Absci Corp (ABSI)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a data-first generative AI drug creation company with the mission to design differentiated antibody therapeutics. Our Integrated Drug Creation platform comprises, in part, cutting edge generative AI models aimed at designing better antibody therapeutics, including against hard-to-drug targets. Antibody therapeutics represent a growing market and significant medical opportunity, yet the biopharmaceutical industry faces challenges in bringing these potentially life-changing medicines to patients. Leveraging our synthetic biology roots, we expect our Integrated Drug Creation platform to improve upon traditional biologic drug discovery by using AI to simultaneously optimize multiple drug characteristics that may be important to development and therapeutic benefit. Through these efforts, we aim to shorten time to clinic, while increasing the probability of success. Our approach expands the possibilities in biopharmaceuticals — shifting from a paradigm of drug discovery to drug creation — with the goal of bringing best-in-class and first-in-class antibody therapeutics to the patients who need them.

Traditional drug discovery and preclinical development can take 4–6 years to go from discovery to clinical development. Moreover, success rates for traditional drug discovery, as defined by successfully reaching a marketed product, are estimated at less than 5%. In all, it can take as much as 12–15 years, with costs estimated to exceed more than $1 billion to bring a drug to market.

Progress in AI has been building for decades, with increasing application in drug discovery. In May 2023, the U.S. Food and Drug Administration (FDA) acknowledged that AI will undoubtedly play a critical role in drug development and recognized its potential to enhance drug development in many ways, including to help bring safe and effective drugs to patients faster. A June 2023 study estimated that AI could yield time and cost savings of at least 25–50% in drug discovery up to the preclinical stage. Some analysts point specifically to generative AI as a promising approach to creating novel drugs with improved attributes, allowing drug development to move closer to drug design, speeding up the process and creating better-targeted drugs. However, generative AI depends on massive high-quality training datasets to generate quality results. For example, GPT-4, a well-known generative AI model, was trained on data at scale readily available through public sources such as the internet. This type of dataset is more limited and not as accessible for biologics drug discovery.

With the data to learn, the AI to create, and the wet lab to validate, we believe we can create billions of antibody designs and screen millions of ranked antibody sequences in weeks, allowing us to go from AI-designed to wet lab-validated product candidates in as little as six weeks. Our proprietary Integrated Drug Creation platform enables us to build a strong pipeline of both internal and partnered programs that can expand therapeutic possibilities.

Our business model is focused on monetizing our Integrated Drug Creation platform by generating internally developed programs that are later partnered or out-licensed following certain value inflection points (anywhere from preclinical through clinical development) or by partnering with third parties who wish to leverage our Integrated Drug Creation platform for early discovery efforts in a variety of deal structures.

Internally Developed Programs: We believe that by developing our own pipeline, we will create optionality for enhanced monetization and validation of our Integrated Drug Creation platform. With the ability to selectively choose both novel and fast-follower targets, in addition to develop potentially best-in-class attributes, we aim to take our internally developed programs to certain value inflection points before considering partnering or out-licensing opportunities.

Partnered Programs:

•Drug Creation Programs: We enter into collaborations with third parties who are seeking to leverage our platform to solve challenging problems. We work closely with our partners on single and multi-target programs to develop product candidates against targets they have selected. We aim to expand and diversify our portfolio of partnered programs through these collaborations, each of

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which may include up-front fees and research fees, as well as potential clinical and/or commercial milestones and royalties.

•Co-development Programs: We enter into co-development partnerships with third parties who may offer perceived synergies with our Integrated Drug Creation platform. Our co-development programs are based on a clear alignment to take these programs through to certain value inflection points before considering partnering or out-licensing opportunities. Our co-development partnerships may be directed to either single and multi-target programs and may include mutual cost-sharing and/or technology contributions. We aim to further expand and diversify our portfolio of partnered programs through these co-development partnerships. By sharing both the risks and rewards of these programs, we ensure both parties are motivated for success.

Our evolving business model is underpinned by our Integrated Drug Creation platform which supports a strategic diversification of our program portfolio through internally developed programs, partnered drug creation programs and co-development programs. This strategic diversification allows us the potential to balance our program portfolio between internally developed programs for which we have more control and may provide more significant economic returns, and partnered programs which broaden our reach into therapeutic areas where our partner has established capabilities and expertise. Thus, the cornerstone of this business model evolution lies in the diversification of risk and potential return on investment. Our business model not only secures a focused set of therapeutic areas, but also gives us greater optionality, enhancing our ability to pivot and adapt as the programs progress. We believe we will grow and diversify our portfolio of programs through our model, ultimately driving innovation and delivering value for all stakeholders.

Total revenue was $4.5 million for the year ended December 31, 2024, compared to $5.7 million for the year ended December 31, 2023, a decrease of $1.2 million due to the number of ongoing partnered programs and respective timing of project-based milestones achieved. We incurred a net loss of $103.1 million for the year ended December 31, 2024, compared to a net loss of $110.6 million for the year ended December 31, 2023. Research and development expenses increased by $15.8 million, or 33%, for the year ended December 31, 2024 compared to the year ended December 31, 2023. The net loss for the year ended December 31, 2023 included a non-cash goodwill impairment charge in the amount of $21.3 million recorded during the quarter ended June 30, 2023.

As of December 31, 2024, we had an accumulated deficit of $509.6 million and cash and cash equivalents and short-term investments totaling $112.4 million.

We expect to continue to incur significant expenses in connection with our ongoing activities, including as we:

•develop our internally developed programs across diverse indications, including the advancement of these product candidates through preclinical and clinical development;

•continue to engage in discovery, research and development efforts and scale our activities to meet potential demand from both new and existing partners;

•execute an effective business development strategy to drive adoption of our Integrated Drug Creation platform by new and existing partners and, as relevant, to identify partners for internally developed programs;

•develop, acquire, in-license or otherwise obtain technologies that enable us to expand our Integrated Drug Creation platform capabilities; and

•attract, retain and motivate highly qualified personnel.

Our corporate headquarters and primary research and development facilities are located in Vancouver, Washington in a 77,974 square foot facility that includes general administrative office space and laboratory space. Our AI Research Lab is located in New York, New York and our Innovation Center is located in Zug, Switzerland. Additionally, we have a research and development presence in Belgrade, Serbia.

Key Factors Affecting Our Results of Operations and Future Performance

We believe that our future financial performance will be primarily driven by multiple factors as described below, each of which presents growth opportunities for our business. These factors also pose important challenges that we must successfully address in order to sustain our growth and improve our results of

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operations. Our ability to successfully address these challenges is subject to various risks and uncertainties, including those described in the sections of this Annual Report on Form 10-K for the year ended December 31, 2024 titled “Risk Factors”.

•Build out our internally developed programs: We are in the process of selectively creating our own programs and intend to advance them to certain value inflection points anywhere from preclinical validation through clinical development prior to out-licensing for further clinical advancement by a partner or other third party. We may also utilize significant resources in the design and execution of clinical trials to support our internally developed programs.

•Establish new partnerships: Our potential to grow revenue and long-term earnings will require us to successfully identify, establish and maintain programs with new and existing partners.

•Successfully complete our drug creation activities with partners and enter into licensing agreements: Our business model relies upon entering into licensing agreements with our partners to advance the product candidates we generate through preclinical validation through clinical development to commercialization. Both our ability to successfully complete drug creation activities to meet the needs of a partner, and the partner’s prioritization of the relevant program, impact the likelihood and timing of any election by a partner to enter into a follow-on licensing agreement. There is no assurance that a partner will elect to license our intellectual property for the development of any product candidates.

•Developing and commercializing product candidates generated with our Integrated Drug Creation platform: Our business model is dependent on the eventual progression of product candidates discovered or initially developed utilizing our Integrated Drug Creation platform into clinical trials by us or our partners and through commercialization by our partners or other third parties. Given the nature of our relationships with our partners, we often do not fully control the progression, clinical development, regulatory strategy, public disclosure or eventual commercialization, if approved, of our partnered programs. As a result, our future success and our potential eligibility to receive milestone payments and royalties are significantly dependent on our partners’ efforts over which we have no control. The timing and scope of any approval that may be required by the U.S. Food and Drug Administration (FDA), or any other regulatory body, for drugs that are developed based on molecules discovered and/or manufactured using our Integrated Drug Creation platform can significantly impact our results of operations and future performance.

•Continued significant investments in our research and development of new technologies and expansion of our Integrated Drug Creation platform: We are seeking to further refine and expand the scope of our capabilities, which may or may not be successful. This includes, but is not limited to, novel target identification, de novo discovery, and application of artificial intelligence across our Integrated Drug Creation platform. We expect to incur significant expenses to advance our discovery, research and development efforts or to invest in and/or acquire complementary technologies, but these efforts may not be successful.

•Drive commercial adoption of our Integrated Drug Creation platform capabilities: Driving the adoption of our Integrated Drug Creation platform across existing and new markets will require significant investment. We plan to further invest in research and development to support the expansion of our capabilities, including to discover and validate new product candidates for existing partners or help expand our capabilities to support new markets.

Key Business Metrics

We have historically identified key business metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. Our key business metrics have changed as our business strategy has evolved and may be substituted for additional or different metrics as our business continues to develop. We have historically applied the number of Active Programs to assess the adoption of our Integrated Drug Creation platform and our ability to generate future revenues; however, as our business strategy has evolved to have a greater focus on internally developed programs, we currently do not intend to continue using or reporting on Active Programs as a key business metric. We continue to evaluate our key business metrics in light of our current strategy and determine how

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to accurately measure the initiation, advancement, and overall progress of our partnered and internally developed programs.

During the years ended December 31, 2024 and 2023, we believed the following metrics were the most important for understanding our business trajectory.

(1) Partners represents the unique number of partners with whom we have executed drug creation agreements. We view this metric as an indication of our ability to execute our business development activities and level of our market penetration.

(2) Active Programs represents partnered programs that are subject to ongoing development activities intended to determine if the program can be pursued by our partner for future preclinical or clinical development, as well as any program for which our partner obtains and maintains a license to our technology to advance such program after completion of the drug creation phase. There is no assurance, however, that our partners will advance any product candidates that are currently the subject of Active Programs into further preclinical or clinical development or that our partners will elect to license our technologies upon completion of the drug creation phase in a timely manner, or at all. In light of the inherent risks and uncertainties associated with drug development, we anticipate that our partners may from time to time abandon or terminate the development of one or more product candidates generated from our Integrated Drug Creation platform. As Active Programs terminate, we have historically removed the subject programs from our Active Programs count.

As of December 31, 2024, our Active Programs were as follows:

Internally Developed Programs

Our pipeline reflects internally developed programs which highlight our differentiated capabilities, including in de novo antibody design, multi-parametric lead optimization, and reverse immunology, with an initial focus on cytokine biology. As of December 31, 2024, we have identified four wholly owned, internally developed programs focusing on cytokine biology, as well as several undisclosed internal pipeline programs currently in early discovery phases

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ABS-101

Our first development candidate, ABS-101 is in development as a potential treatment for Inflammatory Bowel Disease (IBD). IBD is a chronic condition characterized by inflammation within the gastrointestinal tract and encompasses two main disorders: ulcerative colitis (UC) and Crohn’s Disease (CD). UC primarily affects the colon and the rectum, and symptoms include bloody diarrhea, abdominal pain, bowel urgency, and frequent bowel movements. CD can affect any part of the gastrointestinal tract, from the mouth to the anus, and symptoms include abdominal pain, diarrhea, weight loss, fatigue, and complications such as strictures or fistulas. Both conditions can significantly impact patients’ quality of life in terms of physical health, emotional well-being, and the unpredictability of symptom onset.

IBD affects millions of individuals worldwide, with increasing prevalence and incidence in both developed and developing countries. In the United States, it is estimated that approximately 2.4 million individuals currently have IBD, with approximately 70,000 patients newly diagnosed every year. Based on research from the Crohn's and Colitis Foundation of America, the market for IBD therapeutics is expected to experience steady growth, driven by rising disease prevalence, increasing diagnosis rates, and evolving treatment paradigms.

We believe ABS-101 may present a significant market opportunity for the treatment of IBD. Current IBD treatments face limitations such as lack of response in some patients, diminishing effectiveness over time, and a therapeutic efficacy ceiling. ABS-101 has the potential to address these limitations by providing a novel mechanism of action through blocking TL1A-driven activation of immune responses and potentially fibrosis. Additionally, ABS-101 is being developed for potential longer dosing intervals and subcutaneous injections, which we believe may improve patient compliance and quality of life. Beyond IBD, ABS-101's therapeutic relevance may extend to a range of immune-related indications, further broadening its market potential.

Preclinical development of ABS-101 is ongoing in preparation for a potential regulatory filing in the first half of 2025, and an anticipated interim clinical readout in the second half of 2025.

ABS-201

Our second development candidate, ABS-201 is in development as a potential treatment for androgenic alopecia (AGA). AGA is an indication with a significant clinical unmet need and a potential patient population of approximately 80 million individuals in the United States alone. AGA is a genetically predetermined disorder that can affect over 50 percent of men and over 40% of women by age 50. It is characterized by progressive loss of terminal hair of the scalp any time after puberty, and follows a characteristic distribution in both males and females. Hair loss is most prominent in the vertex and frontotemporal regions in males. In women, the frontal hairline is typically spared with diffuse hair loss at the crown and top of the head, with loss often marked by a wider center part.

Current FDA-approved treatments for AGA are limited due to variable efficacy, lack of patient compliance, potential sexual and neurological side effects. Additionally, incremental limitations exist for women of reproductive age. We believe that an antibody therapeutic that is safe and efficacious with durable effects

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and convenient dosing has the potential to unlock a significant commercial market for hair-regrowth therapy.

Preclinical development of ABS-201 is ongoing in preparation for a potential regulatory filing in the first half of 2026.

Components of Results of Operations

Revenue

Our revenue currently consists primarily of fees earned from our partners in conjunction with drug creation agreements utilizing our Integrated Drug Creation platform, which are presented as partner program revenue in our results of operations. These fees are earned and paid at various points throughout the terms of these agreements including upfront, upon the achievement of specified project-based milestones, and throughout the program.

We expect that our revenue will fluctuate from period to period due to, for example, the timing of executing additional partnerships, the contractual structure of future partnerships, the uncertainty of the timing of milestone achievements and dependence on our partners’ program-related decisions. We expect revenue to increase over time as we grant licenses to our partners for the clinical and commercial use of product candidates, and as the partnered product candidates advance into and through clinical development and commercialization.

Operating Expenses

Research and development

Research and development expenses include the personnel-related costs (comprised of salaries, benefits and share-based compensation), contract research services, contract manufacturing, consulting fees, laboratory supplies and facilities, and certain technology costs. These expenses are exclusive of depreciation and amortization. Research and development activities consist of continued development of our Integrated Drug Creation platform, internally developed programs, and partnered programs. We derive improvements to our Integrated Drug Creation platform from each type of activity. Research and development efforts apply to our Integrated Drug Creation platform broadly, as well as and across programs.

We expect research and development expenses to increase in absolute dollars over the long term as we develop and advance our internally developed programs, enter into additional partnerships, and continue to invest in technology enhancements.

Selling, general, and administrative

Selling, general, and administrative expenses include personnel-related costs (comprised of salaries, benefits and share-based compensation) for executive, business development, legal, finance, human resources, information technology and other administrative functions. Business development expenses include costs associated with attending conferences and other promotion efforts of our Integrated Drug Creation platform. General and administrative expenses include certain professional service expenses such as, external legal, accounting, and other consultants, as well as certain technology costs and allocated facility costs. These expenses are exclusive of depreciation and amortization.

As we grow our operations, we expect personnel-related costs to increase in absolute dollars and we expect to actively manage other general and administrative expenses. We expect these expenses to vary from period to period as a percentage of revenue in the near term, and to decrease as a percentage of revenue in the long term.

We have a comprehensive intellectual property portfolio directed towards the many aspects of our Integrated Drug Creation platform, including those related to our internally developed programs, product candidates proprietary cell lines and protein expression technologies, proprietary screening assays, antibody discovery methods, and generative AI models. We regularly file patent applications to protect innovations arising from our research and development. We also hold trademarks and trademark applications in the United States and foreign jurisdictions. Costs to secure and defend our intellectual property are expensed as incurred and are classified as selling, general and administrative expenses.

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Depreciation and amortization

Depreciation and amortization expense consists of the depreciation expense of our property and equipment and amortization of our intangibles. Our equipment is used most actively as part of our lab operations.

We expect depreciation expense to fluctuate in future periods in line with continued growth and compute demands in absolute dollars as we purchase additional equipment.

Goodwill impairment

Goodwill is tested for impairment on an annual basis in the fourth fiscal quarter, or sooner if an indicator of impairment exists. We performed a quantitative impairment evaluation of goodwill as of June 30, 2023 and recorded a full impairment charge in the amount of $21.3 million.

Other income (expense)

Interest expense

Interest expense, net, consists primarily of interest related to borrowings under our term debt and financed laboratory equipment.

Other income, net

Other income, net consists primarily of interest income from our cash, cash equivalents and short-term investments.

Results of Operations

The results of operations presented below should be reviewed in conjunction with our consolidated financial statements and notes included elsewhere in this Annual Report. The following tables set forth our results of operations for the periods presented (In thousands):

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Comparison of the Years Ended December 31, 2024 and 2023

The following table summarizes our results of operations for the years ended December 31, 2024 and 2023 (In thousands, except for percentages):

Revenue

Partner program revenue decreased by $1.2 million, or 21%, for the year ended December 31, 2024 compared to the year ended December 31, 2023, driven by a combination of the timing of achieving project-based milestones and the mix of ongoing program activity under our drug creation agreements. For the years ended December 31, 2024 and 2023, two partners represented approximately 99% and 89% of partner program revenue, respectively.

Operating expenses

The following table summarizes our operating expenses for the years ended December 31, 2024 and 2023 (In thousands, except for percentages):

Research and development

Research and development expenses increased by $15.8 million, or 33%, for the year ended December 31, 2024 compared to the year ended December 31, 2023. The increase was primarily attributable to the advancement of our drug creation programs representing $11.8 million of this increase, which also included direct costs associated with IND-enabling studies for ABS-101, an increase in stock-based compensation of $2.8 million, and an increase in impairment expense of $0.9 million for assets.

Selling, general and administrative expenses

Selling, general, and administrative expenses decreased by $1.7 million, or 4%, for the year ended December 31, 2024 compared to the year ended December 31, 2023. The decrease was primarily attributable to a decrease in personnel costs of $4.2 million, decreased other administrative costs of $2.7 million, offset by a $5.2 million increase in stock-based compensation.

Depreciation and amortization

Depreciation and amortization expense decreased by $0.6 million, or 4%, for the year ended December 31, 2024 compared to the year ended December 31, 2023, remaining relatively consistent between periods.

Goodwill impairment

We performed a quantitative impairment evaluation of goodwill as of June 30, 2023 and recorded an impairment charge in the amount of $21.3 million.

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Other income (expense)

Interest expense

Interest expense was $0.6 million for the year ended December 31, 2024, compared to $1.0 million for the year ended December 31, 2023, representing a decrease of $0.4 million, or 44%, primarily attributable to decreased finance lease and long-term debt obligations.

Other income, net

Other income, net, was $6.4 million for the year ended December 31, 2024, compared to $6.1 million for the year ended December 31, 2023, representing an increase of $0.3 million, or 6%, primarily attributable to increases in investment income from cash, cash equivalents and short-term investments due to higher balances and interest rates, offset by impairment of a non-marketable equity investment.

Liquidity and Capital Resources

Overview

As of December 31, 2024, we had $112.4 million of cash, cash equivalents and short-term investments.

We have incurred net operating losses since inception. As of December 31, 2024, our accumulated deficit was $509.6 million. To date, we have funded operations through issuances and sales of equity securities and debt, in addition to revenue generated from our drug creation agreements. We believe that our cash, cash equivalents and short-term investments will be sufficient to meet our operating expenses, working capital and capital expenditure needs over at least the next 12 months following the date of this filing.

Our future capital requirements will depend on many factors, including, but not limited to our ability to raise additional capital through equity or debt financing, the development of our internally developed programs including the progress and strategy of any pre-clinical and clinical activities, our ability to successfully secure additional partnerships under contract with new partners and increase the number of programs covered under contracts with existing partners, the advancement of technology development activities with existing and future partners, the successful preclinical and clinical development by us and our partners of product candidates generated using our Integrated Drug Creation platform, and the successful commercialization by us and our partners of any such product candidates that are approved. If we are unable to execute on our business plan and adequately fund operations, or if our business plan requires a level of spending in excess of cash resources, we may be required to change our strategies related to pre-clinical and clinical development and our approach to negotiating partnerships. Alternatively, we may need to seek additional equity or debt financing, which may not be available on terms acceptable to us or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants restricting our ability to take specific actions, such as incurring additional debt, selling or licensing our programs, making product acquisitions, making capital expenditures, or declaring dividends. If we are unable to generate sufficient revenue or raise additional capital when desired, our business, financial condition, results of operations and prospects would be adversely affected.

Sources of liquidity

Since our inception, we have financed our operations primarily from the issuance and sale of our redeemable convertible preferred stock, issuances of equity securities, borrowings under long-term debt agreements, and to a lesser extent, cash flow from operations.

Equipment financing

In 2022, we received a total of $12.0 million of proceeds from equipment financing arrangements. Terms of the agreements require monthly payments over 42-48 month periods with imputed interest rates ranging from 8%-10%. As of December 31, 2024, the combined outstanding balance on these agreements is $4.0 million.

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Shelf registration statement on form S-3

On August 24, 2022, we filed a shelf registration statement on Form S-3 (the Shelf Registration Statement) with the SEC relating to the registration of up to an aggregate of $250.0 million in shares of our common stock, preferred stock, debt securities, warrants and units or any combination thereof. The Shelf Registration Statement was declared effective by the SEC on September 2, 2022.

On June 16, 2023, we entered into a Sales Agreement with Cowen and Company, LLC, as Sales Agent, with respect to an “at the market offering” program under which we may offer and sell, from time to time at our sole discretion, shares of our common stock, par value $0.0001 per share, having an aggregate offering price of up to $100.0 million through the Sales Agent. We will pay the Sales Agent a commission up to 3.0% of the gross sales proceeds of any shares sold under the Sales Agreement. As of December 31, 2024, we have issued 377,996 shares and received $1.6 million net proceeds from the sale of securities registered pursuant to the Sales Agreement. Subsequent to December 31, 2024, the Company issued and sold 5,269,192 shares of common stock for net proceeds of $21.7 million pursuant to the Sales Agreement.

On March 1, 2024, we closed the sale of an aggregate of 19,205,000 shares of our common stock, pursuant to an underwriting agreement with Morgan Stanley & Co. LLC and Cowen and Company, LLC at a public offering price of $4.50 per share, before underwriting discounts and commissions. We received total net proceeds from the offering of $80.8 million after deducting underwriting discounts and commissions and offering expenses payable by us.

Private Investment in Public Equity

On January 7, 2025, we closed the sale of an aggregate of 5,714,285 shares of our common stock, through a private investment in public equity (PIPE) to Advanced Micro Devices, Inc. (AMD), at an offering price of $3.50 per share. We received total net proceeds from the offering of $20.0 million.

Cash Flows

The following summarizes our cash flows (In thousands):

Cash flows from operating activities

In the year ended December 31, 2024, net cash used in operating activities was $72.4 million and consisted primarily of a net loss of $103.1 million adjusted for non-cash items, including depreciation and amortization expense of $13.4 million, stock-based compensation of $19.5 million, and impairment of $1.4 million for assets that met the held for sale criteria during the period, partially offset by $3.7 million of accretion of discount on short-term investments. Net cash used in operations increased by $7.8 million year-over-year primarily due to increased research and development costs, including ABS-101 IND-enabling studies.

In the year ended December 31, 2023, net cash used in operating activities was $64.6 million and consisted primarily of a net loss of $110.6 million adjusted for non-cash items, including depreciation and amortization expense of $14.0 million, stock-based compensation of $11.4 million, and goodwill impairment of $21.3 million, partially offset by $2.7 million of accretion of discount on short-term investments.

Cash flows from investing activities

In the year ended December 31, 2024, net cash used in investing activities was $41.6 million primarily from purchases of short-term investments of $186.1 million, partially offset by cash provided by maturities of short-term investments of $144.0 million.

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In the year ended December 31, 2023, net cash provided by investing activities was $81.9 million primarily from maturities of short-term investments of $229.9 million, partially offset by cash used for purchases of short-term investments of $147.3 million and purchases of lab equipment of $0.9 million.

Cash flows from financing activities

In the year ended December 31, 2024, net cash provided by financing activities was $82.5 million. The net cash provided resulted primarily from proceeds of $82.4 million from the issuance of common stock from a public offering and the Sales Agreement, pursuant to the “at the market offering” program, and proceeds of $4.2 million from the issuance of common stock from stock option exercises and our 2021 ESPP, partially offset by principal payments of $4.0 million made for financed equipment.

In the year ended December 31, 2023, net cash used in financing activities was $4.5 million primarily from cash used for principal payments of $5.3 million made for financed equipment, partially offset by proceeds of $0.9 million from the issuance of common stock from option exercises and our 2021 ESPP.

Income taxes

Income tax expense for the year ended December 31, 2024 represents state income tax obligations and taxes in foreign jurisdictions for which we conduct business. Income tax expense for the year ended December 31, 2023 represents our federal and certain state income tax obligations and taxes in foreign jurisdictions for which we conduct business. As of December 31, 2024, we have recorded a full valuation allowance on our U.S. federal and state deferred tax assets.

Our effective income tax rate from continuing operations was (0.1)% and (0.1)% for the years ended December 31, 2024 and 2023, respectively. The difference between the effective rate and the statutory rate is primarily attributed to the change in the valuation allowance against net deferred tax assets.

Critical Accounting Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with United States Generally Accepted Accounting Principles (US GAAP). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in Note 2: Summary of significant accounting policies, we believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. Critical accounting policies and estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of the matters that are inherently uncertain.

Revenue recognition

We recognize revenue as control of our products and services are transferred to our customers in an amount that reflects the consideration expected to be received in exchange for those products and services. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when or as the performance obligations are satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. We consider a performance obligation satisfied once control of a good or service has been transferred to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service. Partner program revenue includes revenue associated to the discovery, development and technology readiness phases of drug creation agreements. We refer to our customers as “partners” when describing our relationship in an agreement.

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Partner program revenue

Our drug creation agreements related to our partnered programs generally include multiple stages of drug creation that combined represent a single performance obligation. The primary goal of the drug creation phase includes target creation, product candidate creation, and development or optimization of a product candidate(s). For the drug creation phase, partners may request a scope that includes, but is not limited to: a specified disease area, a target for creation of a product candidate, or supply a specified product candidate for AI-driven optimization. These agreements may include options for additional goods and services such as readying the technology to transfer to the partner and licensing terms. The transaction prices for these arrangements include fixed and variable consideration for the single performance obligation as well as variable consideration for success-based achievements. Any variable consideration is constrained to the extent that it is probable that a significant reversal of cumulative revenue will not occur. Primarily all of our contracts with our partners include an enforceable right to payment. While there is no alternative use for the asset created, the agreement’s terms vary as to whether an enforceable right to payment exists for performance completed as of that date.

We measure progress toward the completion of the performance obligations satisfied over time using an input method based on actual costs incurred and estimated cost to complete at each reporting date to satisfy a performance obligation. This method provides an appropriate depiction of completed progress toward fulfilling our performance obligations for each respective arrangement. In certain drug creation agreements that require a portion of the contract consideration to be received in advance at the commencement of the contract, such advance payment is initially recorded as a contract liability.

Contingent Consideration

We utilized the acquisition method of accounting for our business combination related to the Totient acquisition which included allocating the purchase price of the acquisition to the various tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The contingent consideration of $15.0 million held in escrow is included in restricted cash on the consolidated balance sheets. The contingent consideration shall be paid upon the achievement of the milestone of either entering into agreements meeting certain financial criteria with third parties using, or relating to, Totient technology or the first commercial sale of a Totient product. We utilize a probability-weighted approach to estimate the fair value of the liability included in contingent consideration on the consolidated balance sheets. As of December 31, 2024 and 2023, contingent consideration payable was $12.8 million. Changes in fair value of the contingent consideration liability are included within research and development expense on the consolidated statements of operations and comprehensive loss.

Emerging Growth Company Status

We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. Section 107 of the JOBS Act provides that an emerging growth company may take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 for complying with new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. Section 107 of the JOBS Act provides that we can elect to opt out of the extended transition period at any time, which election is irrevocable. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

Subject to certain conditions, as an emerging growth company, we may rely on certain other exemptions and reduced reporting requirements, including without limitation (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement by the Public Company Accounting Oversight Board (PCAOB) regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the consolidated financial statements, known as the auditor discussion and analysis. We will remain an emerging growth company until the earlier of (a) the last day of the fiscal year in which we have total annual gross revenue of $1.235 billion or more; (b) December 31, 2026, the last day of

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the fiscal year following the fifth anniversary of the date of the completion of our IPO; (c) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or (d) the date we qualify as a “large accelerated filer,” which requires the market value of our common stock that are held by non-affiliates to exceed $700.0 million as of the prior June 30th.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Absci is a data-first generative AI drug creation company that combines AI with scalable wet lab technologies to create better biologics for patients, faster. With the data to train, the AI to create, and the wet lab to validate, our Integrated Drug Creation platform aims to engineer better biologics with design-in functionality and best-in-class properties.

Antibody-based therapeutics represent an extraordinary medical and economic opportunity, yet the biopharmaceutical industry faces significant challenges in bringing these life-changing medicines to patients. Our Integrated Drug Creation platform is designed to improve upon traditional biologic drug discovery by using AI to simultaneously optimize multiple drug characteristics that may be important to development and therapeutic benefit. This has the potential to significantly shorten time to clinic and increase the probability of success. Our approach expands the possibilities in biopharmaceuticals — shifting from a paradigm of drug discovery to drug creation — with the goal of bringing best-in-class and first-in-class antibody therapeutics to the patients who need them.

Generative AI depends on massive training datasets to generate quality results. For example, GPT-4, a well-known generative AI model, was trained on data at scale readily available through public sources such as the internet. Such a data set does not exist for drug discovery. For this reason, current AI drug discovery mainly focuses on small-molecule drugs. Their simpler structure allows the synthesis and screening of million-member chemical libraries, which can then provide training data for generative AI models. In contrast, using AI models to design biologic drugs is more challenging because the existing biological datasets are much smaller, meaning there is less training data available for developing highly predictive AI models. Biologic drugs, however, are inherently more selective than small molecules and hence have in general better safety profiles in patients. Hence, building large training data sets for biologic drugs interactions offers the potential for AI models to design highly specific, safe therapeutics for a wide variety of disease targets less addressable by small molecules.

Our AI models accelerate the design and optimization of antibody candidates with potentially novel, best-in-class attributes. We then use our proprietary wet lab assays to validate those antibody candidates at scale. This combination of in silico modeling with wet lab testing allows us to generate immense real-world datasets that we harness to train and refine our deep learning models.

Through iterative AI predictions, wet lab validation, and AI training we enable a virtuous cycle that we believe will accelerate us toward fully in silico biologic drug discovery. With the data to learn, the AI to create, and the wet lab to validate, Absci can create billions of antibody designs and screen millions of ranked antibody sequences in weeks, allowing us to go from AI-designed antibodies to wet lab-validated candidates in as little as six weeks. Our unique Integrated Drug Creation approach has the potential to significantly shorten preclinical development timelines from 5-7 years in benchmarked timelines to 18-24 months, enabling us to build a strong pipeline of both partnered and wholly-owned candidates that can expand therapeutic possibilities.

Our business model is to use our platform for rapid creation of biologic drug candidates by:

Establishing partnerships with stakeholders in the drug discovery and development life cycle: We create drug candidates with partners, including pharmaceutical and biotechnology companies who are responsible for preclinical and clinical testing of biologic candidates generated through our platform. Our partnerships will provide us with the opportunity to participate in the future success of the biologic candidates generated utilizing our platform, including through potential clinical, regulatory and commercial milestone payments as well as royalties on net sales of approved products. We aim to assemble economic interests in a diversified portfolio of partnered pipeline assets of biologics across multiple indications.

Developing our own proprietary asset pipeline: We aim to create therapeutic assets comprising our own internal program pipeline. With the ability to find targets and develop potential best-in-class

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assets, we intend to develop promising assets to value inflection points, anywhere from preclinical validation through clinical trials, before partnering or selling them. We may enter into clinical trials and/or manufacturing partnerships to advance specific therapeutic assets to target such value inflection points. We believe that by developing our own pipeline, we will create optionality for enhanced monetization and validation of our platform.

Our evolving business model is underpinned by a strategic shift towards diversifying our program portfolio through both partnered drug creation programs and internal asset development programs. Our approach is to balance the portfolio between partnered programs that broaden our reach into various indications and provide R&D and upfront funding, and internal programs for which we have more control and the potential for partnerships or asset sales that provide more significant economic returns. The cornerstone of this business model evolution lies in the diversification of risk and potential return on investment. Engaging in drug creation partnerships may enable us to reach broader indications and markets, whereas internal asset development may be more advantageous in terms of greater control over program selection, development timeline, and return on investment. Our dual-faceted model not only secures a focused set of indications but also gives us greater optionality, enhancing our ability to pivot and adapt as the programs progress. We believe we will grow and diversify our portfolio of programs through our model, ultimately driving innovation and delivering value for all stakeholders.

Total revenue was $5.7 million for the years ended December 31, 2023 and 2022, which included an increase in technology development revenue of $1.2 million due to timing of project-based milestones achieved and the mix of ongoing programs utilizing our Integrated Drug Creation platform and a decrease in collaboration revenue of $1.2 million due to completion of our collaboration program in 2022. For the year ended December 31, 2023 we incurred a net loss of $110.6 million, which includes a non-cash goodwill impairment charge of $21.3 million. Research and development expenses decreased by $10.8 million, or 18%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. As of December 31, 2023, we had an accumulated deficit of $406.5 million and cash and cash equivalents and short-term investments totaling $97.7 million.

We expect to continue to incur significant expenses in connection with our ongoing activities, including as we:

•implement an effective business development strategy to drive adoption of our Integrated Drug Creation platform by new and existing partners;

•develop our internal proprietary asset pipeline of lead drug candidates;

•continue to engage in research and development efforts and scale our drug creation activities to meet potential demand at a reasonable cost;

•develop, acquire, in-license or otherwise obtain technologies that enable us to expand our platform capabilities;

•attract, retain and motivate highly qualified personnel; and

•implement operational, financial and management information systems.

In September 2023, we announced a plan to realign internal investments and operations to further focus on and allocate resources to our internal pipeline of drug creation programs and our Integrated Drug Creation platform. In connection with this decision, we announced a reduction in our global workforce of 15%.

Our corporate headquarters and primary research and development facilities are located in Vancouver, Washington in a 77,974 square foot facility that includes general administrative office space and laboratory space. Our AI Research Lab is located in New York, New York and our Innovation Center is located in Zug, Switzerland. Additionally, we have a research and development presence in Belgrade, Serbia.

Key Factors Affecting Our Results of Operations and Future Performance

We believe that our future financial performance will be primarily driven by multiple factors as described below, each of which presents growth opportunities for our business. These factors also pose important challenges that we must successfully address in order to sustain our growth and improve our results of

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operations. Our ability to successfully address these challenges is subject to various risks and uncertainties, including those described in the section of this Annual Report titled “Risk Factors”.

•Establish new partnerships: Our potential to grow revenue and long-term earnings will require us to successfully identify and establish drug creation arrangements with new partners.

•Increase the number of programs under existing partnerships: The execution of our long-term strategy relies substantially on the value our partners believe can be recognized from our programs. Our continued growth depends on our ability to expand the scope of our existing partnerships and add new molecules for drug creation partnerships with current partners.

•Create our proprietary asset pipeline. We are in the process of selectively creating our own lead drug candidates and intend to advance them up to value inflection points anywhere from preclinical validation through clinical trials. In some cases we may out-license or transfer drug candidates for clinical advancement by a partner, with the expectation of a greater share in the economics relative to the milestones and royalties we may secure for our core platform technology development licenses.

•Successfully complete our drug creation activities and enter licensing arrangements with our partners: Our business model depends upon entering into licensing arrangements with our partners to advance the drug candidates which we generate through clinical development to commercialization. Both our ability to successfully complete drug creation activities to meet the needs of a partner, and the partner’s prioritization of the subject program, impact the likelihood and timing of any election by a partner to enter into a licensing arrangement. There is no assurance that a partner will elect to license.

•Our partners successfully developing and commercializing the drug candidates generated with our technology: Our business model is dependent on the eventual progression of biologic drug candidates discovered or initially developed utilizing our Integrated Drug Creation platform into clinical trials and commercialization. Given the nature of our relationships with our partners, we often do not fully control the progression, clinical development, regulatory strategy, public disclosure or eventual commercialization, if approved, of our partnered product candidates. As a result, our future success and our potential eligibility to receive milestone payments and royalties are significantly dependent on our partners’ efforts over which we have no control. The timing and scope of any approval that may be required by the U.S. Food and Drug Administration (FDA), or any other regulatory body, for drugs that are developed based on molecules discovered and/or manufactured using our Integrated Drug Creation platform technologies can significantly impact our results of operations and future performance

•Continued significant investments in our research and development of new technologies and platform expansion: We are seeking to further refine and expand our platform and the scope of our capabilities, which may or may not be successful. This includes, but is not limited to, novel target identification, de novo discovery, incorporation of non-standard amino acids (Bionic protein creation), and application of artificial intelligence across our Integrated Drug Creation platform. We may also invest significantly in developing our own proprietary lead drug candidates and advancing them through preclinical, or later, validation. We expect to incur significant expenses to advance these research and development efforts or to invest in or acquire complementary technologies, but these efforts may not be successful.

•Drive commercial adoption of our Integrated Drug Creation platform capabilities: Driving the adoption of our Integrated Drug Creation platform across existing and new markets will require significant investment. We plan to further invest in research and development to support the expansion of our platform capabilities including new molecules to existing partners or help deliver our platform to new markets.

Key Business Metrics

We continue to identify key business metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. We believe that the following metrics are the most important for understanding our current business trajectory. These metrics may change or may be substituted for additional or different metrics as our business develops. For example, as our business matures and to the extent drug candidates generated with our technologies enter clinical

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development, or as we may enter partnerships addressing programs over multiple years, or as certain programs may be discontinued by partners, we anticipate updating these metrics to reflect such changes.

(1) Partners represents the unique number of partners with whom we have executed drug creation agreements. We view this metric as an indication of our ability to execute our business development activities and level of our market penetration.

(2) Programs represents the number of molecules we have addressed or are addressing with our platform. We view this metric as an indication of the robustness of our technology and the commercial success of our platform.

(3) Active Programs represents drug creation programs that are subject to ongoing technology development activities intended to determine if the program can be pursued by our partner for future clinical development, as well as any program for which our partner obtains and maintains a license to our technology to advance the program after completion of the drug creation phase. There is no assurance, however, that our partners will advance any drug candidates that are currently the subject of Active Programs into further preclinical or clinical development or that our partners will elect to license our technologies upon completion of the drug creation phase in a timely manner, or at all. In light of the inherent risks and uncertainties associated with drug development, we anticipate that our partners may from time to time abandon or terminate the development of one or more drug candidates generated from our platform. As we are notified of such terminations, we will remove the subject programs from our Active Programs count.

As of December 31, 2023, our Active Programs are as follows:

Our Integrated Drug Creation platform is primarily utilized in our partnerships for drug creation across indications using AI to simultaneously optimize multiple drug characteristics that may be important to development and therapeutic benefit. One of our Active Programs with an undisclosed partner is leveraging our platform capabilities to optimize pharmacokinetic properties for a Phase II candidate and one of our Active Programs with an undisclosed partner is leveraging our platform capabilities including our antibody library. We also have three Active Programs focused on our legacy model of developing production cell lines for drug candidates that our partners are developing. Two of these legacy cell line development Active Programs are preclinical and one is in Phase 3 clinical development (PhaseBio Pharmaceuticals’ drug candidate, bentracimab, assumed by SFJ Pharmaceuticals, Inc. in January 2023).

We have negotiated license agreements, or expected to negotiate license agreements upon completion of certain drug creation activities, with potential downstream milestone payments and royalties for all Active

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Programs. We have not negotiated terms for a sufficient number of royalty- and milestone-bearing licenses, however, to enable us to make accurate predictions regarding our potential revenue and financial performance.

Internal Pipeline

Our biologics pipeline reflects our differentiated capabilities in de novo antibody creation, multi-parameteric lead optimization, and reverse immunology. We’re developing a diversified portfolio of programs with a focus on cytokine biology as we scale our Integrated Drug Creation platform and strive to impact millions of lives.

Internal Asset Programs

As of December 31, 2023, we have identified three wholly-owned internal asset programs focusing on cytokine biology as well as several undisclosed internal pipeline programs under evaluation.

We are aware of clinical stage assets targeting TL1A that are being developed by Merck, Roche and Sanofi. For purposes of comparing the anticipated attributes of ABS-101 to these competitive product candidates, we generated putative clinical competitor molecules and performed a head to head comparison against several potential ABS-101 molecules. In these preclinical studies, ABS-101 potential candidates exhibited properties consistent with a potentially superior product profile by demonstrating equal or superior potency data from multiple biophysical and cellular assays, in addition to improved developability properties. We believe these attributes support the program’s potential to create an efficacious candidate conducive to subcutaneous dosing. Furthermore, in vitro and preliminary in vivo PK studies confirm the potential for extended half-life, supporting the objective for significantly improved dosing intervals. While we are encouraged by these preclinical results, we cannot assure you that similar results will be obtained in clinical studies of ABS-101. Additionally, while we endeavored to create molecules with the same attributes as those of competitive product candidates under development, we cannot assure you that the molecules we created are similar or better than those being developed by our competitors, nor can we assure you that direct comparisons of our clinical product candidate to those of our competitors will produce similar results.

In February 2024, we initiated IND-enabling studies to further evaluate certain properties of ABS-101. Based on these IND-enabling studies, we plan to submit an IND in the first quarter of 2025 and potentially initiate a Phase 1 clinical trial in the first half of 2025.

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Our Active Programs, internal asset programs, and historical programs demonstrate our platform’s capabilities to successively address broad ranges of biologics and modalities.

Components of Results of Operations

Revenue

Our revenue currently consists primarily of fees earned from our partners in conjunction with drug creation partnership agreements utilizing our integrated drug creation platform, which are delineated as technology development revenue in our results of operations. These fees are earned and paid at various points throughout the terms of these agreements including upfront, upon the achievement of specified project-based milestones, and throughout the program.

We expect revenue to increase over time as we enter into additional drug creation partnership agreements. We expect revenue to increase over time as we grant licenses to our partners for the clinical and commercial use of intellectual property rights to the biological assets we create, and as the partners advance product candidates into and through clinical development and commercialization. We expect that our revenue will fluctuate from period to period due to the timing of executing additional partnerships, the uncertainty of the timing of milestone achievements and our dependence on the program decisions of our partners.

Operating Expenses

Research and development

Research and development expenses include the cost of materials, personnel-related costs (comprised of salaries, benefits and share-based compensation) for personnel performing research and development functions, consulting fees, equipment and allocated facility costs (including occupancy and information technology). These expenses are exclusive of depreciation and amortization. Research and development activities consist of continued development of our Integrated Drug Creation platform, internal pipeline, and drug creation for partners. We derive improvements to our platform from each type of activity. Research and development efforts apply to our platform broadly and across programs.

We expect research and development expenses to increase in absolute dollars over the long-term as we enter into additional drug creation partnerships, continue to invest in platform enhancements, and develop and advance our internal asset pipeline.

Selling, general, and administrative

Selling, general, and administrative expenses include personnel-related costs (comprised of salaries, benefits and share-based compensation) for executive, business development, alliance management, legal, finance, marketing and other administrative functions. Marketing and business development expenses include costs associated with attending conferences and all promotion efforts of our Integrated Drug Creation platform. Professional service expenses such as external legal expenses, accounting and tax service expenses, and other consultants, and allocated facilities costs (including occupancy and information technology) are also included within selling, general and administrative expenses. These expenses are exclusive of depreciation and amortization.

We expect our selling costs to increase in absolute dollars as we continue to grow our business development efforts and increase marketing activities to drive awareness and adoption of our platform. We expect general and administrative expenses to continue to stabilize as we more effectively control costs associated with operating as a public company, including expenses related to legal, accounting, regulatory, maintaining compliance with exchange listing and requirements of the U.S. Securities and Exchange Commission (SEC), director and officer insurance premiums and investor relations. Following an initial reduction due to the September 2023 realignment and resulting reduction in our global workforce, we expect these expenses to vary from period to period as a percentage of revenue in the near term, and to decrease as a percentage of revenue in the long term.

We have a comprehensive intellectual property portfolio directed towards the many aspects of our Integrated Drug Creation platform, including those related to our proprietary cell lines and protein expression technologies, non-standard amino acid technology, proprietary screening assays, antibody discovery methods, and generative AI models. We regularly file patent applications to protect innovations arising from our research and development. We also hold trademarks and trademark applications in the United States and

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foreign jurisdictions. Costs to secure and defend our intellectual property are expensed as incurred and are classified as selling, general and administrative expenses.

Depreciation and amortization

Depreciation and amortization expense consists of the depreciation expense of our property and equipment and amortization of our intangibles. Our equipment is used most actively as part of our lab operations.

We expect depreciation expense to stabilize following the completion of the build-out of our primary facility, though it may fluctuate in the future in line with continued growth and compute demands in absolute dollars if we purchase additional equipment.

Goodwill impairment

Goodwill is tested for impairment on an annual basis in the fourth fiscal quarter, or sooner if an indicator of impairment exists. We performed a quantitative impairment evaluation of goodwill as of June 30, 2023 and recorded a full impairment charge in the amount of $21.3 million.

Other income (expense)

Interest expense

Interest expense, net, consists primarily of interest related to borrowings under our term debt and financed laboratory equipment.

Other income

Other income consists primarily of interest income from our cash, cash equivalents and short-term investments.

Results of Operations

The results of operations presented below should be reviewed in conjunction with our consolidated financial statements and notes included elsewhere in this Annual Report. The following tables set forth our results of operations for the periods presented (In thousands):

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Comparison of the Years Ended December 31, 2023 and 2022

The following table summarizes our results of operations for the years ended December 31, 2023 and 2022 (In thousands, except for percentages):

Revenue

Technology development revenue increased by $1.2 million, or 26%, for the year ended December 31, 2023 compared to the year ended December 31, 2022, driven by a combination of overall program progress, the timing of project-based milestones achieved, and the mix of ongoing programs activity.

Collaboration revenue decreased by $1.2 million, or 100%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. In September 2021, the JMA was amended to shorten the term to approximately three years, ending in October 2022.

Operating expenses

The following table summarizes our operating expenses for the years ended December 31, 2023 and 2022 (In thousands, except for percentages):

Research and development

Research and development expenses decreased by $10.8 million, or 18%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The decrease was primarily attributable to a decrease in laboratory operational costs of $8.0 million and a $2.8 million decrease in personnel costs, including stock-based compensation.

Selling, general and administrative expenses

Selling, general, and administrative expenses decreased by $2.7 million, or 7%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The decrease was primarily driven by decreased stock-based compensation of $1.1 million and decreased insurance and other administrative costs of $2.2 million.

Depreciation and amortization

Depreciation and amortization expense increased by $1.0 million, or 7%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase was primarily due to a full year of depreciation for the year ended December 31, 2023 on leasehold improvement additions in 2022.

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Goodwill impairment

We performed a quantitative impairment evaluation of goodwill as of June 30, 2023 and recorded an impairment charge in the amount of $21.3 million during the second quarter. See Note 6: Goodwill and intangibles, net to our consolidated financial statements in this Annual Report on Form 10-K for further discussion.

Other income (expense)

The following table summarizes our other income (expense) for the years ended December 31, 2023 and 2022 (In thousands, except for percentages):

Interest expense

Interest expense was $1.0 million for the years ended December 31, 2023 and 2022, remaining consistent between periods.

Other income, net

Other income, net, was $6.1 million income for the year ended December 31, 2023 compared to $2.4 million income for the year ended December 31, 2022, representing a change of $3.7 million, or 157%, primarily attributable to increases in investment income from cash, cash equivalents and short-term investments.

Liquidity and Capital Resources

Overview

As of December 31, 2023, we had $97.7 million of cash,cash equivalents and short-term investments.

We have incurred net operating losses since inception. As of December 31, 2023, our accumulated deficit was $406.5 million. To date, we have funded operations through issuances and sales of equity securities and debt, in addition to revenue generated from our drug creation agreements. We believe that our cash, cash equivalents and short-term investments will be sufficient to meet our operating expenses, working capital and capital expenditure needs over at least the next 12 months following the date of this filing.

Our future capital requirements will depend on many factors, including, but not limited to our ability to raise additional capital through equity or debt financing, our ability to successfully secure additional partnerships under contract with new partners and increase the number of programs covered under contracts with existing partners, the successful preclinical and clinical development by our partners of product candidates generated using our Integrated Drug Creation platform, the successful commercialization by our partners of any such product candidates that are approved, and the progress of any IND-enabling studies for our internal program assets. If we are unable to execute on our business plan and adequately fund operations, or if our business plan requires a level of spending in excess of cash resources, we may be required to negotiate partnerships in which we receive greater near-term payments at the expense of potential downstream revenue. Alternatively, we may need to seek additional equity or debt financing, which may not be available on terms acceptable to us or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants restricting our ability to take specific actions, such as incurring additional debt, selling or licensing our assets, making product acquisitions, making capital expenditures, or declaring dividends. If we are unable to generate sufficient revenue or raise additional capital when desired, our business, financial condition, results of operations and prospects would be adversely affected.

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Sources of liquidity

Since our inception, we have financed our operations primarily from the issuance and sale of our redeemable convertible preferred stock, issuances of equity securities, borrowings under long-term debt agreements, and to a lesser extent, cash flow from operations.

Initial public offering

In July 2021, we completed our initial public offering (IPO) and issued 14.4 million shares of our common stock, including 1.9 million shares pursuant to the full exercise of the underwriters’ option to purchase additional shares, at a price of $16.00 per share and received net proceeds of $210.1 million from the IPO.

Equipment financing

In 2022, we received a total of $12.0 million of proceeds from equipment financing arrangements. Terms of the agreements require monthly payments over 42-48 month periods with imputed interest rates ranging from 8%-10%. As of December 31, 2023, the combined outstanding balance on these agreements is $7.9 million.

Shelf registration statement on form S-3

On August 24, 2022, we filed a shelf registration statement on Form S-3 (the Shelf Registration Statement) with the SEC relating to the registration of up to an aggregate of $250.0 million in shares of our common stock, preferred stock, debt securities, warrants and units or any combination thereof. The Shelf Registration Statement was declared effective by the SEC on September 2, 2022.

On June 16, 2023, we entered into a Sales Agreement with Cowen and Company, LLC, as Sales Agent, with respect to an “at the market offering” program under which we may offer and sell, from time to time at our sole discretion, shares of our common stock, par value $0.0001 per share, having an aggregate offering price of up to $100.0 million through the Sales Agent. We will pay the Sales Agent a commission up to 3.0% of the gross sales proceeds of any shares sold under the Sales Agreement.To date, we have not issued any securities or received any proceeds from the sale of any securities registered pursuant to the Sales Agreement. There can be no assurance that any financing will be available on terms acceptable to us.

On March 1, 2024, the Company closed the sale of an aggregate of 19,205,000 shares of its common stock, pursuant to an underwriting agreement with Morgan Stanley & Co. LLC and Cowen and Company, LLC at a public offering price of $4.50 per share, before underwriting discounts and commissions. The total estimated net proceeds to the Company from the offering are expected to be approximately $80.8 million after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company.

Cash Flows

The following summarizes our cash flows (In thousands):

Cash flows from operating activities

In the year ended December 31, 2023, net cash used in operating activities was $64.6 million and consisted primarily of a net loss of $110.6 million adjusted for non-cash items, including depreciation and amortization expense of $14.0 million, stock-based compensation of $11.4 million, goodwill impairment of $21.3 million, and a net decrease in operating assets and liabilities in the amount of $1.5 million.

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In the year ended December 31, 2022, net cash used in operating activities was $81.3 million and consisted primarily of a net loss of $104.9 million adjusted for non-cash items, including depreciation and amortization expense of $13.0 million, stock-based compensation of $12.5 million, and a net increase in operating assets and liabilities in the amount of $1.5 million.

Cash flows from investing activities

In the year ended December 31, 2023, net cash provided by investing activities was $81.9 million. The net cash provided resulted primarily from maturities of short-term investments of $229.9 million, partially offset by cash used for purchases of short-term investments of $147.3 million and purchases of lab equipment of $0.9 million.

In the year ended December 31, 2022, net cash used in investing activities was $127.0 million primarily from purchases of short-term investments of $108.6 million, purchases of lab equipment of $16.2 million as we expanded our operations and overall capacity and cash paid as part of our acquisition of Totient, Inc. of $8.0 million, partially offset by cash provided by maturities of short-term investments of $5.0 million.

Cash flows from financing activities

In the year ended December 31, 2023, net cash used in financing activities was $4.5 million. The net cash used resulted primarily from principal payments of $5.3 million made for financed equipment, partially offset by proceeds from the issuance of common stock of $0.9 million from stock option exercises and our 2021 ESPP.

In the year ended December 31, 2022, net cash provided by financing activities was $5.2 million primarily from proceeds from equipment financing agreements of $12.0 million and proceeds from the issuance of common stock of $0.7 million, partially offset by cash used for principal payments of $7.5 million made for financed equipment and long-term debt.

Income taxes

Our effective income tax rate from continuing operations was (0.1)% and 0.4% for the year ended December 31, 2023 and 2022, respectively. The difference between the effective rate and the statutory rate is primarily attributed to the change in the valuation allowance against net deferred tax assets.

We estimate an annual effective income tax rate based on projected results for the year and apply this rate to income before taxes to calculate income tax expense. When applicable, the income tax provision also includes adjustments for discrete tax items. Any refinements made due to subsequent information that affects the estimated annual effective income tax rate are reflected as adjustments in the current period.

Critical Accounting Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with United States Generally Accepted Accounting Principles (US GAAP). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in Note 2: Summary of significant accounting policies, we believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. Critical accounting policies and estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of the matters that are inherently uncertain.

Long-lived asset impairment

We tested long-lived assets for recoverability as of June 30, 2023 by comparing the estimated future cash flows (on an undiscounted basis) to be generated from the use and residual value of the entity wide asset

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group to its carrying value and concluded that the long-lived assets were not impaired. For details regarding the interim impairment assessment performed for long-lived assets see Note 6: Goodwill and intangibles, net.

Goodwill

Goodwill is tested for impairment on an annual basis in the fourth fiscal quarter, or sooner if an indicator of impairment exists. We may elect to first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of goodwill at the reporting unit level is less than the carrying amount. The qualitative assessment includes our consideration of relevant events and circumstances that would affect our single reporting unit, including macroeconomic, industry and market conditions, our overall financial performance, and trends in the market price of our common stock. We perform a qualitative assessment of goodwill at the reporting unit level by comparing the carrying amount to the estimated fair value of the reporting unit, including an estimated control premium. Assumptions are subject to change as a result of changing economic and competitive conditions.

We performed a quantitative impairment evaluation of goodwill as of June 30, 2023 and recorded an impairment charge of $21.3 million reported as goodwill impairment on the consolidated statement of operations and comprehensive loss. For details regarding the impairment assessments performed for goodwill see Note 6: Goodwill and intangibles, net.

Revenue recognition

We recognize revenue as control of our products and services are transferred to our customers in an amount that reflects the consideration expected to be received in exchange for those products and services. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when or as the performance obligations are satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. We consider a performance obligation satisfied once control of a good or service has been transferred to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service. Technology development revenue includes revenue associated to the discovery, development and technology readiness phases of drug creation agreements. We refer to our customers as “partners” when describing our relationship in an agreement.

Technology development revenue

Our drug creation agreements generally include multiple stages of drug creation that combined represent a single performance obligation. The primary goal of the drug creation phase includes target creation, lead or candidate creation, and development or optimization of a lead candidate or set of lead candidates. For the drug creation phase partners may request a scope that includes, but is not limited to: a specified disease area, a target for creation of a new biologic, or supply a specified lead candidate for AI-driven optimization. These agreements may include options for additional goods and services such as readying the technology to transfer to the partner and licensing terms. The transaction prices for these arrangements include fixed and variable consideration for the single performance obligation as well as variable consideration for success-based achievements. Any variable consideration is constrained to the extent that it is probable that a significant reversal of cumulative revenue will not occur. Primarily all of our contracts with our partners include an enforceable right to payment. While there is no alternative use for the asset created, the agreement’s terms vary as to whether an enforceable right to payment exists for performance completed as of that date.

We measure progress toward the completion of the performance obligations satisfied over time using an input method based on an overall estimate of the effort incurred to date at each reporting period to satisfy a performance obligation. This method provides an appropriate depiction of completed progress toward fulfilling our performance obligations for each respective arrangement. In certain drug creation agreements that require a portion of the contract consideration to be received in advance at the commencement of the contract, such advance payment is initially recorded as a contract liability.

Contingent Consideration

We utilized the acquisition method of accounting for our business combination related to the Totient acquisition which included allocating the purchase price of the acquisition to the various tangible and

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intangible assets acquired and liabilities assumed based on their estimated fair values. The contingent consideration of $15.0 million held in escrow is included in restricted cash on the consolidated balance sheets. The contingent consideration shall be paid upon the achievement of the milestone of either entering into agreements meeting certain financial criteria with third parties using, or relating to, Totient technology or the first commercial sale of a Totient product. We utilize a probability-weighted approach to estimate the fair value of the liability included in accrued expenses on the consolidated balance sheets. Changes in fair value of the contingent consideration liability are included within research and development expense on the consolidated statements of operations and comprehensive loss.

Emerging Growth Company Status

We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. Section 107 of the JOBS Act provides that an emerging growth company may take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 for complying with new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. Section 107 of the JOBS Act provides that we can elect to opt out of the extended transition period at any time, which election is irrevocable. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

Subject to certain conditions, as an emerging growth company, we may rely on certain other exemptions and reduced reporting requirements, including without limitation (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement by the Public Company Accounting Oversight Board (PCAOB) regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the consolidated financial statements, known as the auditor discussion and analysis. We will remain an emerging growth company until the earlier of (a) the last day of the fiscal year in which we have total annual gross revenue of $1.235 billion or more; (b) December 31, 2026, the last day of the fiscal year following the fifth anniversary of the date of the completion of our IPO; (c) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or (d) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a generative AI drug creation company harnessing deep learning and synthetic biology to expand the therapeutic potential of proteins. We leverage our Integrated Drug Creation platform to identify novel drug targets and create encouraging biotherapeutic candidates. We believe our approach enables us, and our partners, to develop novel biologics that are optimized for many traits at disruptive speed.

We couple our powerful deep learning AI models, built to understand and predict determinants of protein function, with our proprietary synthetic biology capabilities, which include high-throughput single-cell assays that can evaluate billions of drug sequence variants, each within its production cell line, for target binding affinity, protein quality, and production level (titer). This combination of in silico modeling with wet lab testing allows us to generate immense real-world datasets that we harness to train and refine our deep learning models. These models guide our protein and cell line designs and enable in silico optimization of multiple attributes. Our target platform technology (formerly “Totient”) uses machine learning computational methods to evaluate patient tissue samples and, without biological bias, identify disease-relevant fully human antibodies and their disease- and tissue-specific molecular targets. In addition to the direct utility of these antibodies and targets as drug discovery assets, these data comprising antibody-epitope recognition elements expand our AI models’ training sets and may improve predictive capabilities for future discovery campaigns.

Through iterative AI predictions, wet lab validation, and AI training, we enable a virtuous cycle that we believe will accelerate us toward fully in silico biologic drug discovery. Our unique Integrated Drug Creation approach has the potential to significantly shorten preclinical development timelines and expand therapeutic possibilities.

Our goal is to become the technology leader in biologic drug creation. Our business model is to use our platform for the rapid creation of biologic drug candidates by:

Establishing partnerships with stakeholders in the drug development life cycle: We develop drug candidates for partners, including those who are responsible for preclinical and clinical testing of biologics generated by our platform. Our partnerships will provide us with the opportunity to participate in the future success of the biologics generated utilizing our platform, through potential clinical, regulatory and commercial milestone payments as well as royalties on net sales of approved products. We aim to assemble economic interests in a diversified portfolio of partners’ biologics across multiple indications.

Developing our own drug discovery pipeline: We intend to develop drug candidates for our own drug discovery pipeline. With the ability to find both targets and lead candidates, we intend to develop promising lead candidates to up to the investigational drug application IND stage or later. This will increase the value of our assets and serve as further validation of our platform. We may enter into clinical trials and/or manufacturing partnerships to advance a lead candidate.

Total revenue was $5.7 million for the year ended December 31, 2022, respectively, compared to $4.8 million for the year ended December 31, 2021, due to timing of project-based milestones achieved and the mix of ongoing programs utilizing our Integrated Drug Creation platform. Throughout 2021 and 2022, we have continued making investments in our operating capacity which has enabled us to achieve additional project-based milestones in our technology development and partnership agreements. Since our inception in 2011, we have devoted substantially all of our resources to research and development activities, including with respect to our Integrated Drug Creation platform, establishing and maintaining our intellectual property portfolio, hiring personnel, raising capital and providing general and administrative support for these activities. As a result, we have incurred net losses in each year. For the years ended December 31, 2022 and 2021, we incurred net losses of $104.9 million and $101.0 million, respectively. Research and development expenses increased by $14.3 million, or 32%, for the year ended December 31, 2022 compared to the year

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ended December 31, 2021. As of December 31, 2022, we had an accumulated deficit of $295.9 million and cash and cash equivalents and short-term investments totaling $164.4 million.

Prior to our initial public offering (IPO), we financed our operations primarily through private placements of redeemable convertible preferred stock and convertible notes. From the date of our company formation up to the IPO, we had raised aggregate gross proceeds of $230.0 million. In July 2021, we consummated our IPO and issued 14,375,000 shares of common stock, including a full exercise of the overallotment option, for net proceeds of $210.1 million, after deducting underwriting discounts and offering related expenses.

We expect to continue to incur significant expenses in connection with our ongoing activities, including as we:

•implement an effective business development strategy to drive adoption of our Integrated Drug Creation platform by new and existing partners;

•continue to engage in research and development efforts and scale our technology development activities to meet potential demand at a reasonable cost;

•develop, acquire, in-license or otherwise obtain technologies that enable us to expand our platform capabilities;

•attract, retain and motivate highly qualified personnel;

•implement operational, financial and management information systems; and

•continue to operate as a public company.

Our corporate headquarters and primary research and development facilities are located in Vancouver, Washington in a 77,974 square foot facility that includes general administrative office space and laboratory space. Our AI Research Lab is located in New York, New York and our Innovation Center is located in Zug, Switzerland. Additionally, we have research and development presence in Belgrade, Serbia. We believe our facilities are adequate and suitable for our current needs and that should it be needed, suitable additional or alternative space will be available to accommodate our operations.

Key Factors Affecting Our Results of Operations and Future Performance

We believe that our future financial performance will be primarily driven by multiple factors as described below, each of which presents growth opportunities for our business. These factors also pose important challenges that we must successfully address in order to sustain our growth and improve our results of operations. Our ability to successfully address these challenges is subject to various risks and uncertainties, including those described in the section of this Annual Report titled “Risk Factors”.

•Establish new partnerships: Our potential to grow revenue and long-term earnings will require us to successfully identify and establish technology development arrangements with new partners. We have been expanding and expect to continue to expand our business development team and our capabilities to find new partners.

•Increase the number of programs under existing partnerships: The execution of our long-term strategy relies substantially on the value our partners believe can be recognized from our programs. Our continued growth depends on our ability to expand the scope of our existing partnerships and add new molecules for Discovery or CLD partnerships with current partners.

•Successfully complete our technology development activities and enter licensing arrangements with our partners: Our business model depends upon entering into licensing arrangements with our partners to advance the drug candidates which we generate through clinical development to commercialization. Both our ability to successfully complete technology development activities to meet the needs of a partner, and the partner’s prioritization of the subject program, impact the likelihood and timing of any election by a partner to enter into a licensing arrangement. There is no assurance that a partner will elect to license.

•Our partners successfully developing and commercializing the drug candidates generated with our technology: Our business model is dependent on the eventual progression of biologic drug candidates discovered or initially developed utilizing our Integrated Drug Creation platform into

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clinical trials and commercialization. Given the nature of our relationships with our partners, we do not control the progression, clinical development, regulatory strategy, public disclosure or eventual commercialization, if approved, of these product candidates. As a result, our future success and our potential eligibility to receive milestone payments and royalties are entirely dependent on our partners’ efforts over which we have no control. The timing and scope of any approval that may be required by the U.S. Food and Drug Administration (FDA), or any other regulatory body, for drugs that are developed based on molecules discovered and/or manufactured using our Integrated Drug Creation platform technologies can significantly impact our results of operations and future performance.

•Continued significant investments in our research and development of new technologies and platform expansion: We are seeking to further refine and expand our platform and the scope of our capabilities, which may or may not be successful. This includes, but is not limited to, novel target identification, de novo discovery, incorporation of non-standard amino acids (Bionic protein creation), and application of artificial intelligence across our Integrated Drug Creation platform. We may also invest significantly in developing our own proprietary lead drug candidates and advancing them through preclinical or later validation. We expect to incur significant expenses to advance these research and development efforts or to invest in or acquire complementary technologies, but these efforts may not be successful.

•Create our proprietary asset pipeline. We intend to selectively create our own lead drug candidates and advance them up to the IND stage or later. In some cases we may out-license or transfer drug candidates for clinical advancement by a partner, with the expectation of a greater share in the economics relative to the milestones and royalties we may secure for our core platform technology development licenses.

•Drive commercial adoption of our Integrated Drug Creation platform capabilities: Driving the adoption of our Integrated Drug Creation platform across existing and new markets will require significant investment. We plan to further invest in research and development to support the expansion of our platform capabilities including new molecules to existing partners or help deliver our platform to new markets.

Key Business Metrics

We continue to identify key business metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. Currently, given our stage of development, we believe that the following metrics are the most important for understanding our current business trajectory. These metrics may change or may be substituted for additional or different metrics as our business develops. For example, as our business matures and to the extent drug candidates generated with our technologies enter clinical development, or as we may enter partnerships addressing programs over multiple years, or as certain programs may be discontinued by partners, we anticipate updating these metrics to reflect such changes.

(1) Partners represents the unique number of partners with whom we have executed technology development agreements. We view this metric as an indication of our ability to execute our business development activities and level of our market penetration.

(2) Programs represents the number of molecules we have addressed or are addressing with our platform. We view this metric as an indication of the robustness of our technology and the commercial success of our platform.

(3) Active Programs represents the number of programs that are subject to ongoing technology development activities intended to determine if the program can be pursued by our partner for future clinical

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development, as well as any program for which our partner obtains and maintains a license to our technology to advance the program after completion of the technology development phase. There is no assurance, however, that our partners will advance any drug candidates that are currently the subject of Active Programs into further preclinical or clinical development or that our partners will elect to license our technologies upon completion of the technology development phase in a timely manner, or at all. In light of the inherent risks and uncertainties associated with drug development, we anticipate that our partners may from time to time abandon or terminate the development of one or more drug candidates generated from our platform. As we are notified of such terminations, we will remove the subject programs from our Active Programs count.

As of December 31, 2022, we had drug candidates in 16 Active Programs across five current partners’ preclinical or clinical pipelines. We have negotiated license agreements, or expect to negotiate license agreements upon completion of certain technology development activities, with potential downstream milestone payments and royalties for all Active Programs.

We have thirteen Active Programs comprising Discovery applications include three through our agreement with Merck & Co., Inc., three through our agreement with EQRx and seven with an undisclosed biotechnology company. Three Active Programs are focused on developing production cell lines for drug candidates that our partners are developing. Two of these cell line development (“CLD”) Active Programs are preclinical and one is in Phase 3 (PhaseBio Pharmaceuticals’ drug candidate, bentracimab, assumed by SFJ Pharmaceuticals, Inc. in January 2023).

Exclusive of our 16 Active Programs with partners, we have utilized our platform to perform technology development activities related to 31 additional molecules. These programs include both internal research programs and technology development programs with third parties intended to demonstrate our platform’s capabilities as we address successively broader ranges of biologics and modalities. We have not transferred technology or granted licenses related to these programs.

We have not negotiated terms for a sufficient number of royalty- and milestone-bearing licenses to enable us to make accurate predictions regarding our potential revenue and financial performance.

Components of Results of Operations

Revenue

Our revenue currently consists primarily of fees earned from our partners in conjunction with technology development agreements (TDAs) and partnership agreements, which are delineated as technology development revenue in our results of operations. These fees are earned and paid at various points throughout the terms of these agreements including upfront, upon the achievement of specified project-based milestones, and throughout the program.

We expect revenue to increase over time as we enter into additional partnership agreements and as our partnerships continue to include more drug discovery activities. We expect revenue to increase over time as we grant licenses to our partners for the clinical and commercial use of intellectual property rights to the biological assets we create, and as the partners advance product candidates into and through clinical development and commercialization. We expect that our revenue will fluctuate from period to period due to the timing of executing additional partnerships, the uncertainty of the timing of milestone achievements and our dependence on the program decisions of our partners.

KBI BioPharma, Inc. Collaboration Agreement

In December 2019, we executed a four-year Joint Marketing Agreement (JMA) with KBI BioPharma, Inc. (KBI) to co-promote technologies through joint marketing efforts. In September 2021, the JMA was amended to shorten the term to approximately three years, ending in October 2022. Pursuant to the JMA, we received a non-refundable upfront payment of $0.8 million and milestone and other payments of $2.6 million in the aggregate, which had been received as of December 31, 2022, upon the achievement of specific milestones.

Operating Expenses

Research and Development

Research and development expenses include the cost of materials, personnel-related costs (comprised of salaries, benefits and share-based compensation) for personnel performing research and development

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functions, consulting fees, equipment and allocated facility costs (including occupancy and information technology). These expenses are exclusive of depreciation and amortization. Research and development activities consist of continued development of our Integrated Drug Creation platform, internal pipeline, target discovery and technology development for partners. We derive improvements to our platform from each type of activity. Research and development efforts apply to our platform broadly and across programs.

We expect research and development expenses to continue to increase in absolute dollars over the long-term as we enter into additional partnerships and continue to invest in platform enhancements.

Selling, General, and Administrative

Selling, general, and administrative expenses include personnel-related costs (comprised of salaries, benefits and share-based compensation) for executive, business development, alliance management, legal, finance, marketing and other administrative functions. Marketing and business development expenses include costs associated with attending conferences and all promotion efforts of our Integrated Drug Creation platform. Professional service expenses such as external legal expenses, accounting and tax service expenses, and other consultants, and allocated facilities costs (including occupancy and information technology) are also included within selling, general and administrative expenses. These expenses are exclusive of depreciation and amortization.

We expect our selling costs to increase in absolute dollars as we continue to grow our business development efforts and increase marketing activities to drive awareness and adoption of our platform. We expect selling costs to fluctuate as a percentage of total revenue due to the timing and magnitude of these expenses, and to decrease as a percentage of total revenue in the long term.

We expect general and administrative expenses to stabilize as we more effectively control costs associated with operating as a public company, including expenses related to legal, accounting, regulatory, maintaining compliance with exchange listing and requirements of the U.S. Securities and Exchange Commission (SEC), director and officer insurance premiums and investor relations. We expect these expenses to vary from period to period as a percentage of revenue in the near term, and to decrease as a percentage of revenue in the long term.

We have a comprehensive intellectual property portfolio directed towards the many aspects of our Integrated Drug Creation platform, including those related to our proprietary cell lines and protein expression technologies, non-standard amino acid technology, proprietary screening assays, antibody discovery methods, and generative AI models. We regularly file patent applications to protect innovations arising from our research and development. We also hold trademarks and trademark applications in the United States and foreign jurisdictions. Costs to secure and defend our intellectual property are expensed as incurred and are classified as selling, general and administrative expenses.

Depreciation and amortization

Depreciation and amortization expense consists of the depreciation expense of our property and equipment and amortization of our intangibles. Our equipment is used most actively as part of our lab operations.

We expect depreciation expense to stabilize following the completion of the build-out of our primary facility, though it may fluctuate in the future in line with continued growth and compute demands in absolute dollars if we purchase additional equipment.

Other Income (Expense)

Interest Expense

Interest expense, net, consists primarily of interest related to borrowings under our term debt and financed laboratory equipment. Prior to our initial public offering in 2021, interest expense also included convertible note interest.

Other Income (Expense)

Other income (expense) consists primarily of interest income from our investments. Prior to our initial public offering in 2021, other income (expense) also included adjustments of our convertible notes and preferred stock warrant liability to fair value.

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Results of Operations

The results of operations presented below should be reviewed in conjunction with our consolidated financial statements and notes included elsewhere in this Annual Report. The following tables set forth our results of operations for the periods presented (In thousands):

Comparison of the Years Ended December 31, 2022 and 2021

The following table summarizes our results of operations for the years ended December 31, 2022 and 2021 (In thousands, except for percentages):

Revenue

Total revenue was $5.7 million for the year ended December 31, 2022, representing an increase of approximately $1.0 million, or 20%, compared to $4.8 million for the year ended December 31, 2021.

Technology development revenue increased by $0.5 million, or 13%, for the year ended December 31, 2022 compared to the year ended December 31, 2021, driven by a combination of overall program progress, the timing of project-based milestones achieved, and the mix of ongoing programs activity, most significantly the result of progress and milestone achievement associated with our Merck partnership utilizing our non-standard amino acid technology.

Collaboration revenue increased by $0.4 million, or 58%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. In September 2021, the JMA was amended to shorten the term to approximately three years, ending in October 2022.

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Operating Expenses

The following table summarizes our operating expenses for the years ended December 31, 2022 and 2021 (In thousands, except for percentages):

Research and development

Research and development expenses increased by $14.3 million, or 32%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase was generally driven by increased costs associated with increased technology development activity with our partners and increased costs associated with continued platform development. These increased costs were primarily attributable to increased average headcount and related personnel costs in the amount of $7.0 million and increased purchases of supplies and services related to lab operations of $7.9 million specifically for our technology development agreements and internal research and platform development activities, offset by a $0.7 million decrease in facility overhead.

Selling, General and Administrative Expenses

Selling, general, and administrative expenses increased by $11.8 million, or 41%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase was primarily driven by increased personnel costs in the amount of $3.4 million, increased stock-based compensation of $2.0 million, and increased administrative costs of $6.5 million. The increases in the administrative expenses include professional services, insurance costs, and other expenses that are primarily the result of our operating as a public company for a full year.

Depreciation and amortization

Depreciation and amortization expense increased by $6.4 million, or 96%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase was primarily due to the increased purchases of lab equipment necessary to complete our increased level of technology development agreements and research and development, purchases of property, equipment, and leasehold improvements related to our new corporate headquarters, and the amortization of intangible assets acquired in 2021.

Other Income (Expense)

The following table summarizes our other income (expense) for the years ended December 31, 2022 and 2021 (In thousands, except for percentages):

Interest Expense

Interest expense was $1.0 million for the year ended December 31, 2022 compared to $3.4 million for the year ended December 31, 2021, representing a decrease of $2.4 million, or 72%. During the year ended December 31, 2021, we recognized interest expense related to the convertible promissory notes issued in March 2021.

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These notes converted into common stock in connection with the IPO in July 2021, resulting in decreased interest expense for the year ended December 31, 2022.

Other income (expense), net

Other income (expense), net, was $2.4 million income for the year ended December 31, 2022 compared to $31.2 million expense for the year ended December 31, 2021, representing a change of $33.5 million, or 108%. For the year ended December 31, 2021, other income included the adjustment of the fair value of our convertible notes for $28.0 million, and the change in the preferred stock warrant liability’s fair value in the amount of $4.1 million, offset by recognition of a gain on extinguishment for the forgiveness of our Payroll Protection Plan loan in the amount of $0.6 million. For the year ended December 31, 2022, other income primarily included interest income.

Liquidity and Capital Resources

Overview

As of December 31, 2022, we had $164.4 million of cash and cash equivalents and short-term investments.

We have incurred net operating losses since inception. As of December 31, 2022, our accumulated deficit was $295.9 million. To date, we have funded operations through issuances and sales of equity securities and debt, in addition to revenue generated from our technology development agreements. We believe that our cash and cash equivalents and short-term investments will be sufficient to meet our operating expenses, working capital and capital expenditure needs over at least the next 12 months following the date of this filing.

Our future capital requirements will depend on many factors, including, but not limited to our ability to raise additional capital through equity or debt financing, our ability to successfully secure additional partnerships under contract with new partners and increase the number of programs covered under contracts with existing partners, the successful preclinical and clinical development by our partners of product candidates generated using our Integrated Drug Creation platform and the successful commercialization by our partners of any such product candidates that are approved. If we are unable to execute on our business plan and adequately fund operations, or if our business plan requires a level of spending in excess of cash resources, we may be required to negotiate partnerships in which we receive greater near-term payments at the expense of potential downstream revenue. Alternatively, we may need to seek additional equity or debt financing, which may not be available on terms acceptable to us or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants restricting our ability to take specific actions, such as incurring additional debt, selling or licensing our assets, making product acquisitions, making capital expenditures, or declaring dividends. If we are unable to generate sufficient revenue or raise additional capital when desired, our business, financial condition, results of operations and prospects would be adversely affected.

Sources of Liquidity

Since our inception, we have financed our operations primarily from the issuance and sale of our redeemable convertible preferred stock, issuances of equity securities, borrowings under long-term debt agreements, and to a lesser extent, cash flow from operations.

Redeemable convertible preferred stock

Prior to our IPO in July 2021, we had raised a total of $104.3 million from the issuance of redeemable convertible preferred stock, net of issuance costs, which included shares of Series E redeemable convertible preferred stock for net proceeds of $4.9 million in February 2021. Immediately prior to our IPO in July 2021, all convertible preferred stock was converted into an aggregate of 46,266,256 shares of common stock.

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Bridge Bank Loan and Security Agreement

In June 2018, we entered into a Loan and Security Agreement (LSA) with Bridge Bank (Bank), a division of Western Alliance Bank. We initially borrowed the first tranche of $0.3 million in June 2018. We increased our borrowings to $3.0 million in March 2019, and to $5.0 million in May 2020. The loan was to mature in May 2022, at which time all outstanding principal and accrued and unpaid interest would have been due and payable. In June 2021, we entered into a fifth amendment to the LSA. This amendment modified the term loan’s maturity date to June 16, 2023. This loan was secured by substantially all our tangible assets; intellectual property were excluded from this secured collateral, but was subject to a negative pledge in favor of Bank. In June 2022, we paid off the remaining outstanding balance of $2.4 million of the LSA, which terminated the LSA and extinguished all of our obligations therein.

Convertible notes

In March 2021, we issued $125.0 million aggregate principal amount of convertible notes to certain existing and new investors. In July 2021, the convertible notes converted into an aggregate of 9,732,593 shares of common stock immediately prior to our IPO, at a price per share calculated based on 82% of the IPO price of $16.00.

Initial Public Offering

In July 2021, we completed our IPO and issued 14.4 million shares of our common stock, including 1.9 million shares pursuant to the full exercise of the underwriters’ option to purchase additional shares, at a price of $16.00 per share and received net proceeds of $210.1 million from the IPO.

Equipment Financing

In 2022, we received a total of $12.0 million of proceeds from equipment financing arrangements. Terms of the agreements require monthly payments over 42-48 month periods with imputed interest rates ranging from 8%-10%. As of December 31, 2022, the combined outstanding balance on these agreements is $10.9 million.

Shelf Registration Statement on Form S-3

On August 24, 2022, we filed a shelf registration statement on Form S-3 (the Shelf Registration Statement) with the SEC relating to the registration of up to an aggregate of $250.0 million in shares of our common stock, preferred stock, debt securities, warrants and units or any combination thereof. The Shelf Registration Statement was declared effective by the SEC on September 2, 2022. To date, we have not issued any securities or received any proceeds from the sale of any securities registered pursuant to the Shelf Registration Statement.

Cash Flows

The following summarizes our cash flows (In thousands):

Cash Flows from Operating Activities

In the year ended December 31, 2022, net cash used in operating activities was $81.3 million and consisted primarily of a net loss of $104.9 million adjusted for non-cash items, including depreciation and amortization expense of $13.0 million, stock-based compensation of $12.5 million, and a net increase in operating assets and liabilities in the amount of $1.5 million.

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In the year ended December 31, 2021, net cash used in operating activities was $60.6 million and consisted primarily of a net loss of $101.0 million adjusted for non-cash items, including depreciation and amortization expense of $6.7 million stock-based compensation of $10.6 million, an increase to our convertible note liability of $30.7 million, an increase to our preferred stock warrant liability of $4.1 million, and a net increase in operating assets and liabilities in the amount of $3.1 million.

Cash Flows from Investing Activities

In the year ended December 31, 2022, net cash used in investing activities was $127.0 million. The net cash used resulted primarily from purchases of short-term investments of $108.6 million, purchases of lab equipment of $16.2 million, and cash paid as part of our acquisition of Totient of $8.0 million, partially offset by cash provided by maturities of short-term investments of $5.0 million.

In the year ended December 31, 2021, net cash used in investing activities was $67.4 million primarily from purchases of lab equipment and leasehold improvements of $38.0 million, cash paid as part of our acquisitions of Denovium and Totient of $28.1 million and an investment in equity securities of $1.2 million.

Cash Flows from Financing Activities

In the year ended December 31, 2022, net cash provided by financing activities was $5.2 million. The net cash provided resulted primarily from new equipment financing agreements of $12.0 million, partially offset by cash used for principal payments of $7.5 million made for financed equipment and long-term debt.

In the year ended December 31, 2021, net cash provided by financing activities was $336.2 million. The net cash provided resulted primarily from total net proceeds of $210.1 million from the IPO, the issuance of $125.0 million of convertible promissory notes and Series E redeemable convertible preferred stock, net of issuance costs, in the amount of $4.9 million, partially offset by principal payments made for financed equipment and long-term debt in the amount of $4.1 million.

Income taxes

Our effective income tax rate from continuing operations was 0.4% and 8.1% for the years ended December 31, 2022 and 2021, respectively. The difference between the effective rate and the statutory rate is primarily attributed to the change in the valuation allowance against net deferred tax assets.

We estimate an annual effective income tax rate based on projected results for the year and apply this rate to income before taxes to calculate income tax expense. When applicable, the income tax provision also includes adjustments for discrete tax items. Any refinements made due to subsequent information that affects the estimated annual effective income tax rate are reflected as adjustments in the current period.

Critical Accounting Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with United States Generally Accepted Accounting Principles (US GAAP). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in Note 2: Summary of Significant Accounting Policies to our financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. Critical accounting policies and estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of the matters that are inherently uncertain.

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Goodwill

Goodwill is tested for impairment on an annual basis in the fourth fiscal quarter, or sooner if an indicator of impairment exists. We may elect to first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of goodwill at the reporting unit level is less than the carrying amount. The qualitative assessment includes our consideration of relevant events and circumstances that would affect our single reporting unit, including macroeconomic, industry and market conditions, our overall financial performance, and trends in the market price of our common stock.

We perform a qualitative assessment of goodwill at the reporting unit level by comparing the carrying amount to the estimated fair value of the reporting unit, including an estimated control premium. Assumptions are subject to change as a result of changing economic and competitive conditions. Based on our assessment in the fourth quarter of the fiscal year ended December 31, 2022 using the qualitative approach, we concluded that the fair value of the reporting unit exceeded the carrying value and that there was no impairment of goodwill.

Revenue recognition

We recognize revenue as control of our products and services are transferred to our customers in an amount that reflects the consideration expected to be received in exchange for those products and services. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when or as the performance obligations are satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. We consider a performance obligation satisfied once control of a good or service has been transferred to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service. Technology development revenue includes revenue associated to the discovery, development and technology readiness phases of technology development and partnership agreements. We refer to our customers as “partners” when describing our relationship in an agreement.

Technology development revenue

Our TDAs generally include multiple phases of Discovery and/or CLD; such as target discovery, library design, assay development, strain screening, fermentation optimization, purification, and analytics that typically all represent a single performance obligation. These agreements may include options for additional goods and services such as readying the technology to transfer to the partner and licensing terms. The transaction prices for these arrangements include fixed and variable consideration for the single performance obligation as well as variable consideration for success-based achievements. Any variable consideration is constrained to the extent that it is probable that a significant reversal of cumulative revenue will not occur. Primarily all of our contracts with our partners include an enforceable right to payment. While there is no alternative use for the asset created, the agreement’s terms vary as to whether an enforceable right to payment exists for performance completed as of that date.

We measure progress toward the completion of the performance obligations satisfied over time using an input method based on an overall estimate of the effort incurred to date at each reporting period to satisfy a performance obligation. This method provides an appropriate depiction of completed progress toward fulfilling our performance obligations for each respective arrangement. In certain TDAs that require a portion of the contract consideration to be received in advance at the commencement of the contract, such advance payment is initially recorded as a contract liability.

Business combinations

We utilize the acquisition method of accounting for business combinations and allocate the purchase price of an acquisition to the various tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. We primarily establish fair value using the replacement cost approach or the income approach based upon a discounted cash flow model. The replacement cost approach measures the value of an asset by the cost to reconstruct or replace it with another of like utility. The income approach requires the

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use of many assumptions and estimates including future revenues and expenses, as well as discount factors and income tax rates. Other estimates include:

•The use of carrying value as a proxy for fair values of fixed assets and liabilities assumed from the target; and

•Fair values of intangible assets and contingent consideration.

While we use best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the business acquisition date, these estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the purchase price measurement period, which is no more than one year from the business acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. We recorded adjustments during the year ended December 31, 2021 related to our Totient acquisition. Business combinations also require us to estimate the useful life of certain intangible assets acquired and this estimate requires significant judgment.

Stock-based compensation

Stock-based compensation includes compensation expense for restricted stock and stock option grants to employees and is measured on the grant date based on the fair value of the award and recognized on a straight-line basis over the requisite service period. The fair value of options to purchase common stock are measured using the Black-Scholes option-pricing model. We account for forfeitures as they occur.

See Note 12: Stock-based compensation to our financial statements included elsewhere in this Annual Report on Form 10-K for more information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options. Certain of such assumptions involve inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation could be materially different.

Emerging Growth Company Status

We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. Section 107 of the JOBS Act provides that an emerging growth company may take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 for complying with new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. Section 107 of the JOBS Act provides that we can elect to opt out of the extended transition period at any time, which election is irrevocable. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

Subject to certain conditions, as an emerging growth company, we may rely on certain other exemptions and reduced reporting requirements, including without limitation (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board (PCAOB) regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the consolidated financial statements, known as the auditor discussion and analysis. We will remain an emerging growth company until the earlier of (a) the last day of the fiscal year in which we have total annual gross revenue of $1.235 billion or more; (b) December 31, 2026, the last day of the fiscal year following the fifth anniversary of the date of the completion of our IPO; (c) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or (d) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a drug and target discovery company harnessing deep learning and synthetic biology to expand the therapeutic potential of proteins. We built our Integrated Drug Creation Platform to identify novel drug targets, discover optimal biotherapeutic candidates, and generate the cell lines to manufacture them in a single efficient process. We believe our approach delivers disruptive efficiency, but more importantly enables our partners to create novel and human/AI-designed new-to-nature biologics (next-generation biologics).

While next-generation biologics have exciting medical potential and are a rapidly growing field of drug development, because their protein architectures (scaffolds or modalities) are biologically foreign, they present challenges for conventional biologic discovery and cell line development methods. These methods typically involve a linear series of steps to screen and select desired molecular parts and reformat them into their final protein scaffold, and subsequent laborious and often unsuccessful generation of a suitable manufacturing cell line. We are transforming the biologic discovery and cell line development process by rapidly screening up to billions of drug candidates in the desired final protein scaffold that goes into patients and in the scalable manufacturing cell line that scales up for clinical and commercial manufacturing.

We couple our powerful deep learning AI models, built to understand and predict determinants of protein function, with our proprietary synthetic biology capabilities, which include high-throughput single cell assays that can evaluate billions of drug sequence variants, each within its production cell line, for target binding affinity, protein quality, and production level (titer). This combination of in silico modeling with wet lab testing allow us to generate immense real-world datasets that we harness to train and refine our deep learning models. These models guide our protein and cell line designs and enable in silico optimization of multiple attributes. In addition, with our “Totient Target” technology, we use machine learning computational methods to evaluate patient tissue samples and, without biological bias, identify disease-relevant fully human antibodies and their disease- and tissue-specific molecular targets. In addition to the direct utility of these antibodies and targets as drug discovery assets, these data comprising antibody-epitope recognition elements expand our AI models’ training sets and may improve predictive capabilities for future discovery campaigns.

Our goal is to become the partner of choice for biologic drug discovery and cell line development. As a technology development company, we generate biologic drug candidates and production cell lines for our partners to develop. Our business model is to establish partnerships with biopharmaceutical companies and use our platform for rapid creation of next-generation biologic drug candidates and production cell lines. We classify our applications into two key categories: Discovery and CLD. We define “Discovery” as any projects for which we are evaluating variants of the protein-of-interest, which includes generation of the production cell line, and we define CLD as a program for which the production cell line alone is the goal of the partnership. Our partners are responsible for preclinical and clinical testing of biologics generated using our platform. We expect our partnerships to provide us with the opportunity to participate in the future success of the biologics generated utilizing our platform, through milestone payments as well as royalties on sales by our partners of any approved products. We aim to assemble economic interests in a diversified portfolio of partners’ next-generation biologic drug candidates across multiple indications.

As of December 31, 2021 we had drug candidates in twelve Active Programs (across eight current partners’ preclinical or clinical pipelines) for which we have negotiated, or expect to negotiate upon completion of certain technology development activities, license agreements with potential downstream milestone payments and royalties. Eight of these Active Programs are focused on developing production cell lines for drug candidates that our partners (Merck & Co., Inc., Xyphos Biotechnology, an Astellas Company (Astellas), Alpha Cancer Technologies, Inc., PhaseBio Pharmaceuticals, Inc., and other undisclosed biotechnology companies) are developing (five preclinical, one Phase 1, one Phase 3, and one animal health). The remaining four Active Programs comprise Discovery applications, including three Discovery programs through our agreement with EQRx and one lead optimization program with Astellas. We define “Active Programs” as programs that are subject to ongoing technology development activities intended to determine if the program can be pursued by our partner for future clinical development, as well as any program for which our

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partner obtains and maintains a license to our technology to advance the program after completion of the technology development phase. There is no assurance, however, that our partners will advance any drug candidates that are currently the subject of Active Programs into further preclinical or clinical development or that our partners will elect to license our technologies upon completion of the technology development phase in a timely manner, or at all.

Total revenue was $4.8 million for the year ended December 31, 2021 was consistent as compared to the year ended December 31, 2020, due to timing of additional project-based milestones achieved and the mix of ongoing programs utilizing our Integrated Drug Creation Platform. Throughout 2020 and 2021, we continued making investments in our operating capacity which enabled us to achieve additional project-based milestones in our technology development agreements. Since our inception in 2011, we have devoted substantially all of our resources to research and development activities, including with respect to our Integrated Drug Creation Platform, establishing and maintaining our intellectual property portfolio, hiring personnel, raising capital and providing general and administrative support for these activities. As a result, we have incurred net losses in each year. For the years ended December 31, 2021 and 2020, we incurred net losses of $101.0 million and $14.4 million, respectively. Research and development expenses increased by $33.1 million, or 289%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. For the year ended December 31, 2021, we adjusted the fair value of the warrant liability and the convertible notes through the initial public offering (IPO) and recorded expense of $4.1 million and $30.7 million. As of December 31, 2021, we had an accumulated deficit of $191.0 million and cash and cash equivalents totaling $252.6 million.

Prior to our IPO, we financed our operations primarily through private placements of redeemable convertible preferred stock and convertible notes. From the date of our company formation up to the IPO, we have raised aggregate gross proceeds of $230.0 million. In July 2021, we consummated our IPO and issued 14,375,000 shares of common stock, including a full exercise of the overallotment option, for net proceeds of $210.1 million, after deducting underwriting discounts and offering related expenses.

We expect to continue to incur significant expenses, and we expect such expenses to increase substantially in connection with our ongoing activities, including as we:

•implement an effective business development strategy to drive adoption of our Integrated Drug Creation Platform by new and existing partners;

•continue to engage in research and development efforts and scale our technology development activities to meet potential demand at a reasonable cost;

•develop, acquire, in-license or otherwise obtain technologies that enable us to expand our platform capabilities;

•attract, retain and motivate highly qualified personnel;

•implement operational, financial and management information systems; and

•operate as a public company.

Our corporate headquarters and research and development facilities are located in Vancouver, Washington. In December 2020, we entered into an operating lease, which was subsequently amended in March 2021, for a 77,974 square foot corporate headquarters facility that includes office and laboratory space. During the second quarter of 2021, we relocated our operations to the new facility and completed the majority of our construction activities throughout 2021. We believe our facilities are adequate and suitable for our current needs and that should it be needed, suitable additional or alternative space will be available to accommodate our operations.

Recent Developments

In January 2021, we completed our acquisition of Denovium as part of our strategy to utilize AI technology that includes deep learning computational models of protein function.

In February 2021, Merck Global Health Innovation Fund purchased 254,886 shares of our Series E Preferred Stock for an aggregate price of $5.0 million.

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In March 2021, we issued $125.0 million aggregate principal amount of convertible notes (the Convertible Notes) to certain existing and new investors. The Convertible Notes were convertible upon a qualifying financing into shares of our common stock under certain circumstances. In July 2021, the Convertible Notes converted into an aggregate of 9,732,593 shares upon the closing of our IPO, based on 82% of the IPO price of $16.00 per share.

In June 2021, we completed our acquisition of Totient, Inc. (Totient), a discovery company harnessing human immune responses to identify novel antibodies and their therapeutic targets, in exchange for a combination of cash and equity consideration. We paid the former stockholders and noteholders of Totient upfront cash consideration of $40.0 million, subject to customary purchase price adjustments, including consideration in exchange for the cancellation of (i) unexercised outstanding options to purchase shares of Totient common stock, whether vested or unvested, and (ii) outstanding stock appreciation rights previously granted by Totient. Holders of Totient’s Class A common stock also received an aggregate of 2,212,208 shares of our common stock, subject to certain vesting conditions. In addition, Totient’s Class A common stockholders and noteholders are eligible to receive up to an additional $15.0 million in cash upon the achievement of certain milestones. We are currently integrating the acquired technology and team into our business model and partnership strategy.

In July 2021, we completed our IPO under a registration statement in which we issued and sold 14,375,000 shares of our common stock, including the full exercise of the underwriters’ overallotment option, at a purchase price of $16.00 per share. We received net proceeds of $210.1 million from the IPO after deducting underwriting discounts and offering expenses. All outstanding preferred stock converted into an aggregate of 46,266,256 shares of common stock and the Convertible Notes converted into an aggregate of 9,732,593 shares of common stock upon completion of the IPO.

In October 2021, we announced a drug discovery collaboration with EQRx, Inc. We will collaborate to jointly engineer and develop several clinical candidates across multiple therapeutic areas, including oncology and immunology. At our option, we may make additional investments at progressive stages of development in exchange for an increased share of product sales.

In January 2022, we announced a research collaboration with Merck Sharp & Dohme Corp. (Merck). Under the collaboration, Absci will deploy its Bionic Protein non-standard amino acid technology to produce enzymes tailored to Merck’s biomanufacturing applications. Additionally, Merck has the option to nominate up to three drug discovery targets and enter into a drug discovery collaboration agreement.

COVID-19 Pandemic

As a result of the ongoing COVID-19 pandemic, we have experienced and may continue to experience severe delays and disruptions, including, for example:

•interruption of or delays in receiving products and supplies from third parties;

•limitations on our business operations by local, state and/or federal governments that could impact our ability to conduct our technology development and other activities;

•delays in negotiations with partners and potential partners;

•increases in facilities costs to comply with physical distancing guidance;

•business disruptions caused by workplace, laboratory and office closures and an increased reliance on employees working from home, travel limitations, cyber security and data accessibility, or communication or mass transit disruptions; and

•limitations on employee resources that would otherwise be focused on the conduct of our activities, including because of sickness of employees or their families or the desire of employees to avoid contact with large groups of people.

While these delays continue to cause short-term disruptions, the overall impact to our financial statements is expected to continue to be immaterial.

Furthermore, COVID-19 has adversely affected the broader economy and financial markets, resulting in an economic downturn that could curtail the research and development budgets of our partners, our ability to hire additional personnel and our financing prospects. In addition, the spread of more contagious strains,

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such as the Omicron and Delta variants, could cause the COVID-19 pandemic to last longer than expected and could result in the reinstatement of restrictive orders that could disrupt our business, including vaccine mandates. Any of the foregoing could harm our operations and we cannot anticipate all the ways in which our business could be adversely impacted by health epidemics such as COVID-19.

For additional details, see the section titled “Risk Factors.”

LLC Conversion

We were originally formed in August 2011 as an Oregon limited liability company and later converted into a Delaware limited liability company in April 2016 under the name AbSci LLC. In October 2020, we completed a reorganization whereby we were converted from a Delaware limited liability company named AbSci LLC to a Delaware corporation under the name Absci Corporation (the LLC Conversion) and all outstanding membership interests in AbSci LLC were exchanged for equity interests in Absci Corporation. All of the share information referenced throughout this Annual Report has been retroactively adjusted to reflect the change in capital structure.

Key Factors Affecting Our Results of Operations and Future Performance

We believe that our future financial performance will be primarily driven by multiple factors as described below, each of which presents growth opportunities for our business. These factors also pose important challenges that we must successfully address in order to sustain our growth and improve our results of operations. Our ability to successfully address these challenges is subject to various risks and uncertainties, including those described in the section of this Annual Report titled “Risk Factors.”

•Establish new partnerships: Our potential to grow revenue and long-term earnings will require us to successfully identify and establish technology development arrangements with new partners. We have been expanding and expect to continue to expand our business development team and our capabilities to find new partners.

•Increase the number of molecules and programs under existing partnerships: The execution of our long term strategy relies substantially on the value our partners believe can be recognized from the product candidates and/or production cell lines that we provide to them. Our continued growth depends on our ability to expand the scope of our existing partnerships and add new molecules for CLD or Discovery partnerships with current partners.

•Successfully complete our technology development activities and enter licensing arrangements with our partners: Our business model depends upon partners licensing the technologies we develop and advancing the drug candidates we generate through clinical development to commercialization. Both our ability to successfully complete technology development activities to meet the needs of our partner, and the partner’s prioritization of the subject program, impact the likelihood and timing of any election by a partner to license the technologies we develop. There is no assurance that a partner will elect to license the technologies we develop.

•Our partners successfully developing and commercializing the drug candidates generated with our technology: Our business model is dependent on the eventual progression of biologic drug candidates discovered or initially developed utilizing our Integrated Drug Creation Platform into clinical trials and commercialization. Given the nature of our relationships with our partners, we do not control the progression, clinical development, regulatory strategy or eventual commercialization, if approved, of these product candidates. As a result, our future success and our potential eligibility to receive milestone payments and royalties are entirely dependent on our partners’ efforts over which we have no control. The timing and scope of any approval that may be required by the FDA, or any other regulatory body, for drugs that are developed based on molecules discovered and/or manufactured using our Integrated Drug Creation Platform technologies can significantly impact our results of operations and future performance.

•Continued significant investments in our research and development of new technologies and platform expansion: We are seeking to further refine and expand our platform and the scope of our capabilities, which may or may not be successful. This includes, but is not limited to, novel target identification, de novo discovery, incorporation of non-standard amino acids (Bionic Protein creation), and application of artificial intelligence across our Integrated Drug Creation Platform. We may in the future also invest significantly in developing our own proprietary lead drug candidates

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and advancing them through preclinical validation. We expect to incur significant expenses to advance these research and development efforts or to invest in or acquire complementary technologies, but these efforts may not be successful.

•Drive commercial adoption of our Integrated Drug Creation Platform capabilities: Driving the adoption of our Integrated Drug Creation Platform across existing and new markets will require significant investment. We plan to further invest in research and development to support the expansion of our platform capabilities including new molecules to existing partners or help deliver our platform to new markets.

Key Business Metrics

We are in the process of identifying key business metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. Currently, given our stage of development, we believe that the following metrics are the most important for understanding our current business trajectory. These metrics may change or may be substituted for additional or different metrics as our business develops. For example, as our business matures and to the extent drug candidates generated with our technologies enter clinical development, or as we may enter partnerships addressing programs over multiple years, or as certain programs may be discontinued by partners, we anticipate updating these metrics to reflect such changes.

Partners represents the unique number of partners with whom we have executed technology development agreements. We view this metric as an indication of our ability to execute our business development activities and level of our market penetration.

Programs represents the number of molecules we have addressed or are addressing with our platform. We view this metric as an indication of the robustness of our technology and the commercial success of our platform.

Active Programs represents the number of programs that are subject to ongoing technology development activities intended to determine if the program can be pursued by our partner for future clinical development, as well as any program for which our partner obtains and maintains a license to our technology to advance the program after completion of the technology development phase. There is no assurance, however, that our partners will advance any drug candidates that are currently the subject of Active Programs into further preclinical or clinical development or that our partners will elect to license our technologies upon completion of the technology development phase in a timely manner, or at all. In light of the inherent risks and uncertainties associated with drug development, we anticipate that our partners may from time to time abandon or terminate the development of one or more drug candidates generated from our platform. As we are notified of such terminations, we will remove the subject programs from our Active Programs count.

We have not negotiated terms for a sufficient number of royalty- and milestone-bearing licenses to enable us to make accurate predictions regarding our potential revenue and financial performance.

Components of Results of Operations

Revenue

Our revenue currently consists primarily of fees earned from our partners in conjunction with technology development agreements (TDAs), which are delineated as technology development revenue in our results of operations. These fees are earned and paid at various points throughout the terms of these agreements including upfront and upon the achievement of specified project-based milestones. In addition, in certain TDAs, we earn success-based fees upon achievement of specified technology goals.

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We expect revenue to increase over time as we enter into additional partnership agreements and grant licenses to our partners for the clinical and commercial use of intellectual property rights to the biological assets we create, and as the partners advance product candidates into and through clinical development and commercialization. We expect that our revenue will fluctuate from period to period due to the timing of executing additional partnerships, the uncertainty of the timing of milestone achievements and our dependence on the program decisions of our partners.

KBI BioPharma, Inc. Collaboration Agreement

In December 2019, we executed a four-year Joint Marketing Agreement (JMA) with KBI BioPharma, Inc. (KBI) to co-promote technologies through joint marketing efforts. The JMA provides for a non-refundable upfront payment of $0.8 million and milestone payments of $2.8 million in the aggregate, of which $2.3 million had been received as of December 31, 2021, upon the achievement of specific milestones. Upfront payments that relate to ongoing collaboration efforts required throughout the contract term such as joint marketing are recognized ratably throughout the contract term. We fully constrain revenue associated with the milestone payments until the specified milestones are probable of achievement. Additionally, KBI is obligated to make royalty payments to us during the fourth year of the JMA representing a percentage of its sales generated through the arrangement. Any costs incurred to KBI through the duration of the JMA are recognized as a reduction to collaboration revenue in the period in which they are incurred.

In September 2021, the JMA was amended to shorten the term to approximately three years, while all remaining payments, including potential royalty payments, were replaced with a one-time fee due from KBI in the amount of $0.3 million. The Company determined the remaining services were distinct from those provided prior to the modification and therefore recognizes the total remaining transaction price prospectively over the remaining contractual term.

Operating Expenses

Research and Development

Research and development expenses include the cost of materials, personnel-related costs (comprised of salaries, benefits and share-based compensation), consulting fees, equipment and allocated facility costs (including occupancy and information technology). These expenses are exclusive of depreciation and amortization. Research and development activities consist of target discovery and technology development for partners, as well as continued development of our Integrated Drug Creation Platform. We derive improvements to our platform from both types of activities. As our research and development efforts apply to our platform broadly and across programs, we have not historically tracked our research and development expenses on a partner-by-partner basis or on a program-by-program basis.

We expect research and development to continue to increase in absolute dollars as we enter into additional partnerships and continue to invest in platform enhancements.

Selling, General, and Administrative

Selling, general, and administrative expenses include personnel-related costs (comprised of salaries, benefits and share-based compensation) for executive, business development, alliance management, legal, finance and other administrative functions. Marketing expenses include costs associated with attending conferences and other promotion efforts of our Integrated Drug Creation Platform. Additionally, these expenses include external legal expenses, accounting and tax service expenses, consulting fees, and allocated facilities costs (including occupancy and information technology). These expenses are exclusive of depreciation and amortization.

We expect our selling costs to increase in absolute dollars as we continue to grow our business development efforts, and increase marketing activities to drive awareness and adoption of our platform. We expect selling costs to fluctuate as a percentage of total revenue due to the timing and magnitude of these expenses, and to decrease as a percentage of total revenue in the long term.

We expect general and administrative expenses to continue to increase in absolute dollars as we increase total headcount and incur costs associated with operating as a public company, including expenses related to legal, accounting, regulatory, maintaining compliance with exchange listing and requirements of the U.S. Securities and Exchange Commission (SEC), director and officer insurance premiums and investor relations.

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We expect these expenses to increase in absolute dollars and vary from period to period as a percentage of revenue in the near term, and to decrease as a percentage of revenue in the long term.

We have a comprehensive IP portfolio covering the many aspects of our Integrated Drug Creation platform, including those related to our proprietary cell lines and protein expression technologies, non-standard amino acid technology, proprietary screening assays, antibody discovery methods, and deep learning AI models. We regularly file patent applications to protect innovations arising from our research and development. We also hold trademarks and trademark applications in the United States and foreign jurisdictions. Costs to secure and defend our IP are expensed as incurred and are classified as selling, general and administrative expenses.

Depreciation and amortization

Depreciation and amortization expense consists of the depreciation expense of our property and equipment and amortization of our intangibles. Our equipment is used most actively as part of our lab operations.

We expect depreciation expense to continue to increase in absolute dollars as we continue to purchase additional lab equipment within our new operating facility.

Other Expenses

Interest Expense

Interest expense, net, consists primarily of interest related to convertible notes, borrowings under our term debt and laboratory equipment leases.

Other Expense, net

Other expenses to date consist primarily of adjustments of our convertible notes and preferred stock warrant liability to fair value and a gain on extinguishment for the forgiveness of our Payroll Protection Plan (PPP) loan.

Results of Operations

The results of operations presented below should be reviewed in conjunction with consolidated financial statements and notes included elsewhere in this Annual Report. The following tables set forth our results of operations for the periods presented (In thousands):

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Comparison of the Years Ended December 31, 2021 and 2020

The following table summarizes our results of operations for the years ended December 31, 2021 and 2020 (In thousands, except for percentages):

Revenue

Total revenue for the year ended December 31, 2021 was consistent as compared to the year ended December 31, 2020 at $4.8 million.

Technology development revenue decreased by $0.1 million, or 3%, for the year ended December 31, 2021 compared to the year ended December 31, 2020, driven by a combination of overall program progress, the timing of additional project-based milestones achieved, and the mix of ongoing programs.

Collaboration revenue increased by $0.1 million, or 17%, for the year ended December 31, 2021 compared to the year ended December 31, 2020, as a result of the September 2021 contract modification which resulted in a shortened term and modified consideration.

Operating Expenses

Research and development

Research and development expenses increased by $33.1 million, or 289%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase was generally driven by increased costs associated with increased technology development activity with our partners and increased costs associated with continued platform development. These increased costs were primarily attributable to increased headcount and related personnel costs in the amount of $17.7 million, increased stock-based compensation from the phantom unit exchange and equity grants in the ordinary course in the amount of $4.4 million, increased purchases of supplies and services related to lab operations in the amount of $8.2 million specifically for our technology development agreements and internal research and platform development activities and increased rent, and increases in facility overhead and research and development related administrative expenses of $2.8 million. Increased administrative costs includes asset impairment of $0.8 million, and increased software and professional services costs.

Selling, General and Administrative Expenses

Selling, general, and administrative expenses increased by $23.3 million, or 423%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase was primarily driven by increased headcount and related personnel and recruitment costs in the amount of $8.0 million, increased stock-based compensation from the phantom unit exchange and equity grants in the ordinary course in the amount of $5.7 million, increased professional service fees in the amount of $4.2 million, of which, $0.9 million represented transaction costs associated with the Totient acquisition, and increased administrative

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costs of $3.0 million. The increases in the administrative and professional service fees are the result of our operating as a public company.

Depreciation and amortization

Depreciation and amortization expense increased by $5.5 million, or 488%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase was primarily due to the increased purchases of lab equipment necessary to complete our increased level of technology development agreements and research and development, purchases of property, equipment, and leasehold improvements related to our new corporate headquarters, and the amortization of intangible assets acquired in 2021.

Other Expenses

Interest Expense

Interest expense was $3.4 million for the year ended December 31, 2021 compared to $0.6 million for the year ended December 31, 2020, representing an increase of $2.8 million, or 441%. We increased borrowings on our term debt in May 2020, which led to an increase in interest expense. In addition, we incurred additional interest expense in connection with finance leases of additional laboratory equipment as we expanded our laboratory capacity from 2020 through 2021. We also recognized increased interest expense related to the convertible promissory notes issued in March 2021 until they were converted into common stock in connection with the IPO.

Other Expense, net

Other expense, net, increased by $30.8 million, or 7361%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase was primarily driven by fair value adjustments of our convertible notes for $28.0 million, and the change in the preferred stock warrant liability’s fair value in the amount of $4.1 million, offset by recognition of a gain on extinguishment for the forgiveness of our PPP loan in the amount of $0.6 million.

Liquidity and Capital Resources

Overview

As of December 31, 2021, we had $252.6 million of cash and cash equivalents. As of December 31, 2020, we had $69.9 million of cash and cash equivalents.

We have incurred net operating losses since inception. As of December 31, 2021, our accumulated deficit was $191.0 million. As of December 31, 2020, our accumulated deficit was $90.1 million. To date, we have funded operations through issuances and sales of equity securities and debt, in addition to revenue generated from our technology development agreements. We believe that our cash and cash equivalents will be sufficient to meet our operating expenses, working capital and capital expenditure needs over at least the next 12 months following the date of this filing.

Our future capital requirements will depend on many factors, including, but not limited to our ability to raise additional capital through equity or debt financing, our ability to successfully secure additional partnerships under contract with new partners and increase the number of programs covered under contracts with existing partners, the successful preclinical and clinical development by our partners of product candidates generated using our Integrated Drug Creation Platform and the successful commercialization by our partners of any such product candidates that are approved. If we are unable to execute on our business plan and adequately fund operations, or if our business plan requires a level of spending in excess of cash resources, we may be required to negotiate partnerships in which we receive greater near-term payments at the

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expense of potential downstream revenue. Alternatively, we may need to seek additional equity or debt financing, which may not be available on terms acceptable to us or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants restricting our ability to take specific actions, such as incurring additional debt, selling or licensing our assets, making product acquisitions, making capital expenditures, or declaring dividends. If we are unable to generate sufficient revenue or raise additional capital when desired, our business, financial condition, results of operations and prospects would be adversely affected.

Sources of Liquidity

Since our inception, we have financed our operations primarily from the issuance and sale of our redeemable convertible preferred stock, issuances of equity securities, borrowings under long-term debt agreements, and to a lesser extent, cash flow from operations.

Redeemable convertible preferred stock

Through December 31, 2021 and December 31, 2020, we have raised a total of $104.3 million and $99.4 million, respectively, from the issuance of redeemable convertible preferred stock, net of issuance costs. In 2020, we issued shares of Series E redeemable convertible preferred stock for net proceeds of $64.7 million. In 2021, we issued additional shares of Series E redeemable convertible preferred stock for net proceeds of $4.9 million. In July 2021, all convertible preferred stock converted into an aggregate of 46,266,256 shares immediately prior to our IPO.

Bridge Bank Loan and Security Agreement

In June 2018, we entered into a Loan and Security Agreement (LSA) with Bridge Bank (Bank), a division of Western Alliance Bank. We initially borrowed the first tranche of $0.3 million in June 2018. We increased our borrowings to $3.0 million in March 2019, and to $5.0 million in May 2020. As of December 31, 2021, we had $3.4 million in outstanding principal under the facility. The loan originally matured in May 2022, at which time all outstanding principal and accrued and unpaid interest is due and payable. In June 2021, the Company entered into a fifth amendment to the LSA. This amendment modified the term loan’s maturity date to June 16, 2023. This loan is secured by substantially all our tangible assets; intellectual property is excluded from this secured collateral, but is subject to a negative pledge in favor of Bank.

Convertible notes

In March 2021, we issued $125.0 million aggregate principal amount of Convertible Notes to certain existing and new investors. In July 2021, the Convertible Notes converted into an aggregate of 9,732,593 shares immediately prior to our IPO, at a price per share calculated based on 82% of the IPO price of $16.00.

Initial Public Offering

In July 2021, we completed our IPO and issued 14.4 million shares of our common stock, including 1.9 million shares pursuant to the full exercise of the underwriters’ option to purchase additional shares, at a price of $16.00 per share and received net proceeds of $210.1 million from the IPO.

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Cash Flows

The following summarizes our cash flows for the years ended December 31, 2021 and 2020 (In thousands):

Cash Flows from Operating Activities

In the year ended December 31, 2021, net cash used in operating activities was $60.6 million and consisted primarily of a net loss of $101.0 million adjusted for non-cash items, including depreciation and amortization expense of $6.7 million, stock-based compensation of $10.6 million, gain on extinguishment of our PPP loan of $0.6 million, an increase to our convertible note liability of $30.7 million, an increase to our preferred stock warrant liability of $4.1 million and a net increase in operating assets and liabilities in the amount of $3.1 million.

In the year ended December 31, 2020, net cash used in operating activities was $11.0 million and consisted primarily of a net loss of $14.4 million adjusted for non-cash items, including depreciation and amortization expense of $1.1 million and an increase to our preferred stock warrant liability of $0.5 million.

Cash Flows from Investing Activities

In the year ended December 31, 2021, net cash used in investing activities was $67.4 million. The net cash used resulted primarily from purchases of lab equipment and leasehold improvements of $38.0 million as we expanded our operations and overall capacity and cash paid as part of our acquisitions of Denovium and Totient of $28.1 million, and an investment in equity securities of $1.2 million.

In the year ended December 31, 2020, net cash used in investing activities was $2.2 million primarily from purchases of lab equipment.

Cash Flows from Financing Activities

In the year ended December 31, 2021, net cash provided by financing activities was $336.2 million. The net cash provided resulted primarily from total net proceeds of $210.1 million from the IPO, the issuance of Series E redeemable convertible preferred stock, net of issuance costs, in the amount of $4.9 million, the issuance of $125.0 million of convertible promissory notes in March 2021, and was partially offset by principal payments made for leased equipment under finance leases and the term loan in the amount of $4.1 million.

In the year ended December 31, 2020, net cash provided by financing activities was $71.0 million. The net cash provided resulted primarily from the issuance of Series D redeemable convertible preferred units, net of issuance costs, in the amount of $69.3 million, proceeds from the issuance of long-term debt and notes payable in the amount of $3.2 million and was partially offset by principal payments made for leased equipment under finance leases and the term loan in the amount of $1.6 million.

Income taxes

The Company's effective income tax rate from continuing operations was 8.1% for the year ended December 31, 2021. The effective income tax rates reflect the impact of non-deductible expenses, state and local taxes and tax credits. When applicable, the income tax provision also includes adjustments from discrete tax items, including the tax impacts of the business combinations for Denovium and Totient for the year ended December 31, 2021.

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Critical Accounting Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in Note 2: Summary of significant accounting policies to our financial statements appearing elsewhere in this Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.

Revenue recognition

We recognize revenue as control of our products and services are transferred to our customers in an amount that reflects the consideration expected to be received in exchange for those products and services. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when or as the performance obligations are satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. We consider a performance obligation satisfied once control of a good or service has been transferred to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service. Technology development revenue includes revenue associated to the discovery, development and technology readiness phases of technology development agreements. We refer to our customers as “partners” when describing our relationship in an agreement.

Technology development revenue

Our TDAs generally include multiple phases of Discovery and CLD such as target discovery, library design, assay development, strain screening, fermentation optimization, purification, and analytics that all represent a single performance obligation. These agreements may include options for additional goods and services such as readying the technology to transfer to the partner and licensing terms. The transaction prices for these arrangements include fixed and variable consideration for the single performance obligation as well as variable consideration for success-based achievements. Any variable consideration is constrained to the extent that it is probable that a significant reversal of cumulative revenue will not occur. Depending on the specific terms of the arrangement, we either recognize revenue over time or at a point in time. While there is no alternative use for the asset created, the agreement’s terms vary as to whether an enforceable right to payment exists for performance completed as of that date. Primarily all of our contracts with our partners include an enforceable right to payment.

We measure progress toward the completion of the performance obligations satisfied over time using an input method based on an overall estimate of the effort incurred to date at each reporting period to satisfy a performance obligation. This method provides an appropriate depiction of completed progress toward fulfilling our performance obligations for each respective arrangement. In certain TDAs that require a portion of the contract consideration to be received in advance at the commencement of the contract, such advance payment is initially recorded as a contract liability.

Business combinations

We utilize the acquisition method of accounting for business combinations and allocate the purchase price of an acquisition to the various tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. We primarily establish fair value using the replacement cost approach or the income approach based upon a discounted cash flow model. The replacement cost approach measures the value of an asset by the cost to reconstruct or replace it with another of like utility. The income approach requires the

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use of many assumptions and estimates including future revenues and expenses, as well as discount factors and income tax rates. Other estimates include:

•The use of carrying value as a proxy for fair values of fixed assets and liabilities assumed from the target; and

•Fair values of intangible assets and contingent consideration.

While we use best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the business acquisition date, these estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the purchase price measurement period, which is no more than one year from the business acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. We have recorded adjustments during the period ended December 31, 2021 related to our Totient acquisition. Business combinations also require us to estimate the useful life of certain intangible assets acquired and this estimate requires significant judgment.

Stock-based compensation

Stock-based compensation includes compensation expense for incentive units, restricted stock, and stock option grants to employees and is measured on the grant date based on the fair value of the award and recognized on a straight-line basis over the requisite service period. The fair value of options to purchase common stock are measured using the Black-Scholes option-pricing model. The Company accounts for forfeitures as they occur. Prior to the LLC Conversion, the Company also granted phantom units which due to the presence of an exercise condition contingent upon a liquidity event, the Company determined that it was not probable that the phantom units would become exercisable.

See Note 10: Stock-based compensation to our financial statements included elsewhere in this Annual Report on form 10-K for more information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options. Certain of such assumptions involve inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation could be materially different.

Determination of the Fair Value of Common Stock

We are required to estimate the fair value of the common stock underlying our stock-based awards when performing fair value calculations using the Black-Scholes option pricing model. Prior to our common stock being publicly traded, the fair value of the common stock underlying our stock-based awards was determined on each grant date by management and approved by our board of directors, considering our most recently available third-party valuation of common shares. All options to purchase shares of our common stock are intended to be granted with an exercise price per share no less than the fair value per share of our common stock underlying those options on the date of grant, based on the information known to us on the date of grant.

Our determination of the value of our common stock was performed using methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants (AICPA), Audit and Accounting Practice Aid Series: Valuation of Privately Held Company Equity Securities Issued as Compensation (AICPA Practice Aid). In addition, our board of directors considered various objective and subjective factors to determine the fair value of our common stock, including:

•valuations of our common stock performed by third-party valuation specialists;

•the anticipated capital structure that will directly impact the value of the currently outstanding securities;

•our results of operations and financial position;

•the composition of, and changes to, our management team and board of directors;

•the lack of liquidity of our common stock as a private company;

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•our stage of development and business strategy and the material risks related to our business and industry;

•external market conditions affecting the life sciences and biotechnology industry sectors;

•U.S. and global economic conditions;

•the likelihood of achieving a liquidity event for the holders of our common stock, such as an IPO or a sale of our company, given prevailing market conditions; and

•the market value and volatility of comparable companies.

The AICPA Practice Aid prescribes several valuation approaches for setting the value of an enterprise, such as the cost, income and market approaches, and various methodologies for allocating the value of an enterprise to its common stock. The cost approach establishes the value of an enterprise based on the cost of reproducing or replacing the property less depreciation and functional or economic obsolescence, if present. The income approach establishes the value of an enterprise based on the present value of future cash flows that are reasonably reflective of our future operations, discounting to the present value with an appropriate risk adjusted discount rate or capitalization rate. The market approach is based on the assumption that the value of an asset is equal to the value of a substitute asset with the same characteristics.

In accordance with the AICPA Practice Aid, we considered the various methods for allocating the enterprise value to determine the fair value of our common stock at the valuation date. Under the option pricing method (OPM), shares are valued by creating a series of call options with exercise prices based on the liquidation preferences and conversion terms of each equity class. The value of the common stock is inferred by analyzing these options. The probability weighted expected return method (PWERM) is a scenario-based analysis that estimates the value per share based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to us, as well as the economic and control rights of each share class.

Starting in 2020, we used a hybrid method to determine the estimated fair value of our common stock, which included both the OPM and PWERM models.

Following our IPO, estimation of the fair value of our common stock was no longer considered a critical accounting estimate.

Recent Accounting Pronouncements

See Note 2: Summary of significant accounting policies to our Financial Statements “Recently adopted accounting pronouncements and Recently issued accounting pronouncements, not yet adopted” for more information.

Emerging Growth Company Status

We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. Section 107 of the JOBS Act provides that an emerging growth company may take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 for complying with new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. Section 107 of the JOBS Act provides that we can elect to opt out of the extended transition period at any time, which election is irrevocable. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

Subject to certain conditions, as an emerging growth company, we may rely on certain other exemptions and reduced reporting requirements, including without limitation (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board (PCAOB) regarding mandatory audit firm rotation or a supplement to the auditor’s report providing

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additional information about the audit and the consolidated financial statements, known as the auditor discussion and analysis. We will remain an emerging growth company until the earlier of (a) the last day of the fiscal year in which we have total annual gross revenue of $1.07 billion or more; (b) December 31, 2026, the last day of the fiscal year following the fifth anniversary of the date of the completion of our IPO; (c) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or (d) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.