Schrodinger(SDGR) - 2022 Q4 - Annual Report

Part I Business Schrödinger operates a dual business model, licensing its computational platform and advancing proprietary and collaborative drug discovery programs Financial Performance (2020-2022) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total Revenue | $181.0 million | $137.9 million | $108.1 million | | YoY Growth | 31% | 28% | - | | Net Loss | ($149.2 million) | ($101.2 million) | ($26.6 million) | - The company operates through two primary business segments: a software business that licenses its computational platform and a drug discovery business that utilizes the platform for its own and partnered programs[26] Software Business Customer Metrics | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Customers with ACV > $100,000 | 227 | 190 | 153 | | Customers with ACV > $1.0 million | 18 | 15 | 16 | | Customers with ACV > $5.0 million | 4 | 2 | N/A | | Customer Retention (ACV > $100k) | 96% | ≥96% | ≥96% | - The proprietary drug discovery pipeline is advancing, with key programs including: SGR-1505 (MALT1 inhibitor) in Phase 1 clinical trial, SGR-2921 (CDC7 inhibitor) IND application expected in the first half of 2023, and SGR-3515 (WEE1 inhibitor) IND application expected in 2024[32][79] - A significant collaboration with Bristol-Myers Squibb (BMS) includes a $55.0 million upfront payment received in 2020, an additional upfront payment in December 2022, and eligibility for up to $2.7 billion in total milestones across all potential targets[33][80] - In February 2023, the company received a $111.3 million cash distribution from its equity stake in Nimbus Therapeutics, with an additional $36.0 million expected in Q2 2023[72] Risk Factors The company faces significant financial, operational, and drug discovery risks, including a material weakness in internal controls - Financial Risk: The company has a history of significant operating losses, with a net loss of $149.2 million in 2022 and an accumulated deficit of $379.1 million as of December 31, 2022[331] - Business Risk: Future operating results are highly dependent on software license renewals and the ability to sell additional solutions, facing strong competition from established players and AI-focused startups[354][361][363] - Drug Discovery Risk: The company and its collaborators may never succeed in developing and commercializing drug products, with preclinical study outcomes not predictive of clinical trial success and a high risk of failure at all development stages[383][390][416] - Internal Control Risk: A material weakness was identified in the company's internal control over financial reporting for the year ended December 31, 2022, related to the revenue process for drug discovery arrangements[23][575] - Operational Risk: The COVID-19 pandemic has caused and may continue to cause delays in drug discovery programs, particularly affecting contract research organizations (CROs) and contract manufacturing organizations (CMOs)[440] Unresolved Staff Comments The company has no unresolved staff comments from the SEC - None[588] Properties The company's principal facilities are leased office spaces, primarily in New York and Portland - The company's principal executive office is approximately 136,047 square feet of leased space in New York, New York, with the lease term extending to December 2037[589] Legal Proceedings The company is not currently subject to any material legal proceedings - The company is not currently a party to any material legal proceedings[591] Mine Safety Disclosures This item is not applicable to the company's business - Not applicable[592] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq, with no cash dividends paid or planned - The company's common stock trades on the Nasdaq Global Select Market under the symbol "SDGR"[595] - The company has never paid cash dividends and does not anticipate paying any in the foreseeable future, intending to retain earnings for business development and expansion[599] Management's Discussion and Analysis of Financial Condition and Results of Operations Total revenue grew 31% in 2022, but net loss widened due to increased R&D and G&A expenses, with strong liquidity Results of Operations Summary (2022 vs. 2021) | Line Item | 2022 (in millions) | 2021 (in millions) | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | $181.0 | $137.9 | 31% | | Software Revenue | $135.6 | $113.2 | 20% | | Drug Discovery Revenue | $45.4 | $24.7 | 84% | | Gross Profit | $101.0 | $65.6 | 54% | | Total Operating Expenses | $247.8 | $177.1 | 40% | | Research and Development | $126.4 | $90.9 | 39% | | General and Administrative | $90.8 | $64.0 | 42% | | Loss from Operations | ($146.8) | ($111.4) | 32% | | Net Loss | ($149.2) | ($101.2) | 47% | - The increase in drug discovery revenue was primarily due to the progress of collaborations and the timing and achievement of milestones[667] - R&D expenses increased by $35.5 million, driven by higher personnel costs and CRO expenses related to the expansion of proprietary drug discovery programs[673] - As of December 31, 2022, the company had $456.3 million in cash, cash equivalents, restricted cash, and marketable securities, supplemented by a $111.3 million cash distribution from Nimbus in February 2023, which management believes is sufficient to fund operations for at least the next 24 months[706][708] - Critical accounting policies involve significant judgment in revenue recognition, particularly in allocating transaction prices, constraining variable consideration like milestones, and measuring progress in collaboration agreements[728][734] Quantitative and Qualitative Disclosures About Market Risk Primary market risks include interest rate sensitivity and foreign currency fluctuations, neither deemed material - The primary market risk is interest rate sensitivity on the company's portfolio of cash equivalents and marketable securities, where an immediate 10% change in interest rates is not expected to have a material effect[736] - The company is exposed to foreign currency exchange rate risk but does not currently hedge this exposure, as it is deemed insignificant[737] - Management does not believe that inflation had a material effect on the business or financial results for the years ended December 31, 2022 and 2021[739] Financial Statements and Supplementary Data Audited financial statements are presented, with an adverse opinion on internal controls due to a material weakness - The independent auditor, KPMG LLP, issued an adverse opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2022[745][758] - A material weakness was identified related to a deficiency in the design of a control in the revenue process to determine when performance milestones in a drug discovery arrangement were probable of achievement[760] - Critical Audit Matters identified by the auditor were: (1) Estimation of total costs to perform for the Bristol-Myers Squibb collaboration and (2) Identification of performance obligations in complex or unusual revenue arrangements[749][753] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes or disagreements with its accountants - None[940] Controls and Procedures Disclosure controls were ineffective due to a material weakness in revenue recognition, now under remediation - Management concluded that disclosure controls and procedures were not effective as of December 31, 2022, due to a material weakness in internal control over financial reporting[942][945] - The material weakness was a design deficiency in the revenue process control for assessing the probability of achieving performance milestones in new drug discovery contracts[945] - This weakness led to a $1.7 million understatement of drug discovery revenue, which was corrected before the financial statements were issued, and a remediation plan is being implemented[947][950] Other Information The company reports no other information for this item - None[954] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not Applicable[955] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference - Information is incorporated by reference from the upcoming 2023 proxy statement[958] Executive Compensation Executive compensation information is incorporated by reference from the proxy statement - Information is incorporated by reference from the upcoming 2023 proxy statement[960] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the proxy statement - Information is incorporated by reference from the upcoming 2023 proxy statement[961] Certain Relationships and Related Transactions, and Director Independence Related party transactions and director independence information is incorporated by reference - Information is incorporated by reference from the upcoming 2023 proxy statement[962] Principal Accountant Fees and Services Principal accountant fees and services information is incorporated by reference - Information is incorporated by reference from the upcoming 2023 proxy statement[963] Part IV Exhibits and Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including financial statements and material contracts - This section lists all exhibits filed with the Form 10-K, including the company's Restated Certificate of Incorporation, material contracts such as the collaboration agreement with Bristol-Myers Squibb, and required SEC certifications[969] Form 10-K Summary The company has not provided a summary for Form 10-K - None[977]