Schrödinger, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Financial amounts below are in U.S. dollars; “$m” means millions.
Business context
Schrödinger sells computational chemistry software and provides drug discovery services through collaborations, while also advancing internal drug programs. It reports Software and Drug Discovery segments. The company completed its IPO in February 2020, raising approximately $209.6m net; preferred shares converted into common and limited common stock.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $23.1m | $19.0m | $49.3m | $39.8m |
| Software revenue | $20.9m | $14.5m | $44.7m | $33.1m |
| Drug discovery revenue | $2.2m | $4.5m | $4.6m | $6.7m |
| Gross profit | $13.6m | $9.9m | $29.2m | $22.9m |
| Operating loss | $(17.1)m | $(14.0)m | $(28.9)m | $(19.6)m |
| Net loss attributable to Schrödinger stockholders | $(3.4)m | $(0.5)m | $(17.2)m | $(6.3)m |
| Operating cash flow | Not presented by quarter | $(14.8)m | $(8.9)m |
Consolidated gross margin was approximately 58.8% in Q2 2020 versus 51.8% in Q2 2019; for the six-month periods it was approximately 59.3% versus 57.5%. Software gross margin was 82% for Q2 and the first half of 2020, compared with 75% and 79%, respectively. Drug discovery segment gross profit was negative $3.5m in Q2 and negative $7.6m for the first half.
At June 30, 2020, cash and cash equivalents were $110.4m, restricted cash $0.5m, and marketable securities $173.6m, totaling $284.5m including restricted cash. Current assets were $307.0m and current liabilities $43.0m. Total liabilities were $53.4m, including $13.6m of lease liabilities; the filing reports no borrowings. Accumulated deficit was $122.3m.
Material changes versus prior comparable periods
- Q2 revenue rose 21%, and first-half revenue rose 24%, driven by software growth. Software revenue increased 44% in Q2 and 35% in the first half; professional services and on-premise software were notable contributors.
- Drug discovery revenue fell 52% in Q2 and 32% in the first half, primarily because of the timing and amount of collaboration milestones.
- Operating expenses increased 29% in Q2 and 37% in the first half. R&D rose 75% and 69%, respectively, reflecting increased internal-program CRO, personnel, and computing costs.
- Net loss widened, although reported results included investment gains: Q2 other income included an $8.4m change in fair value and a $4.2m Petra-related gain. Investment gains are variable and do not represent recurring operating revenue.
- The IPO materially strengthened liquidity and converted preferred stock to common and limited common stock. First-half financing cash inflow was $211.7m.
Outlook, commentary, and risks
- Management said available cash, cash equivalents, and marketable securities should fund operations and capital expenditures for at least the next 12 months. It expects operating losses to continue and R&D spending to increase; the filing provides no specific revenue or earnings guidance.
- Management reported no material COVID-19 business impact in the first half, but warned that customer budget pressure and reduced in-person sales activity could affect software growth, and that program delays could postpone collaboration milestones. The company had shifted to remote work and began limited office reopenings in June.
- Petra’s May merger generated $4.6m cash consideration and a $4.2m investment gain; Schrödinger may receive additional escrow payments and milestone-based earn-outs. A subsequent event: Relay Therapeutics completed its IPO on July 20, 2020; Schrödinger held 422,425 shares carried at zero at June 30, with future valuation based on market price.
- Potential Nimbus distributions remain uncertain. Gilead’s Phase 2 trial including firsocostat did not meet its primary endpoint, and further payments depend on development milestones and Nimbus board approval.
- Material risks include continued operating losses, dependence on software sales and uncertain collaboration milestones, volatile equity investment values, early-stage internal drug programs, customer and program disruptions from COVID-19, competition, and execution risks as a newly public company. The company disclosed $18m of minimum cloud-computing payments over three years, not included in its contractual-obligations table, and $14.2m of future minimum lease payments.
Important facts for investors to verify
- Whether software revenue growth, renewals, and the rise in professional-services revenue are sustainable, and how much revenue is point-in-time versus recognized over time.
- How operating expenses—especially internal-program R&D—and cash burn evolve relative to the stated minimum 12-month funding outlook.
- The assumptions and market movements behind Morphic and other investment valuations, and the timing and likelihood of Petra, Nimbus, and other contingent proceeds.
- The status and funding needs of internal drug discovery programs, which the filing says had not yet produced a clinical candidate.
- Customer concentration in receivables: one customer represented 28% of accounts receivable at June 30, 2020, versus 10% at year-end 2019; also monitor collection and milestone timing.
- Potential dilution and governance implications of the common and limited common share structure, IPO-related shares, and significant insider and principal-stockholder ownership.