Absci(ABSI) - 2021 Q3 - Quarterly Report

Part I Financial Information This section presents Absci Corporation's unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures Item 1. Financial Statements This section presents Absci Corporation's unaudited condensed consolidated financial statements and detailed notes on accounting policies, acquisitions, and other financial aspects Condensed Consolidated Balance Sheets This statement provides a snapshot of Absci's financial position, detailing assets, liabilities, and equity at specific points in time | (In thousands) | September 30, 2021 | December 31, 2020 | | :--------------- | :----------------- | :------------------ | | ASSETS | | | | Cash and cash equivalents | $279,262 | $69,867 | | Total current assets | $300,665 | $73,234 | | Property and equipment, net | $44,090 | $8,909 | | Intangibles, net | $55,835 | — | | Goodwill | $23,013 | — | | TOTAL ASSETS | $449,119 | $88,569 | | LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND OTHER STOCKHOLDERS' DEFICIT | | | | Total current liabilities | $30,248 | $10,095 | | TOTAL LIABILITIES | $61,106 | $21,564 | | Redeemable convertible preferred stock | — | $156,433 | | TOTAL OTHER STOCKHOLDERS' DEFICIT | $388,013 | $(89,428) | | TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND OTHER STOCKHOLDERS' DEFICIT | $449,119 | $88,569 | - Total assets increased significantly from $88.569 million at December 31, 2020, to $449.119 million at September 30, 2021, primarily driven by a substantial increase in cash and cash equivalents, property and equipment, and the recognition of intangibles and goodwill from acquisitions[12] - Redeemable convertible preferred stock was eliminated by September 30, 2021, converting to common stock, while total stockholders' deficit shifted to a positive equity position of $388.013 million from a deficit of $(89.428) million[12] Condensed Consolidated Statements of Operations and Comprehensive Loss This statement details Absci's revenues, expenses, and net loss over specific periods, reflecting operational performance | (In thousands) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Revenues | | | | | | Technology development revenue | $1,390 | $922 | $2,922 | $1,964 | | Collaboration revenue | $149 | $(6) | $408 | $88 | | Total revenues | $1,539 | $916 | $3,330 | $2,052 | | Operating expenses | | | | | | Research and development | $10,730 | $2,692 | $28,820 | $6,851 | | Selling, general and administrative | $9,733 | $1,257 | $19,597 | $3,089 | | Depreciation and amortization | $2,218 | $331 | $3,895 | $780 | | Total operating expenses | $22,681 | $4,280 | $52,312 | $10,720 | | Operating loss | $(21,142) | $(3,364) | $(48,982) | $(8,668) | | Other income (expense) | | | | | | Total other expense, net | $(4,195) | $(384) | $(34,609) | $(746) | | Loss before income taxes | $(25,337) | $(3,748) | $(83,591) | $(9,414) | | Income tax benefit | $1,703 | — | $7,797 | — | | Net loss | $(23,634) | $(3,748) | $(75,794) | $(9,414) | | Net loss per share (Basic and diluted) | $(0.33) | $(0.85) | $(2.16) | $(2.88) | - Total revenues increased by 68% for the three months ended September 30, 2021, and by 62% for the nine months ended September 30, 2021, compared to the same periods in 2020, driven by increased technology development and collaboration revenue[16] - Net loss significantly widened to $(23.634) million for the three months and $(75.794) million for the nine months ended September 30, 2021, from $(3.748) million and $(9.414) million respectively in 2020, primarily due to substantial increases in operating expenses (R&D, SG&A) and other expenses (fair value adjustments of convertible notes and preferred stock warrant liability)[16] Condensed Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Units and Other Stockholders' and Members' Deficit This statement tracks changes in Absci's equity, including preferred stock conversions and accumulated deficit, over specific periods - As of September 30, 2021, all redeemable convertible preferred stock was converted to common stock, resulting in a total of 92,557,233 common shares outstanding and a positive total stockholders' deficit of $388.013 million, a significant change from the $(89.428) million deficit at December 31, 2020[19] - The increase in additional paid-in capital from $0.635 million to $553.878 million was primarily due to the issuance of common shares upon initial public offering and conversion of convertible notes and preferred stock[19] - Accumulated deficit increased from $(90.065) million at December 31, 2020, to $(165.859) million at September 30, 2021, reflecting ongoing net losses[19] Condensed Consolidated Statements of Cash Flows This statement summarizes Absci's cash inflows and outflows from operating, investing, and financing activities over specific periods | (In thousands) | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(43,519) | $(8,449) | | Net cash used in investing activities | $(59,061) | $(1,261) | | Net cash provided by financing activities | $337,489 | $6,581 | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $234,909 | $(3,129) | | Cash, cash equivalents and restricted cash - End of period | $306,617 | $10,747 | - Net cash used in operating activities increased from $(8.449) million in 2020 to $(43.519) million in 2021, primarily due to higher net losses and changes in operating assets and liabilities[25] - Net cash used in investing activities significantly increased from $(1.261) million in 2020 to $(59.061) million in 2021, driven by substantial purchases of property and equipment and cash paid for acquisitions (Denovium and Totient)[25] - Net cash provided by financing activities surged to $337.489 million in 2021 from $6.581 million in 2020, mainly due to proceeds from the IPO and issuance of convertible promissory notes[25] Notes to Unaudited Condensed Consolidated Financial Statements These notes provide detailed explanations and disclosures supporting the unaudited condensed consolidated financial statements 1. Organization and nature of operations This note describes Absci's corporate structure, business activities, and significant events like its Initial Public Offering and acquisitions - Absci Corporation developed an Integrated Drug Creation Platform for biologics discovery and cell line development, converting from a Delaware LLC to a Delaware corporation in October 2020[27] - The company completed its Initial Public Offering (IPO) on July 26, 2021, issuing 14,375,000 shares of common stock at $16.00 per share, generating $210.2 million in net proceeds, with all outstanding redeemable convertible preferred stock and convertible notes converting to common stock prior to the IPO[29] - In connection with the IPO, the company amended its certificate of incorporation to authorize 500,000,000 shares of common stock and 10,000,000 shares of undesignated preferred stock, and established a classified board of directors[30] 2. Summary of significant accounting policies This note outlines the key accounting principles and methods used in preparing Absci's financial statements, including revenue recognition and R&D expenses - The company prepares its condensed consolidated financial statements in accordance with US GAAP and operates as a single operating segment[35][40] - Absci is an 'emerging growth company' under the JOBS Act, allowing it to take advantage of certain exemptions from reporting requirements, including delayed adoption of new accounting standards[36] - Revenue is primarily recognized from technology development agreements (TDAs) over time or at a point in time, based on the transfer of control of services, while collaboration revenue is recognized ratably or upon milestone achievement[55][56][58] - Research and development expenses include costs for materials, personnel, consulting, and allocated facility costs, and are not tracked on a partner-by-partner or program-by-program basis[68] 3. Acquisitions This note details Absci's acquisitions of Denovium and Totient, including consideration, recognized goodwill, and intangible assets - In January 2021, Absci acquired Denovium, Inc., an AI deep learning company, for an estimated total consideration of $3.0 million (cash and equity), integrating its technology into the Integrated Drug Creation Platform, and recognized goodwill of $1.1 million[74][75][79] - In June 2021, Absci acquired Totient, Inc., a discovery company focused on novel antibodies, for an aggregate payment of $55.0 million (cash and equity) plus up to an additional $15.0 million contingent on milestones, resulting in $21.958 million in goodwill and $54.6 million in intangible assets[83][86][89] - Acquisition costs of $0.9 million related to Totient were expensed as selling, general and administrative expenses[91] 4. Property and equipment, net This note provides a breakdown of Absci's property and equipment, net of depreciation, and changes over the reported periods | (In thousands) | September 30, 2021 | December 31, 2020 | | :--------------- | :----------------- | :------------------ | | Construction in progress | $1,728 | $— | | Lab Equipment | $22,384 | $8,578 | | Leasehold Improvements | $21,035 | $2,016 | | Total Cost | $49,028 | $11,254 | | Less accumulated depreciation and amortization | $(4,938) | $(2,345) | | Property and equipment, net | $44,090 | $8,909 | - Property and equipment, net, increased significantly from $8.909 million at December 31, 2020, to $44.090 million at September 30, 2021, primarily due to increased lab equipment and leasehold improvements[96] - Depreciation expense for the nine months ended September 30, 2021, was $2.6 million, up from $0.8 million in the same period of 2020[96] 5. Long-term debt and other borrowings This note describes Absci's debt obligations, including its Loan and Security Agreement, PPP loan, and convertible promissory notes - Absci has a Loan and Security Agreement (LSA) with Bridge Bank, with an outstanding principal balance of $4.0 million as of September 30, 2021, and the maturity date was modified to June 16, 2023[104] - The company received full forgiveness for a $0.6 million PPP loan in February 2021, recognized as a gain on extinguishment[104] - In March 2021, Absci issued $125.0 million in convertible promissory notes, which converted into 9,732,593 shares of common stock immediately prior to the IPO in July 2021[105] 6. Leases This note details Absci's lease agreements, including a new facility lease and associated finance lease assets and liabilities - In December 2020, Absci entered into a lease for a new 61,607 sq ft facility, amended in March 2021 to add 16,367 sq ft, extending the lease term and providing additional tenant incentives[106][107] - Property and equipment includes approximately $9.0 million of assets under finance leases as of September 30, 2021, up from $4.3 million at December 31, 2020[110] Lease Type | Lease Type | Weighted Average Remaining Lease Term (years) | Weighted Average Discount Rate | | :----------- | :-------------------------------------------- | :----------------------------- | | Operating leases | 6.2 | 8% | | Finance leases | 2.4 | 7% | 7. Commitments and contingencies This note outlines Absci's future lease payment commitments and ongoing legal proceedings in the ordinary course of business - As of September 30, 2021, future lease payments are secured by irrevocable standby letters of credit totaling $1.8 million[113] - The company is party to claims and legal proceedings in the ordinary course of business but does not believe the ultimate outcome will have a material adverse effect on its financial position[114] 8. Redeemable convertible preferred stock This note explains the conversion of Absci's redeemable convertible preferred stock into common stock prior to the IPO and related warrant liabilities - Prior to the IPO, all redeemable convertible preferred stock was classified as temporary equity, and immediately before the IPO, all 14,006,929 outstanding shares were converted into 46,266,256 shares of common stock[116][117] - A preferred stock warrant liability, previously classified as a long-term liability, was converted into a common stock warrant upon IPO and fully exercised during the three months ended September 30, 2021[118] 9. Stock-based compensation This note details Absci's stock-based compensation expense, including grants of restricted shares and stock options, and unrecognized compensation Stock-based Compensation Expense | (In thousands) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Research and development | $952 | $43 | $2,879 | $70 | | Selling, general and administrative | $2,831 | $43 | $4,497 | $82 | | Total stock-based compensation expense | $3,783 | $86 | $7,376 | $152 | - Total stock-based compensation expense significantly increased to $3.783 million for the three months and $7.376 million for the nine months ended September 30, 2021, compared to $0.086 million and $0.152 million respectively in 2020, driven by equity grants and the phantom unit exchange[121][215][217] - As of September 30, 2021, there was $12.9 million of unrecognized compensation expense for restricted shares (2.8 years remaining weighted-average period) and $25.3 million for stock options (3.6 years remaining weighted-average period)[123][131] 10. Fair Value Measurements This note describes Absci's fair value measurement hierarchy and the valuation of significant Level 3 liabilities, including contingent consideration - The company classifies fair value measurements into a three-tier hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (unobservable inputs)[146] - As of September 30, 2021, significant Level 3 liabilities included contingent consideration of $12.0 million related to the Totient acquisition, with the fee in-lieu of warrant, convertible promissory notes, and preferred stock warrant liability all settled or converted by this date[151][153][154] - Changes in fair value during the nine months ended September 30, 2021, included a $30.722 million increase for convertible promissory notes and a $4.124 million increase for preferred stock warrant liability, both settled upon IPO[153] 11. Related party transactions This note discloses transactions with related parties, including a joint development agreement and warrant exercise by a board member's employer - No revenue was recognized from a joint development agreement with AGC, Inc. (parent company of a former director's employer) for the three and nine months ended September 30, 2021[157] - During the three months ended September 30, 2021, the employer of a board member exercised a warrant to purchase 307,211 shares of common stock, generating $0.1 million in cash proceeds for the company[158] 12. Net loss per share attributable to common stockholders and unitholders This note presents the calculation of basic and diluted net loss per share for Absci's common stockholders and unitholders Net Loss Per Share | (In thousands, except share and per share amounts) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :------------------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net loss available to common stockholder and unitholders | $(23,876) | $(12,963) | $(78,078) | $(43,750) | | Weighted-average common shares and units outstanding | 73,291,288 | 15,215,747 | 36,177,105 | 15,215,747 | | Net loss per share, basic and diluted | $(0.33) | $(0.85) | $(2.16) | $(2.88) | - Basic and diluted net loss per share was $(0.33) for the three months and $(2.16) for the nine months ended September 30, 2021, compared to $(0.85) and $(2.88) respectively in 2020[160] - Potentially dilutive securities, including redeemable convertible preferred stock and units, warrants, incentive units, stock options, and unvested restricted stock, were excluded from diluted EPS calculation as their effect was anti-dilutive[161] 13. Income Taxes This note provides details on Absci's effective income tax rate and the factors influencing it, including non-deductible expenses and acquisition impacts - The effective income tax rate from continuing operations was 6.7% for the three months and 9.3% for the nine months ended September 30, 2021[162] - The rates reflect non-deductible expenses, state and local taxes, tax credits, and adjustments from discrete tax items, including the tax impacts of the Denovium and Totient acquisitions[162] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of Absci's business, recent developments, key performance factors, and a detailed analysis of financial results, liquidity, and accounting policies Overview This section introduces Absci's drug and target discovery platform, business model, and current program status, highlighting its accumulated deficit - Absci is a drug and target discovery company leveraging deep learning and synthetic biology through its Integrated Drug Creation Platform to identify novel drug targets, discover biotherapeutic candidates, and generate manufacturing cell lines[164] - The business model focuses on partnerships with biopharmaceutical companies, aiming for milestone payments and royalties on sales of approved products originating from its platform, with applications categorized into Discovery and Cell Line Development (CLD)[166] - As of September 30, 2021, Absci had nine Active Programs across seven partners, with eight focused on CLD and one on Discovery, and has incurred net losses since inception, with a $165.9 million accumulated deficit[167][170] Recent Developments This section outlines Absci's key recent events, including acquisitions, convertible note issuance, IPO, new collaborations, and COVID-19 impacts - In January 2021, Absci acquired Denovium, an AI deep learning company, to integrate its technology for protein discovery and design[173] - In March 2021, the company issued $125.0 million in convertible promissory notes, which converted into 9,732,593 shares of common stock upon the IPO in July 2021[174] - Absci completed its IPO in July 2021, issuing 14,375,000 shares of common stock for net proceeds of $210.2 million, with all outstanding preferred stock and convertible notes converting into common stock[176] - In October 2021, Absci announced a drug discovery collaboration with EQRx, Inc. for engineering and developing clinical candidates across multiple therapeutic areas[176] - The COVID-19 pandemic has caused and may continue to cause delays and disruptions, including supply chain issues and extended business development timelines, though the overall financial impact is expected to be immaterial[177][178] Key Factors Affecting Our Results of Operations and Future Performance This section identifies critical drivers of Absci's financial performance, including partnership growth, technology adoption, R&D investments, and commercialization success - Establish new partnerships and increase the number of molecules/programs under existing partnerships[181] - Successfully complete technology development activities and enter licensing arrangements with partners[182] - Partners successfully developing and commercializing drug candidates generated with Absci's technology[183] - Continued significant investments in research and development of new technologies and platform expansion, including AI and non-standard amino acid incorporation[184] - Drive commercial adoption of the Integrated Drug Creation Platform capabilities[185][187] Key Business Metrics This section presents key operational metrics such as cumulative partners, programs, and active programs, indicating business development growth Key Business Metrics | Metric | September 30, 2021 | December 31, 2020 | | :------- | :----------------- | :------------------ | | Partners, Cumulative | 17 | 16 | | Programs, Cumulative | 31 | 29 | | Active Programs | 9 | 8 | - Cumulative partners increased from 16 to 17, cumulative programs from 29 to 31, and active programs from 8 to 9, indicating growth in business development and technology adoption[189][190] - Active Programs are subject to ongoing technology development activities, but there is no assurance partners will advance drug candidates or license technologies[190] Components of Results of Operations This section breaks down Absci's revenue, operating expenses (R&D, SG&A, D&A), and other expenses, explaining their drivers and future expectations - Revenue: Primarily from technology development agreements (TDAs), with fees earned upfront and upon project-based milestones, expected to increase with new partnerships and licenses[192][196] - Operating Expenses: Include Research and Development (R&D), Selling, General, and Administrative (SG&A), and Depreciation and Amortization, with R&D and SG&A expected to increase in absolute dollars due to platform enhancements, business development, and public company costs[198][200] - Other Expenses: Primarily interest expense from debt and leases, and fair value adjustments of convertible notes and preferred stock warrant liability[202][203] Comparison of the Three and Nine Months Ended September 30, 2021 and 2020 This section provides a detailed comparative analysis of Absci's financial performance for the three and nine months ended September 30, 2021 and 2020 Revenue This section analyzes the changes in Absci's technology development and collaboration revenue for the reported periods Revenue (Three Months) | Revenue Type | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | $ Change | % Change | | :------------- | :-------------------------- | :-------------------------- | :------- | :------- | | Technology development revenue | $1,390 | $922 | $468 | 51% | | Collaboration revenue | $149 | $(6) | $155 | (2583)% | | Total revenues | $1,539 | $916 | $623 | 68% | Revenue (Nine Months) | Revenue Type | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | $ Change | % Change | | :------------- | :-------------------------- | :-------------------------- | :------- | :------- | | Technology development revenue | $2,922 | $1,964 | $958 | 49% | | Collaboration revenue | $408 | $88 | $320 | 364% | | Total revenues | $3,330 | $2,052 | $1,278 | 62% | - Total revenue increased by 68% ($0.6 million) for the three months and 62% ($1.2 million) for the nine months ended September 30, 2021, compared to the prior year, driven by increased technology development agreements and milestone achievements[208][209] - Collaboration revenue saw a significant increase (2583% for three months, 364% for nine months) due to a milestone achievement under the JMA with KBI BioPharma[210] Operating Expenses This section details the changes in Absci's research and development, selling, general and administrative, and depreciation and amortization expenses Operating Expenses (Three Months) | Expense Type | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | $ Change | % Change | | :------------- | :-------------------------- | :-------------------------- | :------- | :------- | | Research and development | $10,730 | $2,692 | $8,038 | 299% | | Selling, general and administrative | $9,733 | $1,257 | $8,476 | 674% | | Depreciation and amortization | $2,218 | $331 | $1,887 | 570% | | Total operating expenses | $22,681 | $4,280 | $18,401 | 430% | Operating Expenses (Nine Months) | Expense Type | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | $ Change | % Change | | :------------- | :-------------------------- | :-------------------------- | :------- | :------- | | Research and development | $28,820 | $6,851 | $21,969 | 321% | | Selling, general and administrative | $19,597 | $3,089 | $16,508 | 534% | | Depreciation and amortization | $3,895 | $780 | $3,115 | 399% | | Total operating expenses | $52,312 | $10,720 | $41,592 | 388% | - Research and development expenses increased by 299% ($8.0 million) for the three months and 321% ($22.0 million) for the nine months, primarily due to increased headcount, stock-based compensation, facility overhead, and lab operations[212][214][215] - Selling, general, and administrative expenses surged by 674% ($8.5 million) for the three months and 534% ($16.5 million) for the nine months, driven by increased headcount, stock-based compensation, professional service fees (including Totient acquisition costs), and administrative costs related to operating as a public company[216][217] - Depreciation and amortization expense increased by 570% ($1.9 million) for the three months and 399% ($3.1 million) for the nine months, mainly due to increased purchases of lab equipment, leasehold improvements for the new headquarters, and amortization of acquired intangible assets[218][219] Other Expenses This section examines the changes in Absci's interest expense and other income (expense), net, for the reported periods Other Expenses (Three Months) | Expense Type | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | $ Change | % Change | | :------------- | :-------------------------- | :-------------------------- | :------- | :------- | | Interest expense | $(768) | $(172) | $(596) | 347% | | Other income (expense), net | $(3,427) | $(212) | $(3,215) | 1517% | | Total other expense, net | $(4,195) | $(384) | $(3,811) | 992% | Other Expenses (Nine Months) | Expense Type | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | $ Change | % Change | | :------------- | :-------------------------- | :-------------------------- | :------- | :------- | | Interest expense | $(3,232) | $(459) | $(2,773) | 604% | | Other income (expense), net | $(31,377) | $(287) | $(31,090) | 10833% | | Total other expense, net | $(34,609) | $(746) | $(33,863) | 4539% | - Interest expense increased by 347% ($0.6 million) for the three months and 604% ($2.7 million) for the nine months, due to increased term debt borrowings, finance leases, and convertible promissory notes[222][223] - Other income (expense), net, decreased significantly by 1517% ($3.2 million) for the three months and 10833% ($31.1 million) for the nine months, primarily driven by fair value adjustments of convertible notes and preferred stock warrant liability, partially offset by a $0.6 million gain on PPP loan extinguishment[224] Liquidity and Capital Resources This section discusses Absci's cash position, historical operating losses, future capital requirements, and sources of liquidity Overview This overview summarizes Absci's cash and cash equivalents, accumulated deficit, and projected sufficiency of capital for future operations - As of September 30, 2021, Absci had $279.3 million in cash and cash equivalents, a significant increase from $69.9 million at December 31, 2020[225] - The company has incurred net operating losses since inception, with an accumulated deficit of $165.9 million as of September 30, 2021[225] - Existing cash and IPO proceeds are expected to be sufficient for operating expenses, working capital, and capital expenditures for at least the next 12 months, with future capital requirements depending on partnership success, R&D, and commercialization[225][226] Sources of Liquidity This section identifies Absci's primary sources of capital, including preferred stock issuances, debt, and proceeds from its Initial Public Offering - Absci raised $104.3 million from redeemable convertible preferred stock issuances through September 30, 2021, with all shares converting to common stock in July 2021 prior to the IPO[228] - The company has a $4.0 million outstanding principal balance under its LSA with Bridge Bank as of September 30, 2021[229] - In March 2021, $125.0 million in convertible promissory notes were issued, converting into 9,732,593 shares of common stock before the IPO[230] - The IPO in July 2021 generated $210.2 million in net proceeds from the sale of 14,375,000 common shares[231] Cash Flows This section analyzes Absci's cash flows from operating, investing, and financing activities for the reported periods Cash Flow Activity | Cash Flow Activity | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :----------------- | :----------------------------- | :----------------------------- | | Operating activities | $(43,519) | $(8,449) | | Investing activities | $(59,061) | $(1,261) | | Financing activities | $337,489 | $6,581 | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $234,909 | $(3,129) | - Net cash used in operating activities increased to $43.5 million in 2021, primarily due to higher net losses and non-cash adjustments like depreciation, stock-based compensation, and fair value changes of liabilities[235] - Net cash used in investing activities significantly increased to $59.1 million in 2021, mainly for lab equipment, leasehold improvements, and acquisitions (Denovium and Totient)[236] - Net cash provided by financing activities surged to $337.5 million in 2021, driven by IPO proceeds and convertible promissory notes, partially offset by debt and lease payments[237] Contractual Obligations and Other Commitments This section notes that there have been no material changes to Absci's contractual obligations since the last prospectus filing - There have been no material changes to contractual obligations as of September 30, 2021, compared to those disclosed in the final prospectus filed on July 23, 2021[239] Income taxes This section discusses Absci's effective income tax rate and the factors influencing it, including non-deductible expenses and acquisition impacts - The effective income tax rate from continuing operations was 6.7% for the three months and 9.3% for the nine months ended September 30, 2021[240] - These rates reflect non-deductible expenses, state and local taxes, tax credits, and adjustments from discrete tax items, including the tax impacts of the Denovium and Totient business combinations[241] Internal Control over Financial Reporting This section addresses the identified material weakness in Absci's internal control over financial reporting and ongoing remediation efforts - Absci identified a material weakness in its internal control over financial reporting related to an insufficient complement of accounting and finance personnel with the necessary US GAAP technical expertise to timely identify and account for complex or non-routine transactions[243] - The company is actively working to remediate this material weakness by hiring additional finance and accounting personnel, implementing appropriate segregation of duties, and formalizing accounting policies and controls[244] - Despite the material weakness, management concluded that the condensed consolidated financial statements fairly present the financial position, results of operations, and cash flows in conformity with US GAAP[253] Critical Accounting Policies and Significant Judgments and Estimates This section confirms no material changes to Absci's critical accounting policies and estimates since the prior fiscal year-end - No material changes to critical accounting policies and use of estimates have occurred since December 31, 2020, as described in Note 2 of the financial statements[246] Recent Accounting Pronouncements This section refers to Note 2 for details on recently adopted and issued accounting pronouncements - Refer to Note 2, 'Summary of Significant Accounting Policies—Recently adopted accounting pronouncements and Recently issued accounting pronouncements, not yet adopted,' for details on recent accounting pronouncements[247] Emerging Growth Company Status This section explains Absci's status as an "emerging growth company" and the associated reduced reporting requirements - Absci is an 'emerging growth company' under the JOBS Act, allowing it to use an extended transition period for complying with new or revised accounting standards and other reduced reporting requirements[248][249] - The company will remain an emerging growth company until the earlier of five years post-IPO, $1.07 billion in annual gross revenue, $1.0 billion in nonconvertible debt, or becoming a large accelerated filer[250] Item 3. Quantitative and Qualitative Disclosure About Market Risk This section discusses the company's exposure to market risks, specifically interest rate risk Interest Rate Risk This section assesses Absci's exposure to interest rate fluctuations, noting the relative insensitivity of its cash and cash equivalents - Absci's cash and cash equivalents, consisting of checking accounts and money market funds, are relatively insensitive to interest rate changes[251] Item 4. Controls and Procedures This section details the evaluation of Absci's disclosure controls and procedures, noting a material weakness in internal control over financial reporting, and outlines ongoing remediation efforts Evaluation of Disclosure Controls and Procedures This section reports the conclusion by Absci's CEO and CFO that disclosure controls were ineffective due to a material weakness, despite fair financial statement presentation - As of September 30, 2021, the CEO and CFO concluded that disclosure controls were not effective due to a material weakness in internal control over financial reporting[253] - Despite the material weakness, management performed additional analyses and concluded that the condensed consolidated financial statements fairly present the company's financial position, results of operations, and cash flows[253] Changes in Internal Control over Financial Reporting This section describes Absci's ongoing remediation efforts for the identified material weakness in internal control over financial reporting - Absci is actively remediating the material weakness by hiring additional finance and accounting personnel, implementing appropriate segregation of duties, and formalizing accounting policies and controls[254] - The material weakness identified in the fiscal year ended December 31, 2020, has not been fully remediated as of September 30, 2021, due to insufficient time to assess the design, implement, and assess operating effectiveness of related controls[255] Part II Other Information This section provides additional information not covered in Part I, including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings Absci is not currently a party to any material litigation or other legal proceedings, though it may face various claims in the ordinary course of business - Absci is not currently involved in any material litigation or legal proceedings[257] - Management believes that the ultimate outcome of any current unresolved matters is not probable or estimable and is not likely to have a material adverse effect on the company's financial position, results of operations, or cash flows[257] Item 1A. Risk Factors This section outlines the significant risks associated with investing in Absci's common stock, covering its limited operating history, financial condition, business model, biologic drug development uncertainties, operational challenges, intellectual property protection, and risks related to its common stock and public company status Summary of Risk Factors This section provides a concise overview of the key risks, including limited operating history, significant losses, capital needs, and reliance on technology and partners - Limited operating history and difficulty in predicting future performance[258] - Significant losses since inception and expectation of future losses[258] - Need to raise additional capital to fund operations and platform improvements[258] - Commercial success depends on the technological capabilities and adoption of its Integrated Drug Creation Platform[258] - Future success is dependent on partners' successful development and commercialization of biologic drugs, over which Absci has no control[258] - Reliance on a limited number of suppliers for critical laboratory equipment and materials[259] - Risk of not meeting partner expectations, leading to adverse business impact[259] - Loss of key management or inability to attract skilled personnel[259] - Challenges in obtaining and maintaining sufficient intellectual property protection[259] - Volatility of share price and potential for significant fluctuations[259] Risks Related to Our Limited Operating History, Financial Condition and Prospects This section details risks stemming from Absci's short operational history, consistent net losses, future capital requirements, and revenue generation challenges - Absci has a limited operating history, with commercial operations starting in 2018, making it difficult to evaluate its business and predict future performance[260][261] - The company has incurred significant net losses since inception ($75.8 million for nine months ended Sep 30, 2021) and expects to continue incurring losses, requiring substantial additional revenue to achieve profitability[264][265] - Absci will need to raise additional capital to fund operations and platform improvements; failure to do so on acceptable terms could harm its business[266][267][270] - Substantially all historical revenue is from technology development activities, and the company has not yet generated significant long-term license or royalty revenues[270][271][272] Risks Related to Our Business Model and Partnerships This section outlines risks associated with Absci's business model, including dependence on its platform, partner success, and the challenges of revenue forecasting and R&D investments - Commercial success is highly dependent on the technological capabilities of Absci's Integrated Drug Creation Platform and its adoption by existing and new partners[274] - Future success relies on partners successfully developing and commercializing drug candidates generated with Absci's technology, over which Absci has no control regarding clinical development, regulatory strategy, or commercialization efforts[281][282] - Absci is substantially dependent on maintaining and expanding relationships with current partners and establishing new ones; a loss of key partners or failure to expand could adversely affect operating results[285][286][287] - Revenue forecasting is difficult due to complexities and long development timelines in biologic drug development, and dependence on partner decisions and milestone achievements[288][290] - Significant investments in R&D for platform expansion (e.g., drug discovery, non-standard amino acids, AI) may not be successful, and developing new technologies is a speculative and risky endeavor[292][294] Risks Related to Biologic Drug Development This section addresses the inherent uncertainties in biologic drug development, market competition, skepticism towards novel technology, and reimbursement challenges - Biologic drug development is inherently uncertain; Absci's technology may not succeed in discovering appropriate molecules or producing cell lines, and partners may not achieve development or regulatory milestones[301][302] - Partners may experience unforeseen negative events during preclinical or clinical development, regulatory approval, or commercialization, which could delay or prevent product advancement and negatively affect Absci's revenue and reputation[309][311] - The biopharmaceutical platform technology market is highly competitive, with numerous companies and in-house systems posing competition, potentially impacting Absci's ability to increase revenue or achieve profitability[313][314][316] - The market may be skeptical of Absci's novel synthetic biology technology, potentially hindering partner adoption and investor confidence[319][320] - Uncertainty in medical insurance coverage and reimbursement for new therapeutics could limit partners' commercialization success, decreasing Absci's revenue generation[321][322] Risks Related to Our Operations This section covers operational risks such as reliance on limited suppliers, meeting partner expectations, managing growth, retaining key personnel, acquisition integration, international expansion, hazardous materials, and public health crises - Absci relies on a limited number of single suppliers for critical laboratory equipment and materials (e.g., Sartorius Ambr system, Hamilton Company robotics); disruptions could severely impact operations[328][329][330] - The Integrated Drug Creation Platform may not meet partner expectations, especially regarding acceleration of timelines and quality of results, potentially damaging reputation and business prospects[332][333] - Rapid workforce and infrastructure expansion to meet demand poses management challenges, potentially leading to delays, higher costs, and reduced quality[334][335][336] - Loss of senior management or inability to attract and retain highly skilled scientists and business development professionals could adversely affect the business[339][340][341] - Integration difficulties from recent acquisitions (Denovium, Totient) may prevent realization of expected benefits, disrupt ongoing business, and incur higher-than-expected costs[343][344] - International expansion exposes Absci to business, regulatory, political, operational, financial, and economic risks, including conflicting laws, intellectual property enforcement challenges, and foreign currency fluctuations[358][360] - The company uses biological and hazardous materials, requiring expertise and expense for handling and disposal, with risks of accidental injury, contamination, and non-compliance with environmental laws[363][364] - Public health crises like COVID-19 can disrupt platform development, supply chains, business development, and personnel recruitment, with potential for prolonged adverse impacts[365][366][367][368][369][370] Risks Related to Our Intellectual Property This section details risks concerning Absci's ability to obtain and maintain intellectual property protection, changes in patent law, challenges to existing patents, reliance on in-licenses, and protection of trade secrets - Inability to obtain and maintain sufficient intellectual property protection for its technologies (platform, Denovium Engine, computational antibody/target discovery) could allow competitors to develop similar technologies and impair Absci's competitive advantage[374][375] - Changes in patent law (e.g., America Invents Act) or interpretations of patent laws could diminish the value of patents, affecting Absci's ability to protect its technologies[383][384][385][386][387] - Issued patents covering Absci's platform could be found invalid or unenforceable if challenged, leading to loss of exclusivity or increased competition[388][389] - Reliance on in-licenses from third parties carries risks; loss of these rights or disputes could materially adversely affect the business and technology development[392][393][394][395] - Failure to protect the confidentiality of information and trade secrets could materially adversely affect the value of technologies and harm the business[411][412][413][414] - Absci may be subject to claims that employees or consultants wrongfully used or disclosed confidential information or trade secrets of third parties, leading to litigation and potential loss of IP rights[415][416] Risks Related to Our Common Stock This section discusses risks related to Absci's common stock, including price volatility, material weakness in internal controls, potential dilution from future stock issuances, and anti-takeover provisions - Absci's share price may be volatile due to fluctuations in financial condition, new technologies, partnership changes, key personnel departures, and market conditions[436] - A material weakness in internal control over financial reporting was identified; failure to remediate could lead to inaccurate or untimely financial reporting and harm the business[438][439][442] - Future sales and issuances of common stock or rights to purchase common stock, including under equity incentive plans, could result in additional dilution for stockholders and cause share price to fall[448][449][450] - Absci does not intend to pay dividends on common stock, limiting stockholder returns to share value appreciation[451][452] - Provisions in corporate charter documents and Delaware law could make an acquisition more difficult and prevent attempts by stockholders to replace management[456][457][458] General Risk Factors This section covers broad risks such as economic conditions, dilution from capital raises, employee misconduct, insufficient insurance coverage, and cybersecurity threats - Unfavorable U.S. or global economic conditions could adversely affect Absci's business, financial condition, or results of operations, including weakened demand and difficulties in raising capital[464] - Raising additional capital may cause dilution to existing stockholders, restrict operations, or require relinquishing rights to technologies[466][467] - Employees, consultants, and partners may engage in misconduct, including non-compliance with regulatory standards or insider trading, leading to legal sanctions and reputational harm[468][469] - Absci's insurance policies are expensive and may not cover all business risks, leaving the company exposed to significant uninsured liabilities[470][471] - Security breaches, data loss, and other disruptions could compromise sensitive information, expose Absci to liability, and adversely affect its business and reputation[472][473][474] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the unregistered sales of equity securities, including the conversion of preferred stock and convertible notes into common stock upon the IPO, and the use of proceeds from the IPO Recent Sales of Unregistered Equity Securities This section describes the conversion of preferred stock and convertible notes into common stock and the granting of stock options, all exempt from registration - Upon the IPO closing on July 26, 2021, all outstanding redeemable convertible preferred stock (46,266,256 shares) and convertible notes (9,732,593 shares) were automatically converted into common stock, exempt from registration under Section 3(a)(9) of the Securities Act[493] - During the three months ended September 30, 2021, 235,674 stock options were granted to employees, directors, and consultants at a weighted average exercise price of $13.67 per share, exempt under Section 4(a)(2) or Rule 701[494] Use of Proceeds This section outlines the gross and net proceeds from Absci's IPO and the allocation of these funds as of the reporting date - The IPO, which closed on July 26, 2021, generated $230.0 million in gross proceeds from the sale of 14,375,000 common shares at $16.00 per share, resulting in $210.2 million in net proceeds after deducting underwriting discounts and offering expenses[495][496] - As of September 30, 2021, $28.6 million of the net IPO proceeds had been used, with no material change in the planned use of proceeds[496] Issuer Purchases of Equity Securities This section confirms that there were no issuer purchases of equity securities during the reported period - There were no issuer purchases of equity securities during the period[497] Item 3. Defaults Upon Senior Securities This item is not applicable to Absci Corporation for the reported period - This item is not applicable[497] Item 4. Mine Safety Disclosures This item is not applicable to Absci Corporation for the reported period - This item is not applicable[497] Item 5. Other Information This item reports that there is no other information to disclose for the reported period - No other information is reported for this period[497] Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including corporate governance documents, equity incentive plans, employment agreements, and certifications - The exhibits include the Amended and Restated Certificate of Incorporation and Bylaws, Specimen Common Stock Certificate, 2021 Stock Option and Incentive Plan, 2021 Employee Stock Purchase Plan, and various employment agreements[500] - Certifications from the Chief Executive Officer and Chief Financial Officer, pursuant to the Securities Exchange Act of 1934 and Sarbanes-Oxley Act of 2002, are also filed[500] Signatures This section contains the duly authorized signatures of Absci Corporation's Chief Financial Officer and Vice President, Corporate Controller, certifying the filing of the Quarterly Report on Form 10-Q - The report is signed by Gregory Schiffman, Chief Financial Officer, and Todd Bedrick, Vice President, Corporate Controller, on November 9, 2021[503][504]