SCHRÖDINGER, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our 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.
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, at lower cost, and with, we believe, a higher likelihood of success 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 have recently advanced our first drug discovery program in the area of oncology, which is our MALT1 inhibitor program, into investigational new drug, or IND, enabling studies. 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. 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 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 collaboration includes HIF-2 alpha and SOS1/KRAS, which are two of our internal pipeline programs. 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 26
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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 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 . We generated revenue of$29.8 million and$23.1 million during the three months endedJune 30, 2021 and 2020, respectively, representing year-over-year growth of 29%. Our net loss attributable to Schrödinger common stockholders and limited common stockholders was$34.6 million and$3.4 million for the three months endedJune 30, 2021 and 2020, 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. Our re-openings are being conducted on a limited basis and are voluntary for all of our employees. 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 six months endedJune 30, 2021 and 2020. 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. 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, 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. 27
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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 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. 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 withGates Ventures, LLC . The agreement is an unconditional non-exchange contribution without restrictions and the initial contribution was invoiced upon execution of the agreement. Revenue was recognized upon execution of the agreement 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
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 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$3.3 million and$5.7 million were included in our drug discovery revenue for the three and six months endedJune 30, 2021 , respectively. 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.
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 for this collaboration since late 2017, we have
recognized and expect to continue to recognize revenues in the future
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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 at a very early stage, currently we do not track research and development expense on a program-by-program basis.
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. Most operating costs of our sales offices inEurope andJapan 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. 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. 29
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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, including
In
We expect that fair value gains and losses may fluctuate significantly in future periods.
Interest Income
Interest income consists of interest earned on our cash equivalents and marketable securities.
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. 30
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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
2021 2020 $ % 2021 2020 $ %
(in thousands)
Revenues:
Software products and services $ 24,052 $ 20,900 $ 3,152 15% $ 50,392 $ 44,712 $ 5,680 13%
Drug discovery 5,732 2,192 3,540 161% 11,519 4,554 6,965 153%
Total revenues 29,784 23,092 6,692 29% 61,911 49,266 12,645 26%
Cost of revenues:
Software products and services 5,641 3,862 1,779 46% 11,547 7,863 3,684 47%
Drug discovery 12,163 5,647 6,516 115% 22,220 12,195 10,025 82%
Total cost of revenues 17,804 9,509 8,295 87% 33,767 20,058 13,709 68%
Gross profit 11,980 13,583 (1,603 ) -12% 28,144 29,208 (1,064 ) -4%
Operating expenses:
Research and development 21,092 16,657 4,435 27% 42,540 30,357 12,183 40%
Sales and marketing 5,380 4,362 1,018 23% 10,619 9,151 1,468 16%
General and administrative 15,850 9,651 6,199 64% 29,239 18,587 10,652 57%
Total operating expenses 42,322 30,670 11,652 38% 82,398 58,095 24,303 42%
Loss from operations (30,342 ) (17,087 ) (13,255 ) 78% (54,254 ) (28,887 ) (25,367 ) 88%
Other (expense) income:
Gain (loss) on equity investments - 4,156 (4,156 ) N/M (1,781 ) 4,156 (5,937 ) N/M
Change in fair value (4,918 ) 8,359 (13,277 ) N/M 19,906 5,280 14,626 N/M
Interest income 357 570 (213 ) N/M 777 1,269 (492 ) N/M
Total other (expense) income (4,561 ) 13,085 (17,646 ) N/M 18,902 10,705 8,197 N/M
Loss before income taxes (34,903 ) (4,002 ) (30,901 ) N/M (35,352 ) (18,182 ) (17,170 ) N/M
Income tax expense 67 64 3 N/M 141 155 (14 ) N/M
Net loss (34,970 ) (4,066 ) (30,904 ) N/M (35,493 ) (18,337 ) (17,156 ) N/M
Net loss attributable to
noncontrolling interest (326 ) (716 ) 390 N/M (820 ) (1,161 ) 341 N/M
Net loss attributable to
Schrödinger stockholders $ (34,644 ) $ (3,350 ) $ (31,294 ) N/M $ (34,673 ) $ (17,176 ) $ (17,497 ) N/M
Revenues
Three Months Ended June 30, Change Six Months Ended June 30, Change
2021 2020 $ % 2021 2020 $ %
(in thousands) (in thousands)
Revenues:
On-premise software $ 14,452 $ 11,105 $ 3,347 30% $ 31,807 $ 26,704 $ 5,103 19%
Hosted software 2,704 2,312 392 17% 5,304 4,446 858 19%
Software maintenance 4,176 3,551 625 18% 8,281 7,088 1,193 17%
Professional services 1,720 2,932 (1,212 ) -41% 4,000 5,474 (1,474 ) -27%
Revenue from contracts
with customers 23,052 19,900 3,152 16% 49,392 43,712 5,680 13%
Contribution 1,000 1,000 - 0% 1,000 1,000 - 0%
Total software products
and services 24,052 20,900 3,152 15% 50,392 44,712 5,680 13%
Drug discovery 5,732 2,192 3,540 161% 11,519 4,554 6,965 153%
Total revenues $ 29,784 $ 23,092 $ 6,692 29% $ 61,911 $ 49,266 $ 12,645 26%
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Table of Contents On-premise software. The increase in revenues for on-premise software was primarily attributable to increased sales from new and existing customers, the timing of multi-year agreements, and timing of revenue for customer renewals during the three and six months endedJune 30, 2021 , as compared to the three and six months endedJune 30, 2020 . Hosted software. The increase in hosted software revenues for the three and six months endedJune 30, 2021 as compared to the three and six months endedJune 30, 2020 was due to increased spend from existing hosted customers, as well as new customers purchasing hosted software subscriptions, for which revenue is recognized over time. Software maintenance. The increase in revenues for software maintenance for the three and six months endedJune 30, 2021 as compared to the three and six months endedJune 30, 2020 was primarily due to the increase in on-premise software sales during prior periods, for which software maintenance revenue is recognized over time. Professional services. The decrease in revenues from professional services for the three and six months endedJune 30, 2021 as compared to the three and six months endedJune 30, 2020 was primarily due to timing of technology and modeling services, for which revenue is recognized as services are performed.
Contributions. Contribution revenue for the three and six months ended
Drug discovery. The increase in revenues for drug discovery was primarily due to the BMS collaboration services that began inNovember 2020 , the timing and amount of collaboration milestones achieved, as well as research funding received during the three and six months endedJune 30, 2021 as compared to the three and six months endedJune 30, 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. Cost of Revenues Three Months Ended June 30, Change Six Months Ended June 30, Change 2021 2020 $ % 2021 2020 $ % (in thousands) (in thousands) Cost of revenues: Software products and services$ 5,641 $ 3,862 $ 1,779 46%$ 11,547 $ 7,863 $ 3,684 47% Gross margin 77 % 82 % 77 % 82 % Drug discovery 12,163 5,647 6,516 115% 22,220 12,195 10,025 82% Software products and services. The increase in cost of revenues for software products and services during the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 was attributable to increases of approximately$1.5 million in personnel-related expenses, approximately$0.2 million in cloud computing expenses, and approximately$0.1 million in royalty expenses. The increase in cost of revenues for software products and services during the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 was attributable to increases of approximately$3.1 million in personnel-related expenses, approximately$0.4 million in cloud computing expenses, and approximately$0.2 million in royalty expenses.
Software products and services gross margin. The decrease in software gross
margin during the three months ended
Drug discovery. The increase in cost of revenues for drug discovery during the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 was due to an approximately$4.0 million increase in CRO costs associated with the expansion and progression of collaboration drug discovery programs, an approximately$2.3 million increase in personnel-related expenses, and an approximately$0.2 million increase in royalty expenses. The increase in cost of revenues for drug discovery during the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 was due to an approximately$6.3 million increase in CRO costs associated with the expansion and progression of collaboration drug discovery programs, an approximately$3.6 million increase in personnel-related expenses, and an approximately$0.3 million increase in cloud computing expenses, which was offset by decreases of approximately$0.2 million in other expenses. 32
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Research and Development Expense
Three Months Ended June 30, Change Six Months Ended June 30, Change
2021 2020 $ % 2021 2020 $ %
(in thousands) (in thousands)
Research and development $ 21,092 $ 16,657 $ 4,435 27% $ 42,540 $ 30,357 $ 12,183 40%
The increase in research and development expense during the three months ended
June 30, 2021 compared to the three months ended June 30, 2020 , was due to an
approximately $3.5 million increase in personnel-related expenses, an
approximately $0.9 million increase in CRO costs associated with the expansion
and progression of internal drug discovery programs, and an approximately $0.4
million increase in cloud computing expenses, which was offset by decreases of
approximately $0.4 million in other expenses.
The increase in research and development expense during the six months ended
June 30, 2021 compared to the six months ended June 30, 2020 was due to an
approximately $7.6 million increase in personnel-related expenses, an
approximately $4.2 million increase in CRO costs associated with the expansion
and progression of internal drug discovery programs, and an approximately $0.8
million increase in cloud computing expenses, which was offset by decreases of
approximately $0.4 million in other expenses.
Sales and Marketing Expense
Three Months Ended June 30, Change Six Months Ended June 30, Change
2021 2020 $ % 2021 2020 $ %
(in thousands) (in thousands)
Sales and marketing $ 5,380 $ 4,362 $ 1,018 23% $ 10,619 $ 9,151 $ 1,468 16%
The increase in sales and marketing expense during the three months ended
June 30, 2021 compared to the three months ended June 30, 2020 was attributable
to an approximately $0.8 million increase in personnel-related expenses and an
approximately $0.2 million increase in travel and marketing expense.
The increase in sales and marketing expense during the six months ended June 30,
2021 compared to the six months ended June 30, 2020 was attributable to an
approximately $1.9 million increase in personnel-related expenses, offset by an
approximately $0.4 million decrease in travel and marketing expense due to
COVID-19.
General and Administrative Expense
Three Months Ended June 30, Change Six Months Ended June 30, Change
2021 2020 $ % 2021 2020 $ %
(in thousands) (in thousands)
General and administrative
64%$ 29,239 $ 18,587 $ 10,652 57% The increase in general and administrative expense during the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 was attributable to an increase of approximately$4.5 million in personnel-related expenses and an increase of approximately$1.2 million in other expenses, primarily reflecting costs necessary to build a public company infrastructure, and approximately$0.5 million of non-comparable costs related to the disposal of our equity stake in Relay. The increase in general and administrative expense during the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 was attributable to an increase of approximately$8.0 million in personnel-related expenses and an increase of approximately$2.2 million in other expenses, primarily reflecting costs necessary to build and maintain a public company infrastructure, and approximately$0.5 million of non-comparable costs related to the disposal of our equity stake in Relay. 33
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Gain (Loss) on Equity Investments
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 Change 2021 2020 Change
(in thousands) (in thousands)
Gain (loss) on equity investments $ -
The loss on equity investments during the six months ended
The gain on equity investments during the three and six months endedJune 30, 2020 represents realized gains in the form of a cash distribution received from thePetra Pharma Corporation , or Petra, merger on account of our equity stake in Petra. Change in Fair Value Three Months Ended June 30, Six Months Ended June 30, 2021 2020 Change 2021 2020 Change (in thousands) (in thousands)
Change in fair value$ (4,918 ) $ 8,359 $ (13,277 ) $ 19,906 $ 5,280 $ 14,626 The change in fair value during the three months endedJune 30, 2021 was due to a loss on our investment in Morphic of$4.9 million . The change in fair value during the three months endedJune 30, 2020 was due to a gain on our investment in Morphic of$10.3 million , offset by a loss in our investment in Nimbus of$2.0 million . The change in fair value during the six months endedJune 30, 2021 was due to a gain on our investment in Morphic of$19.9 million . The change in fair value during the six months endedJune 30, 2020 was due to a gain on our investment in Morphic of$8.3 million offset by a loss on our investment of Nimbus of$3.0 million . Interest Income Three Months Ended June 30, Six Months Ended June 30, 2021 2020 Change 2021 2020 Change (in thousands) (in thousands) Interest income $ 357 $ 570$ (213 ) $ 777 $ 1,269 $ (492 )
Interest income decreased during the three and six months ended
Income Tax Expense
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 Change 2021 2020 Change
(in thousands) (in thousands)
Income tax expense $ 67 $ 64 $ 3 $ 141 $ 155 $ (14 )
Due to the full valuation allowance on our U.S. federal and state deferred tax
assets, income tax expense primarily represents our income tax obligations in
certain foreign jurisdictions in which we conduct business.
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Critical Accounting Policies and Significant Judgments and Estimates
Detailed information about our critical accounting policies and estimates is set forth in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2020 , which is incorporated by reference into this Quarterly Report on Form 10-Q. There have been no significant changes to these policies during the six months endedJune 30, 2021 .
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. As ofJune 30, 2021 , we had an accumulated deficit of$164.2 million . 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. 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 financed our operations from sales of our equity securities. OnFebruary 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, onAugust 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. 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, 2021 , no securities have been sold under the Form S-3.
As of
Cash Flows
The following table presents a summary of our cash flows for the periods shown:
Six Months Ended June 30,
2021 2020
(in thousands)
Net cash used in operating activities $ (40,293 ) $ (14,829 )
Net cash used in investing activities (47,097 ) (112,500 )
Net cash provided by financing activities 5,293 211,723
Net (decrease) increase in cash and cash equivalents and restricted cash$ (82,097 ) $ 84,394 Operating activities 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 . 35
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During the six months endedJune 30, 2020 , operating activities used approximately$14.8 million of cash, primarily resulting from net loss of$18.3 million , which included$4.2 million of non-cash gain on equity investments and a$5.9 million non-cash gain from changes in fair value, partially offset by$7.1 million of non-cash operating expenses included in net loss, including depreciation and stock-based compensation costs. Changes in our operating assets and liabilities provided cash of approximately$5.9 million .
Investing activities
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 from Petra in connection with the Petra merger. During the six months endedJune 30, 2020 , investing activities used approximately$112.5 million of cash, consisting of$112.9 million used for purchases of marketable securities, net of maturities,$2.9 million used for the purchase of additional shares of Nimbus, and$1.3 million used for purchases of property and equipment, partially offset by a$4.6 million cash distribution received from our investment in Petra.
Financing activities
During the six months ended
During the six months ended
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. 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 co-founded companies and other 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. 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, inNovember 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 upfront payment of$55 million 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. 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.
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 theSEC . 36
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Contractual Obligations and Commitments
The following table summarizes our contractual obligations as ofJune 30, 2021 : More Less than 1 to 3 3 to 5 than Total 1 Year Years Years 5 Years (in thousands)
Operating lease obligations(1)
(1) Operating lease obligations consist of our continuing rent obligations
through
2026, respectively.
InDecember 2020 , we entered 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 new agreement. These amounts are not included in the table above because there is not an annual commitment. InApril 2021 , we entered into an office lease agreement, or the Lease, with SPUSV51540 Broadway , LLC, or the Landlord, pursuant to which we will lease approximately 108,849 square feet of office space located at1540 Broadway ,New York, New York for our corporate headquarters. Under the terms of the Lease, subject to specified exceptions, including an initial 16 month rent abatement period, or the Rent Abatement Period, we will pay an initial annual base rent of (i)$7.6 million , or$0.6 million per month, for the first 60 months following the Rent Abatement Period, (ii)$8.3 million , or$0.7 million per month, for months 61 through 120 following the Rent Abatement Period, and (iii)$8.9 million , or$0.7 million per month, for months 121 through 180 following the Rent Abatement Period. In addition, we have agreed to pay our proportionate share of the Landlord's annual operating expenses associated with the premises in excess of certain base year thresholds, calculated as set forth in the Lease. The term of the Lease will continue untilJanuary 1, 2038 , subject to specified adjustments. These amounts are not included in the table above as the Lease term commences subsequent toJune 30, 2021 . InMay 2021 , we entered into an amendment to our office lease inPortland, Oregon , or the Amendment, for 8,537 square feet of additional office space. Under the terms of the Amendment, we will pay an additional base rent of approximately$23 thousand per month with a 3% annual rental escalation. The term of the Amendment continues untilSeptember 30, 2026 . These amounts are not included in the table above as the Amendment lease term commences subsequent toJune 30, 2021 . 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. 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.
Emerging Growth Company Status
We currently 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 (auditor discussion and analysis);
• reduced disclosure obligations regarding executive compensation
arrangements; and
• exemptions from the requirements of holding a nonbinding advisory vote on
executive compensation and stockholder approval of any golden parachute
payments not previously approved.
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
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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. Based on the market value of our common stock and limited common stock held by non-affiliates as ofJune 30, 2021 , we will cease to qualify as an emerging growth company, effective as ofDecember 31, 2021 , and as such, we will no longer be allowed to take advantage of the reduced reporting requirements that are applicable to emerging growth companies.
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