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Item 7. Management’s Discussion and Analysis

2024-02-28 compared with 2023-02-28 · 177 added, 194 removed, 423 unchanged (47% of the section changed)

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You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes appearing elsewhere in this Annual Report.

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.

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, includes forward-looking statements that involve risks and uncertainties.

The following discussion and analysis of our financial condition and results of operations covers fiscal 2023 and fiscal 2022 items and year-over-year comparisons between fiscal 2023 and fiscal 2022.

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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 are applying our computational platform to advance a broad pipeline of drug discovery programs in collaboration with leading biopharmaceutical companies.

In addition, we use our computational platform to discover novel molecules for our pipeline of proprietary drug discovery programs, which we are advancing through preclinical and clinical development.

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 on our own.

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.

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.

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.

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

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

In June 2022, the U.S.

Food and Drug Administration, or FDA, cleared our first investigational new drug application, or IND, for our MALT1 inhibitor, which we refer to as SGR-1505.

We have initiated dosing in a Phase 1 clinical trial of SGR-1505 in patients with relapsed or refractory B-cell lymphomas and we anticipate reporting initial data from the trial in late 2024 or 2025.

We also completed a Phase 1 clinical trial of SGR-1505 in 73 healthy volunteers to gather additional data, including data relating to the safety, tolerability and pharmacokinetics of SGR-1505, as well as the effect of food and drug-drug interactions.

In the healthy volunteer trial, SGR-1505 was well tolerated with no drug-related serious adverse events or dose limiting toxicities observed.

In the trial, we observed that SGR-1505 achieved greater than 90 percent inhibition of IL-2 secretion in an activated T cell whole blood assay, confirming target engagement and meeting the pharmacodynamic goals for the trial.

Inhibition of IL-2 secretion is a marker for target engagement and pathway modulation as it is tightly linked to MALT1 and the downstream NF-κB signaling.

The data supported continued evaluation of SGR-1505 in the ongoing Phase 1 clinical trial in patients with relapsed or refractory B-cell lymphomas.

In addition, the FDA recently granted orphan drug designation to SGR-1505 for the potential treatment of mantle cell lymphoma.

In July 2023, the FDA cleared our IND for our CDC7 inhibitor, which we refer to as SGR-2921.

We have initiated dosing in a Phase 1 clinical trial of SGR-2921 in patients with relapsed or refractory acute myeloid leukemia or high-risk myelodysplastic syndrome, and we anticipate reporting initial data from the trial in late 2024 or 2025.

We are also advancing SGR-3515, our novel WEE1/MYT1 inhibitor for the treatment of solid tumors.

We expect to submit an IND to the FDA for SGR-3515 in the first half of 2024, subject to favorable data from ongoing IND-enabling studies, and we plan to initiate a Phase 1 clinical trial of SGR-3515 by the end of 2024, 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.

On February 13, 2023, April 6, 2023, and November 9, 2023, on account of our equity stake in Nimbus Therapeutics, LLC, or Nimbus, we received cash distributions of $111.3 million, $35.8 million, and $0.1 million, respectively, from Nimbus in connection with Takeda’s acquisition of Nimbus Lakshmi, Inc., a wholly-owned subsidiary of Nimbus, and its TYK2 inhibitor NDI-034858.

We currently conduct our operations through two reportable segments:

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We deliver our software through either (i) a product license that permits our customers to install the software solution directly on their own in-house hardware and use it for a specified term, or (ii) a subscription that allows our customers to access our cloud-based software solution on their own hardware without taking control of licenses.

We currently generate drug discovery revenue from our collaborations, including upfront payments, research funding payments and discovery and development milestones.

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 wholly-owned drug discovery programs when we believe it will help maximize clinical and commercial opportunity for the program.

We currently generate drug discovery revenue from our collaborations, including upfront payments, research funding and discovery and development milestones.

In the future, we may also derive drug discovery revenue from our collaborations from option fees, the achievement of regulatory and 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 proprietary drug discovery programs when we believe it will help maximize our clinical and commercial opportunities 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 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.

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.

After mutual agreement on the targets(s) of interest, the Schrödinger therapeutics group is responsible for the

discovery of development candidates.

Once a development candidate meeting specified criteria for a target has been identified, BMS will be solely responsible for the development, manufacturing and commercialization of such development candidate.

We are eligible to receive up to $1.5 billion in total milestone payments across the potential targets currently subject to the collaboration, of which we have received $25.0 million as of December 31, 2023, 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 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.

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.

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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

In order to safeguard the health of our employees in light of the COVID-19 pandemic, in early March 2020 we implemented a company-wide work-from-home policy.

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

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.

While we do not expect the COVID-19 pandemic to have future material impacts on our business, the full extent of the future impact will depend on many factors outside of our control, including, without limitation, the extent, trajectory and duration of the COVID-19 pandemic, the development, availability and distribution of effective treatments and vaccines, the imposition of protective public safety measures, the emergence of new strains and variants of COVID-19 and the effectiveness of vaccines against such strains and variants, and the impact of the COVID-19 pandemic on the global economy.

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.

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.

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 SGR-2921.

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.

Management is actively monitoring the COVID-19 pandemic and its possible effects on our financial condition, liquidity, operations, customers, contractors, and workforce.

For additional information on risks posed by the COVID-19 pandemic, please see “Risk Factors – Risks Related to Our Operations – A widespread outbreak of an illness or other health issue, such as the COVID-19 pandemic, could negatively affect various aspects of our business and make it more difficult to meet our obligations to our customers, and could result in reduced demand from our customers as well as delays in our drug discovery and development programs,” included elsewhere in this Annual Report.

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.

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

We generated revenue of $216.7 million and $181.0 million in 2023 and 2022, respectively, representing a year-over-year growth of 20%.

Our net income for the year ended December 31, 2023 was $40.7 million and our net loss for the year ended December 31, 2022 was $149.2 million.

Key Factors Affecting Our Performance

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Our large existing base of customers represents a significant opportunity for us to expand our revenue through increased utilization of our software.

We had 1,785 and 1,748 active customers for the years ended December 31, 2023 and 2022, respectively.

We define the number of active customers as the number of customers who had an annual contract value, or ACV, of at least $1,000 in the fiscal year.

We use $1,000 as a threshold for defining our active customers as this amount will generally exclude customers who only license our PyMOL software, which is our open-source molecular visualization system broadly available at low cost.

The revenue that we generate through our software solutions from each of our customers varies depending on the number of licenses for each software solution that each customer purchases from us.

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Biopharmaceutical companies are increasingly adopting our software at a larger scale, and we anticipate that this scaling-up will drive future revenue growth.

Our ability to expand within our customer base is demonstrated by the increasing number of our customers with an annual contract value, or ACV, of over $100,000.

We had 227 and 190 of these customers for the years ended December 31, 2022 and 2021, respectively.

This subset of customers represented approximately 82% and 80% of our total ACV for the years ended December 31, 2022 and 2021, respectively.

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.

Our ability to expand within our customer base is demonstrated by the increasing number of our customers with an ACV at higher thresholds, including customers with an ACV of at least $500,000 or $1.0 million.

For the year ended December 31, 2023, we had 54 customers with an ACV of at least $500,000 compared to 52 for the year ended December 31, 2022.

Furthermore, we had 27, 18, and 15 customers with an ACV of at least $1.0 million for the years ended December 31, 2023, 2022, and 2021, respectively.

We also had four customers with an ACV of at least $5.0 million for the year ended December 31, 2023, compared to four and two such customers for the years ended December 31, 2022 and 2021, respectively.

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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Our ACV was $154.2 million and $140.6 million for the years ended December 31, 2023 and 2022, respectively.

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

Ability to retain our customer base for our software solutions

Another important driver of our performance is our ability to retain our customer base.

We had 222, 227, and 190 customers with an ACV of at least $100,000 for the years ended December 31, 2023, 2022, and 2021, respectively.

For the year ended December 31, 2023, our year-over-year customer retention rate for such customers was 92% 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.

We then calculate how many of these customers were active customers in the current fiscal year.

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 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

We believe that we have significant opportunity to continue to increase the number of customers who use our solutions.

We had 1,748 and 1,647 active customers for the years ended December 31, 2022 and 2021, respectively.

We define the number of active customers as the number of customers who had an ACV of at least $1,000 in the fiscal year.

While we have significantly penetrated the pharmaceutical industry, with all of the top 20 pharmaceutical companies, measured by 2021 revenue, licensing our software in 2022, our strategy is to grow our customer base.

We believe there remains a large opportunity for growth as there are thousands of biopharmaceutical companies that could benefit from our solutions.

Additionally, since the physics underlying the properties of drug molecules and materials is the same, we have been able to extend our computational platform to materials science applications in fields such as aerospace, energy, semiconductors, and electronic displays.

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 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.

Our customer retention rate for our customers with an ACV of at least $500,000 was 98% for the year ended December 31, 2023 and 100% for the year ended December 31, 2022.

We calculate year-over-year customer retention for our customers with an ACV of at least $100,000 or $500,000 by starting with the number of such customers we had in the previous fiscal year.

We then calculate how many of these customers were active

customers in the current fiscal year.

We then divide this number by the number of customers with an ACV of at least $100,000 or $500,000, as applicable, that, we had in the previous fiscal year to arrive at the year-over-year customer retention rate for such customers.

We believe our sales and marketing approach and the quality of our software solutions result in long-term relationships and high retention with our largest customers.

This is demonstrated by the length of our key relationships, with the average tenure of our 10 largest software customers in 2023 being nearly 19 years.

Furthermore, we have significantly penetrated the pharmaceutical industry, with all of the top 20 pharmaceutical companies, measured by 2022 revenue, licensing our software in 2023.

Our ability to continue to grow our software revenue is dependent upon our ability to retain customers through the continued support and investment in our sales and marketing efforts and the ongoing enhancement of our software solutions.

Advancement of our collaborative programs

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

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

We will seek to enter into additional collaboration agreements, driven by the synergies we expect to achieve between our platform and the capabilities and expertise of our potential collaborators.

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We continue to work with our current collaborators to advance existing programs through discovery research stages and initiate additional programs.

However, we do not generally exercise control over the development programs of our collaborators and often rely on decisions of the management of such companies with respect to clinical development and commercialization.

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.

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.

However, we do not generally exercise control over the development programs of our collaborators and depend on our collaborators' decisions with respect to clinical development and commercialization.

Our ability to continue to derive value from our collaborations will be driven by our capability to make progress in these programs, whether our collaborators successfully advance such programs beyond the discovery stage, and the strategic priorities of our collaboration partners.

We track the aggregate number of collaborative programs for which we are eligible to receive any amount of royalties on sales and as of December 31, 2023, we had an aggregate of 12 collaborative programs for which we are eligible to receive future royalties compared to 15 collaborative programs as of December 31, 2022.

Ability to progress and expand our pipeline of proprietary drug discovery programs

We are advancing our pipeline of proprietary programs through preclinical and clinical development.

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.

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.

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

We have initiated dosing in a Phase 1 clinical trial of SGR-1505 in patients with relapsed or refractory B-cell lymphomas as well as in a Phase 1 clinical trial of SGR-2921 in patients with relapsed or refractory acute myeloid leukemia or high-risk myelodysplastic syndrome, and we anticipate reporting initial data from both clinical trials in late 2024 or 2025.

In addition, we expect to submit an IND application to the FDA for SGR-3515 in the first half of 2024, subject to favorable data from IND-enabling studies, and we plan to initiate a Phase 1 clinical trial of SGR-3515 by the end of 2024, subject to the receipt of regulatory clearance.

We continue to advance new programs where we can leverage our computational platform to discover novel molecules, and we have recently announced new discovery-stage programs targeting PRMT5-MTA, EGFR C797S , and NLRP3.

As we progress and expand our pipeline of proprietary programs, we will strategically evaluate on a program-by-program basis advancing them 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.

Components of Results of Operations

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On-premise software.

Our on-premise software license arrangements grant customers the right to use our software on their own in-house servers or their own cloud instances for a specified term, typically for one year.

We recognize revenue for on-premise software license fees upfront, either upon delivery of the license or the effective date of the agreement, whichever is later.

Our on-premise software license arrangements grant customers the right to use our software on their own in-house servers or their own cloud instances for a specified term, typically for one year, though in recent years, we have entered into a small number of large multi-year on-premise software license agreements.

We recognize revenue for on-premise software license fees upfront, either upon transfer of control of the license or the effective date of the agreement, whichever is later.

Hosted software.

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.

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.

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.

Software maintenance.

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Professional services.

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.

Professional services include training, technical setup, installation or assisting customers with modeling services, where we use our software to perform tasks such as virtual screening 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.

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Software contribution revenue .

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

Software contribution revenue consists of funds received under a non-reciprocal agreement with Gates Ventures, LLC originally entered into in June 2020 and further extended through August 2026.

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.

Revenue was recognized annually from June 2020 through June 2022 and upon extension of the agreement in August 2023, when invoiced, in accordance with Accounting Standard Codification, or ASC, Topic 958 , Not-for-Profit Entities as the agreement is not an exchange transaction.

Drug Discovery Revenue

Drug discovery services.

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.

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

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

The majority of our current collaborations are in the discovery and preclinical development stages.

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 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.

However, our focus is increasingly on investing in our proprietary drug discovery programs, which may result in a smaller number of collaborative programs over time and, as a result, fewer milestone payments on account of those collaborative programs.

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

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.

Contribution revenue consists of funds received under an agreement with the Bill and Melinda Gates Foundation on a cost reimbursement basis, to perform services aimed at accelerating drug discovery in women’s health.

Contribution revenue consists of funds received under agreements with the Bill and Melinda Gates Foundation on a cost reimbursement basis, to perform services aimed at accelerating drug discovery in women’s health.

Revenue is recognized as conditions are met in accordance with ASC Topic 958, Not-for-Profit Entities .

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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, 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.

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 deemed probable or achieved.

Generally, drug discovery costs of revenue for collaborations are incurred in advance of the revenue milestone achievement.

Royalty payments to third-parties represented 3.5% and 4.8% of drug discovery revenues in the years ended December 31, 2023 and 2022, respectively.

We expect our drug discovery costs of revenue to trend higher over time as our discovery collaborations advance.

We expect our drug discovery costs of revenue to trend lower over time as we shift our focus to proprietary drug discovery programs.

Gross Profit and Gross Margin

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Gross margin is gross profit expressed as a percentage of revenue.

Our software products and services gross margin may fluctuate from period to period as our revenue fluctuates, and as a result of changes in sales mix between on-premise and hosted software solutions.

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 less meaningful for measuring the operating results of our drug discovery business.

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

While the gross margin of our drug discovery business will fluctuate significantly from period to period depending on factors such as the timing of recognition of milestones, we expect the gross margins to generally trend higher over time as more programs advance to later stages of development, the milestones increase in size and our ongoing research and development obligations to such programs decline in cost.

Research and Development Expense

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• 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 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 proprietary drug discovery programs, in advancing our computational platform, and as we incur expenses associated with hiring additional personnel directly involved in such efforts.

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

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

We expect our research and development expense to increase in absolute dollars 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.

The amount to which our research and development expense may increase in the future will also be dependent on our development plans for our proprietary drug discovery programs, including the timing of any partnering or out-licensing decisions.

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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General and Administrative Expense

General and administrative expense consists of personnel-related expenses associated with our executive, legal, finance, human resources, information technology, and other administrative functions, including salaries, benefits, bonuses, and stock-based compensation.

and stock-based compensation.

General and administrative expense also includes professional fees for external legal, accounting and other consulting services, allocated overhead costs, and other general operating expenses.

We expect to increase the size of our general and administrative staff to support the anticipated growth of our business.

We expect to continue to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a U.S.

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.

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.

Gain on Equity Investments

Gain on equity investments consists of realized gains in the form of cash distributions from our equity investments.

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, Structure Therapeutics Inc., formerly known as ShouTi Inc., or Structure Therapeutics, Eonix, LLC, or Eonix, and Morphic Holding, Inc., or Morphic.

Fair value gains and losses consist of adjustments to the fair value of our equity investments, which may include Nimbus, Structure Therapeutics Inc., or Structure Therapeutics, and Morphic Holding, Inc., or Morphic.

We remeasure our investments at each period end.

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Other income (expense):

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

Gain on equity investments 147,213 11,825 135,388

Change in fair value 53,461 (18,084) 71,545

Other income 19,693 3,950 15,743

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

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

Total other income (expense) 220,367 (2,309) 222,676

Income (loss) before income taxes 42,919 (149,126) 192,045

Income tax expense 2,199 63 2,136

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)

Net income (loss) 40,720 (149,189) 189,909

Net income (loss) attributable to noncontrolling interest — (3) 3

Net income (loss) attributable to Schrödinger stockholders $ 40,720 $ (149,186) $ 189,906

Year Ended December 31, Change

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On-premise software.

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.

The increase in revenues for on-premise software during the year ended December 31, 2023 as compared to the year ended December 31, 2022 was primarily attributable to an increase in multi-year arrangements for which revenue was recognized ahead of annual billings, as well as growth from existing and new customers during the year ended December 31, 2023 as compared to the year ended December 31, 2022.

Hosted software.

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.

The increase in revenues for hosted software during the year ended December 31, 2023 as compared to the year ended December 31, 2022 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 the period of the contract.

Software maintenance.

The increase in revenues for software maintenance during the year ended December 31, 2023 as compared to the year ended December 31, 2022 was primarily due to the increase in on-premise software sales in current and previous years.

Software maintenance revenue is recognized ratably over time.

Software maintenance revenue is recognized ratably over the period of the contract.

Professional services.

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.

The decrease in revenues from professional services during the year ended December 31, 2023 as compared to the year ended December 31, 2022 was primarily due to decreases of approximately $3.1 million in structural biology services and approximately $2.7 million related to progress and completion of technology and modeling service projects.

Software contribution revenue .

Contribution revenue during the year ended December 31, 2022 and the year ended December 31, 2021 was due to funds received under an agreement with Gates Ventures, LLC, which began in June 2020.

Contribution revenue during the year ended December 31, 2023 and the year ended December 31, 2022 was due to funds received under an agreement with Gates Ventures, LLC, which began in June 2020 and was extended in August 2023.

Drug Discovery Revenue

Drug discovery services.

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.

The increase in revenues for drug discovery services during the year ended December 31, 2023 as compared to the year ended December 31, 2022 was primarily due to the timing and amount of collaboration milestones achieved, including $25.0 million received from BMS, and the progress of existing and new collaborations accomplished during 2023 as compared to 2022.

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.

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Software products and services.

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.

The decrease in cost of revenues for software products and services during the year ended December 31, 2023 as compared to the year ended December 31, 2022 was attributable to decreases of approximately $0.9 million in personnel-related expense and approximately $0.1 million in other expenses, offset by an increase of approximately $0.9 million in cloud computing expense.

Software products and services gross margin.

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.

The increase in software gross margin during the year ended December 31, 2023 as compared to the year ended December 31, 2022 was primarily due to an increase in software revenue and relatively flat fixed costs, which was due to the re-allocation of resources from cost of revenue to research and development activities.

Drug discovery.

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.

The decrease in cost of revenues for drug discovery during the year ended December 31, 2023 as compared to the year ended December 31, 2022 was attributable to decreases of approximately $4.6 million in personnel-related expense reflecting the redeployment of our discovery organization towards proprietary drug discovery programs, approximately $0.5 million in cloud computing expense, and approximately $0.1 million in royalty expense, offset by increases of approximately $1.1 million in third-party CRO costs associated with the expansion and progression of collaborative programs, and approximately $0.2 million in other expenses.

Research and Development Expense

A significant portion of our research and development costs have been external preclinical and clinical CRO costs, which we track on a program-by-program basis related to a product candidate, once the candidate has been identified.

Our internal research and development costs are primarily personnel-related costs, rent expense, and other indirect costs and are not tracked on a program-by-program basis.

All other research and development costs are related to non-program related costs.

The following table summarizes our research and development expense for the years ended December 31, 2023 and 2022:

Year Ended December 31, Change

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(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, 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.

External costs by program:

SGR-1505 $15,337 $7,635 $7,702 101%

SGR-2921 6,090 4,430 1,660 37%

SGR-3515 6,363 8,533 (2,170) (25)%

Other early development candidates and unallocated costs 30,880 14,621 16,259 111%

Total external costs for programs in preclinical and clinical development 58,670 35,219 23,451 67%

Internal costs for discovery, preclinical and clinical development:

Employee compensation and benefits 32,949 19,273 13,676 71%

Facility and other 2,015 661 1,354 205%

Total internal costs 34,964 19,934 15,030 75%

All other research and development 88,132 71,219 16,913 24%

Total research and development expense $181,766 $126,372 $55,394 44%

The increase in external costs of $23.5 million during the year ended December 31, 2023 as compared to the year ended December 31, 2022 was primarily attributable to an increase in costs associated with the ongoing Phase 1 clinical trials and other development activities for SGR-1505, as well as other external research costs to support our early-stage product candidates, including SGR-2921 and SGR-3515.

The increase in internal costs for programs in clinical and preclinical development of $15.0 million during the year ended December 31, 2023 as compared to the year ended December 31, 2022 was primarily attributable to an increase in personnel-related expense and rent expense.

The increase in all other research and development expense during the year ended December 31, 2023 as compared to the year ended December 31, 2022 was attributable to increases of approximately $8.4 million in personnel-related expense, approximately $4.1 million in cloud computing expense, approximately $3.4 million related to office rent, approximately $0.6 million in travel and entertainment expenses, approximately $0.3 million related to professional services, and approximately $0.1 million in other expenses.

Sales and Marketing Expense

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Sales and marketing $ 37,226 $ 30,642 $ 6,584 21%

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.

The increase in sales and marketing expense during the year ended December 31, 2023 as compared to the year ended December 31, 2022 was attributable to increases of approximately $4.6 million in personnel-related expense, approximately $0.9 million related to office rent, approximately $0.7 million in travel and entertainment expenses, and approximately $0.4 million in cloud computing expense.

General and Administrative Expense

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General and administrative $ 99,148 $ 90,825 $ 8,323 9%

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

The increase in general and administrative expense during the year ended December 31, 2023 as compared to the year ended December 31, 2022 was attributable to increases of approximately $8.5 million of personnel-related expense, approximately $2.2 million in royalties related to cash distributions we received from Nimbus, approximately $0.8 million in cloud computing expense, approximately $0.8 million related to office rent, approximately $0.5 million in travel and entertainment expense, and approximately $0.5 million in amortization related to the acceleration of customer relationship intangible assets, offset by decreases of approximately $2.4 million related to professional services, approximately $1.1 million related to a one-time non-recurring state and local tax item, and approximately $1.5 million in other expenses.

Gain on Equity Investments

Year Ended December 31,

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(in thousands)

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

Gain on equity investments $ 147,213 $ 11,825 $ 135,388

The gain on equity investments during the year ended December 31, 2023 was due to the realized gain on our equity investment in Nimbus following the closing of Takeda's acquisition of Nimbus Lakshmi, Inc., a wholly-owned subsidiary of Nimbus, and its tyrosine kinase 2 inhibitor, NDI-034858.

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

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Change in fair value $ 53,461 $ (18,084) $ 71,545

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, 2023 was due to an unrealized gain on our investment in Structure of $49.8 million, an unrealized gain on our investment in Nimbus of $1.9 million, and an unrealized gain on our investment in Morphic of $1.8 million.

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

Year Ended December 31,

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Other income $ 19,693 $ 3,950 $ 15,743

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.

The increase in other income during the year ended December 31, 2023 as compared to the year ended December 31, 2022 was primarily attributable to an increase in interest rates on our investment portfolio.

Income Tax Expense

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Income tax expense $ 2,199 $ 63 $ 2,136

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

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.

Income tax expense for the year ended December 31, 2023 represents our federal and certain state income tax obligations and taxes in foreign jurisdictions for which we conduct business.

Income tax expense for the year ended December 31, 2022 represents our income tax obligations in certain states and taxes in foreign jurisdictions in which we conduct business.

As of December 31, 2023, we have a full valuation allowance on our U.S.

federal and state deferred tax assets.

At December 31, 2023, we had federal and state net operating loss carryforwards of approximately $179.1 million and $98.6 million, respectively.

These carryforwards, with the exception of federal net operating losses generated post 2017, will expire between 2023 and 2042 if not used by us to reduce income taxes payable in future periods.

Utilization of post-2017 federal net operating loss carryforwards is limited to 80% of taxable income generated in a given tax year and carry forward indefinitely.

The state net operating loss carryforwards will expire between 2025 and 2042, if not utilized.

The federal net operating loss carryforwards are limited to 80% of taxable income generated in a given year and carry forward indefinitely.

At December 31, 2023, we had federal and state research and development tax credit carryforwards of approximately $23.3 million and $1.6 million, respectively.

These carryforwards will expire between 2023 and 2042 if not used by us to reduce income taxes payable in future periods.

These carryforwards will expire between 2024 and 2043, if not utilized.

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.

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Other income (expense) 6,626 5,804 4,326 2,937 2,687 1,231 (296) 328

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)

Total other (expense) income (1,891) (8,718) 44,980 185,996 1,194 6,501 (4,168) (5,836)

(Loss) income before income taxes (31,512) (64,911) (16,153) 155,495 (27,344) (39,662) (47,641) (34,479)

Income tax (benefit) expense (842) (2,887) (20,431) 26,359 (136) 194 33 (28)

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

Net (loss) income (30,670) (62,024) 4,278 129,136 (27,208) (39,856) (47,674) (34,451)

Net (loss) income attributable to noncontrolling interest — — — — (1) (3) 12 (11)

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

Net (loss) income attributable to Schrödinger stockholders $ (30,670) $ (62,024) $ 4,278 $ 129,136 $ (27,207) $ (39,853) $ (47,686) $ (34,440)

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

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Drug discovery contribution 516 935 605 766 574 596 439 341

Total drug discovery 9,024 12,313 8,458 15,582 7,606 5,570 5,732 5,787

Total drug discovery revenue 5,471 13,665 5,837 32,569 9,024 12,313 8,458 15,582

Total revenues $ 74,126 $ 42,569 $ 35,189 $ 64,782 $ 56,843 $ 36,980 $ 38,469 $ 48,663

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(in thousands)

Depreciation and amortization:

Depreciation and

amortization:

Cost of revenues:

Software products and services $ 124 $ 109 $ 101 $ 112 $ 113 $ 106 $ 118 $ 99

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

Drug discovery $ 83 $ 110 $ 130 $ 116 $ 97 $ 117 $ 127 $ 112

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General and administrative $ 286 $ 291 $ 268 $ 874 $ 393 $ 399 $ 412 $ 371

Total depreciation and amortization expense

Total depreciation and amortization

$ 1,354 $ 1,273 $ 1,165 $ 1,760 $ 1,142 $ 1,107 $ 1,126 $ 969

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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 over 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 ratably over the term of the contract.

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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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.

Milestone payments typically increase in magnitude as a program advances.

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Deferred revenue consists of the unearned portion of customer billings, which is recognized as revenue in accordance with our revenue recognition policy, as well as the unearned portion of unbilled collaboration milestones that are deemed probable in advance of actual achievement.

Deferred revenue balances have fluctuated based on the timing of sales, shifts in product mix, fluctuations to the number and size of milestones that were deemed probable in advance of actual achievement, and the measurement of progress toward completion for service projects.

Deferred revenue balances have fluctuated based on the measurement of progress toward completion for service projects, the timing of sales, shifts in product mix, and fluctuations to the number and size of milestones that were deemed probable in advance of actual achievement.

Quarterly Gross Margin Trends

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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.

Quarterly 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 Morphic and Structure Therapeutics, and, to a lesser degree, interest income.

Segment Information

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Certain cost items are not allocated to our reportable segments.

These cost items primarily consist of compensation and general operational expenses associated with our research and development, sales and marketing, and general and administrative activities.

These cost items primarily consist of non-drug discovery program related compensation and general operational expenses associated with our research and development, sales and marketing, and general and administrative activities.

These costs are incurred by both segments and, due to the integrated nature of our software and drug discovery segments, any allocation methodology would be arbitrary and provide no meaningful analysis.

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General and administrative (99,148) (90,825)

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

Gain on equity investment

147,213 11,825

Change in fair value 53,461 (18,084)

Interest 3,950 1,057

Income taxes (2,199) (63)

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

Consolidated net income (loss)

$ 40,720 $ (149,189)

Liquidity, Capital Resources and Funding Requirements

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As of December 31, 2023, we had an accumulated deficit of $338.4 million.

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, 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, 2023, no securities had been sold under the Form S-3.

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.

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

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.

In May 2023, we entered into a sales agreement with Leerink Partners LLC (formerly SVB Securities LLC), or Leerink Partners, as sales agent, with respect to an at-the-market offering program, or the ATM, under which we could offer and sell, from time to time pursuant to our Form S-3, shares of common stock, having an aggregate offering price of up to $250.0 million, through Leerink Partners.

During the three months ended December 31, 2023, no shares of common stock were sold under the ATM and as of December 31, 2023, we had $250.0 million of common stock remaining available for sale under the ATM.

As of December 31, 2023, we had cash, cash equivalents, restricted cash, and marketable securities of $468.8 million.

We believe our existing cash, cash equivalents, and marketable securities as of December 31, 2023 will be sufficient to fund our operating expenses and capital expenditure requirements through at least the next 24 months.

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.

The potential for these distributions, and the amounts which we may be entitled to receive, are difficult to predict due to the inherent uncertainty of the events which may trigger such distributions.

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 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.

With respect to our proprietary drug discovery 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, 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.

Our contractual obligations as of December 31, 2023 include lease obligations of $195.5 million, consisting of our continuing rent obligations through December 2037, primarily for our offices located in New York, New York for $145.4 million, Cambridge, Massachusetts for $16.4 million and Framingham, Massachusetts for $11.3 million, which expire in December 2037, June 2032 and March 2033, respectively.

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

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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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.

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 royalty obligations.

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

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Net cash used in operating activities $ (136,733) $ (119,683)

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

Net cash provided by investing activities 193,034 90,023

Net cash provided by financing activities 9,048 2,110

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

Net increase (decrease) in cash and cash equivalents and restricted cash $ 65,349 $ (27,550)

Operating activities

During the year ended December 31, 2023, operating activities used approximately $136.7 million in cash, due to a $147.2 million gain from equity investments, of which the cash received is included in investing activities , $53.5 million of non-cash gain on changes in fair value, $22.4 million in changes in our operating assets and liabilities, and $2.1 million of non-cash operating expenses.

These items are offset by a net income of $40.7 million, including depreciation and investment accretion costs and $47.8 million in stock-based compensation.

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.

Investing activities

During the year ended December 31, 2023, investing activities provided approximately $193.0 million of cash, consisting of $147.2 million cash distributions received, on account of our equity investment in Nimbus, from Nimbus in connection with Takeda’s acquisition of Nimbus Lakshmi, Inc., a wholly-owned subsidiary of Nimbus, and its TYK2 inhibitor NDI-034858 and $63.3 million provided by marketable securities, net of purchases.

These items are partially offset by $13.4 million in cash used for purchases of property and equipment, $4.1 million used for purchases of equity investments in Structure Therapeutics.

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 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

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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 certain 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.

To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we perform the following five steps:

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

In accordance with Topic 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.

To determine revenue recognition for arrangements that we determine are within the scope of Topic 606, we perform the following five steps:

(i) identify the contract(s) with a customer;

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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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Software performance obligations and transaction price allocation :

At contract inception, we assess the goods or services promised within each contract that falls under the scope of ASC 606 to identify distinct performance obligations, which requires significant judgment based on the nature of each transaction.

At contract inception, we assess the goods or services promised within each contract that falls under the scope of Topic 606 to identify distinct performance obligations, which requires significant judgment based on the nature of each transaction.

We allocate the transaction price to each distinct performance obligation on an SSP basis.

16 unchanged sentences

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