What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-03-04 compared with 2020-03-16 · 393 added, 410 removed, 449 unchanged (64% of the section changed)

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Consolidated Balance Sheets as of December 31, 2020 and 2019

Consolidated Statements of Operations for the Years ended December, 31, 2018

Consolidated Statements of Operations for the Years ended December 31, 2020 and 2019

Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit

for the Years ended December 31, 2020 and 2019

Consolidated Statements of Cash Flows for the Years ended December 31, 2018

Consolidated Statements of Cash Flows for the Years ended December 31, 2020 and 2019

Notes to Consolidated Financial Statements

Report of Independent Regist ered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

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We have audited the accompanying consolidated balance sheets of Schrödinger, Inc.

and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive loss, convertible preferred stock and stockholders’ deficit, and cash flows for the years then ended, and the related notes (collectively, the consolidated financial statements).

and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, convertible preferred stock and stockholders’ equity (deficit), and cash flows for the years then ended, 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, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with U.S.

generally accepted accounting principles.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases .

Basis for Opinion

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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.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

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March 4, 2021

SCHRÖDINGER, INC.

SCH RÖDINGER, INC.

AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2018 and 2019

(in thousands, except for share and per share amounts)

December 31, 2020

December 31, 2019

Current assets:

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Accounts receivable, net of allowance for doubtful accounts of $60 and $50

Unbilled receivables and other receivables

Unbilled and other receivables

Prepaid expenses

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Right of use assets

Liabilities, Convertible Preferred Stock, and Stockholders’ Deficit

Liabilities, Convertible Preferred Stock, and Stockholders’ Equity (Deficit)

Current liabilities:

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Deferred revenue, long-term

Deferred rent, long term

Lease liabilities, long-term

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Series E convertible preferred stock, $0.01 par value.

Authorized, 67,087,074

73,795,777 shares issued and outstanding;

liquidation preference

Authorized zero and 77,150,132

zero and 73,795,777 shares issued and outstanding at December 31, 2020 and

December 31, 2019, respectively

Series D convertible preferred stock, $0.01 par value.

Authorized, 39,540,611

39,540,611 shares issued and outstanding;

liquidation preference

Authorized zero and 39,540,611

zero and 39,540,611 shares issued and outstanding at December 31, 2020 and

December 31, 2019, respectively

Series C convertible preferred stock, $0.01 par value.

Authorized, 47,242,235

47,242,235 shares issued and outstanding, liquidation preference

Authorized zero and 47,242,235

zero and 47,242,235 shares issued and outstanding at December 31, 2020 and

December 31, 2019, respectively

Series B convertible preferred stock, $0.01 par value.

Authorized, 29,468,101

29,468,101 shares issued and outstanding;

liquidation preference

Authorized zero and 29,468,101

zero and 29,468,101 shares issued and outstanding at December 31, 2020 and

December 31, 2019, respectively

Series A convertible preferred stock, $0.01 par value.

Authorized, 134,704,785

134,704,785 shares issued and outstanding;

liquidation preference

Authorized zero and 134,704,785

zero and 134,704,785 shares issued and outstanding at December 31, 2020 and

December 31, 2019, respectively

Total convertible preferred stock

Stockholders' deficit:

Stockholders’ equity (deficit):

Common stock, $0.01 par value.

Authorized 500,000,000 and 425,000,000 shares;

and 6,121,821 shares issued and outstanding at December 31, 2018 and

2019, respectively

60,713,534 and 6,121,821 shares issued and outstanding at December 31, 2020

and December 31, 2019, respectively

Limited common stock, $0.01 par value.

Authorized 100,000,000 and 146,199,885 shares;

9,164,193 and zero shares issued and outstanding at December 31, 2020 and

December 31, 2019, respectively

Additional paid-in capital

Accumulated deficit

Accumulated other comprehensive income (loss)

Total stockholders’ deficit of Schrödinger stockholders

Accumulated other comprehensive income

Total stockholders’ equity (deficit) of Schrödinger stockholders

Noncontrolling interest

Total stockholders’ deficit

Total liabilities, convertible preferred stock, and stockholders’ deficit

Total stockholders’ equity (deficit)

Total liabilities, convertible preferred stock, and stockholders’ equity (deficit)

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Operations

December 31, 2018 and 2019

(in thousands, except for share and per share amounts)

Year Ended December 31,

Software products and services

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Loss from operations

Other (expense) income:

Gain on equity investment

Other income:

Gain on equity investments

Change in fair value

Interest income

Total other (expense) income

Total other income

Loss before income taxes

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Net loss attributable to noncontrolling interest

Net loss attributable to Schrödinger stockholders

Net loss per share attributable to Schrödinger common

stockholders, basic and diluted:

Weighted average common shares used to compute net

loss per share attributable to common stockholders,

basic and diluted:

Net loss attributable to Schrödinger common and

limited common stockholders

Net loss per share attributable to Schrödinger

common and limited common stockholders, basic and diluted:

Weighted average shares used to compute net loss

per share attributable to Schrödinger common and

limited common stockholders, basic and diluted:

See accompanying notes to consolidated financial statements.

SCHRÖDINGER, INC.

SCH RÖDINGER, INC.

AND SUBSIDIARIES

Consolidated Statements of Comprehensive Loss

December 31, 2018 and 2019

Consolidated State ments of Comprehensive Loss

(in thousands)

Year Ended December 31,

Net loss attributable to Schrödinger common and

limited common stockholders

Changes in market value of investments, net of tax:

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AND SUBSIDIARIES

Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit

December 31, 2018 and 2019

Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(in thousands, except for share amounts)

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Series A preferred

Limited common

comprehensive

Non Controlling

stockholders’

loss (income)

equity (deficit)

Balance at December 31, 2018

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Issuances of common

stock upon stock

option exercise

Stock-based compensation

Contributions by

noncontrolling interest

Balance at December 31, 2019

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loss on marketable

Issuances of Series E

preferred stock, net

Issuances of common

stock upon stock

option exercise

Stock-based compensation

Issuances of common

stock upon initial

public offering, net

of issuance costs

Issuances of common

Contributions by noncontrolling interest

stock upon follow-on

offering, net of

issuance costs of

Conversion of

preferred stock into

limited common

Conversion of limited

common stock into

Contributions by

non-controlling interest

Balance at December 31, 2020

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Consolidated Statements of Cash Flows

December 31, 2018 and 2019

(in thousands)

Year Ended December 31,

Cash flows from operating activities:

Adjustments to reconcile net loss to net cash used in

Adjustments to reconcile net loss to net cash provided by (used in)

operating activities:

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Fair value adjustments

Depreciation and amortization

Noncash rent expense

Stock-based compensation

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Noncash investment accretion

Loss on disposal of property and equipment

Decrease (increase) in assets:

Accounts receivable, net

Other receivables

Reduction in the carrying amount of right of use asset

Unbilled and other receivables

Reduction in the carrying amount of right of use assets

Prepaid expenses and other assets

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Other accrued liabilities

Net cash used in operating activities

Net cash provided by (used in) operating activities

Cash flows from investing activities:

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Purchases of marketable securities

Proceeds from maturity of marketable securities

Net cash provided by (used in) investing activities

Proceeds from sale and maturity of marketable securities

Net cash used in investing activities

Cash flows from financing activities:

Issuances of common stock upon initial public offering, net

Issuances of common stock upon follow-on public offering, net

Issuances of Series E preferred stock, net

Issuances of common stock upon stock option exercise

Contribution by noncontrolling interest

Deferred offering costs

Issuances of common stock

Net cash provided by financing activities

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Cash paid for income taxes

Noncash operating activities:

Supplemental disclosure of non-cash investing and financing activities

Accrued deferred offering costs

Acquisition of right of use assets in exchange for lease obligations

Right of use assets recognized on adoption

Purchases of property and equipment

Acquisitions of right of use assets in exchange for lease obligations

Right of use assets recognized on adoption

Reclassification of deferred financing costs to additional paid-in capital

See accompanying notes to consolidated financial statements.

Schr ö dinger, Inc.

SCH RÖDINGER, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the years ended December 31, 2020 and 2019

(in thousands, except for share and per share amounts)

Description of Business

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The Company sells its software to biopharmaceutical and industrial companies, academic institutions, and government laboratories.

The Company also applies its computational platform to a broad pipeline of drug discovery programs in collaboration with biopharmaceutical companies, some of which the Company co-founded.

In addition, the Company uses its platform to advance a pipeline of internal, wholly-owned drug discovery programs.

The Company also applies its computational platform to a broad pipeline of drug discovery and development programs in collaboration with biopharmaceutical companies, some of which the Company co-founded.

In addition, the Company uses its platform to advance a pipeline of internal drug discovery programs.

On February 10, 2020, the Company completed an initial public offering (“IPO”), in which the Company issued and sold 11,882,352 shares of its common stock at a public offering price of $17.00 per share.

The underwriters fully exercised their option to purchase an additional 1,782,352 shares of the Company’s common stock at the public offering price less underwriting discounts.

The Company raised $209.6 million in net proceeds after deducting underwriting discounts and commissions and offering expenses payable by the Company.

Immediately prior to the closing of the IPO, preferred stockholders voluntarily exchanged 98,406,823 shares of preferred stock for an aggregate of 13,164,193 shares of limited common stock.

In addition, upon the closing of the IPO, the remaining 226,344,686 shares of preferred stock automatically converted into an aggregate of 30,278,832 shares of common stock.

On August 17, 2020, the Company completed a follow-on public offering, in which the Company issued and sold 4,500,000 shares of its common stock at a public offering price of $66.00 per share.

The underwriters fully exercised their option to purchase an additional 750,000 shares of the Company’s common stock at the public offering price less underwriting discounts.

The Company raised $325.6 million in net proceeds after deducting underwriting discounts and commissions and offering expenses payable by the Company.

In addition, a stockholder of the Company sold 500,000 shares of common stock.

The Company did not receive any proceeds from the sale of shares of common stock by the selling stockholder.

Significant Accounting Policies

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No.

2016-02, “Leases (ASC 842),” which supersedes, “Leases (ASC 840).” ASU No.

2016-02 increases the transparency and comparability of organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.

This guidance requires that operating lessees recognize a right-of-use asset and a lease liability measured at the present value of the lease payments in the statement of financial position, recognize a single lease cost allocated over the lease term on a straight-line basis, and classify all cash payments within operating activities in the statement of cash flows.

The amendments in this update were effective for fiscal years beginning after December 31, 2018, and interim periods beginning in the first interim period within the year of adoption.

In July 2018, the FASB issued ASU No.

2018-11, “ Leases (ASC 842) Targeted Improvements,” to provide a transition election to not restate comparative periods for the effects of applying the new standard.

This transition election permitted entities to change the date of initial application to the beginning of the year of adoption and to recognize the effects of applying the new standard as a cumulative-effect adjustment to the opening balance of retained earnings.

In March 2019, the FASB issued ASU No.

2019-01, “Leases (ASC 842) Codification Improvements,” to increase transparency and comparability about disclosing essential information about leasing transactions.

Collectively, ASU’s 2016-02, 2018-11 and 2019-01 are defined as “ASC 842”.

On January 1, 2019, the Company adopted ASU No.

2016-02, and its associated amendments using the modified retrospective transition method by applying the new standard to all leases existing at the date of initial application and not restating comparative periods.

There were no material cumulative effect adjustments recorded to retained earnings upon adoption.

Operating lease ROU assets and liabilities are recognized on the commencement date of the lease based on the present value of lease payments over the lease term.

The new guidance also modified the classification criteria and requires additional disclosures to enable users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases.

Consistent with current guidance, a lessee’s recognition, measurement, and presentation of

Schr ö dinger, Inc.

Notes to Consolidated Financial Statements — Continued

expenses and cash flows arising from a lease continues to depend primarily on its classification.

At inception, the Company determine s if an arrangement is a 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.

The Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to carryforward its historical lease classification, its assessment on whether a contract was or contains a lease, and its initial direct costs for any leases that existed prior to January 1, 2019.

In addition, the Company elected the short-term lease exception as a practical expedient and to combine lease and non-lease components.

On the date of adoption, the Company derecognized a deferred rent liability in the amount of $513, and recognized a ROU asset of $16,475 and a lease liability $18,033.

As of December 31, 2019, lease liabilities in the amount of $5,584 and $8,888 are included in current lease liabilities and lease liabilities, long-term, respectively.

Accounting Pronouncements Not Yet Adopted

In August 2017, the FASB issued ASU No.

2017-12, Derivatives and Hedging (“Topic 815”), Targeted Improvements to Accounting for Hedging Activities .

The new guidance better aligns an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results.

The new guidance also makes certain targeted improvements to simplify the application of hedge accounting guidance and ease the administrative burden of hedge documentation requirements and assessing hedge effectiveness.

The standard is effective for fiscal years beginning after December 15, 2018, and early adoption is permitted.

The Company does not expect this standard to have a material impact on its consolidated financial statements and related disclosures.

In August 2018, the FASB issued Accounting Standard Update No.

Recently Issued Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No.

2018-13 , Changes to Disclosure Requirements for Fair Value Measurements (Topic 820), which improved the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements.

The standard removes, modifies, and adds certain disclosure requirements.

The Company plans to adopt the new standard effective January 1, 2020 and does not expect the adoption of Topic 820 guidance to have a material impact on its consolidated financial statements.

The Company adopted this new standard effective January 1, 2020 with no material impact on its consolidated financial statements.

In November 2018, the FASB issued ASU No.

2018-18, Collaborative Arrangements (Topic 808) – Clarifying the Interaction between Topic 808 and Topic 606 .

The amendments in this ASU clarified that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606, Revenue from Contracts with Customers , when the collaborative arrangement participant is a customer in the context of a unit of account and precluded recognizing as revenue consideration received from a collaborative arrangement participant if the participant is not a customer.

The new guidance is effective for fiscal years beginning after December 15, 2019.

The Company adopted the amendment on January 1, 2020, with no material impact on its consolidated financial statements.

Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments-Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments , which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost.

ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates.

It also eliminates the concept of other-than-temporary impairment and requires credit losses related to certain available-for-sale debt securities to be recorded through an allowance for credit

losses rather than as a reduction in the amortized cost basis of the securities.

These changes result in earlier recognition of credit losses.

The Company will adopt ASU 2016-13 as of January 1, 2021 and does not expect this adoption to have a significant impact on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Topic 350):

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The Company has not yet adopted ASU 2018-15 and does not expect the adoption to have a significant impact on its consolidated financial statements.

Schr ö dinger, Inc.

Notes to Consolidated Financial Statements — Continued

In December 2019, the FASB issued Accounting Standard Update No.

2019-12, Income Taxes (“Topic 740”):

Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes.

This guidance will be effective for the Company in the first quarter of 2021 on a prospective basis, and early adoption is permitted.

The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

The Company has not yet adopted ASU 2019-12, and does not expect this adoption to have a significant impact on its consolidated financial statements.

Basis of Presentation and Use of Estimates

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generally accepted accounting principles (“U.S.

GAAP”) requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements.

Such estimates include the useful lives of long-lived assets, the recoverability of deferred tax assets, assumptions used in the allocation of revenue, and assumptions used in testing for impairment of long-lived assets.

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, estimates towards the progress of completion of collaboration agreements, and the valuation of stock-based compensation.

Actual results could differ from those estimates, and such differences may be material to the consolidated financial statements.

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Recovery of accounts receivable previously written off is recorded when received.

Changes in the balance of

Schr ö dinger, Inc.

Notes to Consolidated Financial Statements — Continued

accounts deemed uncollectible were deemed immaterial as of December 31, 2018 and 2019.

Changes in the balance of accounts deemed uncollectible were deemed immaterial as of December 31, 2020 and 2019.

Interest is not charged on accounts receivable.

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The Company did not capitalize any interest during 2020 and 2019.

Intangible Assets

Intangible assets include various intangible assets acquired through business acquisitions and asset purchases.

Intangible assets are amortized using the straight‑line method over their estimated useful lives, which range from 5 to 10 years, and are included in other assets in the consolidated balance sheets.

Intangible assets are reviewed for impairment as discussed below under Accounting for the Impairment of Long‑Lived Assets.

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.

Long-lived assets, such as property and equipment 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.

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No impairment was identified for the years ended December 31, 2020 and 2019.

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.

Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade 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, and net income.

The Company maintains an allowance for doubtful accounts.

As of December 31, 2020, two customers accounted for 17% and 14% of total accounts receivable, respectively.

As of December 31, 2019, one customer accounted for 10% of total accounts receivable.

For the year ended December 31, 2020, no customer accounted for more than 10% of total revenues.

For the year ended December 31, 2019, one customer accounted for 12% of total revenues.

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 $7,663 and $7,352 for the years ended December 31, 2020 and 2019, respectively.

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.

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 2020 or 2019.

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.

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 $1,362 and $754 in 2020 and 2019, respectively.

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.

Comprehensive Loss

Comprehensive loss includes net loss and changes in equity related to changes in unrealized gains or losses on marketable securities.

Equity Investments

The Company has entered into collaboration agreements with Nimbus Therapeutics, LLC (“Nimbus”), Morphic Therapeutic, Inc., a wholly owned subsidiary of Morphic Holding, Inc.

(“Morphic”), Petra Pharma Corporation (“Petra”), and Relay Therapeutics, Inc.

(“Relay”) to perform drug design services in exchange for minority ownership, which are included within equity investments in the Company’s consolidated balance sheets.

The Company has concluded that the carrying value of its equity investment in Nimbus should reflect its contractual rights to substantive profits.

The Company further determined that the hypothetical liquidation at book value method (“HLBV method”) for valuing contractual rights to substantive profits provides the best representation of its financial position in Nimbus.

During 2020, the Company continued to value Nimbus using the HLBV method.

The HLBV method is a balance sheet-oriented approach to equity method accounting.

Under the HLBV method, the Company determines its share of earnings or losses by comparing its claim on the book value at the beginning and end of each reporting period.

GAAP, and distribute the resulting cash to creditors and investors in accordance with their respective priorities.

Upon the completion of Morphic’s initial public offering in June 2019 , the Company changed the valuation methodology used to value the Morphic investment.

As there is a readily available public market for Morphic’s common stock , the Company values its investment based on the closing price of Morphic’s common sto ck as of the reporting date.

Upon the completion of Relay’s initial public offering in July 2020, the Company changed the valuation methodology used to value the Relay investment.

As there is a readily available public market for Relay’s common stock, the Company values its investment based on the closing price of Relay’s common stock as of the reporting date.

Prior to May 2020, the Company had concluded that its equity investment in Petra should be valued using the historical cost method, as the Company does not exercise significant influence over Petra.

During May 2020, Petra merged with a third party.

For further information regarding the Company’s equity investments, see Note 5, Fair Value Measurements and Note 12, Equity Investments.

Net Loss per Share Attributable to Common and Limited Common Stockholders

Following the completion of the Company’s IPO in February 2020, 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 loss attributable to common and limited common stockholders.

Basic net loss per share is computed by dividing net 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 loss, net income attributable to common and limited common stockholders for basic net loss is adjusted by the effect of dilutive securities, including awards under the Company’s equity compensation plans.

Diluted net loss 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.

For purposes of this calculation, stock options are considered common stock equivalents but have been excluded from the calculation of net loss per share attributable to common and limited stockholders as their effect is anti-dilutive.

For years ended December 31, 2020 and 2019, the computation of basic and diluted net loss per share is presented on a combined basis for common and limited common stock because the results are identical.

Revenue Recognition

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The Company’s performance obligations are satisfied either over time or at a point in time.

Schr ö dinger, Inc.

Notes to Consolidated Financial Statements — Continued

The following table illustrates the timing of the Company’s revenue recognition:

Year Ended December 31,

Software products and services – point in time

6 unchanged sentences

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 four sources:

(i) on-premise software license fees, (ii) hosted software subscription fees, (iii) software maintenance fees, and (iv) professional services fees.

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 for a specified term, typically for one year.

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.

The Company recognizes revenue for on-premise software license fees upfront, either upon delivery 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 its invoicing, the Company considers whether a significant financing component exists.

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 annually.

Payments typically are received upfront or annually.

Hosted software.

Hosted software revenue consists primarily of fees to provide the Company’s customers with access to its hosted software platform and is recognized ratably over the term of the arrangement.

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 licenses.

Hosted software is recognized ratably over the term of the arrangement.

Software maintenance .

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Professional services .

Professional services, such as technical support and installation or assisting customers with modeling, generally are not related to the functionality of the Company’s software and may be recognized as resources are consumed or over the term of the arrangement, depending on the terms of the underlying agreement.

The Company has historically estimated project status with relative accuracy.

A number of internal and external factors can affect such estimates, including labor rates, utilization and efficiency variances.

Professional services, such as training, technical support and installation or assisting customers with modeling, generally are not related to the functionality of the Company’s software and may be recognized as resources are consumed or over the term of the arrangement, depending on the terms of the underlying agreement.

The Company has historically estimated project status with relative accuracy, although a number of internal and external factors can affect such estimates, including labor rates, utilization and efficiency variances.

Payments for services are due in advance or upon consumption of resources.

Schr ö dinger, Inc.

Notes to Consolidated Financial Statements — Continued

The following table illustrates the revenue recognized from the four components of the software products and services revenue:

As of December 31,

Contribution .

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

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

Revenue was recognized upon execution of the agreement when invoiced in accordance with Accounting Standards Codification (“ASC”) Topic 958, Not-for-Profit Entities, as the agreement is not an exchange transaction.

The following table presents the revenue recognized from the five sources of the software products and services revenue:

Year Ended December 31,

On-premise software

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Professional services

Revenue from contracts with customers

Total software revenue

Contribution Revenue

During the year ended December 31, 2020, the Company recognized contribution revenue related to an agreement with Gates Ventures, LLC, which covers the period from June 23, 2020 through June 22, 2023 for total consideration of up to $3,000.

The Company received $1,000 in connection with its entry into the agreement, and the Company is entitled to receive additional $1,000 payments on or around the first and second anniversary of its entry into the agreement, subject to the Company providing certain progress reports to the Trustees of Columbia University in the City of New York.

As of December 31, 2020, the Company had no deferred revenue balance related to this agreement.

During the year ended December 31, 2020, the Company recognized $1,000 of contribution revenue.

Drug Discovery

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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.

As of December 31, 2018 and 2019, respectively, the Company determined that milestones totaling $3,650 and $1,500 were probable to occur, and $2,622 and $1,500 of those milestones were recognized as revenue during 2018 and 2019, respectively.

As of December 31, 2020 and 2019, milestones not yet achieved that were determined to be probable of achievement totaled $250 and $1,500, respectively, and $85 and $1,500 of those milestones were recognized as revenue for the years ended December 31, 2020 and 2019.

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.

The Company will be 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 targets include HIF-2 alpha and SOS1/KRAS, which are two of the Company’s internal 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, BMS paid the Company an initial upfront fee payment of $55,000.

The Company also is entitled to receive up to $2.7 billion in total milestone payments across all potential targets, consisting of:

a) up to $585,000 in milestone payments per oncology target, including $360,000 in the aggregate for the achievement of certain specified research, development, and regulatory milestones and $225,000 in the aggregate for the achievement of certain specified commercial milestones;

and b) up to $482,000 million in milestone payments per neurology and immunology target, including $257,000 in the aggregate for the achievement of certain specified research, development, and regulatory milestones and $225,000 in the aggregate for the achievement of certain specified commercial milestones.

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 ASC 606, Revenue from Contracts with Customers (Topic 606), and concluded that BMS is a customer based on the agreement structure.

At inception, the Company identified one performance obligation for each of the five programs 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 $55,000.

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 $55,000 to each performance obligation based on the relative stand-alone selling price of each performance obligation at inception, which was determined based on each performance obligation’s estimated stand-alone selling price.

The Company determined the estimated stand-alone selling price 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 th e end of each reporting period.

During the year ended December 31, 2020, the Company recognized $988 associated with the agreement based on the research activities performed subsequent to the contract start date.

As of December 31, 2020, there was $54,012 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 was no outstanding receivable for this collaboration as of December 31, 2020.

Significant Judgments

Significant judgments and estimates are required under Accounting Standard Codification (“ASC”) Topic 606, Revenue from Contract with Customers (“Topic 606”).

Significant judgments and estimates are required under ASC 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/or licenses and services, including professional services, technical support services, and rights to unspecified updates.

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.

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The Company has concluded that such promised goods and services are separate distinct performance obligations.

Schr ö dinger, Inc.

Notes to Consolidated Financial Statements — Continued

The Company is required to estimate the total consideration expected to be received from contracts with customers, including any variable consideration.

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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 project status and the costs incurred or hours expended.

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.

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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 to complete the research plan.

Generally, the Company has not experienced significant returns or refunds to customers.

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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 and records a deferred revenue liability when revenue is expected to be recognized subsequent to invoicing.

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 that include payment plans, the Company records a receivable related to revenue recognized upon delivery because it has an unconditional right to invoice and receive payment in the future related to those deliveries.

Schr ö dinger, Inc.

Notes to Consolidated Financial Statements — Continued

Contract assets are presented as other receivables within the consolidated balance sheets and primarily relate to the Company’s rights to consideration for work completed but not billed on service contracts.

Contract assets are transferred to receivables when the Company invoices the customer.

For certain drug discovery agreements where the milestones are deemed probable, 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,

Contract assets

Deferred revenue

During 2018 and 2019, respectively, the Company recognized $11,297 and $17,720 of revenue that was included in deferred revenue at the end of the preceding year.

Deferred revenue, short-term:

Drug discovery

Deferred revenue, long-term:

Drug discovery

For the years ended December 2020 and 2019, respectively, the Company recognized $24,921 and $17,720 of revenue that was included in deferred revenue at the end of the preceding period.

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 92% of its December 31, 2019 deferred revenue balance in 2020 and the remainder thereafter.

The Company expects to recognize as revenue approximately 52% of its December 31, 2020 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 $29,147 as of December 31, 2020.

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Deferred Sales Commissions

The Company has applied the practical expedient for sales commission expense, as any compensation paid to sale representatives to obtain a contract relates to a period of one year or less.

The Company has applied the practical expedient for sales commission expense, as any compensation paid to sales representatives to obtain a contract relates to a period of one year or less.

Therefore, the Company has not capitalized any costs related to sales commissions.

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.

Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade receivables.

The Company does not require customers to provide collateral to support accounts receivable.

If deemed necessary, credit reviews of significant 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, and net income.

The Company maintains an allowance for doubtful accounts.

Schr ö dinger, Inc.

Notes to Consolidated Financial Statements — Continued

As of December 31, 2018 and 2019, one customer accounted for 18% and 10% of total accounts receivable.

For the year ended December 31, 2018, no customer accounted for more than 10% of total revenues.

For the year ended December 31, 2019, one customer accounted for 12% of total revenues.

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 $4,894 and $7,352 for the years ended December 31, 2018 and 2019, respectively.

Software Development Costs

Costs to develop new software products and substantial enhancements to existing software products are expensed as incurred.

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 2018 or 2019.

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.

Commissions represent a component of sales and marketing expense and consist of the variable compensation paid to the Company’s direct sales force.

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 personnel are recoverable only in the case that the Company cannot collect against any invoiced fee associated with a sales order.

Commission expense was $602 and $754 in 2018 and 2019, respectively.

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.

Schr ö dinger, Inc.

Notes to Consolidated Financial Statements — Continued

The Company recognizes the effect of income tax positions only if such positions are deemed “more likely than not” capable to be sustained.

Interest and penalties accrued on unrecognized tax benefits are included within income tax expense in the consolidated financial statements.

Comprehensive Loss

Comprehensive loss includes net loss and changes in equity related to changes in unrealized gains or losses on marketable securities.

Equity Investments

The Company has entered into collaboration agreements with Nimbus Therapeutics, LLC (“Nimbus”), Morphic Therapeutic, Inc., a wholly-owned subsidiary of Morphic Holding, Inc.

(“Morphic”), and Petra Pharma Corporation (“Petra”) to perform drug design services in exchange for minority ownership, which are included within equity investments in the Company’s consolidated balance sheets.

The Company has concluded that the carrying value of its equity investment in Nimbus should reflect its contractual rights to substantive profits.

During 2019, the Company continued to value Nimbus using the HLBV method.

The HLBV method is a balance sheet oriented approach to equity method accounting.

Under the HLBV method, the Company determines its share of earnings or losses by comparing its claim on the book value at the beginning and end of each reporting period.

This claim is calculated as the amount that the Company would receive (or be obligated to pay) if the investee were to liquidate all of its assets at recorded amounts, determined as of the balance sheet date in accordance with generally accepted accounting principles, and distribute the resulting cash to creditors and investors in accordance with their respective priorities.

Upon the completion of Morphic’s initial public offering, the Company changed the valuation methodology used to value the Morphic investment.

As there is a readily available market price for Morphic’s common stock, the Company values its investment based on the closing price of Morphic’s common stock as of the reporting date.

The Company has concluded that its equity investment in Petra should be valued using the historical cost method, as the Company does not exercise significant influence over Petra.

For further information regarding the Company’s equity investments, see Note 5, Fair Value Measurements and Note 12, Equity Investments.

Net Loss Per Share Attributable to Common Stockholders

The Company calculates basic and diluted net loss per share attributable to common stockholders in conformity with the two-class method required for companies with participating securities.

The Company considers its convertible preferred stock to be participating securities.

In the event a dividend is declared or paid on common stock, holders of convertible preferred

Schr ö dinger, Inc.

Notes to Consolidated Financial Statements — Continued

stock are entitled to a share of such dividend in proportion to the holders of common stock on an as-if converted basis.

Under the two-class method, basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period.

Net loss attributable to common stockholders is determined by allocating undistributed earnings between common and preferred stockholders.

The diluted net loss per share attributable to common stockholders is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period determined using the treasury stock method.

The net loss attributable to common stockholders was not allocated to the convertible preferred stock under the two-class method as the convertible preferred stock does not have a contractual obligation to share in the Company’s losses.

For purposes of this calculation, convertible preferred stock and certain stock options are considered common stock equivalents but have been excluded from the calculation of net loss per share attributable to common stockholders as their effect is anti-dilutive.

Property and Equipment

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Depreciation expense for 2020 and 2019 was $3,658 and $3,625, 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.

Intangible Assets

Intangible assets are included within other assets in the consolidated balance sheets.

The following table presents the Company’s intangible assets and their related useful lives:

As of December 31,

Purchased technology

Customer relationships

Trademarks, logos, and website

Less accumulated amortization

Schr ö dinger, Inc.

Notes to Consolidated Financial Statements — Continued

Intangible asset amortization expense for 2018 and 2019 was $37 and $15, respectively, and is included within general and administrative expenses in the consolidated statements of operations.

The estimated amortization expense for the year ending December 31, 2020 is zero, as all intangible assets are fully amortized.

Fair Value Measurements

Various inputs are used in determining the fair value of the Company’s financial assets and liabilities and are summarized into the following three broad categories:

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

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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 consists primarily of corporate and U.S.

Marketable securities, which consist primarily of corporate and U.S.

government agency bonds, are classified as available for sale and fair value does not differ significantly from carrying value as of December 31, 2020 and 2019.

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Equity investments

Fair value of the Company’s investment in Morphic, classified as Level 1 in the fair value hierarchy, was determined using the market price of Morphic’s common stock as of the close of trading on December 31, 2019.

Schr ö dinger, Inc.

Notes to Consolidated Financial Statements — Continued

Fair value of the Company’s investments in Morphic and Relay, classified as Level 1 in the fair value hierarchy, were determined using the respective market prices of Morphic’s and Relay’s common stock as of the close of trading on December 31, 2020.

Fair value of the Company’s investment in Nimbus, classified as Level 3 in the fair value hierarchy, was determined under the HLBV method, as further described in Note 2, Significant Accounting Policies.

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As of December 31, 2018

Cash contributions

Unrealized loss

Conversion of investment

As of December 31, 2019

Cash contributions

Unrealized loss

As of December 31, 2020

Unrealized 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.

There were no transfers between Level 1, Level 2, and Level 3 investments in 2018 or 2019.

The conversion of investment represents the conversion of Morphic from an equity investment to a cost investment.

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.

During the years ended December 31, 2020 and 2019, there were no transfers between Level 1, Level 2 and Level 3 investments.

See Note 12, Equity Investments, for further information.

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The Company leases office space under operating leases that expire at various dates through 2029.

In addition to rental payments, the Company pays real property taxes, insurance, and repair and maintenance expenses for its office facilities.

The Company’s fixed operating leases cost was $4,703 and $5,181 for the years ended December31, 2018 and 2019, respectively.

The variable and short term lease costs were immaterial for the year ended December 31, 2019.

The Company adopted Topic 842 as of January 1, 2019.

The Company adopted Topic 842, Leases as of January 1, 2019 and elected the package of practical expedients permitted under the transition guidance, which allowed the Company to carryforward its historical lease classification, its assessment on whether a contract was or contains a lease, and its initial direct costs for any leases that existed prior to January 1, 2019.

In addition, the Company elected the short-term lease exception as a practical expedient and to combine lease and non-lease components.

The Company recognizes rent expense on a straight-line basis over the life of the related lease, including any periods of free rent.

Upon inception of a lease, the Company determines if an arrangement is a lease, if it includes options to extend or terminate the lease, and if it is reasonably certain that the Company will exercise the options.

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.

At the date of adoption of Topic 842, the Company determined lease liability amounts using a discount rate of 5.01%, which represents the Company’s incremental borrowing rate.

The Company determined lease liability amounts using a discount rate of 5.01%, which represents the Company’s incremental borrowing rate.

The Company determines its incremental borrowing rate for lease liability using its current borrowing rate, adjusted for various factors including level of collateralization and lease term.

Cash paid for operating lease liabilities, included in cash flow from operating activities in the consolidated statements of cash flows, was $5,108 for the year ended December 31, 2019.

As of December 31, 2020, the remaining weighted average lease term was 4 years.

Three leases expire in January 2020 with the option to extend through August 2020.

The company has concluded that these leases are likely to be extended and have included the extension terms in the calculation of the lease liability.

During the year ended December 31, 2019, the Company entered into two new leases, which increased ROU assets and lease liabilities by $464.

During the year ended December 31, 2020, the Company entered into two new leases, which increased right-of-use (“ROU”) assets and lease liabilities by $2,709.

ROU assets and lease liabilities were equal as no lease costs or incentives were associated with acquiring the leases.

Schr ö dinger, Inc.

Notes to Consolidated Financial Statements — Continued

Future minimum lease payments as of December 31, 2018 under noncancelable operating leases were as follows:

Year ending December 31:

Total future minimum lease payments

Variable and short-term lease costs were immaterial for the year ended December 31, 2020.

Additional details of the Company’s operating leases are presented in the following table:

Year Ended December 31,

Operating lease costs

Cash paid for operating leases

Maturities of operating lease liabilities as of December 31, 2020 under noncancelable operating leases were as follows:

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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.

Schr ö dinger, Inc.

Notes to Consolidated Financial Statements — Continued

Income tax expense is comprised of the following:

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United States

Loss before income taxes

Reconciliation of income tax expense at the applicable statutory income tax rates to the effective rate is as follows:

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Withholding tax

Section 162(m) limitation

Stock compensation

Return-to-provision adjustments

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Tax contingencies, net of reversals

Tax Cuts and Jobs Act

Change in valuation allowance

Effective income tax rate

Income tax expense for the year ended December 31, 2018 primarily related to state taxes, and taxes in foreign jurisdictions.

Income tax expense for the year ended December 31, 2019 primarily relates state taxes, taxes in foreign jurisdictions, and foreign withholding taxes, offset from the benefit of the refundable AMT credit.

The income tax expense for the year ended December 31, 2020 primarily related to state taxes and taxes in foreign jurisdictions.

Income tax benefit for the year ended December 31, 2019 primarily related to alternative minimum tax credits previously utilized that are refundable under the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”).

The total change in valuation allowance for the year ended December 31, 2020 was $22,904, which primarily was due to the generation of net operating losses.

Schr ö dinger, Inc.

Notes to Consolidated Financial Statements — Continued

Tax effects of temporary differences that give rise to significant portions of deferred income tax assets and deferred income tax liabilities were as follows:

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Accrued expenses

Depreciation and amortization

Gross deferred tax assets

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Deferred income tax liabilities:

Unrealized gain on equity investments

Prepaid expenses

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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.

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law in March 2020.

The CARES Act lifts certain deduction limitations originally imposed by the 2017 Tax Act.

Corporate taxpayers may carryback NOLs originating during 2018 through 2020 for up to five years, which was not previously allowed under the 2017 Tax Act.

The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020.

Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for tax years beginning January 1, 2019 and 2020.

The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act.

The CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation.

In addition, the CARES Act allows companies to defer making certain payroll tax payments until future years.

With the enactment of the CARES Act, the Company has not recognized a quantitative or qualitative impact for the year ended December 31, 2020.

The Company classifies interest and penalties related to unrecognized tax benefits within income tax expense in the consolidated statement of operations.

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The Company does not anticipate any significant increases or decreases in its uncertain tax positions within the next 12 months.

Schr ö dinger, Inc.

Notes to Consolidated Financial Statements — Continued

As of December 31, 2020, statutes of limitations were open for all of the Company’s federal and state tax returns filed after the year ended December 31, 2015 and 2014, respectively.

Net operating loss 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.

Net operating loss 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 undergoing any federal or state income tax examinations .

Convertible Preferred Stock

Series A Convertible Preferred Stock (“Series A Preferred Stock”)

On April 16, 2010, the board of directors approved the issuance of 7,255,853 shares of Series A preferred stock to existing Series A stockholders as payment for $2,490 in cumulative dividends in arrears.

The Series A preferred stock was issued at $0.3432 per share.

Also, on April 16, 2010, the board of directors approved the issuance of 2,987,648 shares of Series A preferred stock to existing Series A stockholders in exchange for the termination of the right to receive future cumulative dividends.

The Series A preferred stock was issued at $0.3432 per share.

As the issuance of shares in the form of a stock dividend on April 16, 2010 was greater than 25% of the shares outstanding prior to the dividend, this qualified as a stock split effected in the form of a dividend and resulted in an increase in the outstanding shares and related par value and an equal reduction to additional paid-in capital.

On June 22, 2010, the board of directors approved the issuance of 89,309,763 shares of Series A preferred stock to the unit holders of Schrödinger, LLC, other than the Company in exchange for their LLC units.

The exchange rate was 1.1488 shares of Series A preferred stock per LLC unit.

Due to the common ownership between the units of the LLC and the equity of the Company, this was considered a transaction between entities under common control and was accounted for at historical cost.

As a result of this transaction, Schrödinger, LLC became a wholly owned subsidiary of the Company.

In a liquidation event, excluding a public offering, holders of the Series A preferred stock were entitled to receive (i) following all preferential distributions made to holders of the shares of Series C, Series D, and Series E preferred stock, prior to any distribution to combined common stockholders, and on a pari passu basis with holders of the Series B preferred stock, an amount equal to $0.135 per share, plus any declared and unpaid dividends and (ii) following payment of all preferential amounts required to be paid to the holders of preferred stock, a portion of any proceeds remaining for distribution to preferred and combined common stockholders, pro rata based on the number of shares held by each such holder.

Holders of Series A preferred stock were entitled to receive noncumulative dividends at a rate of $0.00675 per share, when and if approved and declared by the board of directors.

Through December 31, 2018 and 2019, no dividends had been approved or declared by the board of directors related to the Company’s Series A preferred stock, other than as described above.

Schr ö dinger, Inc.

Notes to Consolidated Financial Statements — Continued

Series B Convertible Preferred Stock (“Series B Preferred Stock”)

On April 16, 2010, the board of directors approved the issuance of 29,468,101 shares of Series B preferred stock to Cascade Investment, LLC.

The Series B preferred stock was issued at $0.33935 per share for gross proceeds of $10,000.

During 2014, such shares were transferred to the Bill & Melinda Gates Foundation Trust (“BMGFT”).

In a liquidation event, excluding a public offering, holders of Series B preferred stock were entitled to receive (i) following all preferential distributions made to holders of the shares of Series C, Series D, and Series E preferred stock, prior to any distribution to combined common stockholders, and on a pari passu basis with holders of the Series A preferred stock, an amount equal to $0.33935 per share, plus any declared and unpaid dividends and (ii) following payment of all preferential amounts required to be paid to the holders of preferred stock, a portion of any proceeds remaining for distribution to preferred and combined common stockholders, pro rata based on the number of shares held by each such holder.

Holders of Series B preferred stock were entitled to receive noncumulative dividends at a rate of $0.016967 per share, when and if approved and declared by the board of directors.

Through December 31, 2018 and 2019, no dividends had been approved or declared by the board of directors related to the Company’s Series B preferred stock.

Series C Convertible Preferred Stock (“Series C Preferred Stock”)

On December 11, 2012, the board of directors approved the issuance of 47,242,235 shares of Series C preferred stock to Cascade Investment, LLC.

The Series C preferred stock was issued at $0.42335 per share for gross proceeds of $20,000.

During 2014, the shares were transferred to the BMGFT.

In a liquidation event, excluding a public offering, holders of Series C preferred stock were entitled to receive (i) following all preferential distributions made to holders of the shares of Series E preferred stock, prior to any distribution to combined common stockholders and holders of Series A and Series B preferred stock, and on a pari passu basis with holders of the Series D preferred stock, an amount equal to $0.42335 per share, plus any declared and unpaid dividends and (ii) following payment of all preferential amounts required to be paid to the holders of preferred stock, a portion of any proceeds remaining for distribution to preferred and combined common stockholders, pro rata based on the number of shares held by each such holder.

Holders of Series C preferred stock were entitled to receive noncumulative dividends at a rate of $0.0211675 per share, when and if approved and declared by the board of directors.

Through December 31, 2018 and 2019, no dividends had been approved or declared by the board of directors related to the Company’s Series C preferred stock.

Series D Convertible Preferred Stock (“Series D Preferred Stock”)

On June 15, 2015, the board of directors approved the issuance of 35,946,010 shares of Series D preferred stock to the BMGFT and 3,594,601 shares of Series D preferred stock to an employee.

The Series D preferred stock was issued at $0.55639 per share for gross proceeds of $22,000.

Schr ö dinger, Inc.

Notes to Consolidated Financial Statements — Continued

In a liquidation event, excluding a public offering, holders of Series D preferred stock were entitled to receive (i) following all preferential distributions made to holders of the shares of Series E preferred stock, prior to any distribution to combined common stockholders and holders of Series A and Series B preferred stock, and on a pari passu basis with holders of the Series C preferred stock, an amount equal to $0.55639 per share, plus any declared and unpaid dividends and (ii) following payment of all preferential amounts required to be paid to the holders of preferred stock, a portion of any proceeds remaining for distribution to preferred and combined common stockholders, pro rata based on the number of shares held by each such holder.

Holders of Series D preferred stock were entitled to receive noncumulative dividends at a rate of $0.0278195 per share, when and if approved and declared by the board of directors.

Through December 31, 2018 and 2019, no dividends had been approved or declared by the board of directors related to the Company’s Series D preferred stock.

Series E Convertible Preferred Stock (“Series E Preferred Stock”)

On November 9, 2018, the board of directors authorized 67,087,074 shares of Series E preferred stock, of which 53,669,659 were issued at $1.4906 per share for gross proceeds of $80,000..

In 2019, the Company issued an additional 20,126,118 shares of Series E preferred stock at $1.4906 per share for gross proceeds of $30,000.

In a liquidation event, excluding a public offering, holders of Series E preferred stock were entitled to receive (i) prior to any distribution to combined common stockholders and holders of Series A, Series B, Series C and Series D preferred stock, an amount equal to $1.4906 per share, plus any declared and unpaid dividends and (ii) following payment of all preferential amounts required to be paid to the holders of preferred stock, a portion of any proceeds remaining for distribution to preferred and combined common stockholders, pro rata based on the number of shares held by each such holder.

Holders of Series E preferred stock were entitled to receive noncumulative dividends at a rate of $0.07453 per share, when and if approved and declared by the board of directors.

Through December 31, 2019 no dividends had been approved or declared by the board of directors related to the Company’s Series E preferred stock.

Convertibility of Preferred Stock

Each share of preferred stock was convertible at any time, at the option of the holder, into a number of shares of common stock determined by dividing the original issuance price by the conversion price, in effect at the time of conversion, as defined in the Company’s Amended and Restated Certificate of Incorporation.

All shares of a series of preferred stock would automatically convert into common stock upon the earlier of (a) the Company’s initial public offering with a price to the public of at least $2.98 per share and at least $100,000 aggregate proceeds to the Company or (b) the date specified by written consent of the holders of a majority of the then outstanding shares of the applicable series of preferred stock.

Schr ö dinger, Inc.

Notes to Consolidated Financial Statements — Continued

Stockholders’ Deficit

Stockholders’ Equity (Deficit)

Upon the closing of the IPO, 226,344,686 shares of preferred stock automatically converted into an aggregate of 30,278,832 shares of common stock.

As of December 31, 2020, 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, receive dividends, if and when declared by the board of directors, and upon liquidation or dissolution, receive a portion of the assets available for distributions to stockholders, subject to preferential amounts owed to holders of the Company’s preferred stock.

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.

Common stockholders have no preemptive or other subscription rights and there are no redemption or sinking fund provisions with respect to such shares.

Common stock is subordinate to preferred stock with respect to dividend rights and rights upon liquidation, winding up, and dissolution of the Company.

Non-Voting Common Stock

As of December 31, 2019, the Company had authorized 146,199,885 shares of non-voting common stock with a par value of $0.01 per share.

Holders of non-voting common stock were entitled to receive dividends, if and when declared by the board of directors, and upon liquidation or dissolution, receive a portion of the assets available for distributions to stockholders, subject to preferential amounts owed to holders of the Company’s preferred stock.

Non-voting common stockholders had no preemptive or other subscription rights and there were no redemption or sinking fund provisions with respect to such shares.

Non-voting common stock was subordinate to preferred stock with respect to dividend rights and rights upon liquidation, winding up, and dissolutions of the Company.

As of December 31, 2018 and 2019, no non-voting common stock was outstanding.

Limited Common Stock

I mmediately prior to the closing of the IPO, preferred stockholders voluntarily exchanged 98,406,823 shares of preferred stock for an aggregate of 13,164,193 shares of limited common stock.

During the year ended December 31, 2020, limited common stockholders voluntarily converted 4,000,000 shares of limited common stock into 4,000,000 shares of common stock.

As of December 31, 2020, 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 are not 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.

Holders of the Company’s limited common stock have the right to exchange each share of limited common stock for 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.

Preferred Stock

As of December 31, 2020, the Company had authorized 10,000,000 shares of 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.

Stock-Based Compensation

Stock Incentive Plan

As of December 31, 2019, the Company’s stock incentive plans included the 2000 Stock Incentive Plan as amended in 2002 (the “2002 Plan”) and the Company’s 2010 Stock Plan (the “2010 Plan”) (together, the “Plans”), and provided for the granting of incentive stock options and nonqualified stock options.

Under the 2010 Plan, stock options must be granted at an exercise price not less than 100% of the fair market value per share at the grant date.

Under the 2002 Plan, incentive stock options must be granted at an exercise price not less than 100% of the fair market value per share on the grant date, but there is no minimum exercise price set for nonqualified stock options.

The maximum contractual term of options granted under the Plans is 10 years, and rights to exercise options generally vest over four years with 25% of the shares underlying the option vesting at the end of each of the first four years.

The 2002 Plan expired during 2010.

Shares issuable under options currently outstanding under the 2002 Plan will not be available for reissuance upon cancellation.

Stock Incentive Plans

As of December 31, 2020, the Company’s stock incentive plans included the 2010 Stock Plan (the “2010 Plan”) and the 2020 Equity Incentive Plan (the “2020 Plan”) (together, the “Plans”).

The 2020 Plan provides for the award of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock awards, restricted stock units, and other stock-based awards.

The 2010 Plan provided for the granting of incentive stock options and non-qualified stock options.

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 remain outstanding and effective.

Shares of common stock subject to outstanding awards granted under the 2010 Plan that expire, terminate, or are otherwise surrendered, cancelled, forfeited, or repurchased by the Company are available for issuance under the 2020 Plan.

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 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.

During 2020 and 2019 , 1,398,177 and 214,845 options under the Plans were exercised at a total exercise price of $ 4,183 and $ 549 , respectively.

Schr ö dinger, Inc.

Notes to Consolidated Financial Statements — Continued

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

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The Company accounts for forfeitures as they occur, as such, the Company does not estimate forfeitures at the time of grant.

Because there had been no public market for the Company’s common stock, the board of directors historically estimated the price of the Company’s common stock based upon several factors, including, but not limited to, third party valuations and the Company’s operating and financial performance.

The third party valuations took into consideration several factors, including prices for preferred stock that were sold to outside investors in arm’s length transactions, and the rights, preferences, and privileges of the preferred stock and the common stock;

the fact that the option grants involved illiquid securities in a private company;

the Company’s stage of development and revenue growth;

the state of the industry and the economy;

the marketplace and major competitors;

and the likelihood of achieving a liquidity event for the shares of common stock underlying the options, such as an initial public offering or sale of the Company, given prevailing market conditions.

These valuations were performed in accordance with the American Institute of Certified Public Accountants’ Audit and Accounting Practice Aid, Valuation of Privately Held Company Equity Securities Issued as Compensation .

As of December 31, 2018 and 2019, respectively, there were 1,334,859 and 236,005 additional shares available for grant under the 2010 Plan, respectively.

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 day of grant.

As of December 31, 2020, there were 2,168,706 shares available for grant under the 2020 Plan.

As of December 31, 2019, there were 236,005 shares available for grant under the 2010 Plan.

Following are the weighted average valuation assumptions used for options:

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General and administrative

Schr ö dinger, Inc.

Notes to Consolidated Financial Statements — Continued

Total stock-based compensation

Stock option activity was as follows:

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Exercisable, December 31, 2020

The weighted average grant date fair value of options granted during 2018 and 2019 was $1.65 and $2.93, respectively.

The weighted average grant date fair value per share of options granted during 2020 and 2019 was $9.55 and $2.93, respectively.

The intrinsic value of options exercised during 2020 and 2019 was $87,946 and $546, respectively.

As of December 31, 2019, there was $5,475 of unrecognized compensation cost related to unvested stock options granted under the 2010 Plan, which is expected to be recognized over a weighted average period of 2.84 years.

As of December 31, 2020, there was $31,424 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 3.01 years.

The fair value of shares vested during 2020 and 2019 was $3,153 and $1,734, respectively.

Net Loss Per Share Attributable to Common Stockholders

The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders (in thousands, except per share data):

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 (“ASC 810”).

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 ASC Topic 805, Business Combinations (“ASC 805”) at the date the reporting entity first becomes the primary beneficiary.

In October 2018, 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 historically consolidated Faxian's results into the consolidated financial statements, and eliminated WuXi's ownership as a non-controlling interest.

Net Loss per Share Attributable to Common and Limited Common Stockholders

The following table presents the calculation of basic and diluted net loss per share attributable to common and limited common stockholders for the years presented (in thousands, except per share data):

Year Ended December 31,

Weighted average common shares used to compute net loss per share

attributable to common stockholders, basic and diluted

Net loss per share

Since the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share as the inclusion of all potential common shares outstanding would have been anti-dilutive.

Net loss attributable to Schrödinger common

and limited common stockholders

Weighted average shares used to compute net

loss per share attributable to Schrödinger common

and limited common stockholders, basic and diluted:

Net loss per share attributable to Schrödinger common

and limited common stockholders, basic and diluted:

Since the Company was in a loss position for all years presented, basic net loss per share is the same as diluted net loss per share as the inclusion of all potential 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:

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Shares subject to outstanding common stock options

Schr ö dinger, Inc.

Notes to Consolidated Financial Statements — Continued

Equity Investments

The Company classifies the Nimbus investment as an equity investment within the consolidated balance sheets.

The Nimbus investment was received as compensation for collaboration services provided under a separate service agreement.

The Company held 8.0% and 6.7% of the issued and outstanding units of Nimbus as of December 31, 2018 and 2019, respectively.

The Company also has the right to designate one of nine board seats, provide software used by Nimbus to pursue drug discovery activities, and participate via the board seat in the governance of the entity.

Based upon these factors, the Company’s management believes that it has significant influence over the entity and therefore accounts for the entity as an equity method investment.

The initial Nimbus investment was received as compensation for collaboration services provided under a separate service agreement.

During the year ended December 31, 2020, the Company made a $2,869 cash investment in Nimbus.

The Company held 6.9% and 6.7% of Nimbus units on a fully diluted basis as of December 31, 2020 and December 31, 2019, respectively.

As Nimbus is a limited liability company and the Company is not a passive investor due to its collaboration with Nimbus on a number of drug discovery targets, the Company's management determined that it has significant influence over the entity and therefore accounts for the entity as an equity method investment.

The Company provides 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 which resulted in equity ownership and related fees are paid in cash to the Company.

Collaboration agreements are separate from the transaction that resulted in equity ownership and related fees are paid in cash to the Company.

Under the HLBV method, the Company reported losses of $2,977 and $4,180 on the Nimbus investment during 2020 and 2019, respectively.

The carrying value of the Nimbus investment was $4,288 and $108 as of December 31, 2018 and 2019, respectively.

The carrying value of the Nimbus investment was zero and $108 as of December 31, 2020 and December 31, 2019, respectively.

The Company has no obligation to fund Nimbus losses in excess of its initial investment.

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The Company accounts for its investment in Morphic at fair value based on the share price of Morphic’s common stock at the measurement date.

The Company held 3.23% and 2.74% of the issued and outstanding shares of Morphic’s common stock as of December 31, 2018 and 2019, respectively.

Prior to December 2018, the Company valued its investment in Morphic using the HLBV method.

Under the HLBV method, the Company reported losses of $679 for the year ended December 31, 2018.

As of December 31, 2018 and 2019, the carrying value of the investment in Morphic was $226 and $14,328, respectively.

During 2020 and 2019, the Company reported a gain of $13,685 and $14,102, respectively, on the Morphic investment.

As of December 31, 2020 and December 31, 2019, the carrying value of the Company’s investment in Morphic was $28,013 and $14,328, respectively.

The Company has no obligation to fund Morphic losses in excess of its initial investment.

On January 1, 2018, the Company adopted ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities , whereby the carrying values of its non-marketable equity securities are adjusted based on price changes from observable transactions of identical or similar securities of the same issuer or for impairment (referred to as the measurement alternative).

Any changes in carrying value are classified within other (expense) income in the consolidated statements of operations.

As of December 31, 2018 and 2019, the carrying value of non-marketable equity securities was $930.

Schr ö dinger, Inc.

Notes to Consolidated Financial Statements — Continued

During May 2020, Petra entered into a merger agreement with a third party.

In connection with the merger, the Company received $4,582 of merger consideration in exchange for the Company’s shares of Petra common stock and is eligible to receive potential earn-outs tied to the achievement of specified development, regulatory, and commercial milestones.

The Company is also eligible to receive $361 in escrow payments.

As the escrow payments are expected to be received within 12 months from the closing of the merger, they have been recorded as other receivables within the consolidated balance sheets.

The Company recorded a gain on the Petra investment of $4,156 for the year ended December 31, 2020.

The Company reported no gain or loss on the Petra investment for the year ended December 31, 2019.

In connection with the merger, the Company also received 2,676,191 shares of common stock of Ravenna Pharmaceuticals, Inc.

The Company does not exercise significant influence over Ravenna and, as such, the Company has recorded its investment in Ravenna as a non-marketable equity security.

As of December 31, 2020 and December 31, 2019, the carrying value of non-marketable equity securities was $94 and $930, respectively.

In July 2020, Relay successfully completed an initial public offering.

The Company accounts for its investment in Relay at fair value based on the share price of Relay’s common stock at the measurement date.

The Company reported a gain of $17,556 on the Relay investment for the year ended December 31, 2020, which is included within change in fair value in the consolidated statements of operations.

The Company reported no gain or loss on the Relay investment for the year ended December 31, 2019.

As of December 31, 2020 and December 31, 2019, the carrying value of the Company’s investment in Relay was $17,556 and zero, respectively.

The Company has no obligation to fund Relay losses in excess of its initial investment.

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 1.5% and 4.0% of compensation contributed by employees for the years ended December 31, 2018 and 2019, respectively.

The Company made discretionary matching contributions equal to 100% of the first 4.0% of compensation contributed by employees for the years ended December 31, 2020 and 2019.

Matching contributions during 2020 and 2019 were $1,748 and $1,492, respectively.

Related Party Transactions

As of December 31, 2018 and 2019, companies collectively controlled by David E.

For the years ended December 31, 2020 and 2019, the Company licensed technology and purchased services for $7,281 and $5,190, respectively, from companies controlled by David E.

Shaw and/or affiliates of companies controlled by David E.

Shaw entities”), owned 123,314,389 shares of the issued and outstanding Series A Preferred stock.

During 2018 and 2019, the Company licensed technology and purchased services for $3,704 and $5,190, respectively, from D.E.

Shaw entities.

In addition, D.E.

Shaw entities purchased certain products and services from, and provided cost reimbursements to, the Company totaling $197 and $195 in 2018 and 2019, respectively.

At December 31, 2018 and 2019, the Company had net payables of $1,028 and $1,760, respectively, to D.E.

Shaw (the “D.

Shaw entities”), stockholders of the Company.

In addition, D.

Shaw entities purchased certain products and services from, and provided cost reimbursements to, the Company totaling $226 and $195 for the years ended December 31, 2020 and 2019, respectively.

As of December 31, 2020 and December 31, 2019, the Company had net payables of $3,464 and $1,760, respectively, to D.E.

Shaw entities.

During 2018 and 2019, the Company paid consulting fees of $347 and $361 respectively, to a member of its board of directors.

Bill & Melinda Gates Foundation

As of December 31, 2018 and 2019, BMGFT owned 29,468,101 shares, 47,242,235 shares, 35,946,010 shares, and 33,543,539 shares of issued and outstanding Series B, Series C, Series D, and Series E Preferred stock.

During 2018 and 2019, the Bill & Melinda Gates Foundation, an entity under common control of BMGFT, 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 were $833 and $1,065 in 2018 and 2019, respectively.

As of December 31, 2018 and 2019, the Company had net receivables of $207 and $294, respectively, due from the Bill & Melinda Gates Foundation.

During 2018 and 2019, the Company recognized revenue of $1,080 and $1,093, respectively, from collaboration services agreements with Nimbus.

For the years ended December 31, 2020 and 2019, the Company paid consulting fees of $364 and $361, respectively, to a member of its board of directors.

Bill and Melinda Gates Foundation

For the years ended December 31, 2020 and 2019, the Bill & Melinda Gates Foundation, an entity under common control with Bill and Melinda Gates Foundation Trust (“BMGFT”), 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 $2,094 and $1,065 for the years ended December 31, 2020 and 2019, respectively.

As of December 31, 2020 and December 31, 2019, the Company had net receivables of $543 and $294, respectively, due from the Bill & Melinda Gates Foundation.

During the year ended December 31, 2020, the Company also recognized contribution revenue of $1,000 related to an agreement with Gates Ventures, LLC, an entity under 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.

There was no revenue recognized under this agreement for year ended December 31, 2019.

As of December 31, 2020 and December 31, 2019, the Company did not record a receivables balance due from Gates Ventures, LLC.

Segment Reporting

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The Drug Discovery segment is focused on building a portfolio of preclinical and clinical drug programs, internally and through collaborations.

Schr ö dinger, Inc.

Notes to Consolidated Financial Statements — Continued

The CODM reviews segment performance and allocates resources based upon segment revenue and segment gross profit of the Software and Drug Discovery reportable segments.

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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 the financial information with respect to the Company’s reportable segments for the periods presented:

Presented below is financial information with respect to the Company’s reportable segments for the periods presented:

Year Ended December 31,

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Total segment gross profit

Research and development expense

Sales and marketing expense

General and administrative expense

Gain on equity investment

Research and development

Sales and marketing

General and administrative

Gain on equity investments

Change in fair value

Interest income

Income tax expense

Income tax (expense) benefit

Consolidated net loss

Schr ö dinger, Inc.

Notes to Consolidated Financial Statements — Continued

The following table sets forth revenues by geographic area for the years ended December 31, 2020 and 2019:

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Subsequent Events

In January 2020, the Company’s Board of Directors and stockholders approved a one-for-7.47534 reverse stock split of the Company’s issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios for the Company’s preferred stock.

All share and per share amounts in the consolidated financial statements and notes thereto have been retrospectively adjusted for all periods presented to give effect to the reverse stock split and the adjustment of the preferred stock conversion ratios.

In January 2020, the Company adopted the 2020 Equity Incentive Plan, (the “2020 Plan”), which became effective with the Company’s initial public offering.

The 2020 Plan authorizes the award of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock awards, restricted stock units, and other stock-based awards.

The number of shares of common stock reserved for issuance under the 2020 Plan equals the sum of (i) 5,645,228 shares of common stock;

plus (ii) (A) the number of shares of common stock reserved for issuance under the 2010 Plan that remained available for grant under the 2010 Plan immediately prior to the effectiveness of the registration statement related to the Company’s initial public offering and (ii) (B) the number of shares of common stock subject to outstanding awards granted under the 2010 Plan that expire, terminate, or are otherwise surrendered, cancelled, forfeited, or repurchased by the Company at their original issuance price pursuant to a contractual repurchase right;

and plus (iii) an annual increase to be added on the first day of each fiscal year, beginning with the fiscal year ending December 31, 2021 and continuing for each fiscal year until, and including, the fiscal year ending December 31, 2025, by a number of shares of common stock equal to the smallest of (A) 1.5% of the sum of (a) the outstanding shares of common stock, (b) the outstanding shares of limited common stock and (c) the outstanding stock options granted by the Company (which sum is referred to as the “outstanding equity”), calculated on the last business day of the prior fiscal year or (B) the number of shares of common stock determined by the board of directors and (iv) an annual increase to be added on the first day of each fiscal year, beginning with the fiscal year ending December 31, 2026 and continuing for each fiscal year until, and including, the fiscal year ending December 31, 2030, by a number of shares of common stock equal to the smallest of (A) 1.0% of the outstanding equity, calculated on the last business day of the prior fiscal year or (B) the number of shares of common stock determined by the board of directors.

Schr ö dinger, Inc.

Notes to Consolidated Financial Statements — Continued

In January 2020, the Company made a cash investment in Nimbus of $2,869, which increased its ownership interest in Nimbus to 8.0% on a fully diluted basis.

On February 10, 2020, the Company completed the sale of 11,882,352 shares of its common stock in the initial public offering (the “IPO”) at a price to the public of $17.00 per share.

The underwriters fully exercised their over-allotment option and purchased an additional 1,782,352 shares of the Company’s common stock.

The offer and sale of the shares in the IPO was registered under the Securities Act pursuant to a registration statement on Form S-1 (File No.

333-235890), which was originally filed with the Securities and Exchange Commission (the “SEC”) on January 10, 2020, as subsequently amended, and declared effective by the SEC on February 5, 2020, as supplemented by a registration statement on Form S-1 (File No.

333 235890) filed pursuant to Rule 462 under the Securities Act of 1933, as amended.

The Company raised approximately $209.9 million in net proceeds in the IPO after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company.

Immediately prior to the closing of the IPO, preferred stockholders voluntary exchanged 98,406,823 shares of preferred stock for an aggregate of 13,164,193 shares of limited common stock.

In addition, in connection with the closing of the IPO, the remaining 226,344,686 shares of preferred stock automatic converted into an aggregate of 30,278,832 shares of common stock.

In February 2020, the Company’s Board of Directors granted 3,687,296 options to executives, directors, and employees at an exercise price of $17.00 per share under the 2020 Plan.

Changes in and Disagreements With Accou ntants on Accounting and Financial Disclosure.

On January 14, 2021, the Company sold 422,425 shares of Relay common stock for $15,735.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data