Schrödinger, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless noted. Schrödinger sells computational software and provides drug-discovery services through collaborations, while also advancing wholly owned drug programs. The company completed its IPO on February 10, 2020.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Total revenue | $26.2 million | $20.7 million; up 26% |
| Software revenue | $23.8 million | $18.6 million; up 28% |
| Drug-discovery revenue | $2.4 million | $2.1 million; up 11% |
| Gross profit / gross margin | $15.6 million / approximately 60% | $13.0 million / approximately 63% |
| Software gross margin | 83% | 83% |
| Operating expenses | $27.4 million | $18.6 million |
| Operating loss | $11.8 million | $5.6 million |
| Net loss attributable to common and limited common stockholders | $13.8 million; $0.34 per share | $5.8 million; $0.98 per share |
| Operating cash flow | $(5.8) million | $(4.6) million |
| Cash, cash equivalents, restricted cash and marketable securities | $288.8 million at March 31 | $86.3 million at December 31, 2019 |
| Total liabilities | $54.3 million | $57.0 million at December 31, 2019 |
Consolidated net loss was $14.3 million, including a $0.4 million loss attributable to noncontrolling interests. The company reported $3.1 million of expense from changes in investment fair value, primarily losses on Morphic and Nimbus. Investing activities used $87.9 million, mainly reflecting net purchases of marketable securities and a $2.9 million additional Nimbus investment. Financing activities provided $212.5 million, primarily from the IPO. No conventional borrowing debt is identified in the presented balance sheet; lease liabilities were $15.0 million, including $5.9 million current.
Material changes and business developments
- Revenue growth was led by software, including on-premise licenses, hosted software, maintenance and professional services. Professional-services revenue nearly doubled, partly due to substantial projects begun in late 2019.
- Operating expenses rose 47%. R&D increased 62% to $13.7 million, including higher internal-program CRO and personnel costs; general and administrative expense rose 76% to $8.9 million, primarily from headcount and public-company costs. Sales and marketing expense declined 6%.
- Drug-discovery segment gross loss widened to $4.2 million from $2.5 million as its costs rose faster than revenue. Software segment gross profit was $19.8 million.
- The IPO generated approximately $209.6 million of net proceeds. Preferred stock converted or exchanged into common and limited common stock at closing; no preferred stock remained outstanding at quarter-end.
- Deferred revenue was $23.8 million, down from $27.3 million at year-end; the company expects to recognize approximately 91% within 12 months. Contracted, unsatisfied performance obligations not yet billed or included in deferred revenue were $13.9 million.
Outlook, risks and unusual items
- Management said existing cash, cash equivalents and marketable securities should fund operations and capital expenditures for at least 12 months. No specific revenue or earnings guidance for 2020 is provided.
- Management expects R&D, sales-and-marketing investment and public-company-related G&A to rise. It also expects drug-discovery costs to increase as collaborations advance; milestone revenue may fluctuate with timing and collaborator decisions.
- COVID-19 had no material business impact in Q1, according to management, but the filing warns of possible customer budget cuts, reduced in-person selling, and delays to drug programs and related milestone revenue. The company moved employees to remote work.
- Schrödinger’s investment in Morphic declined $2.1 million in value during the quarter; its Nimbus investment recorded a $1.0 million loss under the HLBV method. These valuation changes can make reported results volatile.
- Potential future Nimbus distributions tied to Gilead’s firsocostat program are uncertain. Gilead reported that the Phase 2 trial’s primary endpoint was not met; if development stops, Schrödinger does not expect further distributions from that program.
- The company has a history of losses, an accumulated deficit of $118.9 million, and no internally developed drug candidate yet in clinical development. Management identifies risks including execution and commercialization, collaborator dependence, competition, cybersecurity and intellectual-property protection.
- Operating lease obligations totaled $15.7 million in future minimum payments. A separate three-year cloud-computing agreement includes an $18 million minimum payment obligation not included in the contractual-obligations table.
- Management reported effective disclosure controls as of March 31, 2020, and no material change in internal control over financial reporting during the quarter. A previously identified material weakness involving review of equity-investee financial information was reported as remediated at year-end 2019.
Important facts for investors to verify
- Whether software revenue growth and the 83% software gross margin persist, particularly as customer budgets and selling conditions are affected by COVID-19.
- Cash-burn trends against management’s stated liquidity runway, planned investment increases, and the $18 million cloud-computing commitment.
- How much future revenue and cash depend on collaboration milestones, including developments in the firsocostat program and any Nimbus distributions.
- The drivers and volatility of fair-value changes in Morphic, Nimbus and other equity investments.
- Progress of the five internal drug programs, including whether any reach preclinical or clinical development, and the associated costs and financing needs.