What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-24 compared with 2021-03-04 · 199 added, 178 removed, 407 unchanged (48% of the section changed)

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

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

We are transforming the way therapeutics and materials are discovered.

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

We generate revenues from sales of our software solutions and from upfront payments, research funding and milestone payments from our drug discovery collaborations, and have received distributions on account of, or proceeds from the sale of, our equity stakes in our collaborators, all of which we have used to support our research and development and other operating expenses.

Furthermore, we have also financed our operations from sales of our equity securities.

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

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

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

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

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

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

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

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

We currently conduct our operations through two reportable segments:

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

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

In November 2020, we entered into an exclusive, worldwide collaboration and license agreement with Bristol-Myers Squibb Company, or BMS, pursuant to which we and

BMS agreed to collaborate in the discovery, research and development of small molecule compounds for biological targets in the oncology, neurology and immunology therapeutic areas.

The collaboration includes HIF-2 alpha and SOS1/KRAS, which are two of our internal pipeline programs.

In addition to revenue from our

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

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

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

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

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

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

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

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

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

We are also eligible to receive up to approximately $338 million in preclinical, clinical, regulatory and sales-based milestone payments from Zai Lab Limited for any product candidate developed under the collaboration, and we are entitled to receive tiered royalties on net sales outside the United States.

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

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Business Impact of COVID-19 Pandemic

In December 2019, a novel coronavirus, or COVID-19, emerged and has since spread to many countries worldwide, including the United States.

On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19.

In response to the COVID-19 pandemic, state, local, federal, and foreign governments have put in place, and others in the future may put in place, quarantines, executive orders, shelter-in-place orders, and similar government orders and restrictions in order to control the spread of the disease.

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

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

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

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

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

During 2020, we did not see material impacts to our business from the COVID-19 pandemic.

While we do not expect material impacts in 2021 from the COVID-19 pandemic, the full extent of the future impact will depend on many factors outside of our control, including, without limitation, the timing, extent, trajectory and duration of the COVID-19 pandemic, the development and availability of effective treatments and vaccines, the imposition of protective public safety measures, and the impact of the COVID-19 pandemic on the global economy.

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

We did not see material impacts to our business from the COVID-19 pandemic during 2021.

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

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

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

Relative to our drug discovery programs, the COVID-19 pandemic could delay the progress of certain programs, particularly ones that are in clinical studies or preparing to enter clinical studies.

Delays in these programs could result in delays in achieving milestones and related revenue.

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

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

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

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

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

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

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

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

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

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

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

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

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

Accordingly, we work with our customers

to improve their experience and increase the utility of our platform in order to expand the scale at which they deploy our platform in their business.

Accordingly, we work with our customers to improve their experience and increase the utility of our platform in order to expand the scale at which they deploy our platform in their business.

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

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

For the year ended December 31, 2020, our year-over-year customer retention rate for such customers was 99% and was 96% or higher for each of the previous seven fiscal years.

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

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

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Advancement of our collaborations

We have entered into a number of collaborations with various biopharmaceutical companies, some of which we have co-founded, to advance drug discovery.

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

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

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

Our ability to continue to derive value from our

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

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

Ability to develop and expand our internal proprietary drug discovery pipeline

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

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

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

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

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

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

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

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

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

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

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Professional services.

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

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

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

Contribution .

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

Software contribution revenue .

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

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

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

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

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

Drug Discovery Revenue

Drug discovery services.

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

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

For example, in November 2020, we entered into an exclusive, worldwide collaboration and license agreement with BMS, pursuant to which we received an upfront payment of $55.0 million from BMS, of which approximately $1.0 million is included in our drug discovery

revenue for the year ended December 31, 2020 .

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

Drug discovery contribution revenue.

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

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

Cost of Revenues

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

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

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

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

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We recognize research and development expense as incurred.

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

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

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

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

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

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

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

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

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

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

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

Sales and Marketing Expense

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Other sales and marketing costs include promotional events that promote and expand knowledge of our company and platform, including industry conferences and events and our annual user group meetings in the United States and Europe, advertising, and allocated overhead costs.

operating costs of our sales offices in Europe and Japan are included in sales and marketing expense.

Due to the inherent scientific complexity of our software solutions, a high level of scientific expertise is needed to support our sales and marketing efforts.

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

Gain on Equity Investments

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

(Loss) Gain on Equity Investments

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

Change in Fair Value

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

Morphic and Relay became publicly traded companies in June 2019 and July 2020, respectively.

As such, fair value is determined as the current market value of the respective common stock as of the reporting date.

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

We remeasure our investments at each period end.

Prior to Morphic’s initial public offering, fair value changes for our Morphic investment were determined under the hypothetical liquidation book value, or HLBV, method.

For further information regarding the HLBV method, see “—Critical Accounting Policies and Significant Judgments and Estimates—Valuation of Equity Investments” in this Annual Report.

Prior to Relay’s initial public offering, fair value changes for our Relay investment were determined under the cost method.

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

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

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

Interest Income

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Other income:

Gain on equity investments

(Loss) gain on equity investments

Change in fair value

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Professional services

Software contribution

Total software products and services

Drug Discovery

Drug discovery services

Drug discovery contribution

Total drug discovery

Total revenues

Software Products and Services Revenue

On-premise software.

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

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

Hosted software.

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Software maintenance.

The increase in revenues for software maintenance was primarily due to the increase in on-premise software sales in previous years, offset by an overall reduction in the cost to provide such services.

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

Software maintenance revenue is recognized over time.

Professional services.

The increase in revenues from professional services was primarily due to revenue from significant technology service projects that began in late 2019, as well as an increased number of modeling service contracts.

Contributions .

Contribution revenue during 2020 was due to an agreement with Gates Ventures, LLC, which began in June 2020.

Drug discovery.

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

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

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

Software contribution revenue .

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

Drug Discovery Revenue

Drug discovery services.

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

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

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

Drug discovery contribution revenue .

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

Cost of Revenues

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Software products and services.

The increase in cost of revenues for software products and services was attributable to increases of approximately $2.6 million in personnel-related expense, approximately $1.5 million in royalty expense due to higher sales levels, and approximately $0.4 million in other costs, offset by a decrease of approximately $0.2 million in travel and entertainment expense due to COVID-19.

The increase in gross margin was primarily attributable to sales mix.

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

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

Software products and services gross margin.

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

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

Drug discovery.

The increase in cost of revenues for drug discovery was attributable to increases of approximately $3.3 million in personnel-related expense, approximately $0.7 million in compute capacity costs, and approximately $0.4 million in royalty expense, offset by a decrease of approximately $0.6 million in third-party CRO costs to support collaborations.

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

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

Research and Development Expense

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Research and development

The increase in research and development expense was attributable to increases of approximately $11.7 million in personnel-related expense, approximately $10.1 million in CRO costs associated with the expansion and progression of internal drug discovery programs, approximately $2.3 million in compute capacity costs, and approximately $1.1 million in other expenses.

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

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

Sales and Marketing Expense

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Sales and marketing

The decrease in sales and marketing expense was attributable to a decrease of approximately $2.7 million in personnel-related expense, a decrease of approximately $1.2 million in travel and entertainment expenses due to COVD-19, partially offset by an increase of $0.3 million in other expenses.

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

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

General and Administrative Expense

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General and administrative

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

Gain on Equity Investment

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

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

(Loss) Gain on Equity Investments

Year Ended December 31,

(in thousands)

Gain on equity investments

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

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

(Loss) gain on equity investments

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

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

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

Change in Fair Value

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Change in fair value

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

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

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

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

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

Interest Income

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Interest income

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

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

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

Income Tax Expense (Benefit)

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

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

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

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

At December 31, 2021, we had federal and state net operating loss carryforwards of approximately $283.3 million and $148.1 million, respectively.

These carryforwards, with the exception of federal net operating losses generated post 2017, will expire between 2022 and 2041 if not used by us to reduce income taxes payable in future periods.

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

At December 31, 2021, we had federal and state research and development tax credit carryforwards of approximately $15.5 million and $1.0 million, respectively.

These carryforwards will expire between 2022 and 2041 if not used by us to reduce income taxes payable in future periods.

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

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

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

We recorded income tax

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

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

Quarterly Results of Operations

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Other (expense) income:

Gain on equity investment

(Loss) gain on equity investment

Change in fair value

Interest income

Interest (expense) income

Total other (expense) income

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Net (loss) income

attributable to

attributable to Schrodinger

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

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with customers

Software contribution

Total software products

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Drug discovery

Drug discovery services

Drug discovery contribution

Total drug discovery

Total revenues

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Quarterly Revenue Trends

On-premise software revenue is subject to seasonality that favors the first quarter of each year, although for 2020 the trend is shifting toward the fourth quarter, primarily due to the calendar year timing of customer renewals for on-premise software arrangements, for which revenue is recognized at a single point in time.

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

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

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

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

Software maintenance revenue is related to on-premise software sales and also is recognized ratably over the term of the underlying agreement.

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

Drug discovery revenue fluctuated from period to period based on the achievement of specific collaboration milestones.

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

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

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Quarterly Deferred Revenue Trends

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

of actual achievement.

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

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

Quarterly Gross Margin Trends

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

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

Quarterly Other (Expense) Income Trends

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

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

Quarterl y Other (Expense) Income Trends

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

Segment Information

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

Additionally, we report assets on a consolidated basis and do not allocate assets to our reportable segments for purposes of assessing segment perf ormance or allocating resources .

Additionally, we report assets on a consolidated basis and do not allocate assets to our reportable segments for purposes of assessing segment performance or allocating resources.

Year Ended December 31,

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General and administrative

Gain on equity investment

(Loss) gain on equity investment

Change in fair value

Consolidated net loss

Liquidity and Capital Resources

Historically we have incurred substantial operating losses and expect to continue to incur significant operating losses for the foreseeable future, we have not maintained profitability and may never become profitable in the future.

Liquidity, Capital Resources and Funding Requirements

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

As of December 31, 2021, we had an accumulated deficit of $230.0 million.

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

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

Our primary use of cash is to fund operating expenses, which consist of research and development, sales and marketing, and general and administrative expenditures.

Cash used to fund operating expenses is impacted by the timing of when we pay operating expenses to vendors and collect amounts due from customers and collaborators, which is reflected in changes in our operating assets and liabilities, including accounts payable, accrued expenses, prepaid expenses, deferred revenue, and accounts receivable.

Furthermore, we have financed our operations from sales of our equity securities.

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

As of December 31, 2020, we had cash, cash equivalents, restricted cash, and marketable securities of $643.2 million.

Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view towards capital preservation and liquidity.

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

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

As of December 31, 2021, no securities had been sold under the Form S-3.

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

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

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

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

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

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

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

In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all.

If we are unable to raise additional capital or generate cash flows necessary to maintain or expand our operations and invest in our platform, we may not be able to compete successfully, which would harm our business, operations and financial condition.

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

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

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

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

The agreement contains a minimum payment obligation, which totals $60 million over the five years after the date we entered into the agreement.

There is no annual commitment.

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

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

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

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

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(in thousands)

Net cash provided by (used in) operating activities

Net cash (used in) provided by operating activities

Net cash used in investing activities

Net cash provided by financing activities

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

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

Operating activities

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

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

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

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Investing activities

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

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

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

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Financing activities

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

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

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

Funding Requirements

We believe that our existing cash, cash equivalents, and marketable securities will be sufficient to fund our operations and capital expenditure requirements for at least the next 12 months.

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

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

For example, in November 2020, we entered into an exclusive, worldwide collaboration and license agreement with BMS, pursuant to which we and BMS agreed to collaborate in the discovery, research and development of small molecule compounds for biological targets in the

oncology, neurology and immunology therapeutic areas.

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

However , under this agreement and any other future arrangements, the potential amounts we may be entitled to and the likelihood and timing of such payments, including at what stage of discovery or development we may choose to pursue such arrangements, is uncertain.

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

In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all.

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

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of December 31, 2020:

(in thousands)

Operating lease obligations (1)

Operating lease obligations consist of our continuing rent obligations through January 2029, primarily for our principal offices located in New York, New York and Portland, Oregon, which expire in August 2021 and August 2026, respectively.

In November 2019, we entered into a three-year agreement with a third-party cloud provider for compute power.

The agreement originally contained a minimum payment obligation, which totaled $18 million over the three years after the date we entered into the agreement.

In December 2020, we entered into a new five-year agreement with such party for compute power, which replaced the prior three-year agreement.

The agreement contains a minimum payment obligation, which totals $60 million over the five years after the date we entered into the subsequent agreement.

These amounts are not included in the table above because there is not an annual commitment.

We have not included these payments in the table of contractual obligations above since the contracts do not contain any minimum purchase commitments and are cancelable at any time by us, generally upon 30 days prior written notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.

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

At December 31, 2020, we had federal and state net operating loss carryforwards of approximately $206.3 million and $126.7 million, respectively.

These carryforwards, with the exception of federal net operating losses generated post 2017, will expire between 2022 and 2040, if not used by us to reduce income taxes payable in future periods.

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

At December 31, 2020, we had federal and state research and development tax credit carryforwards of approximately $9.4 million and $0.5 million, respectively.

These carryforwards will expire between 2021 and 2040 if not used by us to reduce income taxes payable in future periods.

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

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

We recorded income tax expense of $0.3 million for the year ended December 31, 2020 and income tax benefit of $0.3 million for the year ended December 31, 2019.

Historically, the first quarter of each year has typically been our largest quarter for software products and services revenue, although for 2020 the fourth quarter was our largest quarter, primarily due to the timing of customer renewals of on-premise software arrangements, for which revenue is recognized at a single point in time.

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

Seasonality has been a less significant factor for our hosted software arrangements, for which revenue is recognized ratably over time.

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Historical seasonality may not be indicative of future periods.

Off-Balance Sheet Arrangements

During the periods presented, we did not have, and currently we do not have, any off-balance sheet arrangements, as defined under the rules and regulations of the SEC.

Critical Accounting Policies and Significant Judgments and Estimates

Critical Accounting Policies and Significant Judgments and Critical Accounting Estimates

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

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The effects of material revisions in estimates, if any, are reflected in the consolidated financial statements prospectively from the date of change in estimates .

While our significant accounting policies are described in more detail Note 2 – Significant Accounting Policies to our consolidated financial statements appearing in Item 8 of this Annual Report, we believe the following accounting policies used in the preparation of our consolidated financial statements require the most difficult, subjective and complex judgments and estimates.

We recognize revenue in accordance with ASC 606, Revenue from Contracts with Customers.

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

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

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

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

Our software revenue may include upfront payments for the performance of services in the future, which have both fixed and variable consideration.

At contract inception, we assess the goods or services promised within each contract that falls under the scope of ASC 606 to identify distinct performance obligations.

We allocate the transaction price to each distinct performance obligation based on a relative stand-alone selling price, which requires our judgement.

We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when or as the performance obligation is satisfied.

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

Variable consideration:

Our revenue may include upfront payments for the performance of services in the future, which have both fixed and variable consideration.

We include the unconstrained amount of estimated variable consideration in the transaction price.

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At the end of each subsequent reporting period, we re-evaluate the estimated variable consideration included in the transaction price and any related constraint and, if necessary, adjust our estimate of the overall transaction price.

Milestone payments :

Research and development, regulatory or commercial milestones in our collaboration agreements may include some, but not necessarily all, of the following types of events:

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

The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied.

The transaction price is then allocated to each performance obligation on an SSP basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied.

At the end of each subsequent reporting period, we re-evaluate the probability of achievement of such development milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price.

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

Collaboration and license agreements:

At the inception of each arrangement we allocate the transaction price to each performance obligation based on the relative stand-alone selling price of each performance obligation at inception, which will be determined based on each performance obligation’s estimated stand-alone selling price.

We determine 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 may 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 will be performed to complete the research plan.

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

Software performance obligations and transaction price allocation :

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

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

We determine the SSP using information that includes historical discounting practices, market conditions, cost-plus analysis, and other observable inputs.

We typically have more than one SSP for individual performance obligations due to the stratification of those items by classes of customers and circumstances.

In these instances, we may use information such as the size and geographic region of the customer in determining the SSP.

We may also estimate SSP based on management judgment by considering available data such as internal cost and margin objectives, pricing strategies, market/competitive conditions, historical profitability data, as well as other observable inputs.

We establish SSP ranges for our products and services and reassesses them periodically.

The determination of SSP required significant management judgment.

Collaboration agreement transaction price allocation and measurement of progress:

At the inception of each arrangement, we utilize judgment to assess the nature of the performance obligations to determine whether they are distinct or a single combined performance obligation.

We allocate the transaction price to each performance obligation based on the relative SSP of each performance obligation at inception, which will be determined based on each performance obligation’s estimated SSP.

We determine the SSP at contract inception of the research activities based on internal estimates of the costs to perform the services, inclusive of a reasonable profit margin.

Significant judgment is used to determine the inputs for total costs to perform the research activities, which may 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 will be performed by third-parties to complete the research plan.

Revenue is recognized on a proportional performance basis over the period of service, using input-based measurements to estimate the performance.

Progress towards completion is remeasured at the end of each reporting period.

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

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

Stock-Based Compensation

We estimate the fair value of stock option awards granted using the Black-Scholes option-pricing model, which uses as inputs the fair value of our common stock and subjective assumptions we make as follows:

Fair Value of Common Stock.

As of February 2020, we determine the fair value of our common stock based on the closing price of our common stock as reported on the Nasdaq Global Select Market.

Expected Term.

The expected term of employee stock options represents the weighted average period that the stock options are expected to remain outstanding.

The expected terms were calculated using an average of historical exercises.

Expected Volatility.

We base expected future volatility on the historical and implied volatility of comparable publicly traded companies over a similar expected term.

Expected Dividend Yield.

We have never declared or paid any cash dividends and do not presently intend to pay cash dividends in the foreseeable future.

As a result, we used an expected dividend yield of zero.

Risk-Free Interest Rates.

We based the risk-free interest rate on the rate for a U.S.

Treasury zero-coupon issue with a term that closely approximates the expected life of the option grant at the date nearest the option grant date.

If any assumptions used in the Black-Scholes option-pricing model change significantly, stock-based compensation for future awards may differ materially compared with the awards granted previously.

JOBS Act Election

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act.

An emerging growth company may take advantage of reduced reporting requirements that are not otherwise applicable to public companies.

These provisions include, but are not limited to:

not being required to comply with the auditor attestation requirements on the effectiveness of our internal control over financial reporting;

not being required to comply with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (au ditor discussion and analysis);

reduced disclosure obligations regarding executive compensation arrangements;

exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

We may use these provisions until December 31, 2025.

However, if certain events occur prior to such date, including if we become a “large accelerated filer,” our annual gross revenues exceed $1.07 billion, or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period.

We are also a “smaller reporting company,” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, although we expect to cease to be a smaller reporting company in connection with the filing of our Quarterly Report on Form 10-Q for the first quarter of 2021.

Similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations, such as an ability to provide simplified executive compensation information and only two years of audited financial statements in an annual report on Form 10-K, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure.

The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards, until those standards apply to private companies.

We have elected to take advantage of the benefits of this extended transition period and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.

Until the date that we are no longer an emerging growth company or affirmatively and irrevocably opt out of the exemption provided by Section 7(a)(2)(B) of the Securities Act of 1933, as amended, upon issuance of a new or revised accounting standard that applies to our financial statements and that has a different effective date for public and private companies, we will disclose the date on which we will adopt the recently issued accounting standard.

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

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

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

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

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

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

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

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

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

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

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

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

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

Recent Accounting Pronouncements

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

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis