Schrodinger, Inc. 10-K

Item 8. Financial Statements and Supplementary Data. 98 Table of Contents INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of December 31, 2020 and 2019 F-3 Consolidated Statements of Operations for the Years ended December 31, 2020 and 2019 F-4 Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit for the Years ended December 31, 2020 and 2019 F-6 Consolidated Statements of Cash Flows for the Years ended December 31, 2020 and 2019 F-7 Notes to Consolidated Financial Statements F-8 F-1 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Schrödinger, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Schrödinger, Inc. and subsidiaries (the Company) as of December 31, 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. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ KPMG LLP We have served as the Company’s auditor since 2010. Portland, Oregon March 4, 2021 F-2 Table of Contents SCH RÖDINGER, INC. AND SUBSIDIARIES Consolidated Balance Sheets (in thousands, except for share and per share amounts) Assets December 31, 2020 December 31, 2019 Current assets: Cash and cash equivalents $ 202,296 $ 25,986 Restricted cash 500 500 Marketable securities 440,395 59,844 Accounts receivable, net of allowance for doubtful accounts of $60 and $50 31,423 18,676 Unbilled and other receivables 3,955 7,062 Prepaid expenses 4,409 6,468 Total current assets 682,978 118,536 Property and equipment, net 5,140 6,268 Equity investments 45,664 15,366 Right of use assets 10,129 12,762 Other assets 2,352 2,338 Total assets $ 746,263 $ 155,270 Liabilities, Convertible Preferred Stock, and Stockholders’ Equity (Deficit) Current liabilities: Accounts payable $ 8,398 $ 3,524 Accrued payroll, taxes, and benefits 12,000 7,034 Deferred revenue 45,403 25,054 Lease liabilities 4,543 5,584 Other accrued liabilities 2,861 3,824 Total current liabilities 73,205 45,020 Deferred revenue, long-term 41,164 2,205 Lease liabilities, long-term 7,221 8,888 Other liabilities, long-term 654 900 Total liabilities 122,244 57,013 Commitments and contingencies (Note 6) Convertible preferred stock: Series E convertible preferred stock, $0.01 par value. Authorized zero and 77,150,132 shares; zero and 73,795,777 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively — 109,270 Series D convertible preferred stock, $0.01 par value. Authorized zero and 39,540,611 shares; zero and 39,540,611 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively — 22,000 Series C convertible preferred stock, $0.01 par value. Authorized zero and 47,242,235 shares; zero and 47,242,235 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively — 19,844 Series B convertible preferred stock, $0.01 par value. Authorized zero and 29,468,101 shares; zero and 29,468,101 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively — 9,840 Series A convertible preferred stock, $0.01 par value. Authorized zero and 134,704,785 shares; zero and 134,704,785 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively — 30,626 Total convertible preferred stock — 191,580 Stockholders’ equity (deficit): Common stock, $0.01 par value. Authorized 500,000,000 and 425,000,000 shares; 60,713,534 and 6,121,821 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively 607 61 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 92 — Additional paid-in capital 752,558 11,655 Accumulated deficit (129,559 ) (105,096 ) Accumulated other comprehensive income 317 16 Total stockholders’ equity (deficit) of Schrödinger stockholders 624,015 (93,364 ) Noncontrolling interest 4 41 Total stockholders’ equity (deficit) 624,019 (93,323 ) Total liabilities, convertible preferred stock, and stockholders’ equity (deficit) $ 746,263 $ 155,270 See accompanying notes to consolidated financial statements. F-3 Table of Contents SCHRÖDINGER, INC. AND SUBSIDIARIES Consolidated Statements of Operations (in thousands, except for share and per share amounts) Year Ended December 31, 2020 2019 Revenues: Software products and services $ 92,530 $ 66,735 Drug discovery 15,565 18,808 Total revenues 108,095 85,543 Cost of revenues: Software products and services 18,003 13,646 Drug discovery 26,620 22,804 Total cost of revenues 44,623 36,450 Gross profit 63,472 49,093 Operating expenses: Research and development 64,695 39,404 Sales and marketing 17,795 21,364 General and administrative 41,898 27,040 Total operating expenses 124,388 87,808 Loss from operations (60,916 ) (38,715 ) Other income: Gain on equity investments 4,108 943 Change in fair value 28,263 9,922 Interest income 2,253 1,878 Total other income 34,624 12,743 Loss before income taxes (26,292 ) (25,972 ) Income tax expense (benefit) 345 (291 ) Net loss (26,637 ) (25,681 ) Net loss attributable to noncontrolling interest (2,174 ) (1,110 ) Net loss attributable to Schrödinger common and limited common stockholders $ (24,463 ) $ (24,571 ) Net loss per share attributable to Schrödinger common and limited common stockholders, basic and diluted: $ (0.41 ) $ (4.09 ) Weighted average shares used to compute net loss per share attributable to Schrödinger common and limited common stockholders, basic and diluted: 60,024,658 6,004,500 See accompanying notes to consolidated financial statements. F-4 Table of Contents SCH RÖDINGER, INC. AND SUBSIDIARIES Consolidated State ments of Comprehensive Loss (in thousands) Year Ended December 31, 2020 2019 Net loss attributable to Schrödinger common and limited common stockholders $ (24,463 ) $ (24,571 ) Changes in market value of investments, net of tax: Unrealized gain on marketable securities 301 25 Comprehensive loss $ (24,162 ) $ (24,546 ) See accompanying notes to consolidated financial statements. F-5 Table of Contents SCHRÖDINGER, INC. AND SUBSIDIARIES Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) (in thousands, except for share amounts) Accumulated Series E preferred stock Series D preferred stock Series C preferred stock Series B preferred stock Series A preferred stock Common stock Limited common stock Additional paid-in Accumulated other comprehensive Non controlling Total stockholders’ Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount capital deficit loss (income) interest equity (deficit) Balance at December 31, 2018 53,669,659 $ 79,377 39,540,611 $ 22,000 47,242,235 $ 19,844 29,468,101 $ 9,840 134,704,785 $ 30,626 5,906,976 $ 59 — $ — $ 8,915 $ (80,525 ) $ (9 ) $ — $ (71,560 ) Change in unrealized loss on marketable securities — — — — — — — — — — — — — — — — 25 — 25 Issuances of Series E preferred stock, net of issuance costs of $127 20,126,118 29,893 — — — — — — — — — — — — — — — — — Issuances of common stock upon stock option exercise — — — — — — — — — — 214,845 2 547 — — — 549 Stock-based compensation — — — — — — — — — — — — — — 2,193 — — — 2,193 Contributions by noncontrolling interest — — — — — — — — — — — — — — — — — 1,151 1,151 Net loss — — — — — — — — — — — — — — — (24,571 ) — (1,110 ) (25,681 ) Balance at December 31, 2019 73,795,777 109,270 39,540,611 22,000 47,242,235 19,844 29,468,101 9,840 134,704,785 30,626 6,121,821 61 — — 11,655 (105,096 ) 16 41 (93,323 ) Change in unrealized loss on marketable securities — — — — — — — — — — — — — — — — 301 — 301 Issuances of common stock upon stock option exercise — — — — — — — — — — 1,398,177 14 — — 4,169 — — — 4,183 Stock-based compensation — — — — — — — — — — — — — — 10,545 — — — 10,545 Issuances of common stock upon initial public offering, net of issuance costs of $22,667 — — — — — — — — — — 13,664,704 136 — — 209,497 — — — 209,633 Issuances of common stock upon follow-on offering, net of issuance costs of $20,901 — — — — — — — — — — 5,250,000 53 — — 325,547 — — — 325,600 Conversion of convertible preferred stock into common stock (73,795,777 ) (109,270 ) (17,844,124 ) (9,928 ) — — — — (134,704,785 ) (30,626 ) 30,278,832 303 — — 149,521 — — — 149,824 Exchange of convertible preferred stock into limited common stock — — (21,696,487 ) (12,072 ) (47,242,235 ) (19,844 ) (29,468,101 ) (9,840 ) — — — — 13,164,193 132 41,624 — — — 41,756 Conversion of limited common stock into common stock — — — — — — — — — — 4,000,000 40 (4,000,000 ) (40 ) — — — — — Contributions by non-controlling interest — — — — — — — — — — — — — — — — 2,137 2,137 Net loss — — — — — — — — — — — — — — — (24,463 ) — (2,174 ) (26,637 ) Balance at December 31, 2020 — $ — — $ — — $ — — $ — — $ — 60,713,534 $ 607 9,164,193 $ 92 $ 752,558 $ (129,559 ) $ 317 $ 4 $ 624,019 See accompanying notes to consolidated financial statements. F-6 Table of Contents SCHRÖDINGER, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, 2020 2019 Cash flows from operating activities: Net loss $ (26,637 ) $ (25,681 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Gain on equity investments (4,108 ) (943 ) Noncash revenue from equity investments (397 ) (186 ) Fair value adjustments (28,263 ) (9,922 ) Depreciation 3,658 3,640 Stock-based compensation 10,545 2,193 Noncash research and development expenses 2,137 1,051 Noncash investment accretion 646 (506 ) Decrease (increase) in assets: Accounts receivable, net (12,747 ) (5,038 ) Unbilled and other receivables 3,468 (1,556 ) Reduction in the carrying amount of right of use assets 5,342 4,177 Prepaid expenses and other assets 187 410 Increase (decrease) in liabilities: Accounts payable 4,882 (294 ) Accrued payroll, taxes, and benefits 4,966 2,948 Deferred revenue 59,705 6,715 Lease liabilities (5,417 ) (4,025 ) Other accrued liabilities (1,210 ) 958 Net cash provided by (used in) operating activities 16,757 (26,059 ) Cash flows from investing activities: Purchases of property and equipment (2,538 ) (1,836 ) Purchases of equity investments (2,869 ) — Distribution from equity investment 4,582 943 Purchases of marketable securities (519,668 ) (110,187 ) Proceeds from sale and maturity of marketable securities 138,772 57,225 Net cash used in investing activities (381,721 ) (53,855 ) Cash flows from financing activities: Issuances of common stock upon initial public offering, net 211,491 — Issuances of common stock upon follow-on public offering, net 325,600 — Issuances of Series E preferred stock, net — 29,893 Issuances of common stock upon stock option exercise 4,183 549 Contribution by noncontrolling interest — 100 Deferred offering costs — (1,858 ) Net cash provided by financing activities 541,274 28,684 Net increase (decrease) in cash and cash equivalents and restricted cash 176,310 (51,230 ) Cash and cash equivalents and restricted cash, beginning of year 26,486 77,716 Cash and cash equivalents and restricted cash, end of year $ 202,796 $ 26,486 Supplemental disclosure of cash flow and noncash information Cash paid for income taxes $ 381 $ 139 Supplemental disclosure of non-cash investing and financing activities Accrued deferred offering costs — 2,142 Purchases of property and equipment 8 90 Acquisitions of right of use assets in exchange for lease obligations 2,709 464 Right of use assets recognized on adoption — 16,475 Reclassification of deferred financing costs to additional paid-in capital 1,858 — See accompanying notes to consolidated financial statements. F-7 Table of Contents 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) (1 ) Description of Business Schrödinger, Inc. (the “Company”) has developed a differentiated, physics-based software platform that enables discovery of high-quality, novel molecules for drug development and materials applications more rapidly, at lower cost, and with, the Company believes, a higher likelihood of success compared to traditional methods. 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 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. (2) Significant Accounting Policies (a) 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 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. (b) 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 F-8 Table of Contents 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): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for annual periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021, with early adoption permitted. 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. 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 has not yet adopted ASU 2019-12, and does not expect this adoption to have a significant impact on its consolidated financial statements. (c ) Basis of Presentation and Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the assumptions used in the allocation of revenue, 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. (d ) Principles of Consolidation The Company’s consolidated financial statements include the accounts of Schrödinger, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The functional currency for foreign entities is the United States dollar. The Company accounts for investments over which it has significant influence, but not a controlling financial interest, using the equity method. (e ) Cash and Cash Equivalents and Marketable Securities and Restricted Cash Included in cash and cash equivalents were cash equivalents of $185,614 and $20,208 as of December 31, 2020 and 2019, respectively, which consisted of money market funds and certificates of deposit, and are stated at cost, which approximates market value. The Company classifies all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company classifies all marketable securities, which consist of fixed income securities, as available for sale securities. At times, cash balances held at financial institutions were in excess of the Federal Deposit Insurance Corporation’s insured limits; however, the Company primarily places its temporary cash with high-credit quality financial institutions. Restricted cash consists of a letter of credit held with the Company’s financial institution related to facility leases, and is classified as current in the Company’s balance sheets based on the maturity of the underlying letter of credit. (f ) Accounts Receivable Accounts receivable are stated at original invoice amount less an allowance for doubtful accounts. Management estimates the allowance for doubtful accounts by evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. Account balances are considered delinquent if payment is not received by the due date. Accounts receivable are written off when deemed uncollectible. Recovery of accounts receivable previously written off is recorded when received. Changes in the balance of accounts deemed uncollectible were deemed immaterial as of December 31, 2020 and 2019. Interest is not charged on accounts receivable. F-9 Table of Contents (g ) Fair Value of Financial Instruments The carrying values of cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value due to their short maturities. (h ) Property and Equipment Property and equipment are stated at cost. Maintenance and repairs are expensed as incurred. Depreciation is calculated using the straight‑line method over the estimated useful lives of the assets, which range from 3 to 7 years. Amortization of leasehold improvements is calculated using the straight‑line method over the remaining life of the lease or the useful life of the asset, whichever is shorter. Property and equipment are reviewed for impairment as discussed below under Accounting for the Impairment of Long‑Lived Assets. The Company did not capitalize any interest during 2020 and 2019. (i ) Accounting for the Impairment of Long‑Lived Assets 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. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that carrying value exceeds fair value. Fair value is determined using various valuation techniques, including discounted cash flow models, quoted market values, and third-party independent appraisals, depending on the nature of the asset. No impairment was identified for the years ended December 31, 2020 and 2019. (j ) Warranties The Company typically warrants that its products will perform in a manner consistent with the product specifications provided to the customer for a period of 30 days. Historically, the Company has not been required to make payments under these obligations. Therefore, no liabilities for such obligations are presented in the consolidated financial statements. ( k ) Concentrations Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade receivables. 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. (l ) Royalties Royalties represent a component of cost of revenues and consist of royalties paid to owners of intellectual property used in or bundled with the Company’s software. Generally, royalties are incurred and recorded at the time a customer enters into a binding purchase agreement, although some royalty agreements are based instead on cash collections. Royalty expense was $7,663 and $7,352 for the years ended December 31, 2020 and 2019, respectively. F-10 Table of Contents (m ) Software Development Costs Costs to develop new software products and substantial enhancements to existing software products are expensed as incurred. Historically, the Company has not capitalized any software development costs because the software development process was essentially completed concurrent with the establishment of technological feasibility. (n ) Research and Development and Advertising Research and development and advertising costs are expensed as incurred. The Company did not incur any significant advertising costs in 2020 or 2019. (o ) Stock‑Based Compensation The Company calculates stock‑based compensation expense utilizing fair value–based methodologies and recognizes expense over the vesting period of such awards. (p ) Commissions Commissions represent a component of sales and marketing expense and consist of the variable compensation paid to the Company’s sales representatives. Generally, sales commissions are earned and recorded as expense at the time that a customer has entered into a binding purchase agreement. Commissions paid to sales representatives are recoverable only in the case that the Company cannot collect against any invoiced fee associated with a sales order. Commission expense was $1,362 and $754 in 2020 and 2019, respectively. ( q ) Income Taxes The Company records deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of the assets and liabilities. Deferred tax assets are reduced by a valuation allowance when it is estimated to become more likely than not that a portion of the deferred tax assets will not be realized. Accordingly, the Company currently maintains a full valuation allowance against existing net deferred tax assets. The Company recognizes the effect of income tax positions only if such positions are deemed “more likely than not” capable of being sustained. Interest and penalties accrued on unrecognized tax benefits are included within income tax expense in the consolidated financial statements. (r ) Comprehensive Loss Comprehensive loss includes net loss and changes in equity related to changes in unrealized gains or losses on marketable securities. (s ) 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. 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 U.S. GAAP, and distribute the resulting cash to creditors and investors in accordance with their respective priorities. F-11 Table of Contents 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. (t ) 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. ( 3) Revenue Recognition Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for promised goods or services. The Company’s performance obligations are satisfied either over time or at a point in time. The following table illustrates the timing of the Company’s revenue recognition: Year Ended December 31, 2020 2019 Software products and services – point in time 55.0 % 49.9 % Software products and services – over time 30.6 28.1 Drug Discovery – point in time 6.7 8.6 Drug Discovery – over time 7.7 13.4 F-12 Table of Contents (a) Software Products and Services The Company enters into contracts that can include various combinations of licenses, products and services, some of which are distinct and are accounted for as separate performance obligations. For contracts with multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation on a relative standalone selling price basis. Revenue is recognized net of any sale and value-added taxes collected from customers and subsequently remitted to governmental authorities. The Company’s software business derives revenue from five sources: (i) on-premise software license fees, (ii) hosted software subscription fees, (iii) software maintenance fees, (iv) professional services fees, and (v) contributions. On-premise software. The Company’s on-premise software license arrangements grant customers the right to use its software on their own in-house servers or their own cloud instances for a specified term, typically for one year. 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 invoicing, the Company considers whether a significant financing component exists. The Company has elected the practical expedient to not assess for significant financing where the term is less than one year. The Company’s updates and upgrades are not integral to maintaining the utility of the software licenses. Payments typically are received upfront or annually. Hosted software. Hosted software revenue consists primarily of fees to provide the Company’s customers with hosted licenses, which allows these customers to access the Company’s cloud-based software solution on their own hardware without taking control of licenses. Hosted software is recognized ratably over the term of the arrangement. Software maintenance . Software maintenance includes technical support, updates, and upgrades. Software maintenance revenue is considered to be a separate performance obligation and is recognized ratably over the term of the arrangement. Professional services . 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. 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, 2020 2019 On-premise software $ 58,311 $ 42,647 Hosted software 9,192 7,418 Software maintenance 14,465 11,643 Professional services 9,562 5,027 Revenue from contracts with customers 91,530 66,735 Contribution 1,000 — Total software revenue $ 92,530 $ 66,735 (b) 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. F-13 Table of Contents (c ) Drug Discovery Revenue from drug discovery and collaboration services contracts is recognized either over time, typically by using costs incurred or hours expended to measure progress, or at a point in time based on the achievement of milestones. Payments for services are generally due upon achieving milestones stated in a contract, upfront at the start of a contract, or upon consumption of resources. Services may at times include variable consideration and milestone payments. The Company has estimated the amount of consideration that is variable using the most likely amount method. The Company evaluates milestones on a case-by-case basis, including whether there are factors outside the Company’s control that could result in a significant reversal of revenue, and the likelihood and magnitude of a potential reversal. If achievement of a milestone is not considered probable, the Company constrains (reduces) variable consideration to exclude the milestone payment until it is probable to be achieved. 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. (d) 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. F-14 Table of Contents 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. (e ) Significant Judgments 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 services, including training, professional services, technical support services, and rights to unspecified updates. Determining whether licenses and services are distinct performance obligations that should be accounted for separately, or are not distinct and therefore should be accounted for together, requires significant judgment. In some arrangements, such as most of the Company’s term-based software license arrangements, the Company has concluded that the licenses and associated services are distinct from each other. In other arrangements, including collaboration services arrangements, the licenses and certain services may not be distinct from each other. The Company’s time-based software arrangements may include multiple software licenses and a right to updates or upgrades to the licensed software products, and technical support. The Company has concluded that such promised goods and services are separate distinct performance obligations. The Company is required to estimate the total consideration expected to be received from contracts with customers, including any variable consideration. Once the estimated transaction price is established, amounts are allocated to the performance obligations that have been identified. The transaction price is allocated to each separate performance obligation on a relative stand-alone selling price (“SSP”) basis. Judgment is required to determine the SSP for each distinct performance obligation. The Company rarely licenses or sells products on a standalone basis, so the Company is required to estimate the range of SSPs for each performance obligation. In instances where the SSP is not directly observable because the Company does not sell the license, product, or service separately, the Company determines the SSP using information that includes historical discounting practices, market conditions, cost-plus analysis, and other observable inputs. The Company typically has more than one SSP for individual performance obligations due to the stratification of those items by classes of customers and circumstances. In these instances, the Company may use information such as the size and geographic region of the customer in determining the SSP. Professional service revenue is recognized as costs and hours are incurred, and judgment is required in estimating both the project status and the costs incurred or hours expended. If a group of agreements are so closely related to each other that they are, in effect, part of a single arrangement, such agreements are deemed to be one arrangement for revenue recognition purposes. The Company exercises significant judgment to evaluate the relevant facts and circumstances in determining whether the separate agreements should be accounted for separately or as, in substance, a single arrangement. The Company’s judgments about whether a group of contracts comprises a single arrangement can affect the allocation of consideration to the distinct performance obligations, which could have an effect on results of operations for the periods involved. Judgment is required to determine the total costs to perform research activities, which include the length of time required, the internal hours expected to be incurred on the services, and the number and costs of various studies that may be performed to complete the research plan. Generally, the Company has not experienced significant returns or refunds to customers. The Company’s estimates related to revenue recognition require significant judgment and the change in these estimates could have an effect on the Company’s results of operations during the periods involved. F-15 Table of Contents (f ) Contract Balances The timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in receivables, contract assets, or contract liabilities (deferred revenue) on the consolidated balance sheets. The Company records a contract asset when revenue is recognized prior to invoicing. A deferred revenue liability is recorded when revenue is expected to be recognized subsequent to invoicing. For the Company’s time-based software agreements, customers are generally invoiced at the beginning of the arrangement for the entire term, though when the term spans multiple years the customers may be invoiced on an annual basis. For certain drug discovery agreements where the milestones are deemed probable, 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, As of December 31, 2020 2019 Contract assets $ 3,589 $ 6,904 Deferred revenue, short-term: Software 28,218 23,287 Drug discovery 17,185 1,767 Deferred revenue, long-term: Software 1,976 1,500 Drug discovery 39,188 705 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 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. Payment terms and conditions vary by contract type, although terms typically require payment within 30 to 60 days. In instances where the timing of revenue recognition differs from that of invoicing, the Company has determined that its contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company’s products and services, not to facilitate financing arrangements. (g ) Deferred Sales Commissions 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. (4) Property and Equipment Property and equipment consisted of the following: As of December 31, 2020 2019 Computers and equipment $ 12,718 $ 11,150 Leasehold improvements 4,385 4,374 Furniture and fixtures 1,839 1,306 18,942 16,830 Less accumulated depreciation (13,802 ) (10,562 ) $ 5,140 $ 6,268 F-16 Table of Contents 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. (5 ) Fair Value Measurements Various inputs are used in determining the fair value of the Company’s financial assets and liabilities. These inputs are summarized into the following three broad categories: Level 1 – quoted prices in active markets for identical securities Level 2 – other significant observable inputs, including quoted prices for similar securities, interest rates, credit risk, etc. Level 3 – significant unobservable inputs, including the Company’s own assumptions in determining fair value The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Marketable securities, which consist primarily of corporate and U.S. government agency bonds, are classified as available for sale and fair value does not differ significantly from carrying value as of December 31, 2020 and 2019. The following table presents information about the Company’s assets and liabilities measured at fair value as of December 31, 2020: Level 1 Level 2 Level 3 Total Assets: Marketable securities $ — $ 440,395 $ — $ 440,395 Equity investments 45,570 — — 45,570 Total $ 45,570 $ 440,395 $ — $ 485,965 The following table presents information about the Company’s assets and liabilities measured at fair value as of December 31, 2019: Level 1 Level 2 Level 3 Total Assets: Marketable securities $ — $ 59,844 $ — $ 59,844 Equity investments 14,328 — 108 14,436 Total $ 14,328 $ 59,844 $ 108 $ 74,280 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. Significant unobservable inputs used under the HLBV method include Nimbus’ annual financial statements and the Company’s respective liquidation priority. The following table sets forth changes in fair value of the Company’s Level 3 investments: Amount As of December 31, 2018 $ 4,288 Unrealized loss (4,180 ) As of December 31, 2019 108 Cash contributions 2,869 Unrealized loss (2,977 ) As of December 31, 2020 $ — 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. F-17 Table of Contents (6 ) Commitments and Contingencies (a) Leases The Company leases office space under operating leases that expire at various dates through 2029. 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. Lease cost, representing lease payments over the term of the lease and any capitalizable direct costs less any incentives received, is recognized on a straight-line basis over the lease term as lease expense. In determining the present value of lease payments, the Company uses its incremental borrowing rate based on the information available at the lease commencement date if the rate implicit in the lease is not readily determinable. 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. As of December 31, 2020, the remaining weighted average lease term was 4 years. 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. 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, 2020 2019 Operating lease costs $ 5,895 $ 5,181 Cash paid for operating leases 6,050 5,108 Maturities of operating lease liabilities as of December 31, 2020 under noncancelable operating leases were as follows: Year ending December 31: 2021 $ 4,622 2022 1,892 2023 1,760 2024 1,777 2025 1,328 Thereafter 962 Total future minimum lease payments 12,341 Less: imputed interest (577 ) Present value of future minimum lease payments 11,764 Less: current portion of operating leases payments (4,543 ) Lease liabilities, long-term $ 7,221 (b) Legal Matters From time to time, the Company may become involved in routine litigation arising in the ordinary course of business. While the results of such litigation cannot be predicted with certainty, management believes that the final outcome of such matters is not likely to have a material adverse effect on the Company’s financial position or results of operations or cash flows. F-18 Table of Contents (7 ) Income Taxes Income tax expense is comprised of the following: Year ended December 31, 2020 2019 Current: Federal $ — $ 583 State 178 (95 ) Foreign 167 (779 ) Current income tax expense (benefit) 345 (291 ) Deferred: Federal — — State — — Deferred income tax expense (benefit) — — $ 345 $ (291 ) Components of income (loss) before income taxes by tax jurisdiction were as follows: Year ended December 31, 2020 2019 United States $ (24,567 ) $ (25,385 ) Foreign 449 523 Loss before income taxes $ (24,118 ) $ (24,862 ) Reconciliation of income tax expense at the applicable statutory income tax rates to the effective rate is as follows: Year ended December 31, 2020 2019 Statutory federal income tax rate 21.0 % 21.0 % State taxes, net of federal benefits 14.2 4.2 Withholding tax — (2.3 ) Section 162(m) limitation (12.8 ) — Stock compensation 68.5 0.2 Return-to-provision adjustments (1.3 ) 3.2 Research and development credit 6.2 5.2 Tax contingencies, net of reversals (0.6 ) (0.5 ) Change in valuation allowance (95.0 ) (31.3 ) Other (1.6 ) (0.6 ) Effective income tax rate (1.4 )% (0.9 )% 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. F-19 Table of Contents Tax effects of temporary differences that give rise to significant portions of deferred income tax assets and deferred income tax liabilities were as follows: As of December 31, 2020 2019 Deferred income tax assets: Net operating loss carryforwards $ 51,498 $ 26,119 Accrued expenses 10,477 7,097 Credits 8,752 7,468 Gross deferred tax assets 70,727 40,684 Less valuation allowance (58,155 ) (35,251 ) Net deferred tax assets 12,572 5,433 Deferred income tax liabilities: Unrealized gain on equity investments (10,185 ) (1,984 ) Prepaid expenses (889 ) (441 ) Depreciation and amortization (1,498 ) (3,008 ) Net deferred income tax assets $ — $ — As of December 31, 2020, the Company had federal and state net operating loss (“NOL”) carryforwards of $206,311 and $126,729, respectively. These carryforwards, with the exception of federal NOLs generated post 2017, will expire between 2022 and 2040 if not used by the Company to reduce income taxes payable in future periods. Utilization of post 2017 federal NOL carryforwards are limited to 80% of taxable income generated in a given year and carry forward indefinitely. As of December 31, 2020, the Company had federal and state research and development tax credit carryforwards of $9,385 and $498, respectively. These carryforwards will expire between 2021 and 2040 if not used by the Company to reduce income taxes payable in future periods. 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. Following is a reconciliation of total gross unrecognized tax benefits: Year ended December 31, 2020 2019 Balance, January 1 $ 902 $ 781 Additions for tax positions taken in prior years 25 24 Reductions for tax positions taken in prior years (16 ) (12 ) Additions for tax positions related to the current year 135 109 Balance, December 31 $ 1,046 $ 902 The Company does not anticipate any significant increases or decreases in its uncertain tax positions within the next 12 months. 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 F-20 Table of Contents 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 . (8 ) Stockholders’ Equity (Deficit) (a) Common Stock 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, 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. (b) 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. (c) 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. (9 ) Stock-Based Compensation 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. F-21 Table of Contents 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. The fair value of each option award is determined on the date of grant using the Black Scholes Merton option-pricing model. The calculation of fair value includes several assumptions that require management’s judgment. The expected terms of options granted to employees during 2020 and 2019 were calculated using an average of historical exercises. Estimated volatility for 2020 and 2019 incorporates a calculated volatility derived from the historical closing prices of shares of common stock of similar entities whose share prices were publicly available for the expected term of the option. The risk-free interest rate is based on the U.S. Treasury constant maturities in effect at the time of grant for the expected term of the option. The Company accounts for forfeitures as they occur, as such, the Company does not estimate forfeitures at the time of grant. 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: Year Ended December 31, 2020 2019 Valuation assumptions Expected dividend yield — % — % Expected volatility 60 % 57 % Expected term (years) 4.49 6.05 Risk-free interest rate 1.46 % 2.33 % The following table presents classification of stock-based compensation expense within the consolidated statements of operations: Year Ended December 31, 2020 2019 Cost of sales $ 1,384 $ 376 Research and development 3,050 460 Sales and marketing 516 311 General and administrative 5,595 1,046 Total stock-based compensation $ 10,545 $ 2,193 Stock option activity was as follows: Number of shares Weighted average exercise price Weighted average remaining contractual term (years) Aggregate intrinsic value Beginning, January 1, 2020 4,943,778 $ 3.57 Granted 3,912,383 19.49 Exercised (1,398,177 ) 2.99 Forfeited (129,315 ) 12.20 Expired (71,209 ) 1.98 Balance, December 31, 2020 7,257,460 12.14 8.06 $ 486,572 Exercisable, December 31, 2020 1,978,647 3.57 6.19 $ 149,604 F-22 Table of Contents 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, 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. (10) 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. (11 ) 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, 2020 2019 Numerator: Net loss attributable to Schrödinger common and limited common stockholders $ (24,463 ) $ (24,571 ) Denominator: Weighted average shares used to compute net loss per share attributable to Schrödinger common and limited common stockholders, basic and diluted: 60,024,658 6,004,500 Net loss per share attributable to Schrödinger common and limited common stockholders, basic and diluted: $ (0.41 ) $ (4.09 ) F-23 Table of Contents 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: Year Ended December 31, 2020 2019 Convertible preferred stock — 42,734,884 Shares subject to outstanding common stock options 7,257,460 4,805,562 7,257,460 47,540,446 (12 ) Equity Investments The Company classifies the Nimbus investment as an equity investment within the consolidated balance sheets. 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 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 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. In June 2019, Morphic successfully completed an initial public offering. 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. 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. 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. (“Ravenna”). 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. F-24 Table of Contents (13 ) Employee Benefit Plan The Company offers a 401(k) employee savings plan to its U.S.‑based employees. The Company made discretionary matching contributions equal to 100% of the first 4.0% 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. (14 ) Related Party Transactions (a) D. E. Shaw 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 (the “D. E. Shaw entities”), stockholders of the Company. In addition, D. E. 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. (b) Board Member 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. (c) 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. (15 ) Segment Reporting The Company has determined that its chief executive officer (“CEO”) is its chief operating decision maker (“CODM”). The Company’s CEO evaluates the financial performance of the Company based on two reportable segments: Software and Drug Discovery. The Software segment is focused on licensing the Company’s software to transform molecular discovery. The Drug Discovery segment is focused on building a portfolio of preclinical and clinical drug programs, internally and through collaborations. The CODM reviews segment performance and allocates resources based upon segment revenue and segment gross profit of the Software and Drug Discovery reportable segments. Segment gross profit is derived by deducting operational expenditures, with the exception of research and development, sales and marketing, and general and administrative activities from U.S. GAAP revenue. Operational expenditures are expenditures made that are directly attributable to the reportable segment. These expenditures are allocated to the segments based on headcount. The reportable segment expenditures include compensation, supplies, and services from contract research organizations. Certain cost items are not allocated to the Company’s reportable segments. These cost items primarily consist of compensation and general operational expenses associated with the Company’s research and development, sales and marketing, and general and administrative. These costs are incurred by both segments and due to the integrated nature of the Company’s Software and Drug Discovery segments, any allocation methodology would be arbitrary and provide no meaningful analysis. F-25 Table of Contents All segment revenue is earned in the United States and there are no intersegment revenues. Additionally, the Company reports assets on a consolidated basis and does not allocate assets to its reportable segments for purposes of assessing segment performance or allocating resources. Presented below is financial information with respect to the Company’s reportable segments for the periods presented: Year Ended December 31, 2020 2019 Segment revenues: Software $ 92,530 $ 66,735 Drug discovery 15,565 18,808 Total segment revenues $ 108,095 $ 85,543 Segment gross profit: Software $ 74,527 $ 53,089 Drug discovery (11,055 ) (3,996 ) Total segment gross profit 63,472 49,093 Unallocated: Research and development (64,695 ) (39,404 ) Sales and marketing (17,795 ) (21,364 ) General and administrative (41,898 ) (27,040 ) Gain on equity investments 4,108 943 Change in fair value 28,263 9,922 Interest income 2,253 1,878 Income tax (expense) benefit (345 ) 291 Consolidated net loss $ (26,637 ) $ (25,681 ) The following table sets forth revenues by geographic area for the years ended December 31, 2020 and 2019: Year Ended December 31, 2020 2019 United States $ 60,737 $ 47,622 Europe 24,370 17,504 Japan 14,558 14,367 Rest of World 8,430 6,050 $ 108,095 $ 85,543 (16 ) Subsequent Events On January 14, 2021, the Company sold 422,425 shares of Relay common stock for $15,735. F-26 Table of Contents Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None.