and development expense consists of internal drug discovery and development program costs and costs incurred for continuous development of the technology and science that supports our computational platform, primarily:

Research and development expense consists of drug discovery and development program costs and costs incurred for continuous development of the technology and science that supports our computational platform, primarily:

• personnel-related expenses, including salaries, benefits, bonuses, and stock-based compensation for employees engaged in research and development functions;

expenses incurred under agreements with third-party CROs and consultants involved in our internal discovery and development programs;

• expenses incurred under agreements with third-party CROs and consultants involved in our proprietary drug discovery and development programs;

• allocated compute capacity on our internal discovery and development programs and overhead (facilities and information technology support) costs.

We expect our research and development expense to increase substantially in absolute dollars for the foreseeable future as we continue to invest in activities related to discovery and development of our internal drug discovery programs, in advancing our platform, and as we incur expenses associated with hiring additional personnel directly involved in such efforts.

At this time, we do not know, nor can we reasonably estimate, the nature, timing, or costs of the efforts that will be necessary to complete the development of any of our internal drug discovery programs.

Since our internal drug discovery efforts are in the early stages, currently we do not track research and development expense on a program-by-program basis.

We expect our research and development expense to increase substantially in absolute dollars for the foreseeable future as we continue to invest in activities related to discovery and development of our proprietary drug discovery programs, in advancing our computational platform, and as we incur expenses associated with hiring additional personnel directly involved in such efforts.

At this time, we do not know, nor can we reasonably estimate, the nature, timing, or costs of the efforts that will be necessary to complete the development of any of our proprietary drug discovery programs.

Since our proprietary drug discovery efforts are in the early stages, currently we do not track research and development expense on a program-by-program basis.

Sales and Marketing Expense

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securities exchange and costs related to compliance and reporting obligations pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC.

In addition, as a public company, we expect to continue to incur increased expenses such as insurance and professional services.

In addition, as a public company, we expect to continue to incur increased expenses such as insurance and

professional services.

As a result, we expect the dollar amount of our general and administrative expense to increase for the foreseeable future.

(Loss) Gain on Equity Investments

(Loss) gain on equity investments consists of realized gains in the form of cash distributions received from our equity investments offset by realized losses on the sale of equity.

Gain (Loss) on Equity Investments

Gain (loss) on equity investments consists of realized gains in the form of cash distributions received from our equity investments offset by realized losses on the sale of equity.

Change in Fair Value

Fair value gains and losses consist of adjustments to the fair value of our equity investments, including Nimbus Therapeutics, Inc., or Nimbus, ShouTi Inc., or ShouTi, Relay Therapeutics, Inc., or Relay, and Morphic Holding, Inc., or Morphic.

Fair value gains and losses consist of adjustments to the fair value of our equity investments, including Nimbus Therapeutics, Inc., or Nimbus, Structure Therapeutics Inc., formerly known as ShouTi Inc., or Structure Therapeutics, Eonix, LLC, or Eonix, and Morphic Holding, Inc., or Morphic.

We remeasure our investments at each period end.

In January 2021, we disposed of our equity stake in Relay for aggregate consideration of $15.7 million.

We expect that fair value gains and losses will fluctuate significantly in future periods.

Interest Income

Interest income consists of interest earned on our cash equivalents and marketable securities.

Income Tax Expense (Benefit)

Income tax expense (benefit) consists of U.S.

Other income consists of interest earned on our cash equivalents and marketable securities, interest expense, and transactional foreign exchange gains and losses.

Income Tax Expense

Income tax expense consists of U.S.

federal and state income taxes and income taxes in certain foreign jurisdictions in which we conduct business.

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The following table summarizes our results of operations data for the years ended December 31, 2022 and 2021:

Year Ended December 31,

Year Ended December 31, Change

2022 2021 $ %

(in thousands)

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Total cost of revenues 79,933 72,311 7,622 11%

Gross profit 101,022 65,620 35,402 54%

Operating expenses:

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Loss from operations (146,817) (111,443) (35,374) 32%

Other income:

(Loss) gain on equity investments

Other income (expense):

Gain (loss) on equity investments 11,825 (1,781) 13,606

Change in fair value (18,084) 11,359 (29,443)

Interest income

Total other income

Other income 3,950 1,057 2,893

Total other (expense) income (2,309) 10,635 (12,944)

Loss before income taxes (149,126) (100,808) (48,318)

Income tax expense (benefit)

Income tax expense 63 411 (348)

Net loss (149,189) (101,219) (47,970)

Net loss attributable to noncontrolling interest (3) (826) 823

Net loss attributable to Schrödinger stockholders $ (149,186) $ (100,393) $ (48,793)

Year Ended December 31,

Year Ended December 31, Change

2022 2021 $ %

(in thousands)

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On-premise software.

The increase in revenues for on-premise software was primarily attributable to existing and new customer growth, and an increase in multi-year arrangements during the year ended December 31, 2021 as compared to the year ended December 31, 2020 and during the year ended December 31, 2020 as compared to the year ended December 31, 2019.

The increase in revenues for on-premise software during the year ended December 31, 2022 as compared to the year ended December 31, 2021 was primarily attributable to growth from existing customers, new customer growth, and an increase in multi-year arrangements for which revenue was recognized ahead of annual billings during the year ended December 31, 2022 as compared to the year ended December 31, 2021.

Hosted software.

The increase in revenues for hosted software was primarily due to increased spend from existing hosted customers, as well as new customers purchasing hosted software subscriptions, for which revenue is recognized ratably over time.

The increase in revenues for hosted software during the year ended December 31, 2022 as compared to the year ended December 31, 2021 was primarily due to increased spend from existing hosted customers, as well as growth in new customers purchasing hosted software subscriptions, for which revenue is recognized ratably over time.

Software maintenance.

The increase in revenues for software maintenance was primarily due to the increase in on-premise software sales in current and previous years.

Software maintenance revenue is recognized over time.

The increase in revenues for software maintenance during the year ended December 31, 2022 as compared to the year ended December 31, 2021 was primarily due to the increase in on-premise software sales in current and previous years.

Software maintenance revenue is recognized ratably over time.

Professional services.

The decrease in revenues from professional services during the year ended December 31, 2021 as compared to the year ended December 31, 2020 was primarily due to the completion of a significant technology service project in 2020 that resulted in an increase to recurring on-premise software revenue upon renewal, as well as the timing of technology and modeling service projects.

The increase in revenues from professional services during the year ended December 31, 2020 as compared to the year ended December 31, 2019 was primarily due to revenue from significant technology service projects that began in late 2019, as well as an increased number of modeling service contracts.

The increase in revenues from professional services during the year ended December 31, 2022 as compared to the year ended December 31, 2021 was primarily due to the addition of XTAL service revenue subsequent to the acquisition, and the increased sales and timing of technology and modeling service projects.

Software contribution revenue .

2 unchanged sentences

Drug discovery services.

The increase in revenues for drug discovery services during the year ended December 31, 2021 as compared to the year ended December 31, 2020 was primarily due to the BMS collaboration services that began in November 2020, the timing and amount of collaboration milestones achieved, as well as research funding received during 2021 as compared to 2020.

The increase in revenues for drug discovery services during the year ended December 31, 2022 as compared to the year ended December 31, 2021 was primarily due to the progress of existing and new collaborations accomplished during the period, the timing and amount of collaboration milestones achieved, as well as research funding received during 2022 as compared to 2021.

We expect that our revenue will fluctuate from period to period due to the inherently uncertain nature of the timing of milestone achievement and our dependence on the program decisions of our collaborators.

The decrease in revenues for drug discovery services during the year ended December 31, 2020 as compared to the year ended December 31, 2019 was primarily due to the timing and amount of collaboration milestones achieved during 2020 as compared to 2019.

Drug discovery contribution revenue.

Contribution revenue during the year ended December 31, 2021 was due to services performed under an agreement with the Bill and Melinda Gates Foundation , aim ed at accelerating drug discovery in women’s health , which began in November 2021.

Contribution revenue during the year ended December 31, 2022 was due to services performed under an agreement with the Bill and Melinda Gates Foundation, aimed at accelerating drug discovery in women’s health, which began in November 2021.

Cost of Revenues

Year Ended December 31,

Year Ended December 31, Change

2022 2021 $ %

(in thousands)

1 unchanged sentence

Software products and services $ 29,576 $ 26,495 $ 3,081 12%

Gross margin 78 % 77 %

Drug discovery 50,357 45,816 4,541 10%

Software products and services.

The increase in cost of revenues for software products and services during the year ended December 31, 2021 as compared to the year ended December 31, 2020 was attributable to increases of approximately $5.5 million in personnel-related expense, approximately $2.3 million in royalty expense due to higher sales levels, and approximately $0.7 million in other expenses.

The increase in cost of revenues for software products and services during the year ended December 31, 2020 as compared to the year ended December 31, 2019 was attributable to increases of approximately $2.6 million in personnel-related expense, approximately $1.5 million in royalty expense due to higher sales levels, and approximately $0.4 million in other expenses, offset by a decrease of approximately $0.2 million in travel and entertainment expense due to COVID-19.

The increase in cost of revenues for software products and services during the year ended December 31, 2022 as compared to the year ended December 31, 2021 was attributable to increases of approximately $3.3 million in personnel-related expense and approximately $1.5 million in other expenses, offset by decreases of approximately $1.5 million in royalty expense and approximately $0.2 million in cloud computing expense.

Software products and services gross margin.

The decrease in software gross margin during the year ended December 31, 2021 as compared to the year ended December 31, 2020 reflects our investment to support the rollout of large-scale deployments of our platform, as well as an increase in royalty fees.

The increase in software gross margin during the year ended December 31, 2020 as compared to the year ended December 31, 2019 was primarily attributable to sales mix.

The increase in software gross margin during the year ended December 31, 2022 as compared to the year ended December 31, 2021 was primarily due to the reduction of $0.7 million in royalty expense as a result of replacing third-party licensed code with internally built functionality, as well as the sales mix.

Drug discovery.

The increase in cost of revenues for drug discovery during the year ended December 31, 2021 as compared to the year ended December 31, 2020 was attributable to increases of approximately $12.6 million in third-party CRO costs associated with the expansion and progression of collaboration drug discovery programs, including the BMS collaboration, approximately $6.7 million in personnel-related expense, and approximately $0.3 million in royalty expense, offset by a decrease of approximately $0.3 million in cloud computing expenses and approximately $0.1 million in other expenses.

The increase in cost of revenues for drug discovery during the year ended December 31, 2020 as compared to the year ended December 31, 2019 was attributable to increases of approximately $3.3 million in personnel-related expense, approximately $0.7 million in cloud computing expenses, and approximately $0.4 million in royalty expense, offset by a decrease of approximately $0.6 million in third-party CRO costs to support collaborations.

The increase in cost of revenues for drug discovery during the year ended December 31, 2022 as compared to the year ended December 31, 2021 was attributable to increases of approximately $1.3 million in third-party CRO costs associated with the expansion and progression of collaboration drug discovery programs, approximately $1.3 million in personnel-related expense, approximately $1.0 million in royalty expense, approximately $0.1 million in cloud computing expense, and approximately $0.8 million in other expenses.

Research and Development Expense

Year Ended December 31,

Year Ended December 31, Change

2022 2021 $ %

(in thousands)

Research and development $ 126,372 $ 90,904 $ 35,468 39%

The increase in research and development expense during the year ended December 31, 2021 as compared to the year ended December 31, 2020 was attributable to increases of approximately $16.3 million in personnel-related expense, approximately $6.0 million in CRO costs associated with the expansion and progression of internal drug discovery programs, approximately $3.0 million in cloud computing expenses, and approximately $0.9 million in other expenses.

The increase in research and development expense during the year ended December 31, 2020 as compared to the year ended December 31, 2019 was attributable to increases of approximately $11.7 million in personnel-related expense, approximately $10.1 million in CRO costs associated with the expansion and progression of internal drug discov ery programs, approximately $2.3 million in cloud computing expenses, and approximately $1.1 million in other expenses.

The increase in research and development expense during the year ended December 31, 2022 as compared to the year ended December 31, 2021 was attributable to increases of approximately $21.8 million in personnel-related expense, approximately $5.4 million in CRO costs associated with the expansion and progression of our proprietary drug discovery programs, approximately $4.0 million in cloud computing expense, approximately $2.0 million related to office rent, and approximately $2.3 million in other expenses.

Sales and Marketing Expense

Year Ended December 31,

Year Ended December 31, Change

2022 2021 $ %

(in thousands)

Sales and marketing $ 30,642 $ 22,150 $ 8,492 38%

The increase in sales and marketing expense during the year ended December 31, 2021 as compared to the year ended December 31, 2020 was attributable to increases of approximately $3.6 million in personnel-related expense, approximately $0.4 million in travel and entertainment expenses, and approximately $0.4 million in other expenses.

The decrease in sales and marketing expense during the year ended December 31, 2020 as compared to the year ended December 31, 2019 was attributable to a decrease of approximately $2.7 million in personnel-related expense and a decrease of approximately $1.2 million in travel and entertainment expenses due to COVID-19, partially offset by an increase of $0.3 million in other expenses.

The increase in sales and marketing expense during the year ended December 31, 2022 as compared to the year ended December 31, 2021 was attributable to increases of approximately $4.9 million in personnel-related expense,

approximately $1.3 million in travel and entertainment expenses, approximately $0.7 million in cloud computing expense, and approximately $1.6 million in other expenses.

General and Administrative Expense

Year Ended December 31,

Year Ended December 31, Change

2022 2021 $ %

(in thousands)

General and administrative $ 90,825 $ 64,009 $ 26,816 42%

The increase in general and administrative expense during the year ended December 31, 2021 as compared to the year ended December 31, 2020 was attributable to increases of approximately $16.5 million of personnel-related expense, approximately $5.1 million in other expenses, primarily reflecting costs necessary to build and maintain a public company infrastructure, and approximately $0.5 million in non-comparable costs related to the disposal of our equity stake in Relay.

The increase in general and administrative expense during the year ended December 31, 2020 as compared to the year ended December 31, 2019 was attributable to an increase of approximately $10.5 million of personnel-related expense, and an increase of approximately $7.5 million in other expenses, primarily reflecting costs necessary to build a public company infrastructure, partially offset by a $3.3 million reduction for non-comparable items recognized during 2019.

(Loss) Gain on Equity Investments

The increase in general and administrative expense during the year ended December 31, 2022 as compared to the year ended December 31, 2021 was attributable to increases of approximately $16.6 million of personnel-related expense, approximately $2.6 million related to professional services, approximately $1.3 million related to one-time non-recurring state and local tax items, approximately $1.2 million in travel and entertainment expense, approximately $1.2 million in cloud computing expense, approximately $1.2 million related to office rent, and approximately $2.7 million in other expenses, primarily reflecting costs necessary to build and maintain a public company infrastructure.

Gain (Loss) on Equity Investments

Year Ended December 31,

2022 2021 Change

(in thousands)

(Loss) gain on equity investments

The loss on equity investments during the year ended December 31, 2021 was primarily due to the realized loss on the disposal of our equity stake in Relay.

The gain on equity investments during the year ended December 31, 2020 represents realized gains in the form of a cash distribution received from the Petra Pharma Corporation, or Petra, merger in May 2020 on account of our equity stake in Petra.

The gain on equity investments during the year ended December 31, 2019 represents realized gains in the form of a cash distribution received from our Nimbus investment.

Gain (loss) on equity investments $ 11,825 $ (1,781) $ 13,606

The gain on equity investments during the year ended December 31, 2022 was due to cash received from a third party, who previously acquired a collaborator in which we held an equity stake, in exchange for the termination of our rights to receive potential earnouts under the acquisition agreement.

The loss on equity investments during the year ended December 31, 2021 was primarily due to the realized loss on the disposal of our equity stake in Relay Therapeutics, or Relay.

Change in Fair Value

Year Ended December 31,

2022 2021 Change

(in thousands)

Change in fair value $ (18,084) $ 11,359 $ (29,443)

The change in fair value during the year ended December 31, 2022 was primarily due to a loss on our investment in Morphic.

The change in fair value during the year ended December 31, 2021 was primarily due to a gain on our investment in Morphic.

The change in fair value during the year ended December 31, 2020 was due to a gain on our investment in Relay of $17.6 million and a gain on our investment in Morphic of $13.7 million, offset by a loss on our investment in Nimbus of $3.0 million.

The change in fair value during the year ended December 31, 2019 was due to a $14.1 million gain on our investment in Morphic, offset by a $4.2 million loss on our investment in Nimbus.

Interest Income

Year Ended December 31,

2022 2021 Change

(in thousands)

Interest income

The decrease in interest income during the year ended December 31, 2021 as compared to the year ended December 31, 2020 was attributable to an overall decline in interest rates on our investment portfolio.

The increase in interest income during the year ended December 31, 2020 as compared to the year ended December 31, 2019 was attributable to increased earnings on our investment portfolio balance, which increased significantly year-over-year due to the investment of proceeds from our initial public offering in February 2020 and our follow-on public offering in August 2020, partially offset by a significant reduction in interest rates year-over-year.

Income Tax Expense (Benefit)

Other income $ 3,950 $ 1,057 $ 2,893

The increase in other income during the year ended December 31, 2022 as compared to the year ended December 31, 2021 was attributable to an increase in interest rates on our investment portfolio offset by exchange rate variances.

Income Tax Expense

Year Ended December 31,

2022 2021 Change

(in thousands)

Income tax expense (benefit)

Income tax expense $ 63 $ 411 $ (348)

Due to the full valuation allowance on our U.S.

federal and state deferred tax assets, income tax expense (benefit) represents our income tax obligations in certain states and taxes in foreign jurisdictions in which we conduct business.

The income tax benefit during the year ended December 31, 2019 is due to alternative minimum tax credits previously utilized that are refundable under the Tax Cuts and Jobs Act of 2017.

federal and state deferred tax assets, income tax expense represents our income tax obligations in certain states and taxes in foreign jurisdictions in which we conduct business.

At December 31, 2022, we had federal and state net operating loss carryforwards of approximately $270.9 million and $170.0 million, respectively.

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As required by ASC Topic 740, Income Taxes, our management has evaluated the positive and negative evidence bearing upon the realizability of our deferred tax assets, which are composed principally of net operating loss carryforwards and research and development credit carryforwards.

Management has determined that it is more likely than not that we will not realize the benefits of our federal and state deferred tax assets and, as a result, a valuation allowance of $95.3 million, $58.2 million, and $35.3 million has been established at December 31, 2021, 2020, and 2019, respectively.

The change in the valuation allowance for the years ended December 31, 2021, 2020, and 2019 was $37.1 million, $22.9 million, and $7.7 million, respectively.

We recorded income tax

expense of $ 0.4 million and $0.3 million for the years ended December 31, 2021 and 2020, respectively.

We recorded an income tax benefit of $0.3 million for the year ended December 31, 2019.

Management has determined that it is more likely than not that we will not realize the benefits of our federal and state deferred tax assets and, as a result, a valuation allowance of $138.0 million and $95.3 million has been established at December 31, 2022 and 2021, respectively.

The change in the valuation allowance for the years ended December 31, 2022 and 2021 was $42.7 million and $37.1 million, respectively.

We recorded income tax expense of $0.1 million and $0.4 million for the years ended December 31, 2022 and 2021, respectively.

Quarterly Results of Operations

4 unchanged sentences

Three Months Ended

September 30,

December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,

2022 2022 2022 2022 2021 2021 2021 2021

(in thousands)

4 unchanged sentences

Software products and services (1)

8,098 6,866 7,101 7,511 8,337 6,611 5,641 5,906

Drug discovery (1)

10,041 12,913 14,234 13,169 11,472 12,124 12,163 10,057

Total cost of revenues 18,139 19,779 21,335 20,680 19,809 18,735 17,804 15,963

Gross profit 38,704 17,201 17,134 27,983 26,361 11,115 11,980 16,164

Operating expenses:

Research and development (1)

34,542 32,885 31,123 27,822 25,145 23,219 21,092 21,448

Sales and marketing (1)

9,382 7,161 7,428 6,671 5,975 5,556 5,380 5,239

General and administrative (1)

23,318 23,318 22,056 22,133 17,756 17,014 15,850 13,389

Total operating expenses 67,242 63,364 60,607 56,626 48,876 45,789 42,322 40,076

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Other (expense) income:

(Loss) gain on equity investment

(Loss) gain on equity investments — (3) 11,828 — — — — (1,781)

Change in fair value (1,493) 5,273 (15,700) (6,164) (7,920) (627) (4,918) 24,824

Interest (expense) income

Total other (expense) income

(Loss) income before income taxes

Income tax expense (benefit)

Net (loss) income

Net loss attributable to

noncontrolling interest

Net (loss) income

attributable to Schrodinger

Other income (expense) 2,687 1,231 (296) 328 (6) 286 357 420

Total other income (expense) 1,194 6,501 (4,168) (5,836) (7,926) (341) (4,561) 23,463

Loss before income taxes (27,344) (39,662) (47,641) (34,479) (30,441) (35,015) (34,903) (449)

Income tax (benefit) expense (136) 194 33 (28) 274 (4) 67 74

Net loss (27,208) (39,856) (47,674) (34,451) (30,715) (35,011) (34,970) (523)

Net (loss) income attributable to noncontrolling interest (1) (3) 12 (11) (2) (4) (326) (494)

Net loss attributable to Schrödinger stockholders $ (27,207) $ (39,853) $ (47,686) $ (34,440) $ (30,713) $ (35,007) $ (34,644) $ (29)

(1) Includes stock-based compensation as indicated in the table located further below.

Three Months Ended

September 30,

December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,

2022 2022 2022 2022 2021 2021 2021 2021

(in thousands)

3 unchanged sentences

Professional services 4,812 3,111 3,868 3,414 3,569 1,699 1,720 2,280

Revenue from contracts

with customers

Revenue from contracts with customers

47,819 24,667 29,011 33,081 38,564 24,280 23,052 26,340

Software contribution — — 1,000 — — — 1,000 —

Total software products

and services revenue

Total software products and services revenue

47,819 24,667 30,011 33,081 38,564 24,280 24,052 26,340

Drug discovery

4 unchanged sentences

Deferred Revenue:

September 30,

December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,

2022 2022 2022 2022 2021 2021 2021 2021

(in thousands)

2 unchanged sentences

Three Months Ended

September 30,

Software products and services

December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,

2022 2022 2022 2022 2021 2021 2021 2021

Software products and services gross margin

83 % 72 % 76 % 77 % 78 % 73 % 77 % 78 %

Stock-Based Compensation:

Three Months Ended

September 30,

December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,

2022 2022 2022 2022 2021 2021 2021 2021

(in thousands)

1 unchanged sentence

Cost of revenues:

Software products and

Software products and services

$ 580 $ 596 $ 584 $ 485 $ 389 $ 396 $ 382 $ 229

Drug discovery $ 626 $ 764 $ 944 $ 803 $ 626 $ 669 $ 738 $ 428

2 unchanged sentences

General and administrative $ 4,902 $ 4,750 $ 5,223 $ 4,740 $ 3,953 $ 4,087 $ 3,609 $ 2,263

Total stock-based

compensation expense

Depreciation:

Total stock-based compensation expense

$ 10,206 $ 9,864 $ 10,427 $ 9,134 $ 7,456 $ 7,652 $ 7,016 $ 4,366

Depreciation and Amortization:

Three Months Ended

September 30,

December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,

2022 2022 2022 2022 2021 2021 2021 2021

(in thousands)

Depreciation:

Depreciation and amortization:

Cost of revenues:

Software products and

Software products and services

$ 113 $ 106 $ 118 $ 99 $ 61 $ 56 $ 68 $ 86

Drug discovery $ 97 $ 117 $ 127 $ 112 $ 82 $ 106 $ 167 $ 232

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General and administrative $ 393 $ 399 $ 412 $ 371 $ 232 $ 197 $ 240 $ 256

Total depreciation

Total depreciation and amortization expense

$ 1,142 $ 1,107 $ 1,126 $ 969 $ 652 $ 581 $ 727 $ 887

Quarterly Revenue Trends

On-premise software revenue is subject to seasonality that generally favors the first and fourth quarter of each year, primarily due to the timing of customer renewals for on-premise software arrangements, for which revenue is recognized at a single point in time.

Hosted software revenue grew more steadily in the periods presented, as existing customers and new customers increased their spend on hosted solutions, for which revenue is recognized over time.

Hosted software revenue grew more steadily over the periods presented, as existing

customers and new customers increased their spend on hosted solutions, for which revenue is recognized over time.

As a result, a portion of the software products and services revenue we reported in each period was attributable to sales we made in prior periods.

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Our professional services arrangements are typically project-based and, therefore, fluctuated based on individual customer needs and ongoing project support.

Drug discovery revenue fluctuated from period to period based on the achievement of specific collaboration milestones, including advancement of BMS collaborative services.

Drug discovery revenue fluctuated from period to period based on the achievement of specific collaboration milestones, as well as advancements of collaborative services.

The majority of our current collaborations are in the discovery stage.

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Our software products and services gross margin experienced fluctuations over the periods presented due to increased headcount and the product mix for software and services, as the cost of royalties due on sales of our hosted software is recognized upfront, while the associated revenue is recognized over the term of the related agreement.

Currently, gross margin is not meaningful for measuring the operating results of our drug discovery business.

Currently, gross margin is less meaningful for measuring the operating results of our drug discovery business.

Quarterly Operating Expense Trends

Operating expenses generally increased during the periods presented due to increased headcount and personnel-related expenses involved in research and development, sales and marketing, general and administrative activities, and CRO costs related to our internal drug discovery programs.

These increases in headcount across our operations have supported the overall growth and management of our business.

CRO cost increases were driven by the expansion and progression of our internal drug discovery programs.

Quarterl y Other (Expense) Income Trends

Other (expense) income during the periods presented consisted primarily of fair value gains and losses related to our equity investments in Nimbus, Morphic, ShouTi and Relay, a loss on the disposal of our equity stake in Relay, a gain from the Petra merger, and, to a lesser degree, interest income.

CRO cost increases were driven by the expansion and progression of our proprietary drug discovery programs.

Quarterly Other Income (Expense) Trends

Other income (expense) during the periods presented consisted primarily of fair value gains and losses related to our equity investments in Morphic and Structure Therapeutics, and, to a lesser degree, interest income.

Segment Information

The following tables summarize segment information for the years ended December 31, 2022 and 2021.

See Note 15 in our audited consolidated financial statements for additional information regarding our segments.

See Note 16 – Segment Reporting in our audited consolidated financial statements for additional information regarding our segments.

Segment gross profit is derived by deducting operational expenditures, with the exception of research and development, sales and marketing, and general and administrative activities, from U.S.

10 unchanged sentences

Segment revenues:

Software $ 135,578 $ 113,236

Drug discovery 45,377 24,695

1 unchanged sentence

Segment gross profit:

Software $ 106,002 $ 86,741

Drug discovery $ (4,980) $ (21,121)

4 unchanged sentences

General and administrative (90,825) (64,009)

(Loss) gain on equity investment

Gain (loss) on equity investment 11,825 (1,781)

Change in fair value (18,084) 11,359

Interest 3,950 1,057

Income taxes (63) (411)

Consolidated net loss $ (149,189) $ (101,219)

Liquidity, Capital Resources and Funding Requirements

We have a history of significant operating losses, and incurred negative cash flows from operations since inception through December 31, 2019, and again in the year ended December 31, 2021.

We have a history of significant operating losses and have incurred negative cash flows from operations from inception through the year ended December 31, 2022.

As of December 31, 2022, we had an accumulated deficit of $379.1 million.

We have funded our operations to date principally from the sale our equity securities, including our initial public offering and our follow-on public offering, and to a lesser extent, from sales of our software solutions and from upfront payments, research funding and milestone payments from our drug discovery collaborations, and from distributions on account of, or proceeds from the sale of, our equity stakes in our collaborators.

Our operating cash flows are impacted by the magnitude and timing of our software sales and by the magnitude and timing of our drug discovery milestone achievements and research funding fees.

As of December 31, 2021, we had cash, cash equivalents and marketable securities of $579.5 million.

On February 10, 2020, we closed our initial public offering of our common stock, in which we sold 13,664,704 shares of common stock at a public offering price of $17.00 per share, resulting in net proceeds to us of $209.6 million, after deducting underwriting discounts and commissions and offering expenses borne by us.

On August 17, 2020, we closed a follow-on public offering, in which we sold 5,250,000 shares of common stock at a public offering price of $66.00 per share, resulting in net proceeds to us of $325.6 million, after deducting underwriting discounts and commissions and offering expenses borne by us.

As of December 31, 2022, we had cash, cash equivalents, restricted cash, and marketable securities of $456.3 million.

On February 13, 2023, on account of our equity stake in Nimbus, we received a $111.3 million cash distribution from Nimbus in connection with Takeda’s acquisition of Nimbus Lakshmi, Inc., a wholly-owned subsidiary of Nimbus, and its TYK2 inhibitor NDI-034858.

On March 4, 2021, we filed a universal shelf registration statement on Form S-3 which allows us to offer and sell an indeterminate number of shares of common stock, preferred stock, depositary shares or warrants, or an indeterminate principal amount of debt securities, from time to time pursuant to one or more offerings at prices and terms to be determined at the time of the sale.

As of December 31, 2022, no securities had been sold under the Form S-3.

We believe our existing cash, cash equivalents and marketable securities will be sufficient to fund our operating expenses and capital expenditure requirements through at least the next 24 months.

Our future capital requirements will depend on many factors, including the growth of our software revenue, the timing and extent of spending to support research and development efforts, the continued expansion of software sales and marketing activities, the timing and receipt of milestone payments from our collaborations, as well as spending to support, advance, and broaden our internal programs.

We believe our existing cash, cash equivalents, and marketable securities as of December 31, 2022, together with the $111.3 million cash distribution received from Nimbus in February 2023, will be sufficient to fund our operating expenses and capital expenditure requirements through at least the next 24 months.

proprietary drug discovery programs.

Furthermore, our capital requirements will also change depending on the timing and receipt of any distributions we may receive from our equity stakes in our drug discovery collaborators and partners.

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We plan to utilize the existing cash, cash equivalents, and marketable securities on hand primarily to fund our software and drug discovery activities.

With respect to our internal programs, as part of our strategy we may choose to enter into collaborations or pursue out-licensing arrangements when we believe it will help maximize the commercial value of any such program.

With respect to our wholly-owned programs, as part of our strategy we may choose to advance them into preclinical and clinical development ourselves, enter into collaborations to co-develop them with leading industry partners, or out-license them to maximize their clinical and commercial opportunities.

We may be required to seek additional equity or debt financing.

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In addition, we may seek additional capital due to favorable market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans.

Our contractual obligations as of December 31, 2021 include operating lease obligations of $132.2 million, consisting of our continuing rent obligations through December 2037, primarily for our principal offices located in New York, New York and Portland, Oregon, which expire in December 2037 and September 2026, respectively.

In addition, see Note 6 – Commitments and Contingencies to our consolidated financial statements appearing in Item 8 of this Annual Report for information relating to executed leases that have not yet commenced.

Our contractual obligations as of December 31, 2022 include operating lease obligations of $187.1 million, consisting of our continuing rent obligations through December 2037, primarily for our principal offices located in New York, New York for $152.2 million, Cambridge, Massachusetts for $18.1 million and Portland, Oregon for $5.0 million, which expire in December 2037, June 2032 and September 2026, respectively.

In addition, see Note 7 – Commitments and Contingencies to our consolidated financial statements appearing in Item 8 of this Annual Report for more information relating to our operating lease obligations.

In December 2022, we entered into an agreement with a third-party to establish an exclusive integrated drug discovery dedicated facility.

The agreement contains a minimum payment obligation, which totals $21.8 million over five years after the date of first occupancy.

In June 2022, we entered into an agreement with a third-party CRO to provide approximately $10.5 million of services, with an estimated service period extending through March 2025.

In June 2022, we entered into a non-cancelable contract to purchase laboratory equipment of $4.2 million, with payment terms extending through June 2023.

In December 2020, we entered into a five-year agreement with a third-party cloud provider for compute power.

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There is no annual commitment.

We enter into agreements in the normal course of business with CRO vendors for research and preclinical studies, professional consultants for expert advice, and other vendors for various products and services.

These contracts do not contain any minimum purchase commitments and are cancelable at any time by us, generally upon 30 days prior written notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.

We also enter into agreements in the normal course of business with CRO vendors for research, preclinical studies, and clinical trials, professional consultants for expert advice, and other vendors for various products and services.

These contracts do not contain any minimum purchase commitments and are cancellable at any time by us, generally upon 30 days prior written notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.

We have also agreed to pay volume-based royalties to third-parties for use of software functionality under various licensing and related agreements.

See Note 2 - Significant Accounting Policies to our audited consolidated financial statements appearing in Item 8 of this Annual Report for more information relating to our royalties.

The following table presents a summary of our cash flows for the periods shown:

1 unchanged sentence

(in thousands)

Net cash (used in) provided by operating activities

Net cash used in investing activities

Net cash used in operating activities $ (119,683) $ (70,669)

Net cash provided by (used in) investing activities 90,023 (16,812)

Net cash provided by financing activities 2,110 7,952

Net (decrease) increase in cash and cash equivalents and restricted cash

Net decrease in cash and cash equivalents and restricted cash $ (27,550) $ (79,529)

Operating activities

During the year ended December 31, 2022, operating activities used approximately $119.7 million in cash primarily resulting from net loss of $149.2 million, which included an $11.8 million gain from equity investments, partially offset by $5.0 million of non-cash operating expenses included in net loss, including depreciation and investment accretion costs, $39.6 million in stock-based compensation, and $18.1 million of non-cash loss on changes in fair value.

Changes in our operating assets and liabilities used cash of approximately $21.4 million.

During the year ended December 31, 2021, operating activities used approximately $70.7 million in cash primarily resulting from net loss of $101.2 million, which included an $11.4 million non-cash gain from changes in fair value, $26.5 million in stock-based compensation costs and $9.0 million of other non-cash operating expenses included in net loss, including depreciation and investment accretion costs, and a $1.8 million loss on equity investment that is classified as an investing activity.

Changes in our operating assets and liabilities provided cash of approximately $4.7 million.

During the year ended December 31, 2020, operating activities provided approximately $16.8 million of cash.

Cash provided by operating activities increased primarily from changes in our operating assets and liabilities, which provided cash of approximately $59.2 million primarily due to an increase of $59.7 million in deferred revenue, of which approximately $54.0 million is related to our agreement with BMS, and $12.5 million of non-cash operating expenses included in net loss, including depreciation and stock-based compensation costs.

These increases are partially offset by our net loss of $26.6 million and $28.3 million non-cash gain from changes in fair value.

During the year ended December 31, 2019, operating activities used approximately $26.1 million of cash, primarily resulting from net loss of $25.7 million, which included a $9.9 million non-cash gain from changes in fair value and a $0.9 million gain on equity investment that is classified as an investing activity, partially offset by $6.2 million of non-cash operating expenses included in net loss, including depreciation and stock-based compensation costs.

Changes in our operating assets and liabilities provided cash of approximately $4.2 million.

Investing activities

During the year ended December 31, 2022, investing activities provided approximately $90.0 million of cash, consisting of $93.2 million provided by marketable securities, net of purchases and $11.8 million in cash from a third party, who previously acquired a collaborator in which we held an equity stake, in exchange for the termination of our rights to receive potential earnouts under the acquisition agreement.

These items are partially offset by $8.0 million in cash used for purchases of property and equipment, $0.6 million used to make equity investments in Structure Therapeutics, and $6.4 million used to acquire XTAL, net of cash acquired.

During the year ended December 31, 2021, investing activities used approximately $16.8 million of cash, consisting of $22.1 million used for purchases of marketable securities, net of maturities, $7.2 million used for purchases of property and equipment and $3.7 million used to make equity investments in Ajax Therapeutics, Inc.

and ShouTi, partially offset by $15.7 million provided by the sale of our equity stake in Relay and $0.4 million provided by the distribution of funds from Petra in connection with the Petra merger.

During the year ended December 31, 2020, investing activities used approximately $381.7 million of cash, primarily for purchases of marketable securities.

During the year ended December 31, 2019, investing activities used approximately $53.9 million of cash, primarily for purchases of marketable securities.

and Structure Therapeutics, partially offset by $15.7 million provided by the sale of our equity stake in Relay and $0.4 million provided by the distribution of funds from Petra Pharma Corporation in connection with its acquisition by a third party.

Financing activities

During the year ended December 31, 2022, financing activities provided approximately $2.1 million of cash, primarily attributable to proceeds from stock option exercises.

During the year ended December 31, 2020, financing activities provided approximately $541.3 million of cash, primarily attributable to proceeds from issuances of our common stock in our initial public and follow-on offerings.

During the year ended December 31, 2019, financing activities provided approximately $28.7 million of cash, primarily attributable to proceeds from issuances of our Series E preferred stock.

During the year ended December 31, 2021, financing activities provided approximately $8.0 million of cash, primarily attributable to proceeds from stock option exercises.

Generally, the first and fourth quarter of each year have typically been our largest quarters for software products and services revenue, primarily due to the timing of customer renewals of on-premise software arrangements, for which revenue is recognized at a single point in time.

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Historical seasonality may not be indicative of future periods.

Critical Accounting Policies and Significant Judgments and Critical Accounting Estimates

Critical Accounting Policies and Estimates

Critical accounting policies are those that are both most important to the portrayal of a company's financial condition and results, and that require management's most difficult, subjective, and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

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While our significant accounting policies are described in more detail in Note 2 – Significant Accounting Policies to our consolidated financial statements appearing in Item 8 of this Annual Report, we believe the following critical accounting estimates used in the preparation of our consolidated financial statements require the most difficult, subjective and complex judgments and estimates and have had, or are reasonably likely to have a material impact on our financial condition or results of operations.

We recognize revenue in accordance with ASC 606, Revenue from Contracts with Customers, except for contracts that are within the scope of other standards, such as contribution grants and collaboration arrangements.

In accordance with ASC 606, we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services.

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and (v) recognize revenue when or as we satisfy a performance obligation.

Significant management judgment is applied to determine the allocation of the transaction price and measurement of progress, including (1) the constraint on variable consideration, (2) the allocation of the transaction price to the performance obligations using their standalone selling price, or SSP, basis, and (3) the appropriate input or output based method to recognize collaboration revenue and the extent of progress to date.

Significant management judgment is applied to determine the allocation of the transaction price and measurement of progress, including (1) the constraint on variable consideration, (2) the allocation of the transaction price to the performance obligations using their standalone selling price, or SSP, and (3) the appropriate input or output based method to recognize collaboration revenue and the extent of progress to date.

Variable consideration:

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At the inception of each arrangement that includes research, development, or regulatory milestone payments, we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method.

If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price.

If it is probable that a significant revenue reversal would not occur,

the associated milestone value is included in the transaction price.

Milestone payments that are not within our control or that of the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received.

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Consequently, there is a risk that we may not earn all of the milestone payments from each of our collaborators.

We recognized $6.3 million, $11.9 million, and $12.1 million from drug discovery milestones for the years ended December 31, 2021, 2020, and 2019, respectively.

We recognized $14.7 million and $6.3 million from drug discovery milestones for the years ended December 31, 2022 and 2021, respectively.

Software performance obligations and transaction price allocation :

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Changes to these assumptions may have a material effect on the amount and timing of revenue recognized.

We recognized revenue of $14.6 million, $1.0 million, and zero related to collaboration agreements with proportional performance measurement for the years ended December 31, 2021, 2020, and 2019, respectively.

Stock-Based Compensation

Compensation expense related to stock-based transactions, including employee, consultant, and non-employee director stock option awards, is measured and recognized in the consolidated financial statements based on fair value.

The fair value of each option award is estimated on the grant date using the Black Scholes option-pricing model.

Expense is recognized on a straight-line basis over the vesting period of the award.

Forfeitures are accounted for in the period in which the awards are forfeited.

We estimate the fair value of our option awards to employees, directors and non-employees using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including the expected stock price volatility and the calculation of expected term of the award.

Due to the lack of complete company-specific historical and implied volatility data for the full expected term of the stock-based awards, we base our estimate of expected volatility on a representative group of publicly traded companies.

For these analyses, we selected companies with comparable characteristics to our own, including enterprise value, risk profiles, position within the industry and with historical share price information sufficient to meet the expected life of the stock-based awards.

We compute historical volatility data using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards.

We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own stock price becomes available.

We have estimated the expected term of our employee stock option using historical exercise data.

Our weighted average volatility was, 59%, 60% and 57% for the years ended December 31, 2021, 2020, and 2019, respectively, and our expected term was 4.66, 4.49 and 6.05 for the years ended December 31, 2021, 2020, and 2019, respectively.

We will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis.

As we continue to accumulate additional data related to our common stock, we may have refinements to our estimates, which could materially impact our future stock-based compensation expense.

We recognized revenue of $24.3 million and $14.6 million related to collaboration agreements with proportional performance measurement for the years ended December 31, 2022 and 2021, respectively.

Recent Accounting Pronouncements

See Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report for a discussion of recently issued accounting pronouncements.

See Note 2 – Significant Accounting Policies to our consolidated financial statements appearing elsewhere in this Annual Report for a discussion of recently issued accounting pronouncements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis