Schrödinger, Inc. — Q3 2020 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2020. Schrödinger sells physics-based molecular discovery software and conducts drug discovery through collaborations and internal programs. Results are unaudited and compared with the same periods in 2019. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Software products and services revenue | $22.9 | $16.1 | $67.6 | $49.2 |
| Drug discovery revenue | $2.9 | $3.8 | $7.5 | $10.5 |
| Total revenue | $25.8 | $20.0 | $75.1 | $59.7 |
| Gross profit | $15.3 | $10.7 | $44.5 | $33.6 |
| Operating loss | $(15.4) | $(11.3) | $(44.3) | $(30.9) |
| Net income (loss) attributable to Schrödinger stockholders | $3.9 | $(11.5) | $(13.3) | $(17.8) |
| Operating cash flow | Not separately presented | Not separately presented | $(26.9) | $(14.8) |
- Q3 total gross margin was approximately 59%, compared with 54% a year earlier. Software gross margin was 81% in both Q3 periods; drug discovery generated negative segment gross profit of $3.3 million in Q3 2020.
- Q3 stockholder-attributable net income was primarily driven by $18.2 million of gains from changes in fair value, including a $18.0 million gain on the Relay investment. The company still reported a $15.4 million operating loss. Nine-month fair-value gains were $23.5 million, alongside a $4.2 million realized gain on the Petra investment.
- At September 30, cash and cash equivalents were $210.5 million, restricted cash $0.5 million, and marketable securities $388.5 million; together, approximately $599.5 million. Current assets were $621.1 million and current liabilities $39.3 million.
- Total liabilities were $49.2 million, including $12.3 million of operating lease liabilities. The filing reports no material debt balance. The company had an accumulated deficit of $118.4 million.
- Operating cash use increased to $26.9 million for the first nine months. Financing provided $539.8 million, primarily from the February IPO and August follow-on offering, which generated net proceeds of $209.6 million and $325.6 million, respectively. Investing cash use was $328.5 million, mainly purchases of marketable securities.
Material changes versus prior comparable periods
- Q3 revenue increased 29% year over year; software revenue rose 42%, while drug discovery revenue fell 24%. For the nine months, revenue grew 26%, with software up 37% and drug discovery down 29%.
- Management attributed software growth to new and existing customers, renewals and multi-year deals, growth in hosted subscriptions, and increased professional-services activity. Lower collaboration milestone and research-funding revenue drove the drug discovery decline.
- Nine-month R&D expense increased 67% to $47.4 million, reflecting higher personnel, CRO, and cloud-computing costs as internal programs expanded. G&A rose 38% to $28.3 million, including public-company infrastructure costs; sales and marketing fell 16%, partly because COVID-19 reduced travel and marketing activity.
- The company completed its IPO and follow-on offering in 2020, substantially increasing cash and equity. Preferred shares converted into common or limited common stock; the offerings and conversion increased the share base.
Outlook, risks, and unusual items
- Management said existing cash, cash equivalents, and marketable securities were expected to fund operations and capital requirements for at least the next 12 months. No specific revenue or earnings guidance was provided. Management expects R&D and other expenses to increase substantially as it advances internal drug programs and invests in its platform and public-company infrastructure.
- The company reported no material COVID-19 impact in the first nine months, but cautioned that customer budget pressure could slow software purchases and that pandemic-related restrictions could delay drug programs, milestones, and related revenue.
- Equity-investment valuations can cause substantial earnings volatility. Relay and Morphic are publicly traded investments measured at market prices. Nimbus-related future proceeds are uncertain: Gilead’s firsocostat Phase 2 trial did not meet its primary endpoint, and Schrödinger said it could not predict whether further earn-outs or distributions would occur.
- Schrödinger stated it may need additional financing in the future, although it believed current resources covered at least 12 months. It also cited milestone timing, collaborator decisions, software renewals and customer concentration, competition, cybersecurity, and drug-development execution as risks. One customer represented 36% of accounts receivable at quarter-end.
- Operating lease obligations totaled $12.7 million. A cloud-provider agreement carries an $18 million minimum payment obligation over three years; it was not included in the contractual-obligations table because the filing said it did not constitute an annual commitment. Management reported no material legal proceedings.
Important facts for investors to verify
- How much of reported earnings and investment value depends on fair-value changes, particularly the Relay and Morphic holdings, rather than operating performance.
- Whether software growth and renewals continue, and whether the decline in collaboration revenue reverses as programs advance or milestones are achieved.
- Actual cash burn and spending growth relative to management’s stated 12-month funding outlook, including R&D investment and the cloud-provider commitment.
- Exposure to customer concentration, COVID-related delays, and the uncertain potential for Nimbus/Gilead earn-outs and distributions.
- Share-count and dilution implications following the IPO, follow-on offering, preferred-stock conversion, and outstanding equity awards.