SCHRÖDINGER, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in Part II, Item 1A. "Risk Factors" of this Quarterly 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 Quarterly Report.
Overview
We are transforming the way therapeutics and materials are discovered. Our differentiated, physics-based software platform enables discovery of high-quality, novel molecules for drug development and materials applications more rapidly and at a lower cost, compared to traditional methods. Our software platform is used by biopharmaceutical and industrial companies, academic institutions, and government laboratories around the world. Our multidisciplinary drug discovery team also leverages our software platform to advance collaborative drug discovery and development programs and our own pipeline of novel therapeutics to address unmet medical needs. Since our founding, we have been primarily focused on developing our computational platform, which is capable of predicting critical properties of molecules with a high degree of accuracy, as well as advancing drug discovery programs both with our collaborators and internally. We have devoted substantially all of our resources to introducing new capabilities and refining our software, conducting research and development activities, recruiting skilled personnel, and providing general and administrative support for these operations. We are using our computational platform for both collaborative and internal drug discovery programs. Over the last decade, we have entered into a number of collaborations with biopharmaceutical companies that have provided us with significant income and have the potential to produce additional milestone payments, option fees, and future royalties. Furthermore, in mid-2018, we launched a pipeline of internal, wholly-owned programs. We recently submitted an investigational new drug application, or IND, for our MALT1 inhibitor, which we refer to as SGR-1505, and theU.S. Food and Drug Administration , or FDA, cleared the IND inJune 2022 . We expect to initiate a Phase 1 clinical trial of SGR-1505 in patients with relapsed or refractory B-cell lymphomas in the fourth quarter of 2022. In addition, we continue to advance other internal programs through IND-enabling studies. We expect to submit an IND application to the FDA for our CDC7 inhibitor, which we refer to as SGR-2921, in the first half of 2023 and for our WEE1 program at the end of 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 the second half of 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: software and drug discovery. The software segment is focused on selling our software to transform drug discovery across the life sciences industry, as well as to customers in materials science industries. The drug discovery segment is focused on generating revenue from a diverse portfolio of preclinical and clinical programs, internally and through collaborations, that have advanced to various stages of discovery and development. Our software segment generates revenue from software product licenses, hosted software subscriptions, software maintenance, professional services, and contributions. The revenue we generate through our software solutions from each of our customers varies largely depending on the number of software licenses our customers purchase from us. The licenses that our customers purchase from us provide them the ability to perform a certain number of calculations used in the design of molecules for drug discovery or materials science. We deliver our software through either (i) a product license that permits our customers to install the software solution directly on their own in-house hardware and use it for a specified term, or (ii) a subscription that allows our customers to access our cloud-based software solution on their own hardware without taking control of licenses. We currently generate drug discovery revenue from our collaborations, including upfront payments, research funding payments and discovery and development milestones. In the future, we may also derive drug discovery revenue from our collaborations from option fees, the achievement of commercial milestones, and royalties on commercial drug sales. In addition to revenue from our collaborations, we may also derive drug discovery revenue from collaborating on or out-licensing our internal drug discovery programs 28
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when we believe it will help maximize the commercial potential of the program. InNovember 2020 , we entered into an exclusive, worldwide collaboration and license agreement with Bristol-Myers Squibb Company, or BMS, pursuant to which we and BMS agreed to collaborate in the discovery, research and development of small molecule compounds for biological targets in the oncology, neurology and immunology therapeutic areas. The initial collaboration targets included HIF-2 alpha and SOS1/KRAS, which were two of our internal pipeline programs. InNovember 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 "Collaboration and License Agreement" in Note 3 to our unaudited condensed consolidated financial statements for additional information relating to this agreement. InAugust 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 inthe 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 outsidethe United States . Furthermore, inJanuary 2022 , we acquiredXTAL BioStructures, Inc. , or XTAL, a company that provides structural biology services, including biophysical methods, protein production and purification, and X-ray crystallography, which we believe will expand our future offerings to include an advanced and differentiated service that provides customers access to protein structures that have been computationally validated and are ready for structure-based virtual screening and lead optimization. See "Business Acquisition" in Note 4 to our unaudited condensed consolidated financial statements for additional information relating to this acquisition. We generated revenue of$38.5 million and$29.8 million during the three months endedJune 30, 2022 and 2021, respectively, representing year-over-year growth of 29%. Our net loss attributable to Schrödinger common stockholders and limited common stockholders was$47.7 million and$34.6 million for the three months endedJune 30, 2022 and 2021, respectively.
Business Impact of COVID-19 Pandemic
In order to safeguard the health of our employees in light of the COVID-19 pandemic, in earlyMarch 2020 we implemented a company-wide work-from-home policy. Beginning inJune 2020 , we began limited re-openings of certain of our offices inthe United States and abroad. 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 the three and six months endedJune 30, 2022 and the fiscal year endedDecember 31, 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 that remain in certain geographic regions, 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 and our collaborators' drug discovery programs, the COVID-19 pandemic has resulted in and may in the future result in disruptions in current and future IND-enabling studies and clinical trials, manufacturing disruptions, trial site disruptions and impact the ability to obtain necessary institutional review board, institutional biosafety committee, or other necessary site approvals. These disruptions have caused and may in the future cause delays in certain of our and our collaborators' drug discovery programs. For example, our contract manufacturing organizations, or CMOs, and our contract research organizations, or CROs, have experienced reductions in the capacity to undertake research-scale production and delays in executing some preclinical studies, including our IND-enabling studies for our CDC7 program. We now expect to submit the IND application to the FDA for our CDC7 inhibitor in the first half of 2023 and to initiate a Phase 1 clinical trial in the second half of 2023, subject to regulatory clearance. In addition, the recent resurgence of COVID-19 in certain cities inChina , and related subsequent lockdowns, have also reduced the capacity of a number of CROs that we work with in those affected areas. We, together with our CMOs and CROs, are closely monitoring the impact of the 29
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COVID-19 pandemic on these operations, and we are actively working to add supplemental or substitute capacity to minimize the impact of these reduced operations. Furthermore, if our collaborators experience similar delays with their drug discovery and development programs, that could cause additional delays in our achievement of milestones and related revenue. While there remains uncertainty about the extent of the effect of the COVID-19 pandemic, we do not envision a long-term impact from the COVID-19 pandemic on our ability to execute on our strategy. Management is actively monitoring the COVID-19 pandemic and its possible effects on our financial condition, liquidity, operations, customers, contractors, and workforce. For additional information on risks posed by the COVID-19 pandemic, please see Part II, Item 1A."Risk Factors -A widespread outbreak of an illness or other health issue, such as the COVID-19 pandemic, could negatively affect various aspects of our business and make it more difficult to meet our obligations to our customers, and could result in reduced demand from our customers as well as delays in our drug discovery and development programs," included elsewhere in this Quarterly Report. In response to the COVID-19 pandemic, we have joined a multi-company philanthropic effort to discover and develop novel small-molecule antiviral therapeutics to address COVID-19. The intent of the alliance, which to date also includes Takeda Pharmaceutical Company Limited, Novartis AG, Alphabet, Inc., Gilead Sciences, Inc., andWuXi 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.
Components of Results of Operations
Software Products and Services Revenue
Our software business generates 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. Our on-premise software license arrangements grant customers the right to use our software on their own in-house servers or their own cloud instances for a specified term, typically for one year. We recognize revenue for on-premise software license fees upfront, either upon delivery of the license or the effective date of the agreement, whichever is later. Hosted software. Hosted software revenue consists primarily of fees to provide our customers with hosted licenses, which allows these customers to access our cloud-based software solution on their own hardware without taking control of the licenses, and is recognized ratably over the term of the arrangement, which is typically one year. When a customer enters into a hosted arrangement for which revenue is recognized over time, the amount paid upfront that is not recognized in the current period is included in deferred revenue in our statement of financial position until the period in which it is recognized. Software maintenance. Software maintenance includes technical support, updates, and upgrades related to our on-premise software licenses. Software maintenance revenue is recognized ratably over the term of the arrangement. Software maintenance activities are performed in connection with the use of our on-premise software, and may fluctuate from period to period. Professional services. Professional services, such as training, technical setup, installation or assisting customers with modeling and structural biology services, where we use our software to perform tasks such as virtual screening and homology modeling on behalf of our customers, 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. Software contribution revenue. Software contribution revenue consists of funds received under a non-reciprocal agreement withGates Ventures, LLC entered intoJune 2020 . The agreement is an unconditional non-exchange contribution without restrictions. Revenue was recognized upon execution of the agreement and on the first anniversary of the agreement when invoiced, in accordance with Accounting Standard Codification, or ASC Topic 958, Not-for-Profit Entities as the agreement is not an exchange transaction.
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. We expect our drug discovery revenue to
trend higher over time as collaboration arrangements advance and we receive
additional revenue from research funding payments, the achievement of discovery,
development, and commercial milestones, option fees, and royalties on commercial
drug sales. The majority of our current collaborations are in the discovery
stage. Milestone payments typically increase in magnitude as a program advances.
In addition to
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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, inNovember 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$5.4 million and$9.4 million were included in our drug discovery revenue for the three and six months endedJune 30, 2022 . However, we expect that our drug discovery revenue will fluctuate from period to period due to the inherently uncertain nature of the timing of milestone achievement and our dependence on the program decisions of our collaborators. Drug discovery contribution revenue. Contribution revenue consists of funds received under an agreement with theBill 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
Software products and services. Cost of revenues for software includes personnel-related expenses (comprised of salaries, benefits, and stock-based compensation) for employees directly involved in the delivery of software solutions, maintenance and professional services, royalties paid for products sold and services performed using third-party licensed software functionality, and allocated overhead (facilities and information technology support) costs. Pursuant to various third-party arrangements, we license technology that is used in our software. These arrangements require us to pay royalties based on sales volume. Drug discovery. 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 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.
We expect our drug discovery costs of revenue to trend higher over time as our discovery collaborations advance.
Gross Profit and Gross Margin
Gross profit represents revenue less cost of revenues. Gross margin is gross profit expressed as a percentage of revenue. Our software products and services gross margin may fluctuate from period to period as our revenue fluctuates, and as a result of changes in sales mix between on-premise and hosted software solutions. For example, the cost of royalties due for sales of our hosted software arrangements are recognized upfront, whereas the associated revenue is recognized over the term of the underlying agreement. Currently, gross margin is not meaningful for measuring the operating results of our drug discovery business.
Research and Development Expense
Research and development expense accounts for a significant portion of our operating expenses. We recognize research and development expense as incurred. 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 and development programs; and
• 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
in the early stages, currently we do not track research and development expense
on a program-by-program basis.
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Table of Contents Sales and Marketing Expense Sales and marketing expense consists primarily of personnel-related costs for our sales and marketing staff and application scientists supporting our sales efforts, including salaries, benefits, bonuses, and stock-based compensation. 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 inthe United States andEurope , advertising, and allocated overhead costs. 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. We plan to make focused investments in sales and marketing over the foreseeable future to foster the growth of our business as we aim to expand software sales to existing customers and increase our customer base.
General and Administrative Expense
General and administrative expense consists of personnel-related expenses associated with our executive, legal, finance, human resources, information technology, and other administrative functions, including salaries, benefits, bonuses, and stock-based compensation. General and administrative expense also includes professional fees for external legal, accounting and other consulting services, allocated overhead costs, and other general operating expenses. We expect to increase the size of our general and administrative staff to support the anticipated growth of our business. We expect to continue to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on aU.S. securities exchange and costs related to compliance and reporting obligations pursuant to the rules and regulations of theSecurities and Exchange Commission , orSEC . In addition, as a public company, we expect to continue to incur increased expenses such as insurance and professional services. As a result, we expect the dollar amount of our general and administrative expense to increase for the foreseeable future.
Gain (Loss) on Equity Investments
Gain (loss) on equity investments consists of realized gains in the form of cash distributions received from our equity investments offset by realized losses on the sale of equity. Change in Fair Value Fair value gains and losses consist of adjustments to the fair value of our equity investments, includingNimbus Therapeutics, Inc. , or Nimbus,Structure Therapeutics Inc. , formerly known asShouTi Inc. , or Structure Therapeutics,Eonix, LLC , or Eonix, and Morphic Holding, Inc., or Morphic. We remeasure our investments at each period end.
We expect that fair value gains and losses will fluctuate significantly in future periods.
Other (Expense) Income
Other (expense) income consists of interest earned on our cash equivalents and marketable securities, interest expense, and transactional foreign exchange gains and losses.
Income Tax Expense
Income tax expense consists ofU.S. federal and state income taxes and income taxes in certain foreign jurisdictions in which we conduct business. We maintain a full valuation allowance on our federal and state deferred tax assets as we have concluded that it is not more likely than not that the deferred tax assets will be realized. 32
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Table of Contents Results of Operations
Comparison of the three and six months ended
The following table summarizes our unaudited results of operations data for the
three and six months ended
Three Months Ended June 30, Change Six Months Ended June 30, Change
2022 2021 $ % 2022 2021 $ %
(in thousands) (in thousands)
Revenues:
Software products and services $ 30,011 $ 24,052 $ 5,959 25% $ 63,092 $ 50,392 $ 12,700 25%
Drug discovery 8,458 5,732 2,726 48% 24,040 11,519 12,521 109%
Total revenues 38,469 29,784 8,685 29% 87,132 61,911 25,221 41%
Cost of revenues:
Software products and services 7,101 5,641 1,460 26% 14,612 11,547 3,065 27%
Drug discovery 14,234 12,163 2,071 17% 27,403 22,220 5,183 23%
Total cost of revenues 21,335 17,804 3,531 20% 42,015 33,767 8,248 24%
Gross profit 17,134 11,980 5,154 43% 45,117 28,144 16,973 60%
Operating expenses:
Research and development 31,123 21,092 10,031 48% 58,945 42,540 16,405 39%
Sales and marketing 7,428 5,380 2,048 38% 14,099 10,619 3,480 33%
General and administrative 22,056 15,850 6,206 39% 44,189 29,239 14,950 51%
Total operating expenses 60,607 42,322 18,285 43% 117,233 82,398 34,835 42%
Loss from operations (43,473 ) (30,342 ) (13,131 ) 43% (72,116 ) (54,254 ) (17,862 ) 33%
Other income (expense):
Gain (loss) on equity investments 11,828 - 11,828 N/M 11,828 (1,781 ) 13,609 N/M
Change in fair value (15,700 ) (4,918 ) (10,782 ) N/M (21,864 ) 19,906 (41,770 ) N/M
Other (expense) income (296 ) 357 (653 ) N/M 32 777 (745 ) N/M
Total other (expense) income (4,168 ) (4,561 ) 393 N/M (10,004 ) 18,902 (28,906 ) N/M
Loss before income taxes (47,641 ) (34,903 ) (12,738 ) N/M (82,120 ) (35,352 ) (46,768 ) N/M
Income tax expense 33 67 (34 ) N/M 5 141 (136 ) N/M
Net loss (47,674 ) (34,970 ) (12,704 ) N/M (82,125 ) (35,493 ) (46,632 ) N/M
Net loss attributable to
noncontrolling interest 12 (326 ) 338 N/M 1 (820 ) 821 N/M
Net loss attributable to
Schrödinger common and
limited common stockholders $ (47,686 ) $ (34,644 ) $ (13,042 ) N/M $ (82,126 ) $ (34,673 ) $ (47,453 ) N/M
N/M - not meaningful
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Revenues
Three Months Ended June 30, Change Six Months Ended June 30, Change
2022 2021 $ % 2022 2021 $ %
(in thousands) (in thousands)
Revenues:
Software
On-premise software $ 16,595 $ 14,452 $ 2,143 15% $ 38,281 $ 31,807 $ 6,474 20%
Hosted software 3,596 2,704 892 33% 6,851 5,304 1,547 29%
Software maintenance 4,952 4,176 776 19% 9,678 8,281 1,397 17%
Professional services 3,868 1,720 2,148 125% 7,282 4,000 3,282 82%
Revenue from contracts
with customers 29,011 23,052 5,959 26% 62,092 49,392 12,700 26%
Software contribution 1,000 1,000 - - 1,000 1,000 - -
Total software products
and services 30,011 24,052 5,959 25% 63,092 50,392 12,700 25%
Drug discovery
Drug discovery services 8,019 5,732 2,287 40% 23,259 11,519 11,740 102%
Drug discovery
contribution 439 - 439 - 781 - 781 -
Total drug discovery 8,458 5,732 2,726 48% 24,040 11,519 12,521 109%
Total revenues $ 38,469 $ 29,784 $ 8,685 29% $ 87,132 $ 61,911 $ 25,221 41%
On-premise software. The increase in revenues for on-premise software for the
three and six months ended June 30, 2022 as compared to the three and six months
ended June 30, 2021 was primarily attributable to increased sales from existing
and new customers, growth in multi-year agreements, and timing of revenue for
customer renewals.
Hosted software. The increase in revenues for hosted software for the three and
six months ended June 30, 2022 as compared to the three and six months ended
June 30, 2021 was primarily due to growth in new customers purchasing hosted
software subscriptions, as well as increased spend from existing hosted
customers, for which revenue is recognized ratably over time.
Software maintenance. The increase in revenues for software maintenance for the
three and six months ended June 30, 2022 as compared to the three and six months
ended June 30, 2021 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 for
the three and six months ended June 30, 2022 as compared to the three and six
months ended June 30, 2021 was primarily due to the addition of XTAL service
revenue subsequent to the acquisition, and the increased sales and timing of
technology and modeling service projects.
Software contribution revenue. Contribution revenue for the three and six months
ended June 30, 2022 and 2021 was due to funds received pursuant to an agreement
with Gates Ventures, LLC , which began in June 2020 .
Drug discovery services. The increase in revenues for drug discovery services
for the three and six months ended June 30, 2022 as compared to the three and
six months ended June 30, 2021 was primarily due to the timing and amount of
collaboration milestones achieved, the progress of existing and new
collaborations accomplished during the period, as well as research funding
received during the three and six months ended June 30, 2022 . We expect that our
revenue will fluctuate from period to period due to the inherently uncertain
nature of the timing of milestone achievement and our dependence on the program
decisions of our collaborators.
Drug discovery contribution revenue. Contribution revenue for the three and six
months ended June 30, 2022 was due to services performed under an agreement with
the Bill and Melinda Gates Foundation , aimed at accelerating drug discovery in
women's health, which began in November 2021 .
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Cost of Revenues
Three Months Ended June 30, Change Six Months Ended June 30, Change
2022 2021 $ % 2022 2021 $ %
(in thousands) (in thousands)
Cost of revenues:
Software products and services $ 7,101 $ 5,641 $ 1,460 26% $ 14,612 $ 11,547 $ 3,065 27%
Gross margin 76 % 77 % 77 % 77 %
Drug discovery 14,234 12,163 2,071 17% 27,403 22,220 5,183 23%
Software products and services. The increase in cost of revenues for software
products and services during the three months ended June 30, 2022 compared to
the three months ended June 30, 2021 was attributable to increases of
approximately $1.4 million in personnel-related expense and approximately $0.1
million in other expenses.
The increase in cost of revenues for software products and services during the
six months ended June 30, 2022 compared to the six months ended June 30, 2021
was attributable to increases of approximately $2.3 million in personnel-related
expense, approximately $0.4 million in royalty expense, and approximately $0.4
million in other expenses.
Software products and services gross margin. The decrease in software gross
margin during the three months ended June 30, 2022 compared to the three months
ended June 30, 2021 reflects our investment to support the rollout of
large-scale deployments of our platform. Software gross margin was consistent
during the six months ended June 30, 2022 compared to the six month ended June
30, 2021 .
Drug discovery. The increase in cost of revenues for drug discovery during the
three months ended June 30, 2022 compared to the three months ended June 30,
2021 was attributable to increases of approximately $1.1 million in
personnel-related expense, approximately $0.3 million in royalties expense,
approximately $0.2 million in cloud computing expense, and approximately $0.5
million in other expenses.
The increase in cost of revenues for drug discovery during the six months ended
June 30, 2022 compared to the six months ended June 30, 2021 was due to
increases of approximately $2.5 million in personnel-related expense,
approximately $1.7 million CRO expense associated with the expansion and
progression of collaboration drug discovery programs, approximately $0.3 million
in royalties expense, approximately $0.2 million in cloud computing expense, and
approximately $0.5 million in other expenses.
Research and Development Expense
Three Months Ended June 30, Change Six Months Ended June 30, Change
2022 2021 $ % 2022 2021 $ %
(in thousands) (in thousands)
Research and development $ 31,123 $ 21,092 $ 10,031 48% $ 58,945 $ 42,540 $ 16,405 39%
The increase in research and development expense during the three months ended
June 30, 2022 compared to the three months ended June 30, 2021 was attributable
to increases of approximately $4.5 million in personnel-related expense,
approximately $3.2 million in CRO expense associated with the expansion and
progression of internal drug discovery programs, approximately $1.2 million in
cloud computing expense, approximately $0.8 million in office rent, and
approximately $0.3 million in other expenses.
The increase in research and development expense during the six months ended
June 30, 2022 compared to the six months ended June 30, 2021 was attributable to
increases of approximately $8.5 million in personnel-related expense,
approximately $4.2 million in CRO expense associated with the expansion and
progression of internal drug discovery programs, approximately $2.0 million in
cloud computing expense, approximately $1.3 million in office rent, and
approximately $0.4 million in other expenses.
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Sales and Marketing Expense
Three Months Ended June 30, Change Six Months Ended June 30, Change
2022 2021 $ % 2022 2021 $ %
(in thousands) (in thousands)
Sales and marketing $ 7,428 $ 5,380 $ 2,048 38% $ 14,099 $ 10,619 $ 3,480 33%
The increase in sales and marketing expense during the three months ended
June 30, 2022 compared to the three months ended June 30, 2021 was attributable
to increases of approximately $1.4 million in personnel-related expenses,
approximately $0.4 million in travel and marketing expense, approximately $0.1
million in cloud computing expense, and approximately $0.2 in other expenses.
The increase in sales and marketing expense during the six months ended June 30,
2022 compared to the six months ended June 30, 2021 was attributable to
increases of approximately $2.2 million in personnel-related expense,
approximately $0.5 million in travel and entertainment expenses, approximately
$0.2 million in cloud computing expenses, and approximately $0.6 million in
other expenses.
General and Administrative Expense
Three Months Ended June 30, Change Six Months Ended June 30, Change
2022 2021 $ % 2022 2021 $ %
(in thousands) (in thousands)
General and administrative
The increase in general and administrative expense during the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 was attributable to increases of approximately$4.4 million in personnel-related expense, approximately$0.4 million related to professional services, approximately$0.5 million related to office rent, and approximately$0.9 million of other expenses, primarily reflecting costs necessary to build and maintain a public company infrastructure. The increase in general and administrative expense during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 was attributable increases of approximately$9.9 million in personnel-related expense, approximately$1.1 million related to a one-time non-recurring state and local tax item, approximately$1.1 million related to professional services, approximately$0.9 million related to office rent, and approximately$1.9 million in other expenses, primarily reflecting costs necessary to build and maintain a public company infrastructure.
Gain (Loss) on Equity Investments
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 Change 2022 2021 Change
(in thousands) (in thousands)
Gain (loss) on equity investments
The gain on equity investments during the three and six months endedJune 30, 2022 was due to cash received from a third party, who previously acquired a collaborator in which we held an equity stake, in exchange for the termination of our rights to receive potential earnouts under the acquisition agreement. The loss on equity investments during the six months endedJune 30, 2021 was primarily due to the realized loss on the disposal of our equity stake in Relay Therapeutics, or Relay. 36
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Change in Fair Value
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 Change 2022 2021 Change
(in thousands) (in thousands)
Change in fair value $ (15,700 ) $ (4,918 ) $ (10,782 ) $ (21,864 ) $ 19,906 $ (41,770 )
The change in fair value during the three months ended June 30, 2022 was
primarily due to a loss on our investment in Morphic. The change in fair value
during the three months ended June 30, 2021 was due to a loss on our investment
in Morphic of $4.9 million .
The change in fair value during the six months ended June 30, 2022 was primarily
due to a loss on our investment in Morphic. The change in fair value during the
six months ended June 30, 2021 was due to a gain on our investment in Morphic of
$19.9 million .
Other (Expense) Income
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 Change 2022 2021 Change
(in thousands) (in thousands)
Other (expense) income $ (296 ) $ 357 $ (653 ) $ 32 $ 777 $ (745 )
Other (expense) income decreased during the three months ended June 30, 2022
compared to the three months ended June 30, 2021 due to $0.6 million of
transactional foreign exchange loss and $0.4 million in interest expense related
to a one-time non-recurring state and local tax item offset by $0.3 million
attributable to higher interest rates on our marketable securities portfolio.
Other (expense) income decreased during the six months ended
Income Tax Expense
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 Change 2022 2021 Change
(in thousands) (in thousands)
Income tax expense $ 33 $ 67 $ (34 ) $ 5 $ 141 $ (136 )
During the three months and six months ended June 30, 2022 and 2021, due to the
full valuation allowance on our U.S. federal and state tax assets, income tax
expense primarily represented our income tax obligations in certain foreign
jurisdictions in which we conduct business.
Critical Accounting Estimates
Detailed information about our critical accounting estimates is set forth in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2021 . There were no material changes to our critical accounting estimates during the six months endedJune 30, 2022 .
Liquidity, Capital Resources and Funding Requirements
We have a history of significant operating losses and have incurred negative cash flows from operations from inception through the three months endedJune 30, 2022 . As ofJune 30, 2022 , we had an accumulated deficit of$312.1 million . 37
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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.
As of
OnMarch 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 ofJune 30, 2022 , 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 ofJune 30, 2022 include operating lease obligations of$150.1 million , consisting of our continuing rent obligations throughDecember 2037 , primarily for our offices located inNew York, New York for$123.3 million ,Cambridge, Massachusetts for$18.7 million andPortland, Oregon for$5.6 million , which expire inDecember 2037 ,April 2032 andSeptember 2026 , respectively. In addition, see Note 6, "Commitments and Contingencies" to our unaudited condensed consolidated financial statements for information relating to executed leases that have not yet commenced.
In
In
InDecember 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 also 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. 38
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Cash Flows
The following table presents a summary of our cash flows for the periods shown:
Six Months Ended June 30,
2022 2021
(in thousands)
Net cash used in operating activities $ (64,378 ) $ (40,293 )
Net cash provided by (used in) investing activities 70,626 (47,097 )
Net cash provided by financing activities 1,304 5,293
Net increase (decrease) in cash and cash equivalents and restricted cash$ 7,552 $ (82,097 ) Operating activities During the six months endedJune 30, 2022 , operating activities used approximately$64.4 million of cash, primarily due to a net loss of$82.1 million , including a$21.9 million non-cash loss from changes in fair value,$11.8 million gain on equity investments and$23.4 million of non-cash operating expenses included in net loss, including depreciation and amortization and stock-based compensation costs. Changes in our operating assets and liabilities used cash of approximately$15.8 million . During the six months endedJune 30, 2021 , operating activities used approximately$40.3 million of cash, primarily due to a net loss of$35.5 million , which included$19.9 million non-cash gain from changes in fair value and$16.1 million of non-cash operating expenses, including depreciation and stock-based compensation costs, and$1.8 million of non-cash loss on equity investments. Changes in our operating assets and liabilities used cash of approximately$2.8 million .
Investing activities
During the six months endedJune 30, 2022 , investing activities provided approximately$70.6 million of cash, consisting of$69.5 million provided by marketable securities maturities, net of purchases and$11.8 million in cash from a third party, who previously acquired a collaborator in which we held an equity stake, in exchange for the termination of our rights to receive potential earnouts under the acquisition agreement. These items are partially offset by$3.7 million in cash used for purchases of property and equipment,$0.6 million used in purchases of equity investments in Structure Therapeutics, and$6.4 million used to acquire XTAL, net of cash acquired. During the six months endedJune 30, 2021 , investing activities used approximately$47.1 million of cash, consisting of$58.1 million used for purchases of marketable securities, net of maturities,$3.4 million used for purchases of property and equipment and$1.7 million used to purchase an equity investment inAjax Therapeutics, Inc. , 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 fromPetra Pharma Corporation in connection with its acquisition by a third party.
Financing activities
During the six months ended
During the six months ended
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