Absci Corp

1. Organization and nature of operations

Absci Corporation (the “Company”) is a data-first generative AI drug creation company that combines AI with scalable wet lab technologies to create better biologics for patients, faster. Absci leverages its integrated drug creation platform (the “Integrated Drug Creation Platform”) to improve upon traditional biologic drug discovery by using AI to simultaneously optimize multiple drug characteristics important to development and therapeutic benefit. The Company was organized in the State of Oregon in August 2011 as a limited liability company and converted to a limited liability company (“LLC”) in Delaware in April 2016. In October 2020, the Company converted from a Delaware LLC to a Delaware corporation. The Company’s headquarters are located in Vancouver, Washington.

Unaudited interim financial information

The Company prepared its interim condensed consolidated financial statements that accompany these notes in conformity with accounting principles generally accepted in the United States (US GAAP), consistent in all material respects with those applied in its Annual Report on Form 10-K for the year ended December 31, 2023.

The Company has made estimates and judgments affecting the amounts reported in its condensed consolidated financial statements and the accompanying notes. The actual results that the Company experiences may differ materially from its estimates. The interim financial information is unaudited and reflects all normal adjustments that are, in the Company’s opinion, necessary to provide a fair statement of results for the interim periods presented. This report should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 where the Company includes additional information about its critical accounting estimates.

2. Revenue recognition

Contract balances

Contract liabilities are recorded as deferred revenue when cash payments are received or due in advance of the satisfaction of performance obligations. As of September 30, 2024 and December 31, 2023, contract liabilities were $1.8 million and $4.1 million, respectively. During the three and nine months ended September 30, 2024, the Company recognized $0.8 million and $3.0 million, respectively, as revenue that had been included in deferred revenue at the beginning of the period. During the three and nine months ended September 30, 2023, the Company recognized no revenue and $0.4 million revenue, respectively, that had been included in deferred revenue at the beginning of the period.

Concentration Risk

During the three and nine months ended September 30, 2024, two partners represented 100% of total revenue under drug creation agreements. During the three and nine months ended September 30, 2023, two partners represented approximately 100% and 92% of total revenue under drug creation agreements, respectively.

3. Collaborative Arrangements

As of September 30, 2024, the Company has collaborative arrangements with PrecisionLife and Memorial Sloan Kettering Cancer Center that involve joint research and development activities and for which the parties are exposed to significant risks and rewards dependent on the commercial success of such activities. The Company performs research and development activities to co-develop therapeutics under the collaborative arrangements. These arrangements include rights for the parties to share in the potential value created by the programs, as well as cost sharing which may result in payments between the collaborators. The Company’s accounting policy is to present cost sharing payments to and from the Company’s collaborators within research and development expense on the condensed consolidated statements of operations and comprehensive loss. The Company did not have cost sharing payments related to such agreements during the three and nine months ended September 30, 2024 and 2023.

4. Investments

Cash equivalents, marketable securities and deposits are classified as available-for-sale and are, therefore, recorded at fair value on the condensed consolidated balance sheets, with any unrealized gains and losses reported in accumulated other comprehensive loss, which is reflected as a separate component of stockholders’ equity on the Company’s condensed consolidated balance sheets, until realized. The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

The amortized cost and fair value of investments are as follows (in thousands):

Investments held as of September 30, 2024 have a remaining maturity of less than one year. Proceeds from maturities of available-for-sale securities were $43.0 million and $132.1 million for the three and nine months ended September 30, 2024, respectively. Proceeds from maturities of available-for-sale securities were $54.0 million and $189.9 million for the three and nine months ended September 30, 2023, respectively. Unrealized gains and losses on securities were primarily due to changes in interest rates.

The Company holds a non-marketable equity investment with a carrying value of $1.2 million which is classified as other long-term assets on the condensed consolidated balance sheets.

5. Property and equipment, net

Property and equipment consist of the following (in thousands):

During the three and nine months ended September 30, 2024, the Company recognized $2.5 million and $7.6 million, respectively of depreciation expense. During the three and nine months ended September 30, 2023, the Company recognized $2.7 million and $8.0 million, respectively, of depreciation expense.

During the third quarter of 2024, the Company determined certain laboratory equipment met all of the prescribed criteria required to classify it as held-for-sale. The Company determined the carrying value exceeded the fair value less costs to sell each asset, which resulted in a write down of $1.1 million for the three months ended September 30, 2024, presented within research and development expense on the condensed consolidated statement of operations and comprehensive loss. As of September 30, 2024, $0.5 million of lab equipment is classified as current assets held-for-sale within prepaid expenses and other current assets on the condensed consolidated balance sheet as the disposal is expected to be consummated within one year of the balance sheet date.

6. Stock-based compensation

The Company grants stock options, restricted stock units, and stock appreciation rights (“SARs”) under the 2021 Stock Option and Incentive Plan (“2021 Plan”) and the 2023 Inducement Plan (the “2023 Inducement Plan”). On January 1, 2024, the number of shares of common stock reserved for future issuance under the 2021 Plan was increased by 4,654,384 shares pursuant to an automatic annual increase. As of September 30, 2024,4,047,067 shares were available for future grant under the 2021 Plan. As of September 30, 2024,1,887,000 shares were available for future grant under the 2023 Inducement Plan.

Total stock-based compensation expense related to all of the Company’s stock-based awards was recorded in the condensed consolidated statements of operations and comprehensive loss as follows (in thousands):

Stock options

Stock options generally vest either 25% after one year from the date of the grant with the remainder vesting monthly over the following three-year period or ratably over three years in three equal installments. The Company recognizes forfeitures as they occur and uses the straight-line expense recognition method. Activity for stock options is shown below:

The aggregate intrinsic value of outstanding stock options as of September 30, 2024 was calculated based on the Company’s closing stock price of $3.82 per share as reported on the Nasdaq Global Select Market on such date.

The weighted-average grant date fair value of stock options granted during the three and nine months ended September 30, 2024 was $2.33 and $3.05, respectively, per share. The weighted-average grant date fair value of stock options granted during the three and nine months ended September 30, 2023 was $1.39 and $1.43, respectively, per share. As of September 30, 2024, total unrecognized stock-based compensation related to stock options was $25.4 million, which the Company expects to recognize over a remaining weighted average period of 2.3 years.

Determination of fair value

The estimated grant-date fair value of all the Company’s stock options was calculated using the Black-Scholes option pricing model, based on the following assumptions:

Restricted stock

In connection with certain business combinations and as compensation for other service relationships, the Company has issued shares of restricted stock that vest over time subject to continued service by the stockholder. Shares of restricted stock that have not yet vested are subject to the Company’s right of repurchase or forfeiture by the stockholder. Activity for restricted shares is shown below:

As of September 30, 2024, there was $0.2 million of unrecognized compensation expense related to the outstanding shares of restricted stock expected to be recognized over a remaining weighted-average period of 0.4 years.

Restricted stock units

Restricted stock units subject to time-based vesting generally vest ratably over a term of 1-4 years. The Company recognizes forfeitures as they occur and uses the straight-line expense recognition method. Activity for restricted stock units is shown below:

The weighted-average grant date fair value of restricted stock units granted during the three and nine months ended September 30, 2024 was $3.57 and $3.95, respectively, per share. The aggregate grant date fair value of restricted stock units vested during the three and nine months ended September 30, 2024 was $0.2 million and $0.3 million, respectively. The aggregate grant date fair value of restricted stock units vested during the three and nine months ended September 30, 2023 was less than $0.1 million. As of September 30, 2024, there was $7.7 million of unrecognized compensation expense related to the outstanding restricted stock units expected to be recognized over a remaining weighted-average period of 1.6 years. Fair value of restricted stock units subject to time-based vesting is calculated based on the Company’s closing stock price per share as reported on the Nasdaq Global Select Market on the date of grant.

Restricted stock unit award with market conditions

In March 2024, the Company granted 1,500,000 performance restricted stock units to its Founder and Chief Executive Officer that contained market conditions (the “2024 Market Award”). Subject to the holder’s continued service, the 2024 Market Award provided for vesting in tranches once the Company’s closing stock price meets or exceeds certain thresholds established by the Company’s Compensation Committee of the Board of Directors. The original grant-date fair value of the 2024 Market Award of $5.5 million was determined using a Monte Carlo simulation model using an expected volatility of 97% and risk-free rate of 4.5%. The stock-based compensation expense is being recognized over the derived service period for each tranche over periods up to 1.3 years. As of September 30, 2024, none of the stock price thresholds for the 2024 Market Award had been met resulting in no shares vesting. Any unvested tranches of the 2024 Market Award will expire in March 2027 if the vesting conditions are not met.

7. Fair value measurements

The Financial Accounting Standards Board (“FASB”) has defined fair value to establish a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Observable inputs such as quoted prices in active markets.

Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

When quoted market prices are available in active markets, the fair value of assets and liabilities is estimated within Level 1 of the valuation hierarchy.

If quoted prices are not available, then fair values are estimated by using pricing models, quoted prices of assets and liabilities with similar characteristics, or discounted cash flows, within Level 2 of the valuation hierarchy. In cases where Level 1 or Level 2 inputs are not available, the fair values are estimated by using inputs within Level 3 of the hierarchy.

The following tables summarize the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2024 and December 31, 2023 (in thousands):

The Company reviews trading activity and pricing for its available-for-sale securities as of the measurement date.

There was no change to the value of liabilities measured at fair value using significant unobservable inputs (Level 3) for the nine months ended September 30, 2024. The contingent consideration liability is related to the acquisition of Totient, Inc. and is included in accrued expenses on the condensed consolidated balance sheets as of September 30, 2024 and December 31, 2023. The fair value estimate is based on a probability-weighted approach. The contingent consideration of $15.0 million held in escrow shall be paid upon the achievement of the milestone of either entering into agreements meeting certain financial criteria with third parties using, or relating to, Totient technology or the first commercial sale of a Totient product. The contingent consideration held in escrow is included in restricted cash on the condensed consolidated balance sheets as of September 30, 2024 and December 31, 2023.

The carrying amount of long-term debt approximates fair value.

There are significant judgments, assumptions and estimates inherent in the determination of the fair value of each of the instruments described above. In the future, depending on the valuation approaches used and the expected timing and weighting of each, the inputs described above, or other inputs, may have a greater or lesser impact on the Company’s estimates of fair value.

8. Net loss per share

Basic net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period.

The following table sets forth the computation of the Company’s basic and diluted net loss per share attributable to common stockholders (in thousands, except share and per share amounts):

The common stock issuable upon the conversion or exercise of the following dilutive securities has been excluded from the diluted net loss per share calculation because their effect would have been anti-dilutive. Diluted net loss per share, therefore, does not differ from basic net loss per share for the periods presented.

Potentially dilutive securities not included in the calculation of diluted net loss per share because to do so would be anti-dilutive are as follows (in common stock equivalent shares calculated on a weighted-average basis for the period outstanding):