Schrodinger(SDGR) - 2025 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the unaudited condensed consolidated financial statements and management's discussion and analysis of Schrödinger, Inc.'s financial performance and condition Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive loss, stockholders' equity, and cash flows, along with detailed explanatory notes Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity at specific points in time Condensed Consolidated Balance Sheets (in thousands) | Assets/Liabilities/Equity | June 30, 2025 | December 31, 2024 | | :------------------------ | :------------ | :------------------ | | Total Assets | $688,244 | $823,226 | | Cash and cash equivalents | $219,901 | $147,326 | | Marketable securities | $230,284 | $204,798 | | Accounts receivable, net | $10,073 | $235,692 | | Total Liabilities | $345,372 | $401,781 | | Deferred revenue | $94,543 | $111,944 | | Total Stockholders' Equity | $342,872 | $421,445 | - Total assets decreased from $823.2 million at December 31, 2024, to $688.2 million at June 30, 2025. A significant decrease was observed in accounts receivable, net, from $235.7 million to $10.1 million[22] - Cash and cash equivalents increased from $147.3 million to $219.9 million, while marketable securities also increased from $204.8 million to $230.3 million[22] Condensed Consolidated Statements of Operations This section details the company's revenues, expenses, and net loss over specific three and six-month periods Condensed Consolidated Statements of Operations (in thousands) | Metric (3 Months Ended June 30) | 2025 | 2024 | Change ($) | Change (%) | | :------------------------------ | :-------- | :-------- | :--------- | :--------- | | Total revenues | $54,759 | $47,334 | $7,425 | 16% | | Total cost of revenues | $28,601 | $15,999 | $12,602 | 79% | | Gross profit | $26,158 | $31,335 | $(5,177) | (17)% | | Total operating expenses | $79,061 | $84,064 | $(5,003) | (6)% | | Loss from operations | $(52,903) | $(52,729) | $(174) | —% | | Total other income (expense) | $10,017 | $(1,235) | $11,252 | N/M | | Net loss | $(43,173) | $(54,047) | $10,874 | N/M | | Net loss per share (basic & diluted) | $(0.59) | $(0.74) | $0.15 | N/M | | Metric (6 Months Ended June 30) | 2025 | 2024 | Change ($) | Change (%) | | :------------------------------ | :--------- | :--------- | :--------- | :--------- | | Total revenues | $114,310 | $83,932 | $30,378 | 36% | | Total cost of revenues | $57,028 | $33,707 | $23,321 | 69% | | Gross profit | $57,282 | $50,225 | $7,057 | 14% | | Total operating expenses | $161,074 | $170,387 | $(9,313) | (5)% | | Loss from operations | $(103,792) | $(120,162) | $16,370 | (14)% | | Total other income (expense) | $1,126 | $11,930 | $(10,804) | N/M | | Net loss | $(102,981) | $(108,771) | $5,790 | N/M | | Net loss per share (basic & diluted) | $(1.41) | $(1.50) | $0.09 | N/M | - For the three months ended June 30, 2025, total revenues increased by 16% to $54.8 million, but gross profit decreased by 17% due to a significant increase in cost of revenues (79%). Net loss improved from $(54.0) million to $(43.2) million, driven by a positive swing in other income[24] - For the six months ended June 30, 2025, total revenues increased by 36% to $114.3 million, and gross profit increased by 14% to $57.3 million. Net loss improved from $(108.8) million to $(103.0) million, despite a decrease in total other income[24] Condensed Consolidated Statements of Comprehensive Loss This section presents the net loss adjusted for other comprehensive income or loss, primarily unrealized gains or losses on marketable securities Condensed Consolidated Statements of Comprehensive Loss (in thousands) | Metric (3 Months Ended June 30) | 2025 | 2024 | | :------------------------------ | :-------- | :-------- | | Net loss | $(43,173) | $(54,047) | | Unrealized loss on marketable securities | $(119) | $(108) | | Comprehensive loss | $(43,292) | $(54,155) | | Metric (6 Months Ended June 30) | 2025 | 2024 | | :------------------------------ | :--------- | :--------- | | Net loss | $(102,981) | $(108,771) | | Unrealized loss on marketable securities | $(249) | $(461) | | Comprehensive loss | $(103,230) | $(109,232) | - The comprehensive loss for the three months ended June 30, 2025, was $(43.3) million, an improvement from $(54.2) million in the prior year, primarily due to a reduced net loss[27] - For the six months ended June 30, 2025, comprehensive loss was $(103.2) million, also an improvement from $(109.2) million in the prior year, reflecting a lower net loss[27] Consolidated Statements of Stockholders' Equity This section details changes in the company's equity accounts, including common stock, additional paid-in capital, and accumulated deficit Changes in Stockholders' Equity (in thousands) | Item | Balance at Dec 31, 2024 | Q1 2025 Changes | Q2 2025 Changes | Balance at Jun 30, 2025 | | :------------------------------------ | :---------------------- | :-------------- | :-------------- | :---------------------- | | Common stock | $637 | $1 | $2 | $644 | | Limited common stock | $92 | $0 | $0 | $92 | | Additional paid-in capital | $946,037 | $11,992 | $12,658 | $970,687 |\ | Accumulated deficit | $(525,541) | $(59,808) | $(43,173) | $(628,522) | | Accumulated other comprehensive (loss) income | $220 | $(130) | $(119) | $(29) | | Total Stockholders' Equity | $421,445 | $373,504 | $342,872 | $342,872 | - Total stockholders' equity decreased from $421.4 million at December 31, 2024, to $342.9 million at June 30, 2025, primarily due to accumulated net losses[30] - Additional paid-in capital increased by $24.6 million during the six months ended June 30, 2025, mainly from stock-based compensation and stock option exercises[30] Condensed Consolidated Statements of Cash Flows This section summarizes the cash inflows and outflows from operating, investing, and financing activities over specific periods Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity (Six Months Ended June 30) | 2025 | 2024 | | :-------------------------------------------- | :-------- | :-------- | | Net cash provided by (used in) operating activities | $91,865 | $(92,999) | | Net cash (used in) provided by investing activities | $(24,969) | $34,657 | | Net cash provided by financing activities | $2,427 | $9,612 | | Net increase (decrease) in cash and cash equivalents and restricted cash | $69,323 | $(48,730) | | Cash and cash equivalents and restricted cash, end of period | $231,980 | $112,336 | - Operating activities generated $91.9 million in cash for the six months ended June 30, 2025, a significant improvement from using $93.0 million in the same period of 2024, primarily due to cash collections from the Novartis collaboration[33][261] - Investing activities used $25.0 million in cash in 2025, mainly for marketable securities purchases, compared to providing $34.7 million in 2024[33][263] - Financing activities provided $2.4 million in cash in 2025, primarily from stock option exercises, a decrease from $9.6 million in 2024 which included proceeds from an ATM offering[33][265] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements (1) Description of Business This section describes Schrödinger, Inc.'s business model, focusing on its computational platform for drug discovery and materials applications - Schrödinger, Inc. utilizes a physics-based computational platform for rapid and cost-effective discovery of novel molecules in drug development and materials applications. The company licenses its software platform to biopharmaceutical and industrial companies, academic institutions, and government laboratories, and also applies it to advance proprietary and collaborative drug discovery programs[35] (2) Significant Accounting Policies This section outlines the key accounting principles and estimates used in preparing the financial statements, including new accounting standards and consolidation policies - The company's financial statements are prepared in accordance with U.S. GAAP and SEC rules for interim financial information, including normal recurring adjustments. Significant estimates are made for revenue allocation and progress on collaboration agreements[38][39] - New accounting standards ASU 2023-09 (Income Tax Disclosures) and ASU 2024-03 (Expense Disaggregation Disclosures) are not yet adopted. ASU 2023-09 is expected to impact disclosures only, while ASU 2024-03's impact is still being evaluated[36][37] - The company consolidates wholly-owned subsidiaries and uses the equity method for investments with significant influence. Equity investments without significant influence or readily determinable fair value are accounted for at cost less impairment[40][48][50] - Customer concentration risk exists, with one customer accounting for 19% of total accounts receivable at June 30, 2025 (down from 68% at Dec 31, 2024) and 16% of total revenue for the three months ended June 30, 2025[44][45] (3) Revenue Recognition This section details the company's revenue recognition policies across software products, services, and drug discovery collaborations, including timing and specific agreements - Revenue is recognized when control of products or services is transferred to customers. The timing of recognition varies, with software products and services recognized both at a point in time and over time, and drug discovery revenue also split between point in time and over time recognition[54][55] Revenue Recognition Patterns (Percentage of Total Revenue) | Category | 3 Months Ended Jun 30, 2025 | 3 Months Ended Jun 30, 2024 | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | | :----------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Software products & services – point in time | 29.4% | 40.1% | 36.5% | 44.1% | | Software products & services – over time | 44.6% | 34.7% | 41.6% | 37.9% | | Drug Discovery – point in time | 5.5% | 19.3% | 3.7% | 10.9% | | Drug Discovery – over time | 20.5% | 5.9% | 18.2% | 7.1% | - Software revenue sources include on-premise licenses (upfront recognition), hosted subscriptions (ratable recognition), software maintenance (ratable), professional services (as consumed), and software contributions (as conditions met or annually when invoiced)[57][58][60][61][62][63][65] - Drug discovery revenue comes from services (over time, based on progress) and milestones (recognized when probable of achievement). Contribution revenue is recognized on a cost reimbursement basis[68][69][70][72] - The collaboration with Novartis Pharma AG, initiated in November 2024, includes an upfront payment of $150.0 million and potential milestones up to $2.272 billion. Revenue recognized from this agreement was $7.6 million for Q2 2025 and $13.3 million for H1 2025[84][86][90] (4) Fair Value Measurements This section explains how financial assets are measured at fair value, categorizing them by input levels and detailing changes in equity investments - Financial assets are measured at fair value using Level 1 (quoted prices in active markets) and Level 2 (observable inputs) categories. No Level 3 (unobservable inputs) assets were reported[103] Assets Measured at Fair Value (in thousands) | Asset Category | June 30, 2025 | December 31, 2024 | | :-------------------------------------- | :------------ | :---------------- | | Cash and cash equivalents and restricted cash | $231,980 | $162,657 | | Marketable securities | $230,284 | $204,798 | | Equity investments | $27,685 | $36,202 | | Total | $489,949 | $403,657 | - Unrealized gains and losses from equity investments are classified within the change in fair value of equity investments in the statements of operations[104] (5) Commitments and Contingencies This section outlines the company's contractual obligations, including lease liabilities, and confirms the absence of material legal proceedings - The company has operating leases for office space and a finance lease for equipment, expiring through 2037. The remaining weighted average lease term for operating and finance leases was 11 years as of June 30, 2025[106][108] Maturities of Operating and Finance Lease Liabilities (in thousands) | Year ending December 31: | Amount | | :----------------------- | :-------- | | Remainder of 2025 | $9,153 | | 2026 | $17,305 | | 2027 | $16,111 | | 2028 | $14,991 | | 2029 | $14,522 | | Thereafter | $97,509 | | Total future minimum lease payments | $169,591 | | Less: imputed interest | $(55,138) | | Present value of future minimum lease payments | $114,453 | | Less: current portion of lease payments | $16,963 | | Lease liabilities, long-term | $97,490 | - The company is not currently subject to any material legal proceedings[110] (6) Income Taxes This section details the company's income tax expense, valuation allowances, unrecognized tax benefits, and the impact of recent tax legislation Income Tax Expense (in thousands) | Period | 2025 | 2024 | | :---------------------- | :--- | :--- | | Three Months Ended June 30 | $287 | $83 | | Six Months Ended June 30 | $315 | $539 | - Income tax expense for both periods is primarily due to obligations in certain states and foreign jurisdictions, as the company maintains a full valuation allowance against U.S. net deferred tax assets[112][113][245] - The company had $4.3 million in unrecognized tax benefits as of June 30, 2025, and does not expect a significant change in the next 12 months[113] - The recently signed One Big Beautiful Bill Act (OBBBA) is being evaluated for its impact, but no material change to the effective income tax rate or net deferred federal income tax assets is anticipated due to the full valuation allowance[116] (7) Stockholders' Equity This section provides information on the company's common stock, limited common stock, preferred stock, and at-the-market offering program - As of June 30, 2025, the company had 64,420,899 shares of common stock and 9,164,193 shares of limited common stock outstanding. Common stock holders have one vote per share, while limited common stock holders cannot vote in director elections or removals[22][117][120] - The company has an at-the-market (ATM) offering program allowing sale of up to $250.0 million in common stock. As of June 30, 2025, $241.1 million remained available under the ATM[119][250] - 10,000,000 shares of undesignated preferred stock are authorized, with rights and preferences to be determined by the board[122] (8) Stock-Based Compensation This section details the company's stock incentive plans, stock-based compensation expense, and unrecognized compensation costs for equity awards - The company has multiple stock incentive plans (2010, 2020, 2021, 2022 Plans) for various equity awards. As of June 30, 2025, 4,242,514 shares were available for grant[123][124][125][126][127][128] Stock-Based Compensation Expense (in thousands) | Category | 3 Months Ended Jun 30, 2025 | 3 Months Ended Jun 30, 2024 | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | | :------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Cost of sales | $1,421 | $1,360 | $2,823 | $2,495 | | Research and development | $3,339 | $4,228 | $6,846 | $8,294 | | Sales and marketing | $968 | $968 | $1,889 | $1,942 | | General and administrative | $4,899 | $6,252 | $10,643 | $12,295 | | Total | $10,627 | $12,808 | $22,201 | $25,026 | - Unrecognized compensation cost for RSUs was $50.7 million (expected over 3.03 years) and for stock options was $37.0 million (expected over 2.39 years) as of June 30, 2025[131][143] (9) Net Loss per Share Attributable to Common and Limited Common Stockholders This section presents the calculation of basic and diluted net loss per share, noting the anti-dilutive effect of potential securities Net Loss per Share (in thousands, except per share data) | Metric (3 Months Ended June 30) | 2025 | 2024 | | :------------------------------ | :-------- | :-------- | | Net loss | $(43,173) | $(54,047) | | Weighted average shares | 73,427,635 | 72,711,685 | | Net loss per share (basic & diluted) | $(0.59) | $(0.74) | | Metric (6 Months Ended June 30) | 2025 | 2024 | | :------------------------------ | :--------- | :--------- | | Net loss | $(102,981) | $(108,771) | | Weighted average shares | 73,243,797 | 72,501,409 | | Net loss per share (basic & diluted) | $(1.41) | $(1.50) | - Basic and diluted net loss per share are identical due to the company being in a net loss position, making all potentially dilutive securities anti-dilutive[144] - Potentially dilutive securities not included in calculations totaled 15,050,432 shares for the three and six months ended June 30, 2025[144] (10) Equity Investments This section details the carrying values and fair value changes of the company's equity investments in various biopharmaceutical companies - The carrying value of the Nimbus investment remained at $2.4 million as of June 30, 2025, and December 31, 2024, after the company lost significant influence in 2023[146] - The company disposed of its equity stake in Morphic Holding, Inc. for $47.6 million in August 2024. For the three and six months ended June 30, 2024, Morphic investment resulted in a mark-to-market loss of $944 thousand and a gain of $4.3 million, respectively[147][148][178] - The carrying value of the Ajax Therapeutics, Inc. investment was $4.5 million as of June 30, 2025, and December 31, 2024[151] - The investment in Structure Therapeutics Inc. is accounted for at fair value. It resulted in a mark-to-market gain of $4.6 million for Q2 2025 and a loss of $8.5 million for H1 2025[153] (11) Related Party Transactions This section outlines transactions with related parties, including consulting fees and significant contributions from the Bill & Melinda Gates Foundation Related Party Transactions (in thousands) | Transaction Type | 3 Months Ended Jun 30, 2025 | 3 Months Ended Jun 30, 2024 | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | | :------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Consulting fees to board member | $109 | $105 | $218 | $210 | | Bill & Melinda Gates Foundation (licenses/services) | $11 | $63 | $20 | $70 | | Bill & Melinda Gates Foundation (drug discovery contribution) | $212 | $424 | $711 | $914 | | Bill & Melinda Gates Foundation (software contribution) | $4,513 | $0 | $8,357 | $0 | - Software contribution revenue from the Bill & Melinda Gates Foundation significantly increased in 2025 due to new agreements for expanding the computational platform to predict toxicity[157] - No revenue was recognized from the Gates Ventures, LLC agreement during the three and six months ended June 30, 2025 and 2024[159] (12) Segment Reporting This section provides financial information for the company's two reportable segments: Software and Drug Discovery, along with geographic revenue breakdown - The company operates in two reportable segments: Software (licensing software for molecular discovery) and Drug Discovery (building a portfolio of drug programs)[160] Segment Financial Information (in thousands) | Metric (3 Months Ended June 30) | Software | Drug Discovery | Total Segment | | :------------------------------ | :-------- | :------------- | :------------ | | Revenues | $40,544 | $14,215 | $54,759 | | Cost of revenues | $13,029 | $15,572 | $28,601 | | Gross profit | $27,515 | $(1,357) | $26,158 | | Metric (6 Months Ended June 30) | Software | Drug Discovery | Total Segment | | :------------------------------ | :-------- | :------------- | :------------ | | Revenues | $89,360 | $24,950 | $114,310 | | Cost of revenues | $26,551 | $30,477 | $57,028 | | Gross profit | $62,809 | $(5,527) | $57,282 | - The Drug Discovery segment reported a gross loss of $(1.4) million for Q2 2025 and $(5.5) million for H1 2025, indicating higher costs than revenues in this segment[164] Revenues by Geographic Area (in thousands) | Geographic Area | 3 Months Ended Jun 30, 2025 | 3 Months Ended Jun 30, 2024 | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | | :---------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | United States | $34,050 | $30,699 | $63,713 | $53,996 | | EMEA | $13,563 | $8,709 | $36,646 | $14,210 | | APAC | $6,971 | $7,805 | $13,045 | $15,001 | | Rest of World | $175 | $121 | $906 | $725 | | Total | $54,759 | $47,334 | $114,310 | $83,932 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, highlighting key business developments, financial performance drivers, and future outlook Overview This section provides a high-level summary of Schrödinger's business, its computational platform, drug discovery efforts, and funding sources - Schrödinger's physics-based computational platform accelerates drug development and materials applications by discovering high-quality, novel molecules more rapidly and at lower cost[167] - The company licenses its software to biopharmaceutical and industrial companies, academic institutions, and government laboratories, and also uses its platform for proprietary and collaborative drug discovery programs[167] - Operations have been funded primarily by equity sales, software solutions, and upfront/milestone payments from drug discovery collaborations[177] Proprietary Drug Discovery Programs This section details the progress of the company's key proprietary drug candidates, including clinical trial phases and regulatory designations - SGR-1505 (MALT1 inhibitor) Phase 1 clinical trial in B-cell malignancies showed SGR-1505 was well-tolerated with preliminary clinical activity, including a 22% overall response rate. The company expects to meet with the FDA by end of 2025 to discuss Phase 2 dose[171] - SGR-1505 received Orphan Drug Designation for mantle cell lymphoma (August 2023) and Fast Track designation for Waldenström macroglobulinemia (June 2025)[173] - SGR-2921 (CDC7 inhibitor) Phase 1 clinical trial for relapsed/refractory AML or high-risk myelodysplastic syndrome has initiated dosing. Initial data is anticipated in Q4 2025. It received Fast Track (July 2024) and Orphan Drug (January 2025) designations for AML[174] - SGR-3515 (Wee1/Myt1 inhibitor) Phase 1 clinical trial for advanced solid tumors has initiated dosing. Initial data is anticipated in Q4 2025[175] Initiative with Bill & Melinda Gates Foundation This section describes a new initiative funded by the Bill & Melinda Gates Foundation to expand the company's computational platform for toxicology prediction - In July 2024, the company launched an initiative, funded by $19.5 million in grants from the Bill & Melinda Gates Foundation, to expand its computational platform to predict toxicology risk in early drug discovery[176] Financial Overview; Collaborations This section provides a financial summary, highlights key collaborations, and discusses the company's two reportable business segments - The company received $47.6 million from the acquisition of Morphic Holding, Inc. by Eli Lilly and Company in August 2024, for its equity stake[178] - The company's two reportable segments are Software (licensing software for drug discovery and materials science) and Drug Discovery (generating revenue from preclinical and clinical programs)[179] - Key collaborations include Bristol-Myers Squibb (BMS) with potential milestones up to $482.0 million for one remaining neurology target, and Novartis Pharma AG with an upfront payment of $150.0 million and potential milestones up to $2.272 billion across initial programs[182][184] - Total revenues increased by 16% year-over-year to $54.8 million for the three months ended June 30, 2025, while net loss improved from $54.0 million to $43.2 million[185] Restructuring This section details the recent operational restructuring, including workforce reduction and expected financial impacts on expenses - On May 19, 2025, the company restructured operations, reducing its workforce by approximately 60 employees (7% of full-time employees) to improve cash burn rate and enhance operational efficiency[186] - The restructuring is expected to incur approximately $3 million in charges, mainly severance and benefits, in fiscal year 2025, and reduce operating expenses by approximately $30 million on an annualized basis[187][188] Impact of Tariffs This section assesses the current and anticipated impact of U.S. tariffs and retaliatory measures on the company's business operations - The company has not experienced, nor does it currently expect, any direct impact from U.S. tariffs and retaliatory measures in the near term, but continues to monitor their possible effects on its business and customers[189] Components of Results of Operations This section breaks down the various revenue and expense components that contribute to the company's overall financial performance Software Products and Services Revenue This section explains the sources and recognition patterns of revenue generated from the company's software products and related services - Software revenue is generated from on-premise licenses (upfront recognition), hosted subscriptions (ratable recognition), software maintenance (ratable), professional services (as consumed), and software contributions (as conditions met or annually when invoiced)[190][191][192][193][194][196][197] Drug Discovery Revenue This section describes the sources of drug discovery revenue, including collaboration agreements, milestones, and contribution funding - Drug discovery revenue is derived from research and development activities under collaboration agreements and achievement of discovery/development milestones. Future revenue potential includes commercial/regulatory milestones, option fees, and royalties[198] - Drug discovery contribution revenue primarily consists of funds from the Bill & Melinda Gates Foundation for women's health drug discovery, recognized on a cost reimbursement basis[199] Cost of Revenues This section details the components of cost of revenues for both software and drug discovery segments, including personnel and third-party expenses - Software cost of revenues includes personnel, cloud computing, CRO expenses, royalties, and allocated overhead. Drug discovery cost of revenues includes personnel, third-party CROs, royalties, allocated compute capacity, and overhead[200][201] Gross Profit and Gross Margin This section discusses the factors influencing gross profit and gross margin for both software and drug discovery segments, and future expectations - Software gross margin may fluctuate due to revenue fluctuations and changes in sales mix between on-premise and hosted solutions. Drug discovery gross margins are expected to trend higher over time as programs advance and milestone sizes increase[202][203] Research and Development Expense This section outlines the nature and expected trends of research and development expenses, covering drug discovery and platform development - R&D expense is a significant portion of operating expenses, recognized as incurred, and includes drug discovery program costs and continuous computational platform development[204] - R&D expenses are expected to increase as the company invests in proprietary drug discovery programs, computational platform advancement, and hiring additional personnel[204] Sales and Marketing Expense This section describes the primary components of sales and marketing expenses and planned investments to expand the customer base - Sales and marketing expense primarily consists of personnel-related costs, promotional events, advertising, and allocated overhead. Focused investments are planned to expand software sales and customer base[205] General and Administrative Expense This section details general and administrative expenses, including personnel and professional fees, and anticipated increases due to public company operations - G&A expense includes personnel-related costs for executive, legal, finance, HR, IT, and other administrative functions, professional fees, and general operating expenses. These expenses are expected to increase due to public company operations and compliance[206][207] Gain on Equity Investments This section explains the nature of gains recognized from cash distributions related to the company's equity investments - Gain on equity investments represents realized gains from cash distributions from equity investments[208] Change in Fair Value of Equity Investments This section describes the fluctuations in fair value adjustments for equity investments, which are remeasured at each period end - Fair value gains and losses reflect adjustments to the fair value of equity investments, which are remeasured at each period end and are expected to fluctuate significantly[210][211] Other Income This section details the components of other income, including interest earned, interest expense, and foreign exchange gains and losses - Other income includes interest earned on cash equivalents and marketable securities, interest expense, and transactional foreign exchange gains and losses[212] Income Tax Expense This section outlines the company's income tax expense, primarily from state and foreign jurisdictions, given the full valuation allowance on U.S. deferred tax assets - Income tax expense consists of U.S. federal and state income taxes and foreign income taxes. A full valuation allowance is maintained on federal and state deferred tax assets[213] Results of Operations This section provides a detailed comparative analysis of the company's financial performance for the three and six months ended June 30, 2025 and 2024 Comparison of the Three and Six Months Ended June 30, 2025 and 2024 This section presents a comparative summary of key financial metrics for the three and six months ended June 30, 2025 and 2024 Summary of Unaudited Results of Operations (in thousands) | Metric (3 Months Ended June 30) | 2025 | 2024 | Change ($) | Change (%) | | :------------------------------ | :-------- | :-------- | :--------- | :--------- | | Total revenues | $54,759 | $47,334 | $7,425 | 16% | | Gross profit | $26,158 | $31,335 | $(5,177) | (17)% | | Loss from operations | $(52,903) | $(52,729) | $(174) | —% | | Net loss | $(43,173) | $(54,047) | $10,874 | N/M | | Metric (6 Months Ended June 30) | 2025 | 2024 | Change ($) | Change (%) | | :------------------------------ | :--------- | :--------- | :--------- | :--------- | | Total revenues | $114,310 | $83,932 | $30,378 | 36% | | Gross profit | $57,282 | $50,225 | $7,057 | 14% | | Loss from operations | $(103,792) | $(120,162) | $16,370 | (14)% | | Net loss | $(102,981) | $(108,771) | $5,790 | N/M | Revenues This section provides a detailed breakdown and analysis of total revenues, distinguishing between software products and drug discovery segments Revenue Breakdown (in thousands) | Revenue Category (3 Months Ended June 30) | 2025 | 2024 | Change ($) | Change (%) | | :---------------------------------------- | :-------- | :-------- | :--------- | :--------- | | Software products and services | $40,544 | $35,404 | $5,140 | 15% | | Drug discovery | $14,215 | $11,930 | $2,285 | 19% | | Total revenues | $54,759 | $47,334 | $7,425 | 16% | | Revenue Category (6 Months Ended June 30) | 2025 | 2024 | Change ($) | Change (%) | | :---------------------------------------- | :--------- | :--------- | :--------- | :--------- | | Software products and services | $89,360 | $68,819 | $20,541 | 30% | | Drug discovery | $24,950 | $15,113 | $9,837 | 65% | | Total revenues | $114,310 | $83,932 | $30,378 | 36% | Software Products and Services Revenue This section analyzes the changes in software revenue, distinguishing between on-premise, hosted, and contribution sources - On-premise software revenue decreased by 16% for Q2 2025 due to timing of multi-year renewals, but increased by 13% for H1 2025 due to new and existing multi-year contracts[216][217] - Hosted software revenue increased by 38% for Q2 2025 and 44% for H1 2025, driven by increased spend from existing customers and new hosted software subscriptions[218] - Software contribution revenue significantly increased in 2025 due to new agreements with the Bill & Melinda Gates Foundation to expand the computational software platform[221] Drug Discovery Revenue This section analyzes the changes in drug discovery revenue, including services and contribution, highlighting the impact of collaborations - Drug discovery services revenue increased by 21% for Q2 2025 and 70% for H1 2025, primarily due to the Novartis collaboration and progress of other existing and new collaborations[222][223] - Drug discovery contribution revenue decreased by 35% for Q2 2025 and 15% for H1 2025, mainly due to fluctuations in allotted funds spent under an agreement with the Bill & Melinda Gates Foundation[224] Cost of Revenues This section analyzes the changes in cost of revenues for both software and drug discovery segments and their impact on gross margins Cost of Revenues and Gross Margin (in thousands) | Category (3 Months Ended June 30) | 2025 | 2024 | Change ($) | Change (%) | | :-------------------------------- | :-------- | :-------- | :--------- | :--------- | | Software products and services | $13,029 | $7,167 | $5,862 | 82% | | Software Gross margin | 68% | 80% | -12% | N/A | | Drug discovery | $15,572 | $8,832 | $6,740 | 76% | | Category (6 Months Ended June 30) | 2025 | 2024 | Change ($) | Change (%) | | :-------------------------------- | :--------- | :--------- | :--------- | :--------- | | Software products and services | $26,551 | $15,143 | $11,408 | 75% | | Software Gross margin | 70% | 78% | -8% | N/A | | Drug discovery | $30,477 | $18,564 | $11,913 | 64% | - Software cost of revenues increased by 82% for Q2 2025 and 75% for H1 2025, driven by increases in personnel-related, cloud computing, and CRO expenses[225][226] - Drug discovery cost of revenues increased by 76% for Q2 2025 and 64% for H1 2025, primarily due to increases in CRO expense and personnel-related expense as proprietary programs moved to partnered programs[228][229] Research and Development Expense This section analyzes the changes in research and development expenses, categorizing them by external, internal, and other R&D costs Research and Development Expense (in thousands) | Category (3 Months Ended June 30) | 2025 | 2024 | Change ($) | Change (%) | | :-------------------------------- | :-------- | :-------- | :--------- | :--------- | | External costs for programs | $11,767 | $15,925 | $(4,158) | (26)% | | Internal costs for development | $8,775 | $10,650 | $(1,875) | (18)% | | All other R&D | $22,596 | $24,260 | $(1,664) | (7)% | | Total R&D expense | $43,138 | $50,835 | $(7,697) | (15)% | | Category (6 Months Ended June 30) | 2025 | 2024 | Change ($) | Change (%) | | :-------------------------------- | :--------- | :--------- | :--------- | :--------- | | External costs for programs | $24,477 | $30,849 | $(6,372) | (21)% | | Internal costs for development | $18,080 | $21,357 | $(3,277) | (15)% | | All other R&D | $46,425 | $49,240 | $(2,815) | (6)% | | Total R&D expense | $88,982 | $101,446 | $(12,464) | (12)% | - Total R&D expense decreased by 15% for Q2 2025 and 12% for H1 2025, primarily due to decreases in external research costs for early-stage candidates and personnel-related expenses as programs moved to partnered status[230][231][232][233] Sales and Marketing Expense This section analyzes the changes in sales and marketing expenses, primarily driven by personnel and cloud computing costs Sales and Marketing Expense (in thousands) | Period (3 Months Ended June 30) | 2025 | 2024 | Change ($) | Change (%) | | :------------------------------ | :-------- | :-------- | :--------- | :--------- | | Sales and marketing | $10,734 | $9,693 | $1,041 | 11% | | Period (6 Months Ended June 30) | 2025 | 2024 | Change ($) | Change (%) | | :------------------------------ | :--------- | :--------- | :--------- | :--------- | | Sales and marketing | $21,101 | $19,864 | $1,237 | 6% | - Sales and marketing expense increased by 11% for Q2 2025 and 6% for H1 2025, mainly due to increases in personnel-related and cloud computing expenses[236][237] General and Administrative Expense This section analyzes the changes in general and administrative expenses, influenced by professional services and personnel costs General and Administrative Expense (in thousands) | Period (3 Months Ended June 30) | 2025 | 2024 | Change ($) | Change (%) | | :------------------------------ | :-------- | :-------- | :--------- | :--------- | | General and administrative | $25,189 | $23,536 | $1,653 | 7% | | Period (6 Months Ended June 30) | 2025 | 2024 | Change ($) | Change (%) | | :------------------------------ | :--------- | :--------- | :--------- | :--------- | | General and administrative | $50,991 | $49,077 | $1,914 | 4% | - G&A expense increased by 7% for Q2 2025 and 4% for H1 2025, primarily due to increases in professional services and royalties related to Nimbus cash distributions, partially offset by decreases in personnel-related expenses[238][239] Gain on Equity Investments This section reports on the absence of gain or loss from equity investments for the specified periods - No gain or loss on equity investments was reported for the three and six months ended June 30, 2025 or 2024[240] Change in Fair Value of Equity Investments This section analyzes the changes in fair value of equity investments, highlighting specific gains and losses from key holdings Change in Fair Value of Equity Investments (in thousands) | Period (3 Months Ended June 30) | 2025 | 2024 | Change ($) | | :------------------------------ | :------ | :-------- | :--------- | | Change in fair value | $4,579 | $(5,833) | $10,412 | | Period (6 Months Ended June 30) | 2025 | 2024 | Change ($) | | :------------------------------ | :--------- | :-------- | :--------- | | Change in fair value | $(8,516) | $2,304 | $(10,820) | - Q2 2025 saw a $4.6 million unrealized gain on Structure Therapeutics investment, a significant improvement from a $5.8 million loss in Q2 2024 (due to losses on Structure Therapeutics and Morphic)[241] - H1 2025 recorded an $8.5 million unrealized loss on Structure Therapeutics, contrasting with a $2.3 million gain in H1 2024 (gain on Morphic partially offset by loss on Structure Therapeutics)[242] Other Income This section analyzes the changes in other income, attributing fluctuations to currency, interest, and reclassification effects Other Income (in thousands) | Period (3 Months Ended June 30) | 2025 | 2024 | Change ($) | | :------------------------------ | :------ | :------ | :--------- | | Other income | $5,438 | $4,598 | $840 | | Period (6 Months Ended June 30) | 2025 | 2024 | Change ($) | | :------------------------------ | :------ | :------ | :--------- | | Other income | $9,642 | $9,626 | $16 | - Other income increased for Q2 2025 due to favorable currency fluctuations and interest income, partially offset by an interest income reclassification[243] - Other income for H1 2025 remained stable, with favorable currency fluctuations offset by decreased interest income and a reclassification[244] Income Tax Expense This section analyzes the income tax expense, noting its origin in state and foreign jurisdictions due to the U.S. valuation allowance Income Tax Expense (in thousands) | Period (3 Months Ended June 30) | 2025 | 2024 | | :------------------------------ | :--- | :--- | | Income tax expense | $287 | $83 | | Period (6 Months Ended June 30) | 2025 | 2024 | | :------------------------------ | :--- | :--- | | Income tax expense | $315 | $539 | - Income tax expense for both periods reflects obligations in certain states and foreign jurisdictions, as the company maintains a full valuation allowance on its U.S. federal and state tax assets[245] Critical Accounting Estimates This section confirms that there were no material changes to the company's critical accounting estimates during the reporting period - There were no material changes to the company's critical accounting estimates during the six months ended June 30, 2025[246] Liquidity, Capital Resources and Funding Requirements This section assesses the company's financial liquidity, capital resources, and future funding needs, considering operating losses and cash reserves - The company has a history of significant operating losses and an accumulated deficit of $628.5 million as of June 30, 2025[247] - As of June 30, 2025, the company had $462.3 million in cash, cash equivalents, restricted cash, and marketable securities, which are believed to be sufficient to fund operations for at least the next 24 months[251][252] - Future capital requirements depend on software revenue growth, R&D spending, sales and marketing expansion, milestone payments, and proprietary drug discovery programs[252] - Contractual obligations as of June 30, 2025, include $169.6 million in lease obligations, a $21.8 million minimum payment for a Hyderabad facility, and a $60.0 million minimum payment for a third-party cloud provider[255][256][258] Cash Flows This section analyzes the company's cash flows from operating, investing, and financing activities, highlighting significant changes and drivers Summary of Cash Flows (in thousands) | Cash Flow Activity (Six Months Ended June 30) | 2025 | 2024 | | :-------------------------------------------- | :-------- | :-------- | | Net cash provided by (used in) operating activities | $91,865 | $(92,999) | | Net cash (used in) provided by investing activities | $(24,969) | $34,657 | | Net cash provided by financing activities | $2,427 | $9,612 | | Net increase (decrease) in cash and cash equivalents and restricted cash | $69,323 | $(48,730) | | Cash and cash equivalents and restricted cash, end of period | $231,980 | $112,336 | - Operating activities provided $91.9 million in cash in H1 2025, a significant improvement from a $93.0 million usage in H1 2024, primarily due to cash collections from the Novartis collaboration[261] - Investing activities used $25.0 million in H1 2025, mainly for marketable securities purchases, compared to providing $34.7 million in H1 2024[263][264] - Financing activities provided $2.4 million in H1 2025, primarily from stock option exercises, a decrease from $9.6 million in H1 2024 which included ATM offering proceeds[265] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there have been no material changes in the company's reported market risks or risk management policies since the filing of its Annual Report on Form 10-K for the fiscal year ended December 31, 2024 - No material changes in market risks or risk management policies have occurred since the December 31, 2024, 10-K filing[266] Item 4. Controls and Procedures This section details the management's evaluation of the effectiveness of the company's disclosure controls and procedures and reports on any changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures This section reports on management's assessment of the effectiveness of the company's disclosure controls and procedures - Management, including the principal executive and financial officers, concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2025[267] Changes in Internal Control Over Financial Reporting This section reports on any changes in the company's internal control over financial reporting during the reporting period - There have been no changes in internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[268] PART II. OTHER INFORMATION This section provides additional disclosures including legal proceedings, risk factors, equity sales, defaults, and director and officer trading arrangements Item 1. Legal Proceedings This section confirms that the company is not currently involved in any material legal proceedings - The company is not currently involved in any material legal proceedings[271] Item 1A. Risk Factors This section outlines various risks and uncertainties that could materially affect the company's business, covering financial position, operations, intellectual property, and regulatory compliance Risks Related to Our Financial Position and Need for Additional Capital This section highlights risks associated with the company's history of operating losses, need for future capital, and potential for fluctuating financial results - The company has a history of significant operating losses, with a net loss of $43.2 million for Q2 2025 and an accumulated deficit of $628.5 million as of June 30, 2025. It expects to incur losses for several more years[273][274] - Achieving and maintaining profitability depends on increasing software sales, drug discovery collaboration revenue, and successful development/commercialization of drug products, which is uncertain[276][277] - Quarterly and annual results may fluctuate significantly due to factors like customer renewals, new customer acquisition, timing of operating expenses, market conditions, and the success of drug discovery collaborations[280][284] - The company will likely require additional capital to fund operations, and inability to raise it on acceptable terms could harm the business. Raising capital may dilute stockholders or restrict operations[282][287][288] Risks Related to Our Software This section addresses risks concerning customer retention, sales cycles, industry concentration, competition, and potential software defects or security breaches - Failure of existing customers to renew licenses, purchase additional solutions, or renew at lower prices would adversely affect business and operating results[295][298] - The software sales cycle can be long and unpredictable, potentially leading to lost opportunities or unoffset expenses[299] - A significant portion of revenue comes from life sciences customers; adverse factors in this industry could negatively impact software sales. Competition is high, including from AI-based drug discovery companies[300][302][307] - Defects or disruptions in software solutions, reliance on third-party cloud infrastructure, or security breaches could diminish demand, reduce revenue, and expose the company to substantial liability[311][312][314] Risks Related to Drug Discovery This section outlines risks associated with the lengthy, expensive, and uncertain nature of drug development, clinical trials, and reliance on third parties - The company may not realize a return on investment in drug discovery collaborations due to lengthy, expensive, and uncertain clinical development processes, and collaborators' discretion over program advancement[319][320] - Equity investments in drug discovery collaborators may not yield returns, are subject to dilution, and their value can fluctuate significantly[323] - The computational platform's focus on drug discovery may not result in commercially viable products, and success in early stages does not guarantee later clinical trial success[327][328][329][357] - Reliance on third-party CROs for clinical trials and manufacturing increases risks of delays, unsatisfactory performance, and supply shortages, which could impair development and commercialization efforts[333][345][349] - Serious adverse effects in clinical trials could lead to abandonment of programs, and interim clinical data may change significantly upon full review[356][361] Risks Related to Our Operations This section covers operational risks including international exposure, infrastructure management, tax law changes, and challenges related to acquisitions - International operations (38-45% of total revenues) expose the company to regulatory, economic, and political risks, including currency fluctuations, staffing difficulties, and weaker intellectual property protection[383][384][385] - Failure to manage technical operations infrastructure could lead to service outages for customers and delays in solution deployment[387][389] - Changes in tax laws (e.g., IRA, OBBBA) or their interpretation could adversely affect the business and financial condition, including limitations on NOL utilization[390][391] - Acquisitions could divert management attention, dilute stockholders, disrupt operations, and may not yield expected synergies[398][399][401] Risks Related to Our Intellectual Property This section details risks concerning the company's ability to obtain, maintain, and enforce intellectual property rights, and potential infringement claims - Failure to comply with license agreements (e.g., with Columbia University) or collaboration agreements could lead to loss of critical intellectual property rights[403][404][408][409] - Inability to obtain, maintain, enforce, and protect patent protection for technology and product candidates could allow competitors to commercialize similar products[413] - Changes to patent laws (e.g., Leahy-Smith Act, Supreme Court rulings on patent eligibility) could diminish the value of patents and weaken protection[426][427][428] - Lawsuits alleging infringement, misapp