Schrodinger, Inc. 10-K

Item 8. Financial Statements and Supplementary Data. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Reports of Independent Registered Public Accounting Firm F- 2 Consolidated Balance Sheets as of December 31, 2023 and 2022 F- 5 Consolidated Statements of Operations for the Years ended December 31, 2023, 2022, and 2021 F- 6 Consolidated Statements of Comprehensive Income (Loss) for the Years ended December 31, 2023, 2022, and 2021 F- 7 Consolidated Statements of Stockholders’ Equity for the Years ended December 31, 2023, 2022, and 2021 F- 8 Consolidated Statements of Cash Flows for the Years ended December 31, 2023, 2022, and 2021 F- 9 Notes to Consolidated Financial Statements F- 10 F-1 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Schrödinger, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Schrödinger, Inc. and subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 28, 2024 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Identification of performance obligations in complex or unusual revenue arrangements As discussed in Note 3(a) to the consolidated financial statements, the Company reported on-premise software revenue of $104,511 thousand and hosted software revenue of $20,381 thousand for the year ended December 31, 2023. As discussed in Note 3(d), the Company’s contracts with customers often include promises to transfer multiple software products and services, including training, professional services, technical support services, and rights to unspecified updates. At contract inception, the Company assesses the products and services promised within each contract to determine distinct performance obligations that should be accounted for separately. We identified the determination of distinct performance obligations in complex or unusual revenue arrangements as a critical audit matter. There was subjective auditor judgment in evaluating whether promised products and services in F-2 Table of Contents complex or unusual revenue arrangements are separate performance obligations or inputs into a combined performance obligation. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the revenue process, including controls related to the determination of distinct performance obligations. For a selection of complex or unusual revenue arrangements, we evaluated whether the performance obligations identified by the Company were capable of being distinct in the context of the contract by obtaining an understanding of the Company’s product and service offerings, obtaining and inspecting contracts, and evaluating the application of the revenue recognition accounting guidance for the selected contract. /s/ KPMG LLP We have served as the Company’s auditor since 2010. Portland, Oregon February 28, 2024 F-3 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Schrödinger, Inc.: Opinion on Internal Control Over Financial Reporting We have audited Schrödinger, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively, the consolidated financial statements), and our report dated February 28, 2024 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ KPMG LLP Portland, Oregon February 28, 2024 F-4 Table of Contents SCHRÖDINGER, INC. AND SUBSIDIARIES Consolidated Balance Sheets (in thousands, except for share and per share amounts) Assets December 31, 2023 December 31, 2022 Current assets: Cash and cash equivalents $ 155,315 $ 90,474 Restricted cash 5,751 5,243 Marketable securities 307,688 360,613 Accounts receivable, net of allowance for doubtful accounts of $ 220 and $ 125 65,992 55,953 Unbilled and other receivables, net for allowance for unbilled receivables of $ 100 and $ 100 23,124 13,137 Prepaid expenses 9,926 8,569 Total current assets 567,796 533,989 Property and equipment, net 23,325 14,244 Equity investments 83,251 25,683 Goodwill 4,791 4,791 Intangible assets, net — 587 Right of use assets - operating leases 117,778 105,982 Other assets 6,014 3,311 Total assets $ 802,955 $ 688,587 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 16,815 $ 9,470 Accrued payroll, taxes, and benefits 31,763 24,882 Deferred revenue 56,231 57,931 Lease liabilities - operating leases 16,868 11,006 Other accrued liabilities 11,996 5,510 Total current liabilities 133,673 108,799 Deferred revenue, long-term 9,043 25,598 Lease liabilities - operating leases, long-term 111,014 105,485 Other liabilities, long-term 667 800 Total liabilities 254,397 240,682 Commitments and contingencies (Note 7) Stockholders’ equity: Preferred stock, $ 0.01 par value. Authorized 10,000,000 shares; zero shares issued and outstanding at December 31, 2023 and December 31, 2022, respectively — — Common stock, $ 0.01 par value. Authorized 500,000,000 shares; 62,977,316 and 62,163,739 shares issued and outstanding at December 31, 2023 and December 31, 2022, respectively 630 622 Limited common stock, $ 0.01 par value. Authorized 100,000,000 shares; 9,164,193 shares issued and outstanding at December 31, 2023 and December 31, 2022, respectively 92 92 Additional paid-in capital 885,973 828,700 Accumulated deficit ( 338,418 ) ( 379,138 ) Accumulated other comprehensive loss 281 ( 2,382 ) Total stockholders’ equity of Schrödinger stockholders 548,558 447,894 Noncontrolling interest — 11 Total stockholders’ equity 548,558 447,905 Total liabilities and stockholders’ equity $ 802,955 $ 688,587 See accompanying notes to consolidated financial statements. F-5 Table of Contents SCHRÖDINGER, INC. AND SUBSIDIARIES Consolidated Statements of Operations (in thousands, except for share and per share amounts) Year Ended December 31, 2023 2022 2021 Revenues: Software products and services $ 159,124 $ 135,578 $ 113,236 Drug discovery 57,542 45,377 24,695 Total revenues 216,666 180,955 137,931 Cost of revenues: Software products and services 29,514 29,576 26,495 Drug discovery 46,460 50,357 45,816 Total cost of revenues 75,974 79,933 72,311 Gross profit 140,692 101,022 65,620 Operating expenses: Research and development 181,766 126,372 90,904 Sales and marketing 37,226 30,642 22,150 General and administrative 99,148 90,825 64,009 Total operating expenses 318,140 247,839 177,063 Loss from operations ( 177,448 ) ( 146,817 ) ( 111,443 ) Other income (expense): Gain (loss) on equity investments 147,213 11,825 ( 1,781 ) Change in fair value 53,461 ( 18,084 ) 11,359 Other income 19,693 3,950 1,057 Total other income (expense) 220,367 ( 2,309 ) 10,635 Income (loss) before income taxes 42,919 ( 149,126 ) ( 100,808 ) Income tax expense 2,199 63 411 Net income (loss) 40,720 ( 149,189 ) ( 101,219 ) Net income (loss) attributable to noncontrolling interest — ( 3 ) ( 826 ) Net income (loss) attributable to Schrödinger common and limited common stockholders $ 40,720 $ ( 149,186 ) $ ( 100,393 ) Net income (loss) per share attributable to Schrödinger common and limited common stockholders, basic: $ 0.57 $ ( 2.10 ) $ ( 1.42 ) Weighted average shares used to compute net income (loss) per share attributable to Schrödinger common and limited common stockholders, basic: 71,776,301 71,173,419 70,594,950 Net income (loss) per share attributable to Schrödinger common and limited common stockholders, diluted: $ 0.54 $ ( 2.10 ) $ ( 1.42 ) Weighted average shares used to compute net income (loss) per share attributable to Schrödinger common and limited common stockholders, diluted: 74,986,816 71,173,419 70,594,950 See accompanying notes to consolidated financial statements. F-6 Table of Contents SCHRÖDINGER, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Loss) (in thousands) Year Ended December 31, 2023 2022 2021 Net income (loss) attributable to Schrödinger common and limited common stockholders $ 40,720 $ ( 149,186 ) $ ( 100,393 ) Changes in market value of investments, net of tax: Unrealized gain (loss) on marketable securities 2,663 ( 1,731 ) ( 968 ) Comprehensive income (loss) $ 43,383 $ ( 150,917 ) $ ( 101,361 ) See accompanying notes to consolidated financial statements. F-7 Table of Contents SCHRÖDINGER, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders’ Equity (in thousands, except for share amounts) Common stock Limited common stock Additional paid-in Accumulated Accumulated other comprehensive Non controlling Total stockholders’ Shares Amount Shares Amount capital deficit income (loss) interest equity Balance at December 31, 2020 60,713,534 $ 607 9,164,193 $ 92 $ 752,558 $ ( 129,559 ) $ 317 $ 4 $ 624,019 Change in unrealized loss on marketable securities — — — — — — ( 968 ) — ( 968 ) Issuances of common stock upon stock option exercises 1,120,981 11 — — 7,916 — — — 7,927 Stock-based compensation — — — — 26,490 — — — 26,490 Contributions by non-controlling interest — — — — — 836 836 Net loss — — — — — ( 100,393 ) — ( 826 ) ( 101,219 ) Balance at December 31, 2021 61,834,515 618 9,164,193 92 786,964 ( 229,952 ) ( 651 ) 14 557,085 Change in unrealized loss on marketable securities — — — — — — ( 1,731 ) — ( 1,731 ) Issuances of common stock upon stock option exercises 329,224 4 — — 2,106 — — — 2,110 Stock-based compensation — — — — 39,630 — — — 39,630 Net loss — — — — — ( 149,186 ) — ( 3 ) ( 149,189 ) Balance at December 31, 2022 62,163,739 622 9,164,193 92 828,700 ( 379,138 ) ( 2,382 ) 11 447,905 Change in unrealized gain on marketable securities 2,663 2,663 Reclassification of non-controlling interest ( 11 ) ( 11 ) Issuances of common stock upon stock option exercises 800,336 8 — — 9,432 — — — 9,440 Issuance of common stock upon vesting of restricted stock units 13,241 — — — — — — — Stock-based compensation — — — — 47,841 — — — 47,841 Net income — — — — — 40,720 — — 40,720 Balance at December 31, 2023 62,977,316 $ 630 9,164,193 $ 92 $ 885,973 $ ( 338,418 ) $ 281 $ — $ 548,558 See accompanying notes to consolidated financial statements. F-8 Table of Contents SCHRÖDINGER, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, 2023 2022 2021 Cash flows from operating activities: Net income (loss) $ 40,720 $ ( 149,189 ) $ ( 101,219 ) Adjustments to reconcile net income (loss) to net cash used in operating activities: (Gain) loss on equity investments ( 147,213 ) ( 11,825 ) 1,781 Noncash revenue from equity investments — — ( 107 ) Fair value adjustments ( 53,461 ) 18,084 ( 11,359 ) Depreciation and amortization 5,552 4,344 2,847 Stock-based compensation 47,841 39,630 26,490 Noncash research and development expenses — — 811 Noncash investment (accretion) amortization ( 7,761 ) 629 5,270 Loss on disposal of property and equipment 142 19 140 (Increase) decrease in assets, net of acquisition: Accounts receivable, net ( 10,039 ) ( 23,697 ) ( 321 ) Unbilled and other receivables ( 9,987 ) ( 4,253 ) ( 5,187 ) Reduction in the carrying amount of right of use assets - operating leases 7,766 7,287 5,799 Prepaid expenses and other assets ( 8,462 ) ( 7,067 ) ( 1,121 ) Increase (decrease) in liabilities, net of acquisition: Accounts payable 7,321 1,179 ( 411 ) Accrued payroll, taxes, and benefits 6,881 6,477 6,405 Deferred revenue ( 18,256 ) ( 1,903 ) ( 1,028 ) Lease liabilities - operating leases ( 3,694 ) 1,900 ( 2,949 ) Other accrued liabilities 5,917 ( 1,298 ) 3,490 Net cash used in operating activities ( 136,733 ) ( 119,683 ) ( 70,669 ) Cash flows from investing activities: Purchases of property and equipment ( 13,403 ) ( 8,014 ) ( 7,167 ) Purchases of equity investments ( 4,125 ) ( 600 ) ( 3,700 ) Distribution from equity investment 147,213 11,825 375 Proceeds from sale of equity investments — — 15,735 Acquisition, net of acquired cash — ( 6,427 ) — Purchases of marketable securities ( 320,624 ) ( 271,472 ) ( 414,802 ) Proceeds from maturity of marketable securities 383,973 364,711 392,747 Net cash provided by (used in) investing activities 193,034 90,023 ( 16,812 ) Cash flows from financing activities: Issuances of common stock upon stock option exercises 9,440 2,110 7,927 Payment of offering costs ( 373 ) — — Principal payments on finance leases ( 19 ) — — Contribution by noncontrolling interest — — 25 Net cash provided by financing activities 9,048 2,110 7,952 Net increase (decrease) in cash and cash equivalents and restricted cash 65,349 ( 27,550 ) ( 79,529 ) Cash and cash equivalents and restricted cash, beginning of year 95,717 123,267 202,796 Cash and cash equivalents and restricted cash, end of year $ 161,066 $ 95,717 $ 123,267 Supplemental disclosure of cash flow and noncash information Cash paid for income taxes $ 2,828 $ 787 $ 448 Supplemental disclosure of non-cash investing and financing activities Purchases of property and equipment in accounts payable 192 169 705 Purchases of property and equipment in accrued liabilities 457 293 — Acquisition of right of use assets - operating leases, contingency resolution 514 1,513 — Acquisition of right of use assets - operating leases 15,085 34,763 71,054 Acquisition of lease liabilities - operating leases 15,085 34,430 71,054 Acquisition of right of use assets in exchange for lease liabilities - finance leases 279 — — See accompanying notes to consolidated financial statements. F-9 Table of Contents SCHRÖDINGER, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements For the years ended December 31, 2023, 2022, and 2021 (in thousands, except for share and per share amounts and note 3(c)) (1) Description of Business Schrödinger, Inc. (the “Company”) has developed a differentiated, physics-based computational platform that enables discovery of high-quality, novel molecules for drug development and materials applications more rapidly and at a lower cost, compared to traditional methods. The Company's software platform is licensed by biopharmaceutical and industrial companies, academic institutions, and government laboratories around the world. The Company is also applying its computational platform to advance a broad pipeline of drug discovery programs in collaboration with leading biopharmaceutical companies. In addition, the Company uses its computational platform to discover novel molecules for its pipeline of proprietary drug discovery programs, which the Company is advancing through preclinical and clinical development. (2) Significant Accounting Policies (a) Accounting Pronouncements Not Yet Adopted In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2023-07, Segment Reporting (Topic 280) — Improvements to Reportable Segment Disclosures, which improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. This standard is effective for annual periods beginning after December 15, 2023, and interim periods within annual periods beginning after December 15, 2024, with early adoption permitted. The Company has not yet adopted ASU 2023-07 and is still evaluating the impact of the adoption on its consolidated financial statements. In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740) — Improvements to Income Tax Disclosures , which requires public business entities to disclose specific categories in the tax rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. This standard is effective for annual periods beginning after December 15, 2024, and interim periods within annual periods beginning after December 15, 2025, on a prospective basis, with early adoption permitted. The Company has not yet adopted ASU 2023-09 and is still evaluating the impact of the adoption on its consolidated financial statements. (b) Basis of Presentation and Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the assumptions used in the allocation of revenue and estimates regarding the progress of completing performance obligations under collaboration agreements. Actual results could differ from those estimates, and such differences may be material to the consolidated financial statements. (c) Principles of Consolidation The Company’s consolidated financial statements include the accounts of Schrödinger, Inc., its wholly owned subsidiaries, and its variable interest entity. All intercompany balances and transactions have been eliminated in consolidation. The functional currency for foreign entities is the United States dollar. The Company accounts for investments over which it has significant influence, but not a controlling financial interest, using the equity method. (d) Cash and Cash Equivalents and Marketable Securities and Restricted Cash Included in cash and cash equivalents were cash equivalents of $ 85,497 and $ 78,066 as of December 31, 2023 and 2022, respectively, which consisted of money market funds and certificates of deposit, and are stated at cost, which approximates market value. The Company classifies all highly liquid investments with an original maturity of 90 days or F-10 Table of Contents less to be cash equivalents. The Company classifies all marketable securities, which consist of fixed income securities, as available for sale securities. At times, cash balances held at financial institutions were in excess of the Federal Deposit Insurance Corporation’s insured limits; however, the Company primarily places its cash with high-credit quality financial institutions. Restricted cash consists of letters of credit held with the Company’s financial institution related to facility leases and is classified as current in the Company’s balance sheets based on the maturity of the underlying letters of credit. Additionally, funds received from certain grants are restricted as to their use and are therefore classified as restricted cash. (e) Accounts Receivable Accounts receivable are stated at original invoice amount less an allowance for doubtful accounts. Management estimates the allowance for doubtful accounts by evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. Account balances are considered delinquent if payment is not received by the due date. Accounts receivable are written off when deemed uncollectible. Recovery of accounts receivable previously written off is recorded when received. Changes in the balance of accounts deemed uncollectible were deemed immaterial as of December 31, 2023 and 2022. Interest is not charged on accounts receivable. (f) Fair Value of Financial Instruments The carrying values of cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value due to their short maturities. (g) Property and Equipment Property and equipment are stated at cost. The Company did not capitalize any interest during 2023 and 2022. Maintenance and repairs are expensed as incurred. Depreciation is calculated using the straight‑line method over the estimated useful lives of the assets, which range from 3 to 10 years. Amortization of leasehold improvements is calculated using the straight‑line method over the remaining life of the lease or the useful life of the asset, whichever is shorter. Property and equipment are reviewed for impairment as discussed below under Accounting for the Impairment of Long‑Lived Assets. (h) Goodwill Goodwill represents the excess purchase price over the fair value of net assets acquired which is not allocable to separately identifiable intangible assets. Other identifiable intangible assets are separately recognized if the intangible asset is obtained through contractual or other legal right or if the intangible asset can be sold, transferred, licensed or exchanged. Goodwill is not amortized but tested for impairment at least annually, and more frequently if events or circumstances indicate the carrying amount more likely than not exceeds the fair value. The Company has the option to qualitatively or quantitatively assess its goodwill for impairment. The Company tests its goodwill for impairment on October 1 of each year. In 2023, the Company evaluated its goodwill using a qualitative process. If the qualitative factors determine that it is more likely than not that the fair value exceeds the carrying amount, goodwill is not impaired. If the qualitative assessment determines it is more likely than not the fair value is less than the carrying amount, the Company would further evaluate for potential impairment. The Company has deemed its goodwill not impaired for the year ended December 31, 2023. (i) Accounting for the Impairment of Long‑Lived Assets Long-lived assets, such as property and equipment and intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for potential impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that carrying value exceeds fair value. Fair value is determined using various valuation F-11 Table of Contents techniques, including discounted cash flow models, quoted market values, and third-party independent appraisals, depending on the nature of the asset. No impairment was identified for the years ended December 31, 2023, 2022, and 2021. (j) Warranties The Company typically warrants that its products will perform in a manner consistent with the product specifications provided to the customer for a period of 30 days. Historically, the Company has not been required to make payments under these obligations. Therefore, no liabilities for such obligations are presented in the consolidated financial statements. (k) Concentrations Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade receivables and contract assets, which represent contracted unbilled receivables. The Company does not require customers to provide collateral to support accounts receivable. If deemed necessary, credit reviews of significant new customers may be performed prior to extending credit. The determination of a customer’s ability to pay requires judgment, and failure to collect from a customer can adversely affect revenue, cash flows, and results of operations. As of December 31, 2023, two customers accounted for 15 % and 11 % of total accounts receivable, respectively. As of December 31, 2022, one customer accounted for 26 % of total accounts receivable. As of December 31, 2023, two customers accounted for 42 % and 22 % of total contract assets, respectively. As of December 31, 2022, two customers accounted for 23 % and 17 % of total contract assets, respectively. For the year ended December 31, 2023, two customers accounted for 26 % and 11 % of total revenues, respectively. For the year ended December 31, 2022, one customer accounted for 16 % of total revenues. For the year ended December 31, 2021, one customer accounted for more than 14 % of total revenues. (l) Royalties Royalties represent a component of cost of revenues and consist of royalties paid to owners of intellectual property used in or bundled with the Company’s software. Generally, royalties are incurred and recorded at the time a customer enters into a binding purchase agreement, although some royalty agreements are based instead on cash collections. Royalty expense was $ 13,349 , $ 9,191 , and 9,826 for the years ended December 31, 2023, 2022, and 2021, respectively. (m) Software Development Costs Costs to develop new software products and substantial enhancements to existing software products are expensed as incurred. Historically, the Company has not capitalized any software development costs because the software development process was essentially completed concurrent with the establishment of technological feasibility. (n) Research and Development and Advertising Research and development and advertising costs are expensed as incurred. The Company did not incur any significant advertising costs in 2023, 2022, and 2021. (o) Stock‑Based Compensation The Company calculates stock‑based compensation expense utilizing fair value–based methodologies and recognizes expense over the vesting period of such awards. For performance-based restricted stock units, the Company records stock-based compensation expense with a cumulative catch-up at the time when performance conditions are considered probable of achievement, and on a straight-line basis over the remaining period for which the performance criteria are expected to be completed. F-12 Table of Contents (p) Commissions Commissions represent a component of sales and marketing expense and consist of the variable compensation paid to the Company’s sales representatives. Generally, sales commissions are earned and recorded as expense at the time that a customer has entered into a binding purchase agreement. Commissions paid to sales representatives are recoverable only in the case that the Company cannot collect against any invoiced fee associated with a sales order. Commission expense was $ 1,636 , $ 2,291 , and $ 1,829 in 2023, 2022, and 2021, respectively. (q) Income Taxes The Company records deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of the assets and liabilities. Deferred tax assets are reduced by a valuation allowance when it is estimated to become more likely than not that a portion of the deferred tax assets will not be realized. Accordingly, the Company currently maintains a full valuation allowance against existing net deferred tax assets. The Company recognizes the effect of income tax positions only if such positions are deemed “more likely than not” capable of being sustained. Interest and penalties accrued on unrecognized tax benefits are included within income tax expense in the consolidated financial statements. (r) Comprehensive Income (Loss) Comprehensive income (loss) includes net income (loss) and changes in equity related to changes in unrealized gains or losses on marketable securities. (s) Equity Investments In the normal course of business, the Company has entered, and may continue to enter, into collaboration agreements with companies to perform drug design services for such companies in exchange for equity ownership stakes in such companies. If it is determined that the Company has control over the investee, the investee is consolidated in the financial statements. If the investee is consolidated with the Company and less than 100% of the equity is owned by the Company, the Company will present non-controlling interest to represent the portion of the investee owned by other investors. If it is determined that the Company does not have control over the investee, the Company evaluates the investment for the ability to exercise significant influence. Equity investments over which the Company has significant influence may be accounted for under equity method accounting in accordance with Accounting Standards Codification ("ASC") Topic 323, Equity Method and Joint Ventures . If it is determined that the Company does not have significant influence over the investee, and there is no readily determinable fair value for the investment, the equity investment may be accounted for at cost less impairment, in accordance with ASC Topic 321 ("Topic 321"), Equity Securities . For further information regarding the Company’s equity investments, see Note 6, Fair Value Measurements and Note 13, Equity Investments. (t) Net Income (Loss) per Share Attributable to Common and Limited Common Stockholders The outstanding equity of the Company consists of common stock and limited common stock. Under the Company’s certificate of incorporation, the rights of the holders of common stock and limited common stock are identical, except with respect to voting and conversion. Holders of limited common stock are precluded from voting such shares in any election of directors or on the removal of directors. Limited common stock may be converted into common stock at any time at the option of the stockholder. Undistributed earnings allocated to the participating securities are subtracted from net income in determining net income (loss) attributable to common and limited common stockholders. Basic net income (loss) per share is computed by dividing net income (loss) attributable to common and limited common stockholders by the weighted-average number of shares of common and limited common stock outstanding during the period. For the calculation of diluted net income, net income attributable to common and limited common stockholders for basic net income is adjusted by the effect of dilutive securities, including awards under the Company’s equity F-13 Table of Contents compensation plans. Diluted net income per share attributable to common and limited common stockholders is computed by dividing the resulting net income attributable to common and limited common stockholders by the weighted-average number of fully diluted shares of common and limited common stock outstanding. (3) Revenue Recognition Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for promised goods or services. The Company’s performance obligations are satisfied either over time or at a point in time, which can result in different revenue recognition patterns. The following table illustrates the timing of the Company’s revenue recognition patterns: Year Ended December 31, 2023 2022 2021 Software products and services – point in time 49.1 % 47.3 % 55.5 % Software products and services – over time 24.3 27.6 26.6 Drug Discovery – point in time 12.7 8.8 3.3 Drug Discovery – over time 13.9 16.3 14.6 (a) Software Products and Services The Company enters into contracts that can include various combinations of licenses, products and services, some of which are distinct and are accounted for as separate performance obligations. For contracts with multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation on a relative standalone selling price (“SSP”) basis. Revenue is recognized net of any sale and value-added taxes collected from customers and subsequently remitted to governmental authorities. The Company’s software business derives revenue from five sources: (i) on-premise software license fees, (ii) hosted software subscription fees, (iii) software maintenance fees, (iv) professional services fees, and (v) contributions. On-premise software. The Company’s on-premise software license arrangements grant customers the right to use its software on their own in-house servers or their own cloud instances for a specified term, typically for one year , though in recent years, the Company has entered into a small number of large multi-year on-premise software license agreements. The Company recognizes 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. In instances where the timing of delivery differs from the timing of invoicing, the Company considers whether a significant financing component exists. The Company has elected the practical expedient to not assess for significant financing where the term is less than one year. The Company’s updates and upgrades are not integral to maintaining the utility of the software licenses. Payments typically are received upfront or annually. Hosted software. Hosted software revenue consists primarily of fees to provide the Company’s customers with hosted licenses, which allows these customers to access the Company's 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, though in recent years, the Company has entered into a small number of large multi-year hosted software license agreements. 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 the Company's statement of financial position until the period in which it is recognized. Software maintenance . Software maintenance includes technical support, updates, and upgrades related to the Company's on-premise software licenses. Software maintenance revenue is recognized ratably over the term of the arrangement. Software maintenance activities are performed in connection with the use of the Company's on-premise software, and may fluctuate from period to period. F-14 Table of Contents Professional services . Professional services include training, technical setup, installation or assisting customers with modeling services, where the Company uses its software to perform tasks such as virtual screening on behalf of the Company’s customers. These services are generally not related to the core functionality of the Company’s 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. 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 annually from June 2020 through June 2022 and upon extension of the agreement in August 2023, when invoiced, in accordance with ASC Topic 958, Not-for-Profit Entities as the agreement is not an exchange transaction. The agreement with Gates Ventures, LLC initially covered the period from June 23, 2020 through June 22, 2023 for total consideration of up to $ 3,000 . The Company recognized revenue of $ 1,000 upon entry into the agreement and $ 1,000 upon each of the first and second anniversary of the agreement. During the period ended September 30, 2023, the agreement was extended through August 13, 2026 and provides for total additional consideration of up to $ 6,000 . The Company recognized revenue of $ 1,800 upon extension of the agreement. As of December 31, 2023, the Company had no deferred revenue balance related to this agreement. As of December 31, 2023 and 2022, the Company had no accounts receivable related to this agreement. The following table presents the revenue recognized from the sources of software products and services revenue: Year Ended December 31, 2023 2022 2021 On-premise software $ 104,511 $ 84,487 $ 74,598 Hosted software 20,381 14,890 11,076 Software maintenance 23,066 19,996 17,294 Professional services 9,366 15,205 9,268 Revenue from contracts with customers 157,324 134,578 112,236 Software contribution 1,800 1,000 1,000 Total software revenue $ 159,124 $ 135,578 $ 113,236 (b) Drug Discovery Drug discovery services. Revenue from drug discovery and collaboration services contracts is recognized either over time or at a point in time, typically by using costs incurred, hours expended to measure progress, or based on the achievement of milestones. Payments for services are generally due upfront at the start of a contract, upon achieving milestones stated in a contract, or upon consumption of resources. Services may at times include variable consideration, and the Company has estimated the amount of consideration that is variable using the most likely amount method. The Company evaluates milestones on a case-by-case basis, including whether there are factors outside the Company’s control that could result in a significant reversal of revenue, and the likelihood and magnitude of a potential reversal. If achievement of a milestone is not considered probable, the Company constrains (reduces) variable consideration to exclude the milestone payment until it is probable to be achieved. Upon removal of the constraint on variable consideration, revenue may be recognized at a point in time or over time by applying the allocation guidance of ASC Topic 606, Revenue from Contracts with Customers ("Topic 606"). As of December 31, 2023, 2022, and 2021, milestones not yet achieved that were determined to be probable of achievement totaled $ 350 , $ 4,000 , and $ 2,250 , respectively, and $ 350 , $ 3,939 , and $ 2,250 of those milestones were recognized as revenue for the years ended December 31, 2023, 2022, and 2021, respectively. F-15 Table of Contents Drug discovery contribution revenue . Drug discovery 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. The initial agreement began in November 2021 and expired in September 2023. In September 2023, the Company entered into a new agreement with the Bill and Melinda Gates Foundation to perform services aimed at accelerating drug discovery in women's health that expires in October 2025. Revenue is recognized as conditions are met in accordance with ASC Topic 958, Not-for-Profit Entities . As of December 31, 2023 and 2022, the Company had deferred revenue balances related to these agreements of $ 1,581 and $ 1,718 , respectively. The following table presents the revenue recognized from the sources of drug discovery revenue: Year Ended December 31, 2023 2022 2021 Drug discovery services revenue from contracts with customers $ 54,720 $ 43,427 $ 24,584 Drug discovery contribution 2,822 1,950 111 Total drug discovery revenue $ 57,542 $ 45,377 $ 24,695 (c) Collaboration and License Agreement On November 22, 2020, the Company entered into an exclusive, worldwide collaboration and license agreement with Bristol-Myers Squibb Company (“BMS”), pursuant to which the Company and BMS have agreed to collaborate in the discovery, research and preclinical development of new small molecule compounds for disease indications in oncology, neurology, and immunology therapeutics areas. Under the agreement, the Company was initially responsible, at its own cost and expense, for the discovery of small molecule compounds directed to five specified biological targets pursuant to a mutually agreed research plan for each such target. The initial targets included HIF-2 alpha and SOS1/KRAS, which were two of the Company’s proprietary programs. In November 2021, the Company 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 the Company. In September 2022, BMS elected not to proceed with further development of another target and all rights to this program reverted to the Company, which increased revenue recognition in the third quarter of 2022 due to the accelerated completion of the Company's obligations related to the program. In December 2022, the Company and BMS entered into an amendment to the agreement to include an additional target in neurology on terms similar to the original agreement. In September 2023, BMS elected not to proceed with further development of two related oncology programs and all rights to these programs reverted to the Company, which increased revenue recognition in the third quarter of 2023 due to the accelerated completion of the Company's obligations related to those programs. Once a development candidate meeting specified criteria for a target under the agreement has been identified by the Company, BMS will be solely responsible for the further development, manufacturing and commercialization of such development candidate at its own cost and expense. Under the terms of the agreement, as amended, BMS paid the Company an initial upfront fee payment of $ 55.0 million in November 2020 and an additional upfront payment in December 2022. The Company also is eligible to receive up to $ 1.5 billion in total milestone payments across the potential currently targets subject to the collaboration, consisting of: a) up to $ 585.0 million in milestone payments per oncology target, consisting of $ 360.0 million in the aggregate for the achievement of certain specified research, development, and regulatory milestones and $ 225.0 million in the aggregate for the achievement of certain specified commercial milestones; and b) up to $ 489.0 million in milestone payments per neurology and immunology target, consisting of $ 264.0 million in the aggregate for the achievement of certain specified research, development, and regulatory milestones and $ 225.0 million in the aggregate for the achievement of certain specified commercial milestones. As of December 31, 2023, the Company has recognized $ 25.0 million in revenue related to milestones under this agreement. The Company is also entitled to a tiered percentage royalty on annual net sales ranging from mid-single digits to low-double digits, subject to certain specified reductions. Royalties are payable by BMS on a licensed product-by-licensed product and country-by-country basis until the later of the expiration of the last valid claim covering the licensed product in such country, expiration of all applicable regulatory exclusivities in such country for such licensed product and the tenth anniversary of the first commercial sale of such licensed product in such country. The Company assessed the collaboration and license agreement in accordance with Topic 606, and concluded that BMS is a customer based on the agreement structure. At inception, the Company identified one performance obligation for F-16 Table of Contents each of the five programs initially covered under the agreement, which includes research activities for each program and a license grant for the underlying intellectual property. The Company determined that the license grant for intellectual property is not separable from the research activities, as the research activities are expected to significantly modify or enhance the license grant over the period of service, and therefore are not distinct in the context of the contract. The Company determined that the transaction price at the onset of the agreement is $ 55.0 million. Additional consideration to be paid to the Company upon the achievement of future milestone payments were excluded from the transaction price as they represent milestone payments that are not considered probable as of the inception date such that there is not a significant risk of revenue reversal. The Company has allocated the transaction price of $ 55.0 million to each performance obligation based on the SSP of each performance obligation at inception, which was determined based on each performance obligation’s estimated SSP. The Company determined the estimated SSP at contract inception of the research activities based on internal estimates of the costs to perform the services, inclusive of a reasonable profit margin. Significant inputs used to determine the total costs to perform the research activities included the length of time required, the internal hours expected to be incurred on the services and the number and costs of various studies that will be performed to complete the research plan. Revenue associated with the research activities is recognized on a proportional performance basis over the period of service for research activities, using input-based measurements of total costs of research incurred to estimate the proportion performed. Progress towards completion is remeasured at the end of each reporting period. During the years ended December 31, 2023, 2022, and 2021, the Company recognized $ 43.2 million, $ 22.1 million, and $ 13.7 million of revenue, respectively, associated with the agreement based on the research activities performed and milestones achieved. As of December 31, 2023 and 2022, there was $ 7.3 million and $ 25.5 million of deferred revenue related to the agreement, which was classified as either current or non-current in the consolidated balance sheet based on the period the services are expected to be performed. There were no outstanding receivables for this collaboration as of December 31, 2023. (d) Significant Judgments Significant judgments and estimates are required under Topic 606. Due to the complexity of certain contracts, the actual revenue recognition treatment required under Topic 606 for the Company’s arrangements may be dependent on contract-specific terms and may vary in some instances. The Company’s contracts with customers often include promises to transfer multiple software products and services, including training, professional services, technical support services, and rights to unspecified updates. Determining whether licenses and services are distinct performance obligations that should be accounted for separately, or are not distinct and therefore should be accounted for together, requires significant judgment. In some arrangements, such as most of the Company’s term-based software license arrangements, the Company has concluded that the licenses and associated services are distinct from each other. In other arrangements, including collaboration services arrangements, the licenses and certain services may not be distinct from each other. The Company’s time-based software arrangements may include multiple software licenses and a right to updates or upgrades to the licensed software products, and technical support. The Company has concluded that such promised goods and services are separate distinct performance obligations. The Company is required to estimate the total consideration expected to be received from contracts with customers, including any variable consideration. For collaborative arrangements, under which the Company is eligible to receive variable consideration in the form of milestones payments, judgment is required to evaluate whether the milestones are considered probable of being achieved. If it is probable that a significant revenue reversal would not occur, the constraint is removed and value of the associated milestone is included in the estimated transaction price using the most likely amount method based on contractual requirements and historical experience. Once the estimated transaction price is established, amounts are allocated to the performance obligations that have been identified. The transaction price is allocated to each separate performance obligation on a relative SSP basis consistent with the allocation objectives of Topic 606. Judgment is required to determine the SSP for each distinct performance obligation. The Company rarely licenses or sells products on a standalone basis, so the Company is required to estimate the range of SSPs for each performance obligation. In instances where the SSP is not directly observable because the Company does not sell the license, product, or service separately, the Company determines the SSP using information that includes historical discounting practices, market conditions, cost-plus analysis, and other observable inputs. The Company typically has more than one SSP for F-17 Table of Contents individual performance obligations due to the stratification of those items by volume of sales, classes of customers and other relevant circumstances. In these instances, the Company may use information such as the size and geographic region of the customer in determining the SSP. Professional service revenue is recognized as costs and hours are incurred, and judgment is required in estimating both the project status and the costs incurred or hours expended. If a group of agreements are so closely related to each other that they are, in effect, part of a single arrangement, such agreements are deemed to be one arrangement for revenue recognition purposes. The Company exercises significant judgment to evaluate the relevant facts and circumstances in determining whether the separate agreements should be accounted for separately or as, in substance, a single arrangement. The Company’s judgments about whether a group of contracts comprises a single arrangement can affect the allocation of consideration to the distinct performance obligations, which could have an effect on results of operations for the periods involved. Judgment is required to determine the total costs to perform research activities, which include the length of time required, the internal hours expected to be incurred on the services, and the number and costs of various studies that may be performed by third-parties to complete the research plan. Generally, the Company has not experienced significant returns or refunds to customers. The Company’s estimates related to revenue recognition may require significant judgment and a change in these estimates could have an effect on the Company’s results of operations during the periods involved. (e) Contract Balances The timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in receivables, contract assets, or contract liabilities (deferred revenue) on the consolidated balance sheets. The Company records a contract asset when revenue is recognized prior to invoicing. A deferred revenue liability is recorded when revenue is expected to be recognized subsequent to invoicing. For the Company’s time-based software agreements, customers are generally invoiced at the beginning of the arrangement for the entire term, though when the term spans multiple years the customers may be invoiced on an annual basis. For certain drug discovery agreements where the milestones are deemed probable in a period prior to when the milestone is achieved, the Company records a contract asset for the full value of the milestone. Contract assets are included in unbilled and other receivables within the consolidated balance sheets and are transferred to receivables when the Company invoices the customer. Contract balances were as follows: As of December 31, 2023 As of December 31, 2022 Contract assets $ 21,107 $ 11,378 Deferred revenue, short-term: Software products and services 44,218 37,085 Drug discovery 12,013 20,846 Deferred revenue, long-term: Software products and services 2,407 2,526 Drug discovery 6,636 23,072 For the years ended December 31, 2023 and 2022, the Company recognized $ 64,120 and $ 60,039 of revenue, respectively, that was included in deferred revenue at the end of the respective preceding periods. All other deferred revenue activity is due to the timing of invoices in relation to the timing of revenue, as described above. The Company expects to recognize as revenue approximately 86 % of its December 31, 2023 deferred revenue balance in the next 12 months and the remainder thereafter. Additionally, contracted but unsatisfied performance obligations that had not yet been billed to the customer or included in deferred revenue were $ 36,357 as of December 31, 2023. F-18 Table of Contents Payment terms and conditions vary by contract type, although terms typically require payment within 30 to 60 days. In instances where the timing of revenue recognition differs from that of invoicing, the Company has determined that its contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company’s products and services, not to facilitate financing arrangements. (f) Deferred Sales Commissions The Company has applied the practical expedient for sales commission expense, as any material compensation paid to sales representatives to obtain a contract relates to a period of one year or less. The Company has not capitalized any costs related to sales commissions. (4) Property and Equipment Property and equipment consisted of the following: As of December 31, 2023 2022 Computers and equipment $ 22,122 $ 20,387 Leasehold improvements 3,787 2,229 Furniture and fixtures 6,230 5,665 Lab equipment 8,757 76 Right of use asset - finance leases 579 — 41,475 28,357 Less accumulated depreciation ( 18,150 ) ( 14,113 ) $ 23,325 $ 14,244 Depreciation expense for 2023, 2022, and 2021 was $ 4,965 , $ 3,831 , and $ 2,847 , respectively, and is included within cost of revenues and research and development, sales and marketing, and general and administrative expenses within the consolidated statements of operations. (5) Business Acquisition On January 14, 2022, the Company used cash on hand to acquire all outstanding shares of XTAL BioStructures, Inc. (“XTAL”), a company that provides structural biology services, including biophysical methods, protein production and purification, and X-ray crystallography. The transaction qualified as a business combination for accounting purposes, which involves application of the acquisition method described in ASC 805, Business Combinations ("Topic 805"). The cash purchase price was approximately $ 7,429 which included $ 6,427 in upfront purchase price, net of cash acquired. The acquisition of XTAL enables the Company to pursue scientific advancements in the field of structural biology, augment its ability to produce high quality target structures for its proprietary drug discovery programs, and expand its offerings to include an advanced and differentiated service that provides customers access to protein structures that have been computationally validated and are ready for structure-based virtual screening and lead optimization, giving rise to expected benefits supporting the amount of acquired goodwill. The following table summarizes the fair values of the assets acquired and liabilities assumed by the Company as of the January 14, 2022 acquisition date. The business combination accounting under Topic 805 was finalized for this acquisition during the three months ended June 30, 2022, with no changes to the provisional amounts disclosed for the three months ended March 31, 2022. The Company elected to use both practical expedients provided by ASU No. 2021-08 F-19 Table of Contents for the valuation of contract assets and contract liabilities from contracts with customers, with no material impact to the consolidated financial statements. Cash $ 1,002 Accounts receivable 588 Other current assets 95 Property, plant and equipment 297 Intangible assets 1,100 Goodwill 4,791 Total assets acquired 7,873 Current liabilities 209 Deferred tax liability 235 Total liabilities assumed 444 Net assets acquired $ 7,429 The following table summarizes the purchase price allocation to the identifiable intangible assets and their estimated useful lives as of the January 14, 2022 acquisition date. All intangibles have been fully amortized as of December 31, 2023: Amount Useful Life (years) Backlog $ 270 1 Customer relationships 710 5 Tradename/Trademark 120 1 $ 1,100 The results of operations for XTAL beginning as of the January 14, 2022 acquisition date are included in these consolidated financial statements. For the fiscal year ended December 31, 2022, the amount of revenues and net income of XTAL were not material to the consolidated financial statements taken as a whole. Because the pro forma results of operations of the Company for the periods presented in these consolidated financial statements would not be materially different as a result of the acquisition, such information is not presented. The costs incurred to acquire XTAL were not material and have been fully expensed and are included in general and administrative expenses in the consolidated statements of operations. Amortization of intangibles was $ 587 and $ 513 in general and administrative expenses as of December 31, 2023 and 2022, respectively. (6) Fair Value Measurements Various inputs are used in determining the fair value of the Company’s financial assets and liabilities. These inputs are summarized into the following three broad categories: Level 1 – quoted prices in active markets for identical securities Level 2 – other significant observable inputs, including quoted prices for similar securities, interest rates, credit risk, etc. Level 3 – significant unobservable inputs, including the Company’s own assumptions in determining fair value F-20 Table of Contents The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Marketable securities, which consist primarily of corporate and U.S. government agency bonds, are classified as available for sale and fair value did not differ significantly from carrying value as of December 31, 2023 and 2022. The following table presents information about the Company’s assets measured at fair value as of December 31, 2023: Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents and restricted cash $ 161,066 $ — $ — $ 161,066 Marketable securities — 307,688 — 307,688 Equity investments 79,623 — 1,928 81,551 Total $ 240,689 $ 307,688 $ 1,928 $ 550,305 The following table presents information about the Company’s assets measured at fair value as of December 31, 2022: Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents and restricted cash $ 95,717 $ — $ — $ 95,717 Marketable securities — 360,613 — 360,613 Equity investments 22,335 — 1,629 23,964 Total $ 118,052 $ 360,613 $ 1,629 $ 480,294 The following table sets forth changes in fair value of the Company’s Level 3 investments: Amount As of December 31, 2021 $ 1,887 Cash contributions 600 Unrealized loss ( 858 ) As of December 31, 2022 1,629 Realized gain 147,213 Cash distributions ( 147,213 ) Transfer to Level 1 ( 1,629 ) Unrealized gain 1,928 As of December 31, 2023 $ 1,928 F-21 Table of Contents The fair value of the Company’s investment in Nimbus Therapeutics, LLC (“Nimbus”), classified as Level 3 in the fair value hierarchy, was recorded as an equity method investment under ASC Topic 323, Investments - Equity Method and Joint Ventures, using the hypothetical liquidated book value method (“HLBV method”) through June 30, 2023, as further described in Note 13, Equity Investments. Significant unobservable inputs used to determine Nimbus’ fair value under the HLBV method were the entity's annual financial statements and the Company’s liquidation preference. During the year ended December 31, 2023, the Company recorded a gain of $ 147,213 on account of its equity position 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. On February 13, 2023, the Company reported receipt of a $ 111,328 cash distribution from Nimbus related to the sale. On April 6, 2023, the Company reported receipt of a $ 35,789 cash distribution from Nimbus related to the sale. On November 9, 2023, the Company reported receipt of a $ 96 cash distribution from Nimbus related to the sale. The realized gain on Level 3 investment during the year ended December 31, 2023 relates to these cash distributions from Nimbus. Following the dilution of the Company's investment in Nimbus during the three months ended September 30, 2023, the fair value of the Company's investment is recorded under ASC Topic 321 as a non-marketable equity security as the Company no longer exercises significant influence over Nimbus. This change in accounting method resulted in an unrealized gain of $ 1,928 . During the three months ended March 31, 2023, the Company recorded a transfer of $ 1,629 from a Level 3 investment to a Level 1 investment due to the completion of Structure Therapeutics Inc.'s, ("Structure Therapeutics"), initial public offering ("IPO"). The Company's investment in Structure Therapeutics was previously recorded using the HLBV method. Following the completion of Structure Therapeutics' IPO, the Company's investment in Structure Therapeutics is recorded under Topic 321 because there is an observable price of the investment . During the year ended December 31, 2022 there were no transfers between Level 1, Level 2 and Level 3 investments. Unrealized gains and losses arising from changes in fair value of the Company’s equity investments are classified within change in fair value in the consolidated statements of operations. Realized gains arising from distributions receivable from the Company's equity investments are classified within gain on equity investments in the consolidated statements of operations. For further information regarding the Company’s equity investments, see Note 13, Equity Investments. (7) Commitments and Contingencies (a) Leases The Company has multiple operating leases for office space and a finance lease for equipment that expire at various dates through 2037. The Company has elected the package of practical expedients under the transition guidance of ASC Topic 842, Leases , to exclude short-term leases from the balance sheet and to combine lease and non-lease components. The Company classifies finance lease right of use assets under property and equipment, net and finance short-term and long-term lease liabilities under other accrued liabilities and other liabilities, long-term, respectively. Upon inception of a lease, the Company determines if an arrangement is a lease, if it is classified as an operating or finance lease, if it includes options to extend or terminate the lease, and if it is reasonably certain that the Company will exercise the options. Lease cost, representing lease payments over the term of the lease and any capitalizable direct costs less any incentives received, is recognized on a straight-line basis over the lease term as lease expense. In determining the present value of lease payments, the Company uses its incremental borrowing rate based on the information available at the lease commencement date if the rate implicit in the lease is not readily determinable. Upon execution of a new lease, the Company performs an analysis to determine its incremental borrowing rate using its current borrowing rate, adjusted for various factors including level of collateralization and lease term. As of December 31, 2023, the remaining weighted average lease term for operating and finance leases was 12 years. During the year ended December 31, 2023, operating lease right of use (“ROU”) assets increased by $ 15,173 due to the accounting commencement of five new leases and by $ 4,388 due to contingency resolutions associated with office leases. During the same period, operating lease liabilities increased by $ 15,085 due the accounting commencement of the new leases. During the year ended December 31, 2023, finance lease right of use assets increased by $ 579 and finance lease liabilities increased by $ 279 due to the accounting commencement of an equipment lease for the Company's Framingham, Massachusetts lab. F-22 Table of Contents Variable and short-term lease costs for the Company's operating and finance leases were immaterial for the year ended December 31, 2023. Additional details of the Company’s operating and finance leases are presented in the following table: Year Ended December 31, 2023 2022 2021 Lease costs $ 16,769 $ 11,999 $ 7,627 Cash paid for leases 12,263 3,275 4,561 Maturities of operating and finance lease liabilities as of December 31, 2023 under noncancelable operating leases were as follows: Year ending December 31: 2024 $ 17,537 2025 17,595 2026 17,280 2027 16,097 2028 14,984 Thereafter 112,034 Total future minimum lease payments 195,527 Less: imputed interest ( 67,377 ) Present value of future minimum lease payments 128,150 Less: current portion of lease payments ( 16,954 ) Lease liabilities, long-term $ 111,196 (b) Legal Matters From time to time, the Company may become involved in routine litigation arising in the ordinary course of business. While the results of such litigation cannot be predicted with certainty, management believes that the final outcome of such matters is not likely to have a material adverse effect on the Company’s financial position or results of operations or cash flows. (c) Contingencies The Company is currently under audit with a royalty partner. As of December 31, 2023, the Company believes a contingency is probable and has accrued $ 2,500 related to this audit. F-23 Table of Contents (8) Income Taxes Income tax expense is comprised of the following: Year Ended December 31, 2023 2022 2021 Current: Federal $ 727 $ ( 195 ) $ — State 509 ( 280 ) 67 Foreign 963 538 344 Current income tax expense 2,199 63 411 Deferred: Federal — — — State — — — Foreign — — — Deferred income tax expense — — — Income tax expense $ 2,199 $ 63 $ 411 Components of income (loss) before income taxes by tax jurisdiction were as follows: Year Ended December 31, 2023 2022 2021 United States $ 39,076 $ ( 150,147 ) $ ( 101,341 ) Foreign 3,843 1,021 1,359 Income (loss) before income taxes $ 42,919 $ ( 149,126 ) $ ( 99,982 ) Reconciliation of income tax expense at the applicable statutory income tax rates to the effective income tax rate is as follows: Year Ended December 31, 2023 2022 2021 Statutory federal income tax rate 21.0 % 21.0 % 21.0 % State taxes, net of federal benefits 5.8 5.1 4.9 Section 162(m) limitation 1.2 ( 1.1 ) ( 5.2 ) Stock compensation 1.7 0.6 12.4 Return-to-provision adjustments ( 3.3 ) 0.2 ( 1.7 ) Research and development credit ( 14.1 ) 3.1 6.3 Tax contingencies, net of reversals 1.4 ( 0.3 ) ( 0.7 ) Change in valuation allowance ( 4.4 ) ( 28.6 ) ( 37.2 ) Other ( 4.2 ) — ( 0.2 ) Effective income tax rate 5.1 % — % ( 0.4 ) % 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 years ended December 31, 2022 and 2021 represents our income tax obligations in certain states and taxes in foreign jurisdictions in which we conduct business. As of December 31, 2023, the Company has a full valuation allowance on U.S. federal and state deferred tax assets. The total change in valuation allowance for the year ended December 31, 2023 was $ 1,926 , which was primarily due to temporary differences for capitalized research and development expenses and share based compensation, partially offset by adjustments to equity method investments. F-24 Table of Contents Tax effects of temporary differences that give rise to significant portions of deferred income tax assets and deferred income tax liabilities were as follows: As of December 31, 2023 2022 2021 Deferred income tax assets: Net operating loss carryforwards $ 44,116 $ 67,758 $ 67,985 Capitalized research and development 13,224 5,511 — Accrued expenses 71,676 43,362 10,309 Deferred revenue 5,296 6,532 10,632 Lease liabilities 32,491 28,952 18,773 Credits 21,903 18,456 14,559 Gross deferred tax assets 188,706 170,571 122,258 Less valuation allowance ( 136,031 ) ( 137,957 ) ( 95,304 ) Net deferred tax assets 52,675 32,614 26,954 Deferred income tax liabilities: Unrealized gain on equity investments ( 18,553 ) ( 4,439 ) ( 8,545 ) Prepaid expenses ( 1,554 ) ( 1,435 ) ( 969 ) Depreciation and amortization ( 32,568 ) ( 26,740 ) ( 17,440 ) Net deferred income tax assets $ — $ — $ — As of December 31, 2023, the Company had federal and state net operating loss (“NOL”) carryforwards of $ 179,076 and $ 98,576 , respectively. The state NOL carryforwards will expire between 2025 and 2042, if not utilized. The federal NOL carryforwards are limited to 80% of taxable income generated in a given year and carry forward indefinitely. As of December 31, 2023, the Company had federal and state research and development tax credit carryforwards of $ 23,336 and $ 1,598 , respectively. These carryforwards will expire between 2024 and 2043 if not utilized. Pursuant to Internal Revenue Code Sections 382 and 383, the utilization of NOLs and other tax attributes may be substantially limited due to cumulative changes in ownership greater than 50% that may have occurred or could occur during applicable testing periods. The Company has performed an analysis through December 31, 2023 and determined that such an ownership change occurred on March 31, 2021. There was no material impact to the financial statements due to this ownership change. The Company has not recognized a deferred tax liability for the undistributed earnings of its foreign operations as the Company considers these earnings to be indefinitely reinvested. The Company classifies interest and penalties related to unrecognized tax benefits within income tax expense in the consolidated statement of operations. Following is a reconciliation of total gross unrecognized tax benefits: Year Ended December 31, 2023 2022 2021 Balance, January 1 $ 2,142 $ 1,702 $ 1,046 Additions for tax positions taken in prior years 89 35 282 Reductions for tax positions taken in prior years ( 4 ) ( 24 ) ( 20 ) Additions for tax positions related to the current year 515 429 394 Balance, December 31 $ 2,742 $ 2,142 $ 1,702 The Company does not anticipate any significant increases or decreases in its uncertain tax positions within the next 12 months. The Company and its subsidiaries file U.S. federal income tax returns and various state, local and foreign income tax returns. As of December 31, 2023, the Company’s statutes of limitations are open for all federal and state years tax F-25 Table of Contents returns filed after the years ended December 31, 2020 and 2019, respectively. NOL and credit carryforwards for all years are subject to examination and adjustments for the three years following the year in which the carryforwards are utilized. The Company is not currently under Internal Revenue Service or state examination. (9) Stockholders’ Equity (a) Common Stock As of December 31, 2023, the Company had authorized 500,000,000 shares of common stock with a par value of $ 0.01 per share. Holders of common stock are entitled to one vote per share, to receive dividends, if and when declared by the board of directors, and upon liquidation or dissolution, to receive a portion of the assets available for distributions to stockholders, subject to preferential amounts owed to holders of the Company’s preferred stock, if any. Common stockholders have no preemptive or other subscription rights and there are no redemption or sinking fund provisions with respect to such shares. The rights, preferences and privileges of holders of the common stock are subject to and may be adversely affected by the right of the holders of shares of any series of preferred stock that the Company may designate and issue in the future. (b) Limited Common Stock As of December 31, 2023, the Company had authorized 100,000,000 shares of limited common stock with a par value of $ 0.01 per share. Holders of limited common stock are entitled to one vote per share, however, the holders of limited common stock shall not be entitled to vote such shares in any election of directors or on the removal of directors. Holders of limited common stock are entitled to receive dividends, if and when declared by the board of directors, and upon liquidation or dissolution, to receive a portion of the assets available for distributions to stockholders, subject to preferential amounts owed to holders of the Company’s preferred stock, if any. Holders of the Company’s limited common stock have the right to convert each share of limited common stock into one share of the Company’s common stock. Limited common stockholders have no preemptive or other subscription rights and there are no redemption or sinking fund provisions with respect to such shares. The rights, preferences and privileges of holders of the limited common stock are subject to and may be adversely affected by the right of the holders of shares of any series of preferred stock that the Company may designate and issue in the future. (c) Preferred Stock As of December 31, 2023, the Company had authorized 10,000,000 shares of undesignated preferred stock with a par value of $ 0.01 per share. The Company’s board of directors has the discretion to determine the rights, preferences, privileges, and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges, and liquidation preferences, of each series of preferred stock . (10) Stock-Based Compensation Stock Incentive Plans As of December 31, 2023, the Company’s stock incentive plans included the 2010 Stock Plan (the “2010 Plan”), the 2020 Equity Incentive Plan (the “2020 Plan”), the 2021 Inducement Equity Incentive Plan, as amended (the “2021 Plan”), and the 2022 Equity Incentive Plan (the “2022 Plan”) (together, the “Plans”). The 2022 Plan provides for the award of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock units, other stock-based awards, and cash-based awards to employees, directors, consultants or advisors. Shares of common stock subject to outstanding awards granted under the 2020 Plan and the 2010 Plan that expire, terminate, or are otherwise surrendered, cancelled, forfeited, or repurchased by the Company are available for issuance under the 2022 Plan. The 2021 Plan provides for the award of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock units, and other stock-based awards to persons who were not previously an employee or director of the Company or who are commencing employment with the Company following a bona fide period of non-employment, in either case, as an inducement material to such person’s entry into employment with the Company F-26 Table of Contents and in accordance with the requirements of the Nasdaq Stock Market Rule 5635(c)(4). Neither consultants nor advisors are eligible to participate in the 2021 Plan. The 2020 Plan provided for the award of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock units, and other stock-based awards to employees, directors, consultants or advisors. As of June 15, 2022, the effective date of the 2022 Plan, no further awards will be made under the 2020 Plan. Any options or awards outstanding under the 2020 Plan are governed by the terms of the 2020 Plan. The 2010 Plan provided for the granting of incentive stock options and nonstatutory stock options to employees, directors, consultants or advisors. As of the effective date of the 2020 Plan, no further awards will be made under the 2010 Plan. Any options or awards outstanding under the 2010 Plan are governed by the terms of the 2010 Plan. As of December 31, 2023, there were 3,472,195 shares available for grant under the Plans. The following table presents classification of stock-based compensation expense within the consolidated statements of operations: Year Ended December 31, 2023 2022 2021 Cost of sales $ 5,177 $ 5,382 $ 3,858 Research and development 15,493 11,816 7,440 Sales and marketing 3,639 2,818 1,281 General and administrative 23,532 19,614 13,911 Total stock-based compensation $ 47,841 $ 39,630 $ 26,490 Restricted Stock Units Each restricted stock unit (“RSU”) represents the right to receive one share of the Company’s common stock upon vesting. The fair value of RSUs granted by the Company was calculated based upon the Company’s closing stock price on the date of the grant, and the stock-based compensation expense is recognized over the vesting period. RSUs generally vest over four years with 25 % of the grants vesting at the end of the first year and the remaining vesting annually over the following three years. Restricted stock unit activity was as follows: Number of Shares Weighted Average Grant Date Fair Value Per Share Beginning, January 1, 2023 48,800 $ 26.69 Granted 773,240 26.09 Vested ( 13,241 ) 26.81 Forfeited ( 34,985 ) 24.36 Balance, December 31, 2023 773,814 26.19 The weighted average grant date fair value for each RSU granted during the years ended December 31, 2023 and 2022 was $ 26.09 and $ 26.86 , respectively. As of December 31, 2023, there was $ 15,375 of unrecognized compensation cost related to RSUs granted under the Plans, which is expected to be recognized over a weighted average period of 3 years. During the year ended December 31, 2023, 13,241 RSUs vested. The fair value of RSUs vested during the year ended December 31, 2023 was $ 355 . No RSUs vested during year ended December 31, 2022. Performance-Based Restricted Stock Units In February 2023, the Company awarded performance-based restricted stock units ("PRSUs") under the 2022 Plan. Each PRSU represents a contingent right to receive one share of common stock upon the achievement of specified F-27 Table of Contents performance goals. The fair value of PRSUs granted by the Company was calculated based upon the Company's closing stock price on the date of the grant, and the stock-based compensation expense is recognized when the grant date is determined and performance conditions are probable of achievement. In February 2023, the Company awarded to certain executive officers PRSUs for a maximum of 62,693 shares (based on 150 % achievement of the applicable performance conditions outlined in the awards), with a target award of 41,795 PRSUs (based on 100 % achievement of the applicable performance conditions), and a threshold award of 20,898 PRSUs (based on 50 % achievement of the applicable performance conditions). All PRSUs were considered granted under ASC 718, Compensation—Stock Compensation ("Topic 718") in February 2023. The PRSUs granted in February 2023 are scheduled to vest, if at all, upon the certification by the Company's compensation committee of the achievement of the applicable performance conditions following the filing of the Company's Annual Report on Form 10-K for the fiscal year ending December 31, 2025. In August 2022, the Company awarded 90,000 PRSUs to an executive officer of which 30,150 PRSUs were considered granted under Topic 718 at the time the PRSUs were awarded. In March 2023, of the 90,000 PRSUs awarded in August 2022, an additional 45,000 PRSUs were considered granted under Topic 718. Of the 45,000 PRSUs that were considered granted in March 2023, 18,000 PRSUs are scheduled to vest, if at all, upon the certification by the Company's compensation committee of the achievement of the applicable performance conditions following the filing of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023 and 27,000 PRSUs are scheduled to vest, if at all, upon the certification by the Company's compensation committee of the achievement of the applicable performance conditions following the filing of the Company's Annual Report on Form 10-K for the fiscal year ending December 31, 2025. Performance based restricted stock unit activity was as follows: Number of Shares Weighted Average Grant Date Fair Value Per Share Beginning, January 1, 2023 30,150 $ 28.55 Granted 86,795 22.48 Vested — — Forfeited — — Balance, December 31, 2023 116,945 24.05 The weighted average grant date fair value for each PRSU granted during the years ended December 31, 2023 and 2022 was $ 22.48 and $ 28.55 , respectively. No PRSUs vested during the years ended December 31, 2023 and 2022. Stock Options Stock options must be granted at an exercise price not less than 100 % of the fair market value per share at the grant date. The board of directors or compensation committee determines the exercise price of the Company’s stock options based on the closing price of the common stock as reported on the Nasdaq Global Select Market on the date of the grant. The maximum contractual term of options granted under the Plans is typically 10 years, options generally vest over four years with 25 % of the shares underlying the option vesting at the end of the first year and the remaining vesting monthly over the following three years. In February 2023, the Company granted the chief executive officer a premium priced option to purchase 65,525 shares of common stock with an exercise price equal to 110 % of the closing price of the Company's common stock on the date of grant. During the years ended December 31, 2023, 2022, and 2021, 800,336 , 329,224 , and 1,120,981 options under the Plans were exercised for total proceeds of $ 9,440 , $ 2,110 , and $ 7,927 , respectively. The fair value of each option award is determined on the date of grant using the Black Scholes Merton option-pricing model. The calculation of fair value includes several assumptions that require management’s judgment. The expected terms of options granted to employees during the years ended December 31, 2023, 2022, and 2021 were calculated using an average of historical exercises. Estimated volatility for 2023, 2022, and 2021 incorporates a calculated volatility derived from the historical closing prices of shares of common stock of similar entities whose share prices were F-28 Table of Contents publicly available for the expected term of the option. The risk-free interest rate is based on the U.S. Treasury constant maturities in effect at the time of grant for the expected term of the option. The Company accounts for forfeitures as they occur; as such, the Company does not estimate forfeitures at the time of grant. Following are the weighted average valuation assumptions used for option awards during the periods presented: Year Ended December 31, 2023 2022 2021 Valuation assumptions Expected dividend yield — % — % — % Expected volatility 66 % 57 % 59 % Expected term (years) 4.92 4.78 4.66 Risk-free interest rate 3.77 % 2.13 % 0.71 % Stock option activity was as follows: Number of shares Weighted average exercise price Weighted average remaining contractual term (years) Aggregate intrinsic value Beginning, January 1, 2023 10,934,227 $ 29.56 Granted 1,487,340 27.15 Exercised ( 800,336 ) 11.80 Forfeited ( 251,444 ) 35.07 Expired ( 95,510 ) 67.20 Balance, December 31, 2023 11,274,277 30.06 6.99 $ 154,266 Exercisable, December 31, 2023 7,279,345 27.88 6.22 $ 121,382 The weighted average grant date fair value per share of options granted during the years ended December 31, 2023, 2022, and 2021 was $ 15.79 , $ 13.67 , and $ 45.07 , respectively. The intrinsic value of options exercised during the years ended December 31, 2023, 2022, and 2021 was $ 16,213 , $ 6,548 , and $ 71,308 , respectively. As of December 31, 2023, there was $ 62,992 of unrecognized compensation cost related to unvested stock options granted under the Plans, which is expected to be recognized over a weighted average period of 2.10 years. The fair value of shares vested during the years ended December 31, 2023, 2022, and 2021 was $ 46,877 , $ 43,559 , and $ 19,080 , respectively. (11) Noncontrolling Interest The Company reviews each legal entity formed by parties related to the Company to determine whether or not the Company has a variable interest in the entity and whether or not the entity would meet the definition of a variable interest entity (“VIE”) in accordance with ASC Topic 810, Consolidation . If the entity is a VIE, the Company assesses whether or not the Company is the primary beneficiary of that VIE based on a number of factors, including (i) which party has the power to direct the activities that most significantly affect the VIE’s economic performance, (ii) the parties’ contractual rights and responsibilities pursuant to any contractual agreements and (iii) which party has the obligation to absorb losses or the right to receive benefits from the VIE. If the Company determines it is the primary beneficiary of a VIE, the Company consolidates the financial statements of the VIE into the Company’s consolidated financial statements at the time that determination is made. The Company evaluates whether it continues to be the primary beneficiary of any consolidated VIEs on a quarterly basis. If the Company were to determine that it is no longer the primary beneficiary of a consolidated VIE, or no longer has a variable interest in the VIE, it would deconsolidate the VIE in the period that the determination is made. If the Company determines it is the primary beneficiary of a VIE that meets the definition of a business, the Company measures the assets, liabilities and noncontrolling interests of the newly consolidated entity at fair value in accordance with Topic 805 at the date the reporting entity first becomes the primary beneficiary. F-29 Table of Contents In October 2018, Faxian Therapeutics, LLC (“Faxian”) was formed in the United States. In April 2019, upon consummation of the joint venture, the Company and WuXi AppTech ("WuXi"), each received a 50 % equity interest in the entity in exchange for their contributions to the entity. The Company determined that Faxian was a VIE and concluded that it is the primary beneficiary of the VIE. As such, the Company has consolidated Faxian's results into the consolidated financial statements, and eliminated WuXi's ownership as a non-controlling interest. (12) Net Income (Loss) per Share Attributable to Common and Limited Common Stockholders The following table presents the calculation of basic and diluted net income (loss) per share attributable to common and limited common stockholders for the years presented (in thousands, except for share and per share data): Year Ended December 31, 2023 2022 2021 Numerator: Net income (loss) attributable to Schrödinger common and limited common stockholders $ 40,720 $ ( 149,186 ) $ ( 100,393 ) Denominator: Weighted average shares used to compute net income (loss) per share attributable to Schrödinger common and limited common stockholders, basic: 71,776,301 71,173,419 70,594,950 Effect of the exercise of common stock options and vested RSUs on weighted average common and limited common shares 3,210,515 — — Weighted average shares used to compute net income (loss) per share attributable to Schrödinger common and limited common stockholders, diluted: 74,986,816 71,173,419 70,594,950 Net income (loss) per share attributable to Schrödinger common and limited common stockholders, basic: $ 0.57 $ ( 2.10 ) $ ( 1.42 ) Net income (loss) per share attributable to Schrödinger common and limited common stockholders, diluted: $ 0.54 $ ( 2.10 ) $ ( 1.42 ) For the year ended December 31, 2023, in order to calculate diluted net income per share, the weighted average shares used to compute net income is adjusted by the effect of dilutive securities, including awards under the Plans. Diluted net income per share is computed by dividing the resulting net income by the weighted average number of fully diluted common and limited shares outstanding. Since the Company was in a loss position for the years ended December 31, 2022 and 2021, basic net loss per share is the same as diluted net loss per share as the inclusion of all potential common shares and limited common shares outstanding would have been anti-dilutive. Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows: Year Ended December 31, 2023 2022 2021 Shares subject to outstanding common stock options and unvested RSUs 6,351,996 11,013,177 7,680,341 (13) Equity Investments (a) Nimbus The Company previously provided collaboration services for Nimbus under the terms of a master services agreement executed on May 18, 2010, as amended. Collaboration agreements are separate from the transaction that resulted in equity ownership and related fees are paid in cash to the Company. Nimbus was previously recorded as an equity method investment under the HLBV method, as the entity is a limited liability company and the Company was determined to have significant influence due to the Company's collaboration with Nimbus on a number of drug discovery targets, as well as the Company's level of ownership in Nimbus. During the period ended September 30, 2023, the Company's equity F-30 Table of Contents ownership in Nimbus was diluted to the point that the Company no longer has significant influence over the entity. As the Company no longer has significant influence over Nimbus, after June 30, 2023, the equity investment in Nimbus is valued as a non-marketable equity security. The carrying value of the Nimbus investment was $ 1,928 and zero as of December 31, 2023 and December 31, 2022, respectively. The Company has no obligation to fund Nimbus losses in excess of its investment. For the year ended December 31, 2023, the Company reported a realized gain of $ 147,213 on the Nimbus investment, which reflected the total cash distribution the Company was eligible to receive from Nimbus on account of Takeda's acquisition of Nimbus Lakshmi, Inc., a wholly-owned subsidiary of Nimbus, and its tyrosine kinase 2 inhibitor NDI-034858, as well as an unrealized gain of $ 1,928 due to the change in accounting method. The Company reported no gains or losses on the Nimbus investment during the years ended December 2022 and 2021. (b) Morphic The Company accounts for its investment in Morphic Holding, Inc. (“Morphic”) at fair value based on the share price of Morphic’s common stock at the measurement date. During the year ended December 31, 2023, the Company reported a mark-to-market gain of $ 1,778 on the Morphic investment. During the year ended December 31, 2022, the Company reported a loss of $ 17,226 on the Morphic investment. During the year ended December 31, 2021, the Company reported a gain of $ 11,548 on the Morphic investment. As of December 31, 2023 and December 31, 2022, the carrying value of the Company’s investment in Morphic was $ 24,114 and $ 22,335 , respectively. (c) Ajax In May 2021, the Company purchased 631,377 shares of Series B preferred stock of Ajax Therapeutics, Inc. (“Ajax”) for $ 1,700 in cash. The Company has concluded that its equity investment in Ajax should be valued as a non-marketable equity security as the Company does not exercise significant influence over Ajax. As of each of December 31, 2023 and December 31, 2022, the carrying value of the Company’s investment in Ajax was $ 1,700 . (d) Structure Therapeutics In July 2021, the Company purchased 494,035 shares of Series B preferred stock of Structure Therapeutics for $ 2,000 in cash. In April 2022, the Company purchased an additional 148,210 shares of Series B preferred stock for $ 600 in cash. On February 7, 2023, Structure Therapeutics completed its IPO. Immediately upon the closing of Structure Therapeutics' IPO, all of the outstanding Series B preferred stock automatically converted into ordinary shares on a one -for-one basis. As of December 31, 2023, the Company owned 3,260,495 ordinary shares of Structure Therapeutics. The Company purchased 275,000 American Depository Shares ("ADS") at $ 15.00 per ADS in the IPO. Each ADS represents three ordinary shares. Upon completion of Structure Therapeutics' IPO, the Company changed the valuation methodology used to value the Structure Therapeutics investment from an equity method investment under the HLBV method to an equity investment reported at fair value as the Company no longer exerts significant influence over Structure after the IPO. As there is a readily available market price for Structure Therapeutics' ADSs, the Company values its investment based on the closing price of Structure Therapeutics' ADSs as of the reporting date. The carrying value of Structure Therapeutics was $ 55,509 and $ 1,629 as of December 31, 2023 and December 31, 2022, respectively. For the year ended December 31, 2023, the Company recorded a mark-to-market gain of $ 49,755 on the Structure Therapeutics investment. For the years ended December 31, 2022 and 2021, the Company recorded losses of $ 858 and $ 113 on the Structure Therapeutics investment under the HLBV method, respectively. (14) Employee Benefit Plan The Company offers a 401(k) employee savings plan to its U.S.‑based employees. The Company made discretionary matching contributions equal to 100 % of the first 4 % of compensation contributed by employees for the years ended December 31, 2023, 2022, and 2021. Matching contributions during 2023, 2022, and 2021 were $ 4,135 , $ 3,243 , and $ 2,592 , respectively. F-31 Table of Contents (15) Related Party Transactions (a) Board Member For the years ended December 31, 2023, 2022, and 2021, the Company paid consulting fees of $ 420 , $ 410 , and $ 390 , respectively, to a member of its board of directors. (b) Bill and Melinda Gates Foundation The Bill & Melinda Gates Foundation, an entity under common control with Bill and Melinda Gates Foundation Trust, a stockholder of the Company, issued a grant under which it agreed to pay the Company directly for certain licenses and services provided to a specified group of third-party organizations. Revenue recognized for services provided by the Company under this grant were $ 253 , $ 387 , and $ 1,160 for the years ended December 31, 2023, 2022, and 2021, respectively. As of December 31, 2023, the Company had no receivables due from the Bill and Melinda Gates Foundation. As of December 31, 2022, the Company had net receivables of $ 20 due from the Bill & Melinda Gates Foundation. For the years ended December 31, 2023, 2022, and 2021, the Company recognized $ 2,822 , $ 1,949 , and $ 111 , respectively, in drug discovery contribution revenue related to funds received under agreements with the Bill & Melinda Gates Foundation, aimed at accelerating drug discovery in women’s health. As of December 31, 2023 and 2022, the Company had no receivables due under these agreements from the Bill & Melinda Gates Foundation. As of December 31, 2023 and 2022, restricted cash on hand related to the arrangement was $ 2,251 and $ 1,742 , respectively. Gates Ventures, LLC is an entity under the control of William H. Gates III, who may be deemed to be the beneficial owner of more than 5 % of the Company’s voting securities. The Company received $ 1,000 in contribution revenue in connection with its entry into an agreement with Gates Ventures, LLC annually from June 2020 to June 2022. In August 2023, the Company renewed the agreement with Gates Ventures, LLC and recognized $ 1,800 in contribution revenue. As of December 31, 2023 and 2022, the Company had no receivables due from Gates Ventures, LLC. (c) Structure Therapeutics During the year ended December 31, 2021, the Company entered into multiple software agreements with Structure Therapeutics and its subsidiaries for approximately $ 650 . During the years ended December 31, 2023, 2022, and 2021, the Company recognized revenue of approximately $ 221 , $ 297 , and $ 129 , respectively, in the aggregate related to these software agreements. During the year ended December 31, 2023, the Company entered into a collaboration agreement with Structure Therapeutics and its subsidiaries to conduct certain drug discovery services as well as provide software access. Revenue recognized under this collaboration was $ 433 for the year ended December 31, 2023 . As of December 31, 2023 and 2022, the Company had net receivables of $ 494 and zero , respectively, due from Structure Therapeutics. (16) Segment Reporting The Company has determined that its chief executive officer (“CEO”) is its chief operating decision maker (“CODM”). The Company’s CEO evaluates the financial performance of the Company based on two reportable segments: Software and Drug Discovery. The Software segment is focused on licensing the Company’s software to transform molecular discovery. The Drug Discovery segment is focused on building a portfolio of preclinical and clinical drug programs, internally and through collaborations. The CODM reviews segment performance and allocates resources based upon segment revenue and segment gross profit of the Software and Drug Discovery reportable 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. GAAP revenue. Operational expenditures are expenditures made that are directly attributable to the reportable segment. These expenditures are allocated to the segments based on headcount. The reportable segment expenditures include compensation, supplies, and services from contract research organizations. Certain cost items are not allocated to the Company’s reportable segments. These cost items primarily consist of non-drug discovery program related compensation and general operational expenses associated with the Company’s research and development, sales and marketing, and general and administrative. These costs are incurred by both segments and due to the integrated nature of the Company’s Software and Drug Discovery segments, any allocation methodology would be arbitrary and provide no meaningful analysis. F-32 Table of Contents Segment revenue is primarily earned in the United States and there are no intersegment revenues. Additionally, the Company reports assets on a consolidated basis and does not allocate assets to its reportable segments for purposes of assessing segment performance or allocating resources. Presented below is financial information with respect to the Company’s reportable segments for the years presented: Year Ended December 31, 2023 2022 2021 Segment revenues: Software $ 159,124 $ 135,578 $ 113,236 Drug discovery 57,542 45,377 24,695 Total segment revenues $ 216,666 $ 180,955 $ 137,931 Segment gross profit: Software $ 129,610 $ 106,002 $ 86,741 Drug discovery 11,082 ( 4,980 ) ( 21,121 ) Total segment gross profit 140,692 101,022 65,620 Unallocated (expense) income: Research and development ( 181,766 ) ( 126,372 ) ( 90,904 ) Sales and marketing ( 37,226 ) ( 30,642 ) ( 22,150 ) General and administrative ( 99,148 ) ( 90,825 ) ( 64,009 ) Gain (loss) on equity investments 147,213 11,825 ( 1,781 ) Change in fair value 53,461 ( 18,084 ) 11,359 Other income 19,693 3,950 1,057 Income tax expense ( 2,199 ) ( 63 ) ( 411 ) Consolidated net income (loss) $ 40,720 $ ( 149,189 ) $ ( 101,219 ) Revenues by geographic area are determined based on the address provided by the Company's customers and partners. The following table sets forth revenues by geographic area for the years ended December 31, 2023, 2022, and 2021: Year Ended December 31, 2023 2022 2021 United States $ 161,961 $ 123,556 $ 90,398 APAC 24,569 21,680 17,778 EMEA 29,135 34,451 28,880 Rest of World 1,001 1,268 875 $ 216,666 $ 180,955 $ 137,931 F-33 Table of Contents Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None.