Absci Corp (ABSI) FY 2024 MD&A

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.