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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-40323

Recursion Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)

Delaware
 46-4099738
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)

41 S Rio Grande Street
Salt Lake City, UT 84101
(Address of principal executive offices) (Zip code)
(385) 269 - 0203
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Class A Common Stock, par value $0.00001RXRX
Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.         YesNo x

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filerNon-accelerated filerx
Accelerated filerSmaller reporting company
Emerging growth companyx

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).                 Yes No x

As of April 30, 2021, there were 168,320,745 of the registrant’s Class A and B common stock, par value $0.00001 per share, outstanding.



TABLE OF CONTENTS
Page



SUMMARY RISK FACTORS

Our business is subject to numerous risks and uncertainties that you should consider before investing in our company. These risks are described more fully in the section titled “Risk Factors” in this Quarterly Report on Form 10-Q. These risks include, but are not limited to, the following:

We are a clinical-stage biotechnology company with a limited operating history.
We have incurred significant operating losses since our inception and anticipate that we will incur continued losses for the foreseeable future.
Our mission is broad and expensive to achieve and we will need to raise substantial additional funding.
We have no products approved for commercial sale and have not generated any revenue from product sales.
We or our current and future collaborators may never successfully develop and commercialize drug products, which would negatively affect our results of operation and our ability to continue our business operations.
Our quarterly and annual operating results may fluctuate significantly in the future due to a variety of factors, many of which are outside of our control and may be difficult to predict.
Our approach to drug discovery is unique and may not lead to successful drug products, for reasons including but not limited to potential challenges identifying mechanisms of action for our candidates.
Our drug candidates are in preclinical or clinical development, which are lengthy and expensive processes with uncertain outcomes and the potential for substantial delays.
Although we intend to explore other therapeutic opportunities, in addition to the drug candidates that we are currently developing, we may fail to identify viable new drug candidates for clinical development for a number of reasons. If we fail to identify additional viable potential drug candidates, our business could be materially harmed.
Our business and operations would suffer in the event of computer system failures, cyber-attacks, or deficiencies in our cybersecurity or the cybersecurity of third parties, suppliers, or service providers.
If we are not able to develop new solutions and enhancements to our platform that keep pace with technological developments, our business and results of operations would be harmed.
Defects or disruptions in our platform could result in diminishing our value and prospects.
A pandemic, epidemic, or outbreak of an infectious disease, such as COVID-19, or other force majeure events, may materially and adversely affect our business and our financial results and could cause a disruption to the development of our drug candidates.
If we fail to sufficiently manage and improve our technical hardware infrastructure we may experience errors, delays and other performance problems.
We are subject to regulatory and operational risks associated with the physical and digital infrastructure at both our internal facilities and those of our external service providers and suppliers.
We may seek to establish additional collaborations for clinical development or commercialization of our drug candidates, and, if we are not able to establish them on commercially reasonable terms, or at all, we may have to alter our development and commercialization plans.
If we are unable to adequately protect and enforce our intellectual property and proprietary technology or obtain and maintain patent protection for our technology and products, or if the scope of the patent protection obtained is not sufficiently broad, our competitors could develop and commercialize technology and products similar or identical to ours, and our ability to successfully commercialize our technology and products may be impaired.
If we are unable to protect the confidentiality of our trade secrets and know-how, our business and competitive position may be harmed.
If we fail to comply with our obligations in the agreements under which we collaborate with and/or license intellectual property rights from third parties, or otherwise experience disruptions to our business relationships with our collaborators or licensors, we could lose rights that are important to our business.

Special Note Regarding Forward-Looking Information

This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our future results of operations and financial position, business strategy, development plans, planned preclinical studies, and clinical trials, future results of clinical trials, expected research and development costs, regulatory strategy, timing, and likelihood of success, as well as plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “would,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,”



“predict,” “potential,” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this report include, but are not limited to, statements about:

our research and development programs and the initiation, timing, progress, results, and cost of our current and future preclinical and clinical studies, including statements regarding design of, and the timing of initiation and completion of, studies or trials and related preparatory work, the period during which the results of the trials will become available;
the ability of our clinical trials to demonstrate safety and efficacy of our drug candidates, and other positive results;
the ability and willingness of our third-party strategic collaborators to continue research and development activities relating to our development candidates and investigational medicines;
future agreements with third parties in connection with the commercialization of our investigational medicines and any other approved product;
the timing, scope, and likelihood of regulatory filings and approvals, including timing of Investigational New Drug applications and final approval by the U.S. Food and Drug Administration, or FDA, of our current drug candidates and any other future drug candidates, including our ability to maintain any such approvals;
the timing, scope, or likelihood of foreign regulatory filings and approvals, including our ability to maintain any such approvals;
the size of the market opportunity for our drug candidates, including our estimates of the number of patients who suffer from the diseases we are targeting;
our ability to identify viable new drug candidates for clinical development and the accelerating rate at which we expect to identify such candidates, whether through an inferential approach or otherwise;
our expectation that the assets that will drive the most value for us are those that we will identify in the future using our datasets and tools;
our ability to develop and advance our current drug candidates and programs into, and successfully complete, clinical studies;
our ability to reduce the time or cost or increase the likelihood of success of our research and development relative to the traditional drug discovery paradigm;
our ability to improve, and the rate of improvement in, our infrastructure, datasets, biology, and technology tools, and drug discovery platform, or to realize benefits from such improvements;
our expectations related to the performance and benefits of our BioHive-1 supercomputer;
our ability to realize a return on our investment of resources and cash in our drug discovery collaborations;
our ability to scale like a technology company and to add more programs to our pipeline each year than in the prior;
our ability to successfully compete in a highly competitive market;
our manufacturing, commercialization, and marketing capabilities and strategy;
our plans relating to commercializing our drug candidates, if approved, including the geographic areas of focus and sales strategy;
our expectations regarding the approval and use of our drug candidates in combination with other drugs;
the rate and degree of market acceptance and clinical utility of our current drug candidates and other drug candidates we may develop;
our competitive position and the success of competing therapies that are or may become available;
our estimates of the number of patients that we will enroll in our clinical trials and the timing of their enrollment;
the beneficial characteristics, safety, efficacy, and therapeutic effects of our drug candidates;
our plans relating to the further development of our drug candidates, including additional indications we may pursue;
our ability to adequately protect and enforce our intellectual property and proprietary technology, including the scope of protection we are able to establish and maintain for intellectual property rights covering our current drug candidates and other drug candidates we may develop, obtaining patent protection, the extensions of existing patent terms where available, the validity of intellectual property rights held by third parties, the protection of our trade secrets, and our ability not to infringe, misappropriate or otherwise violate any third-party intellectual property rights;
the impact of any current or future intellectual property litigation and our ability to defend against claims of infringement, misappropriation, or other violations of any third-party intellectual property rights;
our ability to keep pace with new technological developments;
our ability to utilize third-party open source software and cloud-based infrastructure, on which we are dependent;
the adequacy of our insurance policies and the scope of their coverage;



the potential impact of a pandemic, epidemic, or outbreak of an infectious disease, such as COVID-19, or natural disaster, and the effect of such outbreak or natural disaster on our business and financial results;
our ability to maintain our technical operations infrastructure to avoid errors, delays, or cybersecurity breaches;
our continued reliance on third parties to conduct additional clinical trials of our drug candidates, and for the manufacture of our drug candidates for preclinical studies and clinical trials;
our ability to obtain, and negotiate favorable terms of, any collaboration, licensing or other arrangements that may be necessary or desirable to research, develop, manufacture, or commercialize our platform and drug candidates;
the pricing and reimbursement of our current drug candidates and other drug candidates we may develop, if approved;
our estimates regarding expenses, future revenue, capital requirements, and needs for additional financing
our financial performance;
the period over which we estimate our existing cash and cash equivalents will be sufficient to fund our future operating expenses and capital expenditure requirements;
our ability to raise substantial additional funding;
the impact of current and future laws and regulations, and our ability to comply with all regulations that we are, or may become, subject to;
the need to hire additional personnel and our ability to attract and retain such personnel;
the impact of any current or future litigation, which may arise during the ordinary course of business and be costly to defend;
our expectations regarding the period during which we will qualify as an emerging growth company under the JOBS Act;
our anticipated use of our existing resources and the net proceeds from this offering; and
other risks and uncertainties, including those listed under the caption “Risk Factors.”

We have based these forward-looking statements largely on our current expectations and projections about our business, the industry in which we operate, and financial trends that we believe may affect our business, financial condition, results of operations, and prospects, and these forward-looking statements are not guarantees of future performance or development. These forward-looking statements speak only as of the date of this report and are subject to a number of risks, uncertainties and assumptions described in the section titled “Risk Factors” and elsewhere in this report. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein until after we distribute this report, whether as a result of any new information, future events, or otherwise.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and you are cautioned not to unduly rely upon them.



PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Recursion Pharmaceuticals, Inc.
Condensed Consolidated Balance Sheets (unaudited)
(in thousands, except share and per share amounts)
 March 31,December 31,
 20212020
Assets  
Current assets  
Cash and cash equivalents$214,088 $262,126 
Restricted cash5,042 5,041 
Accounts receivable71 156 
Other current assets2,621 2,155 
Total current assets221,822 269,478 
Property and equipment, net44,642 25,967 
Intangible assets, net2,414 2,490 
Other non-current assets3,065 650 
Total assets$271,943 $298,585 
Liabilities, convertible preferred stock and stockholders’ deficit
Current liabilities
Accounts payable$3,125 $1,074 
Accrued expenses and other liabilities11,085 10,485 
Current portion of unearned revenue10,000 10,000 
Current portion of notes payable2,145 1,073 
Current portion of lease incentive obligation499 467 
Total current liabilities26,854 23,099 
Deferred rent2,750 2,674 
Unearned revenue, net of current portion14,167 16,667 
Notes payable, net of current portion10,339 11,414 
Lease incentive obligation, net of current portion2,552 2,708 
Total liabilities56,662 56,562 
Commitments and contingencies (Note 6)
Convertible preferred stock (series A, A-1, B, C, and D), $0.00001 par value; 121,434,713 shares authorized as of March 31, 2021 and December 31, 2020; 112,088,065 shares issued and outstanding as of March 31, 2021 and December 31, 2020; Liquidation preference of $450,850 as of March 31, 2021 and December 31, 2020
448,312 448,312 
Stockholders’ deficit
Common stock, $0.00001 par value; 188,400,000 shares authorized as of March 31, 2021 and December 31, 2020; 24,036,725 and 22,314,685 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively
  
Additional paid-in capital11,287 7,312 
Accumulated deficit(244,318)(213,601)
Total stockholders’ deficit(233,031)(206,289)
Total liabilities, convertible preferred stock and stockholders’ deficit$271,943 $298,585 


See the accompanying notes to these condensed consolidated financial statements.
1


Recursion Pharmaceuticals, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited)
(in thousands, except share and per share amounts)
Three months ended
March 31,
20212020
Revenue
Grant revenue$62 $60 
Operating revenue2,500  
Total revenue2,562 60 
Operating expenses
Research and development24,109 12,842 
General and administrative8,937 5,561 
Total operating expenses33,046 18,403 
Loss from operations(30,484)(18,343)
Other loss, net(233)(81)
Net loss and comprehensive loss$(30,717)$(18,424)
Per share data
Net loss per share, basic and diluted$(1.33)$(0.85)
Weighted average shares of common stock, basic and diluted23,035,623 21,639,891 
























See the accompanying notes to these condensed consolidated financial statements.
2


Recursion Pharmaceuticals, Inc.
Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit (unaudited)
(in thousands, except share amounts)
Convertible Preferred Stock
Common Stock
Additional Paid-in-Capital
Accumulated
Deficit
Stockholders’
Deficit
Shares
Amount
Shares
Amount
Balance as of December 31, 2020112,088,065 $448,312 22,314,685 $ $7,312 $(213,601)$(206,289)
Net loss— — — — — (30,717)(30,717)
Stock option exercises and other— — 1,722,040 — 2,154 — 2,154 
Stock-based compensation— — — — 1,821 — 1,821 
Balance as of March 31, 2021112,088,065 $448,312 24,036,725 $ $11,287 $(244,318)$(233,031)

Convertible Preferred StockCommon StockAdditional Paid-in-CapitalAccumulated DeficitStockholders’ Deficit
SharesAmountSharesAmount
Balance as of December 31, 201975,189,517 $201,109 21,637,609 $ $2,330 $(126,595)$(124,265)
Net loss— — — — — (18,424)(18,424)
Stock option exercises— — 14,668 — 16 — 16 
Stock-based compensation— — — — 1,286 — 1,286 
Balance as of March 31, 202075,189,517 $201,109 21,652,277 $ $3,632 $(145,019)$(141,387)





















See the accompanying notes to these condensed consolidated financial statements.
3


Recursion Pharmaceuticals, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)
Three months ended
March 31,
 20212020
Cash flows from operating activities
Net loss$(30,717)$(18,424)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization1,402 937 
Stock-based compensation1,821 1,265 
Other, net101 22 
Changes in operating assets and liabilities:
Accounts receivable85 82 
Other assets(2,915)(132)
Unearned revenue(2,500) 
Accounts payable2,051 625 
Accrued development expense(1,216)(400)
Accrued expenses, deferred rent and other current liabilities1,133 (1,792)
Net cash used in operating activities(30,755)(17,817)
Cash flows from investing activities
Purchases of property and equipment(19,416)(684)
Net cash used in investing activities(19,416)(684)
Cash flows from financing activities
Proceeds from exercise of stock options2,154 16 
Repayment of long-term debt(20)(19)
Proceeds from convertible notes 6,000 
Net cash provided by financing activities2,134 5,997 
Net change in cash, cash equivalents and restricted cash
(48,037)(12,504)
Cash, cash equivalents and restricted cash, beginning of period267,167 75,171 
Cash, cash equivalents and restricted cash, end of period$219,130 $62,667 
Supplemental disclosure of non—cash investing and financing information
Accrued property and equipment
$705  
Deferred issuance costs
2,997  
Supplemental disclosure of cash flow information
Cash paid for interest$254 $306 








See the accompanying notes to these condensed consolidated financial statements.
4


Recursion Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
Note 1.    Description of the Business

Recursion Pharmaceuticals, Inc. (Recursion, the Company, or we) was originally formed as a limited liability
company on November 4, 2013 under the name Recursion Pharmaceutical, LLC. In September 2016, we converted to a Delaware corporation and subsequently changed our name to Recursion Pharmaceuticals, Inc.

Recursion is a biotechnology company that combines automation, artificial intelligence, machine learning, in vivo validation capabilities and a highly cross-functional team to discover novel medicines that expand our collective understanding of biology. Recursion’s rich, relatable database of biological images generated in-house on the Company’s robotics platform enables advanced machine learning approaches to reveal drug candidates, mechanisms of action, novel chemistry, and potential toxicity, with the eventual goal of decoding biology and advancing new therapeutics that radically improve people’s lives.

As of March 31, 2021, the Company had an accumulated deficit of $244.3 million. The Company expects to incur substantial operating losses in future periods and will require additional capital to advance its drug candidates. The Company does not expect to generate significant revenue until the Company successfully completes significant drug development milestones with its subsidiaries or in collaboration with third parties, which the Company expects will take a number of years. In order to commercialize its drug candidates, the Company or its partners need to complete clinical development and comply with comprehensive regulatory requirements. The Company is subject to a number of risks and uncertainties similar to those of other companies of the same size within the biotechnology industry, such as the uncertainty of clinical trial outcomes, uncertainty of additional funding, and a history of operating losses.

The Company has funded its operations to date primarily through the issuance of convertible preferred stock (see Note 7, “Convertible Preferred Stock” for additional information) and will likely be required to raise additional capital. As of March 31, 2021, the Company did not have any unconditional outstanding commitments for additional funding. If the Company is unable to access additional funds when needed, it may not be able to continue the development of its products or the Company could be required to delay, scale back or abandon some or all of its development programs and other operations. The Company’s ability to access capital when needed is not assured and, if not achieved on a timely basis, could materially harm its business, financial condition and results of operations.

In April 2021, the Company completed an Initial Public Offering (IPO). See Note 16, “Subsequent Events” for additional details.

The Company believes that the net proceeds from the IPO, together with the Company’s existing cash, and cash equivalents and borrowings available to us will be sufficient to fund the Company’s operating expenses and capital expenditures for at least the next 12 months.

Note 2.    Basis of Presentation

Basis of Presentation

The unaudited interim condensed consolidated financial statements of Recursion have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) have been condensed or omitted. These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes for the year ended December 31, 2020 included in the Company’s final prospectus dated as of April 15, 2021 and filed with the Securities and Exchange Commission (SEC) pursuant to Rule 424(b)(4) on April 16, 2020.

In April 2021, the Company completed a 1.5-for-1 forward stock split of common and convertible preferred stock. All shares presented within these condensed consolidated financial statements were adjusted to reflect the forward stock split for all periods presented. See Note 16, “Subsequent Events” for additional details.

5


It is management’s opinion that these financial statements include all normal and recurring adjustments necessary for a fair presentation of the Company’s financial position, operating results and cash flows. Revenues and net loss for any interim period are not necessarily indicative of future or annual results. Certain reclassifications were made to conform the prior period interim condensed consolidated financial statements to the current period presentation.

Emerging Growth Company

The Company is an emerging growth company (EGC), as defined by the Jumpstart Our Business Startups Act of 2012 (the JOBS act). The JOBS Act, exempts EGCs from being required to comply with new or revised financial accounting standards until private companies are required to comply. Recursion has elected to use the extended transition period for new or revised financial accounting standards. However, the Company may adopt certain new or revised accounting standards early. This may make comparisons of the Company’s financial statements with other public companies difficult because of the potential differences in accounting standards used.

Recursion may remain an EGC until December 31, 2026 although if we: (1) become a “large accelerated filer;” (2) have annual gross revenues of $1.07 billion or more in any fiscal year; or (3) issue more than $1.0 billion of non-convertible debt over a three-year period, the Company would cease to be an EGC as of December 31 of the applicable year.

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02, Leases -Topic 842 (ASU 2016-02). Under Topic 842, the Company will be required to recognize a lease liability and a right-of-use asset for all leases (with the exception of short-term leases) at the commencement date of each lease. ASU 2016-02 is effective for annual and interim periods beginning on or after December 15, 2021 and early adoption is permitted. The Company must adopt the standard using the modified retrospective approach either: (1) as of the earliest period presented and through the comparative periods in the entity’s financial statements or (2) as of the effective date of ASC 842, with a cumulative-effect adjustment to equity. The Company expects the adoption to materially increase assets and liabilities on the Condensed Consolidated Balance Sheets related to those leases classified as operating and not recognized on the Balance Sheets under current GAAP. The Company is continuing to evaluate the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures. The Company will adopt the new standard on January 1, 2022.

Note 3.    Supplemental Financial Information

Property and Equipment

March 31,December 31,
(in thousands)20212020
Lab equipment$21,234 $19,701 
Leasehold improvements13,792 13,792 
Office equipment18,994 1,075 
Construction in progress2,016 1,361 
Property and equipment, gross56,036 35,929 
Less: Accumulated depreciation(11,394)(9,962)
Property and equipment, net$44,642 $25,967 

Depreciation expense on property and equipment was $1.4 million and $1.0 million during the three months ended March 31, 2021 and 2020, respectively.

For the three months ended March 31, 2021 the Company purchased a Dell EMC supercomputer, accessories and parts for $17.9 million. The purchase was classified as office equipment in the above table.

6


Accrued Expenses and Other Liabilities

March 31,December 31,
(in thousands)20212020
Accrued compensation$1,800 $3,085 
Accrued development expenses1,073 2,289 
Accrued administrative expenses2,487 10 
Accrued other expenses5,725 5,101 
Accrued expense and other liabilities$11,085 $10,485 

Interest Expense, net

Three months ended March 31,
(in thousands)20212020
Interest expense$249 $301 
Interest income(16)(220)
Interest expense, net$233 $81 

Interest expense primarily relates to the Midcap and tenant improvement allowance notes (see Note 5, “Notes Payable” for additional details on the notes.) Interest expense is included in Other loss, net on the Condensed Consolidated Statements of Operations and Comprehensive Loss.

The Company capitalizes certain legal, professional, accounting and other third-party fees that are directly associated with debt and equity financings. There was $3.0 million of capitalized issuance costs on the Condensed Consolidated Balance Sheet on March 31, 2021 related to the planned IPO. See Note 16, “Subsequent Events” for additional information on the IPO.

Note 4.    Goodwill and Intangible Assets

Goodwill

The carrying amount of Goodwill was $801 thousand as of March 31, 2021. There were no changes to the carrying amount of goodwill during the three months ended March 31, 2021. There was no Goodwill balance outstanding during the three months ended March 31, 2020. As of March 31, 2021, there were no reductions in Goodwill relating to impairment losses.

Intangible Assets, Net

The following table summarizes intangible assets:

March 31, 2021December 31, 2020
(in thousands)Gross carrying amountAccumulated AmortizationNet carrying amountGross carrying amountAccumulated AmortizationNet carrying amount
Definite-lived intangible asset$911 $(202)$709 $911 $(127)$784 
Indefinite-lived intangible asset 904 — 904 904 — 904 
Amortization expense was $76 thousand during the three months ended March 31, 2021. There was no amortization expense during the three months ended March 31, 2020. Amortization expense was included in research and development in the Condensed Consolidated Statements of Operations and Comprehensive Loss. No definite-lived intangible asset impairment charges were recorded during the three months ended March 31, 2021. There were no intangible asset balances outstanding during the three months ended March 31, 2020.

7


The indefinite-lived intangible asset represents the Recursion domain name that the Company purchased. No indefinite-lived intangible asset impairment charges were recorded during the three months ended March 31, 2021.

Note 5.    Notes Payable

Midcap Financial

In September 2019, the Company entered into a new Credit and Security Agreement with Midcap Financial Trust (Midcap), and the other lenders party thereto (the Midcap loan agreement). The Midcap loan agreement provides for a term loan facility that includes: i) an initial tranche of $11.9 million; and ii) a second tranche of up to $15.0 million, which if drawn would result in a maximum outstanding amount of $26.9 million. The Company used a portion of the proceeds from the initial tranche to fully repay a previously outstanding term loan, the Pacific Western Bank (Pacific) loan, for $11.2 million. Proceeds from the term loans may be used for general corporate purposes. As of March 31, 2021 and December 31, 2020, the outstanding principal balance under the Midcap loan agreement was $11.9 million.

Interest on the Midcap loan accrues on the principal amount outstanding at a floating per annum rate equal to the LIBOR rate (floor of 2.00%) plus 5.75% and is payable monthly in arrears. The Company is required to make interest-only payments from September 2019 to September 2021, and thereafter, 36 monthly principal payments of $330 thousand plus interest. The interest only period will be extended an additional 12 months under certain conditions.

The Company may voluntarily prepay the Midcap term loan, subject to certain minimum repayment requirements and prepayment fees. The Midcap term loan is subject to a mandatory prepayment under certain conditions.

The debt is secured against substantially all of the Company assets. The Midcap loan agreement includes standard affirmative and restrictive covenants, including covenants limiting the ability of the Company and its subsidiaries, among other things, to dispose of assets, grant certain licenses, make investments, merger or consummate acquisitions, incur debt, grant liens and make dividends or distributions, in each case subject to certain exceptions. The loan agreement also includes standard events of default, including, subject to grace periods in certain instances, payment defaults, breaches of covenants, breaches of representations and warranties, cross-defaults with certain other indebtedness, insolvency and bankruptcy defaults, change of control of the Company or any subsidiary, and a material adverse change in the business, operations or conditions of the Company. Upon the occurrence of an event of default, Midcap may declare all outstanding obligations immediately due and payable, increase the applicable interest rate by 2% and take such other actions as set forth in the Credit and Security Agreement. As of March 31, 2021 and 2020, the Company was in compliance with all debt covenants.

In 2019, the Company paid fees of approximately $298 thousand in connection with the origination of the Midcap loan agreement. These fees were deferred and recorded as a direct deduction from the carrying value of the loan payable and are being amortized to interest expense over the remaining term of the agreement.

Pacific Western

In May 2018, Pacific issued a standby letter of credit of $3.8 million for the benefit of the Company’s landlord, securing certain Company obligations relating to tenant improvements. As of March 31, 2021 and December 31, 2020, the outstanding letter of credit was $3.8 million, for which the Company held $4.0 million as of March 31, 2021 and December 31, 2020, of restricted cash as collateral.
Convertible Notes

In March 2020, the Company issued convertible promissory notes for an aggregate principal amount of $6.0 million. Under certain conditions, the principal would convert to an amount of equity with a fair value that exceeded the amount of the notes’ principal on the conversion date. This feature of the notes was accounted for separately at fair value as a derivative liability. Changes in the fair value of the derivative were recorded in other loss, net in the Condensed Consolidated Statements of Operations and Comprehensive Loss and were immaterial during the three months ended March 31, 2020.

8


In September 2020, these notes and additional notes that were issued in April 2020 converted to 1,203,231 shares of Series D Preferred Stock. Upon conversion of the notes, the Company recorded the $1.6 million fair value of the derivative liability as equity on the Condensed Consolidated Balance Sheet.

Notes Payable for Tenant Improvement Allowance

In 2018, the Company borrowed $992 thousand, which was available as part of the station 41 lease, from our landlord to be used on tenant improvements (see Note 6, “Commitments and Contingencies” for additional details.) Under the terms of the lease, the note will be repaid over a 10 year period at an 8% interest rate.
Notes payable for the Midcap loan agreement and tenant improvement allowance consisted of the following:

March 31,December 31,
(in thousands)
20212020
Current portion of notes payable$2,145 $1,073 
Long-term portion of notes payable10,522 11,615 
Less: unamortized issuance costs
(183)(201)
Notes payable, net$12,484 $12,487 

The following table presents information regarding the Company’s debt principal repayment obligations as of March 31, 2021:

(in thousands)
Amount
2021$1,053 
20224,052 
20234,059 
20243,059 
2025112 
Thereafter346 
Total debt principal payments$12,681 

Note 6. Commitments and Contingencies

Lease Obligations

The Company has entered into various long-term real estate leases primarily related to office, research and development (R&D) and operating activities. For the three months ended March 31, 2021 and 2020, total rent expense was $1.3 million and $988 thousand, respectively. The following Komas, Station 41 and Milpitas leases are classified as operating leases.

Komas Lease
In August 2016, the Company entered a new facilities lease, with the right of use and payments beginning in January 2017. The term of the lease is 7 years. This lease includes provisions for escalating rent payments. Rent expense is recognized on a straight-line basis over the term of the lease. This lease included an allowance for tenant improvements. Tenant improvements were recorded as property and equipment and are being depreciated over the term of the lease. In conjunction with the allowance for tenant improvements, the Company recorded a lease incentive obligation of $847 thousand which is being amortized over the term of the lease as a reduction to rent expense. As of March 31, 2021, the related unamortized lease incentive obligation was $343 thousand.

Station 41 Lease
In August 2017, the Company entered a new facilities lease, with the right of use beginning in December 2017 and payments beginning in June 2018. The term of the lease is 10 years, with one five-year renewal option exercisable by the Company. This lease includes provisions for escalating rent payments. Rent expense is recognized straight-
9


line over the term of the lease. This lease included an allowance for tenant improvements of $4.0 million, the full balance of which was drawn in 2017. Tenant improvements were recorded as property and equipment and are being depreciated over the remaining term of the lease. In conjunction with the allowance for tenant improvements, the Company recorded a leasehold obligation, which is being amortized over the term of the lease as a reduction to rent expense. As of March 31, 2021, the related unamortized lease incentive obligation was $2.7 million.

In 2018, the Company elected to draw an additional tenant improvement loan of $992 thousand offered in the Station 41 lease. This loan is incorporated into, and acts to increase the base rent over the remaining life of the lease. The increase in rent includes a charge for interest, which accrues on the principal amount outstanding at a rate equal to 8%. The Company accounts for this additional tenant improvement loan as a oote payable on the Condensed Consolidated Balance Sheets with the current portion included in the Current Portion of Notes Payable.

In 2019, the Company amended the Station 41 Lease to include additional space in the conjoining unit with the right to use the new space beginning in June 2020 for an additional 7 years. This amendment for the extra space includes provisions for escalating rent payments. Rent expense is recognized straight-line over the term of the lease.

In January 2021, the company amended the Station 41 Lease, increasing the leased square footage by an additional 91,478 square feet. This amendment includes provisions for escalating rent, has a 10 year term and additional total minimum payments of $32.4 million. This lease included a tenant improvement allowance of up to approximately $10.1 million.

Milpitas Lease
In August 2019, the Company entered a new facilities lease, with the right of use and payments beginning in August 2019. The term of the lease is 9 years. This lease includes provisions for escalating rent payments. Rent expense is recognized on a straight-line basis over the term of the lease.

Future Minimum Lease Payments
Future minimum commitments as of March 31, 2021 under the Company’s lease agreements are as follows:

(in thousands)
Amount
2021$2,911 
20224,963 
20237,344 
20247,371 
20257,560 
Thereafter33,214 
Total Minimum Payments$63,363 

Contract Obligations
In the normal course of business, the Company enters into contracts with clinical research organizations, drug manufacturers and other vendors for preclinical and clinical research studies, research and development supplies and other services and products for operating purposes. These contracts generally provide for termination on notice, and therefore are cancellable contracts.

Indemnification

The Company has agreed to indemnify its officers and directors for certain events or occurrences, while the officer or director is or was serving at the Company’s request in such capacity. The Company purchases directors and officers liability insurance coverage that provides for corporate reimbursements of covered obligations that limits the Company’s exposure and enables it to recover a portion of potential future amounts paid. The Company had no liabilities recorded for these agreements as of March 31, 2021 and December 31, 2020 as no amounts in excess of insurance coverage are probable or estimable.
10



Employee Agreements

The Company has signed employment agreements with certain key employees pursuant to which if their employment is terminated by the Company following a change of control of the Company, the employees are entitled to receive certain benefits, including accelerated vesting of equity incentives.

Legal Matters

The Company is not currently a party to any material litigation or other material legal proceedings. The Company may, from time to time, be involved in various legal proceedings arising in the normal course of business, and an unfavorable resolution of any of these matters could materially affect the Company’s future financial position, results of operations or cash flows.

Note 7.    Convertible Preferred Stock

The Company has issued preferred stock as part of various financing events. No new convertible preferred stock was issued during three months ended March 31, 2021 and 2020. As of March 31, 2021 and 2020, there were no cumulative dividends owed or in arrears on the preferred stock.

Convertible Preferred Stock consisted of the following as of March 31, 2021 and December 31, 2020:
(in thousands except share data)
Preferred
Shares
Authorized
Preferred
Shares Issued
and
Outstanding
Carrying
Value
Liquidation
Preferences
Shares of
Common
Stock Issuable
Upon
Conversion
Series A30,078,402 29,965,754 $21,281 $21,281 29,965,754 
Series A-14,975,521 4,975,520   4,975,520 
Series B21,497,667 21,471,898 59,913 60,000 21,471,898 
Series C18,956,354 18,776,345 119,915 122,058 22,286,298 
Series D45,926,769 36,898,548 247,203 247,511 36,898,548 
Total convertible preferred stock121,434,713 112,088,065 $448,312 $450,850 115,598,018 
In April 2021, all outstanding shares of convertible preferred stock converted into common stock as part of the IPO. See Note 16, “Subsequent Events” for additional details.

Balance Sheet Classification

The Company’s convertible preferred stock is classified outside of stockholders’ deficit on the Condensed Consolidated Balance Sheets because the holders of such shares have liquidation rights in the event of a deemed liquidation that, in certain situations, are not solely within the control of the Company and would require the redemption of the then-outstanding convertible preferred stock. The convertible preferred stock is not redeemable, except in the event of a deemed liquidation event.

Note 8.    Common stock

Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are entitled to receive dividends, as may be declared by the Company’s board of directors. As of March 31, 2021 and December 31, 2020, no dividends had been declared.

As of March 31, 2021 and December 31, 2020, there were 188,400,000 shares of common stock authorized, of which 24,036,725 and 22,314,685 shares were outstanding, respectively.
11


Additionally, the Company has reserved the following shares of common stock for issuance as of March 31, 2021:

 
Shares
Conversion of series A preferred stock
29,965,754 
Conversion of series A-1 preferred stock
4,975,520 
Conversion of series B preferred stock
21,471,898 
Conversion of series C preferred stock
22,286,298 
Conversion of series D preferred stock
36,898,548 
Conversion of series A warrants
112,647 
Conversion of series B warrants
25,762 
Conversion of series C warrants
213,646 
2016 equity incentive plan
25,686,958 
Key personnel incentive plan
1,601,566 
Total shares of common stock reserved for issuance143,238,597 

Note 9. Collaborative and Other Research and Development Contracts

Bayer AG

In August 2020, the Company entered into a Research Collaboration and Option Agreement (the Bayer Agreement) with Bayer AG (Bayer) for a five-year term pursuant to which the Company and Bayer may initiate approximately ten research projects related to fibrosis across multiple organ systems, including lung, liver, and heart. Under the agreement, the Company contributed compounds from our proprietary library and Bayer contributed compounds from its proprietary library and will contribute scientific expertise throughout the collaboration.

Under the terms of the agreement, the Company received a non-refundable upfront payment of $30.0 million, which was recorded as unearned revenue on the Condensed Consolidated Balance Sheet. The Company determined that it has one performance obligation under the agreement, which is to perform research and development services for Bayer. Recursion determined the transaction price to be the $30.0 million upfront payment received and allocated the amount to the single performance obligation. The Company is recognizing the revenue over time using a cost-based input method, based on labor costs incurred to perform the research and development services. This method of recognizing revenue requires the Company to make estimates of the total costs to provide the services required under the performance obligation. A significant change in these estimates could have a material effect on the timing and amount of revenue recognized in future periods.

For the three months ended March 31, 2021, the Company recognized $2.5 million of revenue resulting from the collaboration. There is $10.0 million and $14.2 million of current and non-current unearned revenue, respectively, remaining as of March 31, 2021. The allocation of unearned revenue between current and non-current is based on Recursion’s estimates of when the Company expects to incur the related costs.

Under each research project, the Company will work with Bayer to identify potential candidates for development. Under the agreement, Bayer has the first option for licenses to potential candidates. Each such license could potentially result in option exercise fees and development and commercial milestones paid to the Company with an aggregate value of up to approximately $100.0 million (for an option on a lead series) or up to approximately $120.0 million (for an option on a development candidate), as well as tiered royalties for each such license, ranging from low- to mid-single digit percentages of sales, depending on commercial success.

The National Institute of Health

During the year ended December 31, 2018, the Company was awarded a grant by the National Institute of Health, which included potential funding of $1.4 million. Revenue recognized related to this grant during the three months ended March 31, 2021 and 2020 was $62 thousand and $60 thousand, respectively. As of March 31, 2021, $395 thousand of the potential funding remained.

As of March 31, 2021 and December 31, 2020, the Company had $62 thousand and $140 thousand of outstanding receivables, respectively with the National Institute of Health, which was deemed to be collectible.
12



Note 10. Stock-Based Compensation

Stock Options

Key Personnel Incentive Plan
In November 2013, the Company adopted the Key Personnel Incentive Plan ( the KPI Plan). The KPI Plan provides for the grant of restricted units and non-statutory option awards to employees, non-employee directors and consultants of the Company. As of March 31, 2021 and December 31, 2020, there were no shares of common stock available for grant under the KPI Plan.

The KPI Plan provides for the early exercise of options. Upon exercise, such option holder receives common stock of the Company, subject to a lapsing right of repurchase. Upon termination of such individual, the Company may exercise its right to repurchase any unvested shares for the exercise price paid by the option holder.

2016 Equity Incentive Plan
In August 2016, the Board of Directors and the stockholders of the Company adopted the 2016 Equity Incentive Plan. Under the 2016 Plan, 25,686,958 shares of common stock were reserved. The Company may grant options to purchase common stock, stock appreciation rights, restricted stock awards and other forms of stock-based compensation. Stock options generally vest over four years and expire no later than 10 years from the date of grant.

As of March 31, 2021, 3,684,798 shares of common stock are available for grant. Stock option activity during the three months ended March 31, 2021 was as follows:

 (in thousands except share data)
Shares 
Weighted-Average Exercise
Price
Weighted-Average Remaining Contractual Life (In Years)
Aggregate
Intrinsic
Value
Outstanding as of 12/31/202020,937,443 $1.85 8.5$12,956 
Granted1,849,311 4.44 
Cancelled384,540 2.33 
Exercised1,722,027 1.25 4,455 
Outstanding as of March 31, 202120,680,187 $2.14 8.5$50,346 
Exercisable as of March 31, 20216,365,727 $1.20 6.9$21,450 
Non-vested options as of March 31, 202114,314,460 $2.55 9.2$28,897 

The fair value of options granted to employees is calculated on the grant date using the Black-Scholes option valuation model. The weighted-average grant-date fair values of stock options granted during the three months ended March 31, 2021 and 2020 were $2.63 and $1.33, respectively.

The following weighted-average assumptions were used to calculate the grant-date fair value of employee stock options:

Three months ended March 31,
 20212020
Expected term (in years)
6.16.2
Expected volatility
66%65%
Expected dividend yield
Risk-free interest rate
0.78%1.33%

For the three months ended March 31, 2021, the Company granted 150,000 shares of stock options with a performance and service condition that had a fair value of $358 thousand. No expense related to these options was recorded during the three months ended March 31, 2021 as the performance condition was not considered probable.

13


For the three months ended March 31, 2020, the Company granted 1,500,000 shares of stock options with performance, market conditions and service conditions. At grant date, the Company estimated that the fair value of the options was approximately $2.0 million. No expense related to these options was recorded during the three months ended March 31, 2021 and 2020 as the performance conditions were not considered probable.

During the years ended December 31, 2020 and 2017, the Company granted options to purchase 120,000 and 330,000 shares, respectively, of common stock to non-employee consultants. These options were granted in exchange for consulting services and vest over a period that approximates the term of the services to be provided by the Company. The fair value of the options granted prior to 2020 were remeasured in each period until they were fully vested. Following the adoption of ASU 2018-07 on January 1, 2020, the fair value of options granted to non-employees were no longer remeasured subsequent to the grant date. The fair value of each option on the date of grant was calculated using the Black-Scholes option model. There were no grants to non-employee consultants during the three months ended March 31, 2021 or 2020.

The following table presents the classification of stock-based compensation expense for employees and non-employees within the Condensed Consolidated Statements of Operations and Comprehensive Loss:

Three months ended March 31,
(in thousands)
20212020
Research and development$628 $688 
General and administrative$1,070 $577 
Total$1,698 $1,265 

As of March 31, 2021, there was $22.0 million of unamortized stock-based compensation cost related to unvested stock options which is expected to be recognized over a weighted average period of 2.98 years.

Warrants

In connection with the execution of the December 2016 Pacific loan agreement (see Note 5, “Notes Payable” for additional details), the Company issued Pacific fully vested warrants to purchase Series A Preferred Stock. In May 2017, the Company drew on additional borrowing capacity under the Pacific loan agreement, this required the Company to issue additional fully vested warrants. These Series A warrants remained outstanding as of March 31, 2021.

In July 2018, the Company drew on additional borrowing capacity under an amended agreement. This required the Company to issue fully vested warrants to purchase Series B Preferred Stock. These warrants remained outstanding as of March 31, 2021.

In January 2020, the Company issued warrants to purchase 180,000 shares of Series C Preferred Stock at a purchase price of $6.50 per share as part of a services agreement. The warrants vest ratably over 18 months. These warrants remained outstanding and 139,999 were vested and exercisable as of March 31, 2021. The grant date fair value was $4.10 per share. As of March 31, 2021, there was $158 thousand of unamortized cost related to the unvested warrants which is expected to be recognized over four months.

14


The following tables summarize the Series A and B warrants outstanding as of March 31, 2021:

(in thousands except share data)
Series A
Grant Date
Number of Warrants
Exercise Price
Fair Value as of March 31, 2021Fair Value as of December 31, 2020
2017 Warrants12/19/201684,486$0.71 $56,232 $58,000 
2018 Warrants5/27/201728,161$0.71 $18,743 $19,000 

(in thousands except share data)
Series B
Grant Date
Number of Warrants
Exercise Price
Fair Value as of March 31, 2021Fair Value as of December 31, 2020
2019 Warrants7/9/201825,762$2.79 $45,499 $48,000 

The fair value of the warrants was calculated using the Black-Scholes option-pricing model with the following weighted average assumptions:

Three months ended March 31,
 20212020
Expected term (in years)
6.16
7.12
Expected volatility66%66%
Expected dividend yield
Risk-free interest rate1.20%0.70%

The FASB has issued accounting guidance on the classification of freestanding warrants and other similar instruments on shares that are redeemable (either puttable or mandatorily redeemable). The guidance requires liability classification for certain warrants issued that are exercisable into convertible preferred stock. The initial fair values of Series A and B warrants were recorded as debt issuance costs, which resulted in a reduction in the carrying value of the debt and subsequent accretion. The Company remeasures the Series A and B warrants on each Condensed Condensed Consolidated Balance Sheet date. The change in the valuation is recorded in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

The Series C warrants compensation expense is being recorded ratably over the requisite service period based on the award’s fair value at the date of grant in general and administrative expense. These warrants were classified as equity as they were issued to non-employees for services and the convertible preferred stock is not redeemable, except in the event of a deemed liquidation event, which is not considered probable.

The following is a summary of the changes in the Company’s Series A and B warrant liability balance during the three months ended March 31, 2021 and 2020:

(in thousands)
Balance as of December 31, 2019$128 
Net decrease in fair value of warrants(10)
Balance as of March 31, 2020$118 
Balance as of December 31, 2020$125 
Net decrease in fair value of warrants
(5)
Balance as of March 31, 2021$120 

Note 11. Employee Benefit Plans

The Company has an employee benefit plan under Section 401(k) of the Internal Revenue Code. The plan allows employees to make contributions up to a specified percentage of their compensation. The Company is currently contributing up to 4% of employee base salary, by matching 100% of the first 4% of annual base salary contributed
15


by each employee. Employer expenses were approximately $281 thousand and $199 thousand during the three months ended March 31, 2021 and 2020, respectively.

Note 12. Income Taxes

The Company did not record any income tax expense during the three months ended March 31, 2021 and 2020. The Company has historically incurred operating losses and maintains a full valuation allowance against its net deferred tax assets. Valuation allowances are recorded when the expected realization of the deferred tax assets does not meet a “more likely than not” criterion. Realization of the Company’s deferred tax assets are dependent upon the generation of future taxable income, the amount and timing of which are uncertain.

Net operating loss carryforwards (NOLs) and tax credit carry-forwards are subject to review by the Internal Revenue Service (IRS) and may become subject to annual limitations due to ownership changes that have occurred previously or that could occur in the future under Section 382 of the Internal Revenue Code. The Company has not conducted a study to assess whether a change of control has occurred or whether there have been multiple changes of control since inception due to the significant complexity and cost associated with such a study. Any limitation may result in expiration of a portion of the NOLs or research and development tax credit carryforwards before utilization. Further, until a study is completed and any limitation is known, no amounts are being presented as an uncertain tax position.

The Company files income tax returns in the United States, Utah, and California. The Company is not currently under examination in any of these jurisdictions. The Company is subject to income tax examinations on all federal returns since the 2018 tax return.

Note 13. Net Loss Per Share

Recursion issued certain convertible preferred stock that was concluded to be participating securities. Due to the presence of participating securities, Recursion calculates net loss per share using the more dilutive of the treasury stock or the two-class method. For periods presented in which the Company reports a net loss, the losses are not allocated to the participating securities. As the Company reported a net loss during the three months ended March 31, 2021 and 2020, diluted net loss per share is the same as basic net loss per share, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.

The following table sets forth the computation of basic and diluted net loss per share:
Three months ended March 31,
(in thousands, except share amounts)
20212020
Numerator:
Net loss$(30,717)$(18,424)
Denominator:
Weighted average common shares outstanding23,035,623 21,639,891 
Net loss per share, basic and diluted$(1.33)$(0.85)

The Company excluded the following potential common shares from the computation of diluted net loss per share for the periods indicated because including them would have had an anti-dilutive effect:

Three months ended March 31,
 20212020
Convertible preferred stock115,598,018 78,699,470 
Options to purchase common stock4,706,313 3,373,642 
Warrants122,358 115,029 
Total120,426,689 82,188,141 

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Note 14. Fair Value Measurements

The fair value hierarchy consists of the following three levels:
Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets that the company has the ability to access;
Level 2 — Valuations based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations in which all significant inputs are observable in the market; and
Level 3 — Valuations using significant inputs that are unobservable in the market and include the use of judgment by the company's management about the assumptions market participants would use in pricing the asset or liability.

As of March 31, 2021 and December 31, 2020, cash and cash equivalents (including restricted cash) included bank deposits held in checking and savings accounts. The Company is required to maintain a balance in a collateralized account to secure the Company’s credit cards. Additionally, the Company holds restricted cash related to an outstanding letter of credit issued by Pacific Western Bank, which was securing certain Company obligations relating to tenant improvements. As of March 31, 2021 and December 31, 2020, cash restricted for the letters of credit was $4.0 million. The remaining restricted cash related to the Company’s credit cards.

The Company measures the Series A and B Preferred Stock warrant liabilities at fair value using the Black-Scholes option-pricing model. See Note 10, “Stock-based Compensation” for details on the valuation of the warrant liabilities and a reconciliation of the balance.

The following tables summarize the Company’s assets and liabilities that are measured at fair value on a recurring basis:

Basis of fair value measurement
(in thousands)March 31, 2021Level 1Level 2Level 3
Assets
Cash and equivalents$214,088 $214,088 $ $ 
Restricted cash5,042 5,042   
Total assets$219,130 $219,130 $ $ 
Liabilities
Warrant liability$120 $ $ $120 
Total liabilities$120 $ $ $120 
Basis of fair value measurement
(in thousands)December 31, 2020Level 1Level 2Level 3
Assets
Cash and equivalents$262,126 $262,126 $ $ 
Restricted cash5,041 5,041   
Total assets$267,167 $267,167 $ $ 
Liabilities
Warrant liability$125 $ $ $125 
Total liabilities$125 $ $ $125 

In addition to the financial instruments that recognized at fair value on the Condensed Consolidated Balance Sheets, the Company has certain financial instruments that are recognized at amortized cost or some basis other than fair value. The carrying amount of these amounts are considered to be representative of their approximate fair values.

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The following tables summarize the Company’s assets and liabilities that are not measured at fair value:

Book valuesFair values
(in thousands)March 31, 2021December 31, 2020March 31, 2021December 31, 2020
Liabilities
Current portion of notes payable$2,145 $1,073 $2,145 $1,073 
Notes payable, net of current portion10,339 11,414 10,339 11,414 
Total liabilities$12,484 $12,487 $12,484 $12,487 

Note 15. Related Party Transactions

On December 5, 2017, the Company entered into a loan agreement with its Chief Executive Officer (CEO) to provide a loan of $595 thousand. The loan had a seven-year term. As of March 31, 2021, no amount remained outstanding on the loan. As of March 31, 2020, the outstanding balance of $595 thousand was recorded on the Condensed Consolidated Balance Sheets within other non-current assets.
Note 16. Subsequent Events

Initial Public Offering

On April 20, 2021, the Company closed its IPO and issued 27,878,787 shares of its common stock at a price of $18.00 per share for approximate net proceeds of $462.6 million, after deducting underwriting discounts and commissions of $35.1 million and expenses of $4.1 million. In connection with the IPO, all shares of Series A, B, C and D convertible preferred stock converted into 115,598,018 shares of Class A common stock.

Stock Split

In April 2021, the Board of Directors approved a 1.5-for-1 forward stock split of the Company’s common and convertible preferred stock. Each shareholder of record on April 9, 2021 received 1.5 shares for each then-held share. The split proportionally increased the authorized shares and did not change the par values of the Company’s stock. The split affected all stockholders uniformly and did not affect any stockholder's ownership percentage of the Company's shares of Common Stock. All shares and per share amounts presented within these condensed consolidated financial statements were adjusted to reflect the forward stock split for all periods presented.

Equity Plans

In April 2021, the Company’s Board of Directors adopted, and its stockholders approved, the 2021 Equity Incentive Plan (the “2021 Plan”), which became effective in connection with the closing of the Company’s IPO. A total of 16,186,000 shares of the Company’s Class A common stock have been reserved for issuance under the 2021 Plan in addition to any shares of Class A common stock outstanding under the 2016 Plan that expire are withheld by the Company for payment of an exercise price or for satisfying tax withholding obligations, or are forfeited to the Company due to failure to vest, subject to an addition of a maximum of 19,479,146 shares. The number of shares of Class A common stock reserved for future issuance under the 2021 Plan will also be increased pursuant to provisions for annual automatic evergreen increases.

In April 2021, the Company’s Board of Directors adopted, and its stockholders approved, the 2021 Employee Stock Purchase Plan (the “2021 ESPP”), which became effective in connection with the closing of the Company’s IPO. A total of 3,238,000 shares of the Company’s Class A common stock have been reserved for issuance under the 2021 ESPP. In addition, the number of shares reserved for future issuance under the 2021 ESPP will be increased for annual automatic evergreen increases.
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Class A and B Common Shares Authorization

In April 2021, the Company’s Board of Directors authorized two classes of common stock, Class A and Class B. The rights of the holders of Class A and B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to ten votes per share and is convertible at any time into one share of Class A common stock.

All Class B common stock is held by Christopher Gibson, Ph.D., our Chief Executive Officer, or his affiliate. Dr. Gibson and his affiliate hold outstanding shares of Class B common stock representing approximately 38% of the voting power of the Company’s outstanding shares. This voting power may increase over time as Dr. Gibson vests in and exercises equity awards outstanding. If all the equity awards held by Dr. Gibson had been fully vested and exercised and exchanged for shares of Class B common stock as of the date of the IPO, Dr. Gibson and his affiliate would hold approximately 42% of the voting power of the Company’s outstanding shares. As a result, Dr. Gibson will be able to significantly influence any action requiring the approval of Recursion stockholders, including the election of the board of directors, the adoption of amendments to the Company’s certificate of incorporation and bylaws, and the approval of any merger, consolidation, sale of all or substantially all of the Company’s assets, or other major corporate transaction.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following is a discussion and analysis of the financial condition of Recursion Pharmaceuticals, Inc. (Recursion, the Company, or we) as of March 31, 2021 and December 31, 2020 and the results of operations during the three months ended March 31, 2021 and 2020. This commentary should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and accompanying notes appearing in Item 1, “Financial Statements” and the Company’s audited consolidated financial statements and accompanying notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the final prospectus for our initial public offering (IPO), which was filed with the Securities and Exchange Commission (SEC), pursuant to Rule 424(b)(4) on April 16, 2020 (the Final Prospectus). This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans, and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading "Special Note About Forward-Looking Statements" in this Quarterly Report on Form 10-Q. You should review the disclosure under the heading "Risk Factors" in this Quarterly Report on Form 10-Q for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.
Overview

We are a clinical-stage biotechnology company decoding biology by integrating technological innovations across biology, chemistry, automation, data science and engineering to radically improve the lives of patients and industrialize drug discovery. Central to our mission is the Recursion Operating System (Recursion OS) that combines an advanced infrastructure layer to generate what we believe is one of the world’s largest and fastest-growing proprietary biological and chemical datasets, and the Recursion Map, a suite of custom software, algorithmic and machine learning tools that we use to explore foundational biology unconstrained by human bias, navigate to new biological insights, and accelerate programs. The combination of wet-lab biology and in silico tools in our closed-loop system accelerates our drug discovery process and differentiates us from others within the industry. Similarly, our balanced team of life scientists and computational and technical experts creates an environment where empirical data, statistical rigor, and creative thinking are brought to bear on every decision. Thus far, we have leveraged our Recursion OS to create three value drivers: i) advancement of 37 internally-developed programs focused on areas of significant unmet need, several of which have market opportunities in excess of $1.0 billion in annual sales, ii) strategic partnerships with leading biopharmaceutical companies, and iii) Induction Labs, a growth engine created to explore new extensions of the Recursion OS both within and beyond therapeutics. The number of programs we are advancing has more than doubled in size since 2019. Although we cannot provide any guarantee that we will achieve similar development timelines with future product candidates, we believe we will be able to continue accelerating the pace of program additions in the future. As such, we are a biotechnology company scaling more like a technology company.

Integrating technological innovations across biology, chemistry, automation, data science and engineering in order to industrialize the discovery of therapeutics has required us to raise significant capital and adopt a long-term approach to capital allocation that balances near-term risks and long-term value creation. Of our 37 internally developed programs, we have four drug candidates that we expect will be entering clinical trials in the next four to five quarters. Our rapidly growing team of more than 200 employees is balanced between life scientists (approximately 40% of employees) and computational and technical expects (approximately 35% of employees).

From inception through March 31, 2021, we have raised approximately $448.9 million in equity financing from investors in addition to $30.0 million in an upfront payment from our strategic partnership with Bayer. We use the capital we have raised to fund operations and investing activities across platform research operations, drug discovery, clinical development, digital and other infrastructure, creation of our portfolio of intellectual property, and administrative support. We do not have any products approved for commercial sale and have not generated any revenues from product sales. We had cash and cash equivalents of $214.1 million as of March 31, 2021.

Since inception, we have incurred significant operating losses. Our net losses were $30.7 million and $18.4 million during the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, our accumulated deficit was $244.3 million. We expect to continue to incur significant expenses and operating losses for the
20


foreseeable future. In addition, we anticipate that our expenses will increase significantly in connection with our ongoing activities, as we:
continue our platform research and drug discovery and clinical development efforts;
continue to invest in the scale and scope of our platform research capabilities in order to identify novel biology and therapeutics;
continue to invest in expansions of the modality capabilities across our platform including large molecules and RNA therapeutics;
invest in or acquire companies or intellectual property that achieves our platform objectives;
accelerate investments in mechanisms to significantly expand our total addressable markets through Induction Labs;
utilize our platform to identify and validate additional therapeutic candidates, technologies, and business opportunities;
initiate additional preclinical studies or clinical or other trials for our product candidates, including under our collaboration agreements;
continue or expand the scope of our clinical trials for our product candidates;
conduct the above and below development activities on an extensive pipeline of therapeutic candidates across diverse areas of biology;
establish agreements with contract research organizations (CROs) and contract manufacturing organizations (CMOs) in connection with our preclinical studies and clinical trials;
change or add to internal manufacturing capacity or capability;
change or add additional suppliers;
seek regulatory approval for our therapeutic candidates;
seek marketing approvals and reimbursement for our therapeutic candidates;
establish a sales, marketing, and distribution infrastructure to commercialize any products for which we may obtain marketing approval;
acquire or in-license other therapeutic candidates and technologies;
make milestone or other payments under any in-license agreements;
maintain, protect, defend, enforce, and expand our intellectual property portfolio;
add additional infrastructure to our quality control, quality assurance, legal, compliance, and other groups to support our operations as we progress our therapeutics candidates toward commercialization;
add additional infrastructure to support our operations as a public company and our product development and future commercialization efforts, including expansion of company sites;
attract and retain world-class talent, including in competitive areas; and
experience any delays or encounter issues with any of the above.
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Components of Operating Results

Revenues

To date, our business generates revenue from two sources: i) grant revenue and ii) operating revenue.

Grant Revenue—We recognize grant revenue in the period in which the revenue is earned in accordance with the associated grant agreement, which is the period in which corresponding reimbursable expenses under the grant agreement are incurred. Grant revenue was generated from grants awarded by the National Institute of Health.

Operating Revenue—Operating revenue is primarily generated through funded research and development agreements derived from strategic alliances such as our strategic partnership with Bayer. We are entitled to receive variable consideration as certain milestones are achieved. The timing of revenue recognition is not directly correlated to the timing of cash receipts.

Research and Development

Research and development expenses account for a significant portion of our operating expenses. We recognize research and development expenses as incurred. Research and development expenses comprise costs incurred in performing research and development activities, including:
cost to develop and operate our platform;
discovery efforts leading to development candidates;
clinical development costs for our programs;
costs associated with discovery as well as clinical development efforts, including research materials and external research;
materials and supply costs associated with the manufacture of drug substance and drug product for preclinical testing and clinical trials;
personnel-related expenses, including salaries, benefits, bonuses, and stock-based compensation for employees engaged in research and development functions;
costs associated with operating our digital infrastructure; and
facilities, depreciation and amortization, insurance and other direct and allocated expenses incurred as a result of research and development activities.

We monitor research and development expenses directly associated with our clinical assets to some degree at the program level, however, indirect costs associated with clinical development and the balance of our research and development expenses are not tracked at the program or candidate level.

We recognize expenses associated with third-party contracted services based on the completion of activities as specified in the applicable contracts. Upon termination of contracts with third parties, our financial obligations are limited to costs incurred or committed to date. Any advance payments for goods or services to be used or rendered in future research and product development activities pursuant to a contractual arrangement are classified as prepaid expenses until such goods or services are rendered.

General and Administrative

The Company expenses general and administrative costs as incurred. General and administrative expenses consist primarily of salaries, benefits, stock-based compensation, and outsourced labor for personnel in executive, finance, human resources, legal and other corporate administrative functions. General and administrative expenses also include legal fees incurred relating to corporate and patent matters, professional fees incurred for accounting, auditing, tax and administrative consulting services, insurance costs, facilities and depreciation expenses.
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Recursion expects that our general and administrative expenses will increase in the future to support personnel in research and development and to support our operations as we increase our research and development activities and activities related to the potential commercialization of our initial drug candidates REC-4881, REC-3599, REC-2282, and REC-994. The Company also expects to incur increased expenses associated with operating as a public company, including costs of accounting, audit, legal, regulatory, and tax-related services associated with maintaining compliance with exchange listing and Securities and Exchange Commission, or SEC, requirements, director and officer insurance costs, and investor and public relations costs.

Other Income, Net

Other income, net primarily consists of interest earned on our cash and cash equivalents and interest expense incurred under our loan agreements.
Results of Operations

Comparison of the three months ended March 31, 2021 and 2020

The following table summarizes the Company’s results of operations:
 
Three months ended March 31,
Change
 (in thousands, except percentages)20212020
$
%
Revenue    
Grant revenue$62 $60 $3.5 %
Operating revenue2,500 — 2,500 n/m
Total revenue2,562 60 2,502 >100%
Operating expenses    
Research and development24,109 12,842 11,267 87.7 %
General and administrative8,937 5,561 3,376 60.7 %
Total operating expenses33,046 18,403 14,643 79.6 %
Loss from operations(30,484)(18,343)(12,141)66.2 %
Other loss, net(233)(81)(152)>100%
Net loss and comprehensive loss$(30,717)$(18,424)$(12,293)66.7 %
n / m = Not meaningful
Revenue
The following table summarizes the components of revenue recognized during the three months ended March 31, 2021 and 2020:
Three months ended March 31,
Change
(in thousands, except percentages)20202019
$
%
Revenue    
Grant revenue$62 $60 $3.5 %
Operating revenue2,500 — 2,500 n/m
Total revenue$2,562 $60 $2,502 >100%

Revenue increased by $2.5 million, or >100%, to $2.6 million during the three months ended March 31, 2021 compared to $60 thousand during the three months ended March 31, 2020. The increase in revenue was due to revenue recognized from our strategic partnership with Bayer entered into in August 2020.
23



 
Research and Development
The following table summarizes the components of research and development expense during the three months ended March 31, 2021 and 2020:
Three months ended March 31,
Change
(in thousands, except percentages)20212020
$
%
Research and development expenses
Platform$10,532 $6,319 $4,212 66.7 %
Discovery7,739 4,047 3,692 91.2 %
Clinical2,955 1,323 1,632 >100%
Stock based compensation628 688 (60)(8.7)%
Other2,255 465 1,789 >100%
Total research and development expenses$24,109 $12,842 $11,265 87.7 %

Significant components of research and development expense include the following: Platform, which refers primarily to expenses related to screening through hit identification; Discovery, which refers primarily to expenses related to hit identification through development candidate; and Clinical, which refers primarily to expenses related to development candidate and beyond.

Research and development expenses increased by $11.3 million, or 87.7%, to $24.1 million during the three months ended March 31, 2021 compared to $12.8 million during the three months ended March 31, 2020. The increase in research and development expenses was due to an increased number of experiments screened on the platform, an increased number of pre-clinical assets being validated and increased clinical costs as studies progress.

General and Administrative Expenses
The following table summarizes the components of general and administrative expense during the three months ended March 31, 2021 and 2020:
Three months ended March 31,
Change
(in thousands, except percentages)20212020
$
%
Total general and administrative expenses$8,937 $5,561 $3,376 60.7 %

General and administrative expenses increased by $3.4 million, or 60.7%, to $8.9 million during the three months ended March 31, 2021 compared to $5.6 million during the three months ended March 31, 2020. The increase in general and administrative expenses was due to growth in size of the Company’s operations including an increase in salaries and wages of $1.2 million, human resources costs, facilities costs, finance costs and other administrative costs associated with operating a growth-stage Company.
 

Other loss, net
The following table summarizes the components of Other loss, net during the three months ended March 31, 2021 and 2020:
 Three months ended March 31,
Change
 (in thousands, except percentages)20212020
$
%
Interest expense$249 $301 $(52)(17.2)%
Interest income(16)(220)204 (92.8)%
Other loss, net$233 $81 $152 >100%

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Other loss, net increased by $152 thousand to $233 thousand during the three months ended March 31, 2021 compared to $81 thousand during the three months ended March 31, 2020. The increase in Other loss, net was primarily due to a decrease in interest earned from the Company’s checking accounts.

Liquidity and Capital Resources

Sources of Liquidity

The Company has not yet commercialized any products and does not expect to generate revenue from the sales of any product candidates for several years. Cash and cash equivalents totaled $214.1 million as of March 31, 2021 and $262.1 million as of December 31, 2020.

The Company has incurred operating losses, experienced negative operating cash flows and Recursion anticipates that the Company will continue to incur losses for at least the foreseeable future. Our net loss totaled $30.7 million during the three months ended March 31, 2021 and $18.4 million during the three months ended March 31, 2020. As of March 31, 2021 and December 31, 2020, Recursion had an accumulated deficit of $244.3 million and $213.6 million, respectively.

To date, Recursion has financed the Company’s operations primarily through private placements of preferred stock. Through March 31, 2021, the Company has received gross proceeds of $448.9 million from sales of our preferred stock. In April 2021, the Company completed an IPO receiving an approximate net proceeds of $462.6 million. See Note 16, “Subsequent Events” to the Condensed Consolidated Financial Statements for additional detail.

Over September and October 2020, the Company received a $30.0 million upfront payment from the Company’s strategic partnership with Bayer.

Midcap Credit and Security Agreement

In September 2019, we entered into a Credit and Security Agreement with Midcap Financial Trust (Midcap), which we refer to as our Credit Agreement. The Credit Agreement includes: i) an initial term loan in an aggregate principal amount of $11.9 million; and ii) a second tranche term loan, which if drawn would result in an aggregate outstanding maximum principal amount of $26.9 million. The second tranche will become available to be drawn upon the achievement of certain drug development milestones. We are required to make interest-only payments from September 2019 to September 2021, and thereafter, 36 monthly principal payments of $330 thousand plus interest commencing in October 2021 and continuing until the maturity date in September 2024. The interest-only period will be extended an additional 12 months upon achievement of certain fundraising related milestones. Interest accrues on the principal amount outstanding at a floating per annum rate equal to the LIBOR (floor of 2.00%) rate plus 5.75%.

The debt is secured against all of our assets. The Credit Agreement includes standard affirmative and restrictive covenants and standard events of default, including payment defaults, breaches of covenants following any applicable cure period, a material impairment in the perfection or priority of Midcap’s security interest or in the value of the collateral and a material adverse change in our business, operations, or conditions. Upon the occurrence of an event of default and following any applicable cure periods, Midcap may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the Credit Agreement. As of March 31, 2021, the Company was in compliance with all debt covenants under the Credit Agreement. In 2019, we paid fees of approximately $298 thousand in connection with the origination of the Credit Agreement. These fees were deferred and recorded as a direct deduction from the carrying value of the loan payable and are amortized to interest expense over the remaining term of the Credit Agreement.

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Cash Flows
The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below:
Three months ended March 31,
(in thousands)20212020
Cash used in operating activities$(30,755)$(17,817)
Cash used in investing activities(19,416)(684)
Cash provided by financing activities2,134 5,997 
Net decrease in cash and cash equivalents$(48,037)$(12,504)

Operating Activities
Net cash used in operating activities was $30.8 million during the three months ended March 31, 2021. Net cash used in operating activities increased from the three months ended March 31, 2020 due to higher costs incurred for research and development and general and administrative due to the Company’s growth as well as the timing of working capital cash flows for the three months ended March 31, 2021.
Net cash used in operating activities was $17.8 million during the three months ended March 31, 2020. Cash used in operating activities increased from the three months ended March 31, 2019 due to higher costs incurred for research and development and general and administrative due to the Company’s growth which was partially offset by the timing of working capital cash flows for the three months ended March 31, 2020.

Investing Activities
Net cash used in investing activities was $19.4 million during the three months ended March 31, 2021. Cash used in investing activities was primarily for the purchase of a Dell EMC supercomputer as well as accessories and parts for a total of $17.9 million.

Net cash used in investing activities was $684 thousand during the three months ended March 31, 2020. Cash used in investing activities was primarily for the purchase of lab equipment and leasehold improvements.

Financing Activities
Net cash provided by financing activities was $2.1 million during the three months ended March 31, 2021. Cash provided by financing activities primarily consisted of $2.2 million of proceeds from the exercise of stock options.

Net cash provided by financing activities was $6.0 million during the three months ended March 31, 2020, which consisted primarily of $6.0 million of proceeds from the issuance of convertible notes. See Note 5, “Notes Payable” to the Condensed Consolidated Financial Statements for additional detail on the convertible notes.

Future Funding Requirements

Since inception, the Company has incurred significant operating losses. Given our broad and ambitious mission, we expect to continue to incur significant expenses and operating losses for the foreseeable future.

The Company believes that the net proceeds from the IPO, together with the Company’s existing cash, and cash equivalents and borrowings available to us will be sufficient to fund the Company’s operating expenses and capital expenditures for at least the next 12 months. The Company’s assumptions that may be incorrect and we could exhaust our available capital resources sooner than we expect.

Recursion does not expect to generate significant revenue from out-licensing transactions, development milestones, or royalties until successfully completing significant drug development milestones, whether on our own or in collaboration with third parties, which Recursion expects will take a number of years. In order to commercialize the Company’s drug candidates, we or our partners need to complete clinical development and comply with comprehensive regulatory requirements. Recursion is subject to a number of risks and uncertainties similar to those of other companies of the same size within the biotechnology industry, such as uncertainty of clinical trial outcomes, uncertainty of additional funding, and history of operating losses.
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Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is a time-consuming, expensive, and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval for any product candidates or generate revenue from the sale of any product candidate for which we may obtain marketing approval. In addition, our drug candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of drugs that we do not expect to be commercially available for many years, if ever. Accordingly, we will need to obtain substantial additional funds to achieve our business objectives.

Adequate additional funds may not be available to us on acceptable terms, or at all. We do not currently have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest may be diluted, and the terms of these securities may include liquidation or other preferences and anti-dilution protections that could adversely affect your rights as a common stockholder. Additional debt or preferred equity financing, if available, may involve agreements that include restrictive covenants that may limit our ability to take specific actions, such as incurring debt, making capital expenditures, or declaring dividends, which could adversely impact our ability to conduct our business, and may require the issuance of warrants, which could potentially dilute your ownership interest further.

If we raise additional funds through collaborations, strategic alliances, or licensing arrangements with third parties, we may have to relinquish valuable rights to our technology, future revenue streams, research programs, or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or collaborations, strategic alliances, or licensing arrangements with third parties when needed, we may be required to delay, limit, reduce, and/or terminate our product development programs or any future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Critical Accounting Estimates and Policies

A summary of the Company’s significant accounting estimates and policies is included in Note 2, “Summary of Significant Accounting Policies” in our Final Prospectus. There have been no significant changes in the company’s application of its critical accounting policies during the three months ended March 31, 2021.

Impact of the COVID-19 Pandemic

In March 2020, the World Health Organization declared the outbreak of novel coronavirus disease, or COVID-19, as a pandemic. The COVID-19 pandemic is evolving, and to date has led to the implementation of various responses, including government-imposed quarantines, travel restrictions and other public health safety measures. COVID-19 has caused market volatility and uncertainty around the world in various industries and, as a result, we expect our operations may also be affected. The Company is closely monitoring the impact of the pandemic of COVID-19 on all aspects of Recursion’s business. The extent to which COVID-19 ultimately impacts our operations and financial position will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the duration of the outbreak, new information that may emerge concerning the severity of COVID-19 or the effectiveness of actions to contain COVID-19 or treat its impact, among others. In addition, recurrences or additional waves of COVID-19 cases could cause other widespread or more severe impacts depending on where infection rates are highest.

The Company has not incurred any significant impairment losses in the carrying values of our assets as a result of the pandemic and we are not aware of any specific related event or circumstance that would require us to revise our estimates reflected in our audited consolidated financial statements.

Emerging Growth Company

The Company is an emerging growth company (EGC), as defined by the Jumpstart Our Business Startups Act of 2012 (the JOBS act). The JOBS Act, exempts EGCs from being required to comply with new or revised financial accounting standards until private companies are required to comply. Recursion as elected to use the extended transition period for new or revised financial accounting standards during the period in which we remain an EGC. However, the Company may adopt certain new or revised accounting standards early. This may make comparisons
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of the Company’s financial statements with other public companies difficult because of the potential differences in accounting standards used.

Recursion may remain an EGC until December 31, 2026 although if we: (1) become a “large accelerated filer;” (2) have annual gross revenues of $1.07 billion or more in any fiscal year; or (3) issue more than $1.0 billion of non-convertible debt over a three-year period, the Company would cease to be an EGC as of December 31 of the applicable year.

Recently Issued and Adopted Accounting Pronouncements

Refer to Note 2 in Item 1 of this Quarterly Report on Form 10-Q for information regarding recently issued and adopted accounting pronouncements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The Company is subject to market risk associated with changing interest rates on our variable rate note issued under our Credit Agreement with Midcap; the interest accrues on the principal amount outstanding at a floating per annum rate equal to the LIBOR rate plus 5.75% with a LIBOR floor of 2.00%. The interest rates applicable to our variable rate note may rise and increase the amount of interest expense. We do not purchase or hold any derivative instruments to protect against the effects of changes in interest rates. As of March 31, 2021 and December 31, 2020 the outstanding balance on the debt issued under our Credit Agreement with Midcap was $11.9 million.

The Company’s cash and cash equivalents consist primarily of highly liquid investments in money market funds and cash on hand and have an original maturity date of 90 days or less. The fair value of our cash and cash equivalents would not be significantly affected by either an increase or decrease in interest rates, due mainly to the short-term nature of these instruments.

Item 4. Controls and Procedures.

The Company has established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including the principal executive officer (our Chief Executive Officer) and principal financial officer (our Chief Financial Officer), to allow timely decisions regarding required disclosure. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures

Our management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2021, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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As a result of the COVID-19 pandemic, many of the Company’s employees are working remotely. Recursion has not identified any material changes in our internal control over financial reporting as a result of these changes to the working environment, in part because our internal control over financial reporting was designed to operate in a remote working environment. The Company is continually monitoring and assessing the COVID-19 situation to determine any potential impacts on the design and operating effectiveness of our internal controls over financial reporting.


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PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

The information in Part I, Item 1, Note 6 is incorporated herein by reference.
Item 1A. Risk Factors.

RISK FACTORS

You should carefully consider the risks and uncertainties described below together with all of the other information contained in this Quarterly Report on Form 10-Q and our other public filings with the SEC. The risks described below are not the only risks facing our company. The occurrence of any of the following risks, or of additional risks and uncertainties not presently known to us or that we currently believe to be immaterial, could cause our business, prospects, operating results, and financial condition to suffer materially.

Risks Related to Our Financial Position and Need for Additional Capital

We are a clinical-stage biotechnology company with a limited operating history.
We are a clinical-stage biotechnology company with a limited operating history. Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. Since our inception in November 2013, we have focused substantially all of our efforts and financial resources on building our drug discovery platform and developing our initial drug candidates. We have no products approved for commercial sale and therefore have never generated any revenue from drug product sales, and we do not expect to generate any revenue from drug product sales in the foreseeable future. We have not obtained regulatory approvals to market any of our drug candidates and there is no assurance that we will obtain regulatory approvals to market and sell drug products in the future.

We have incurred significant operating losses since our inception and anticipate that we will incur continued losses for the foreseeable future.

We have incurred net losses in each year since our inception. Our net losses were $30.7 million and $18.4 million for the three months ended March 31, 2021 and 2020, respectively. We had an accumulated deficit of $244.3 million as of March 31, 2021. Substantially all of our operating losses have resulted from costs incurred in connection with research and development efforts, including clinical studies, and from general and administrative costs associated with our operations. We expect our operating expenses to significantly increase as we continue to invest in research and development efforts and the commencement and continuation of clinical trials of our existing and future drug candidates. In addition, if we obtain marketing approval for any drug candidates, we will incur significant sales, marketing, and outsourced-manufacturing expenses. We continue to incur additional costs associated with operating as a public company. As a result, we expect to continue to incur significant and increasing operating losses for the foreseeable future. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ deficit and working capital. Because of the numerous risks and uncertainties associated with developing pharmaceutical products and new technologies, we are unable to predict the extent of any future losses or when we will become profitable, if at all. Even if we do become profitable, we may not be able to sustain or increase our profitability on a quarterly or annual basis.

Our mission is broad and expensive to achieve and we will need to raise substantial additional funding. If we are unable to raise capital when needed, we would be forced to delay, reduce, or eliminate at least some of our product development programs, business development plans, strategic investments, or potential commercialization efforts.

We have ambitious plans to decode biology and deliver new drugs to the patients that need them. Our mission is broad, expensive to achieve and will require additional capital in the future. In addition, the development of pharmaceutical products is capital-intensive. We have four clinical stage programs and 33 additional programs in various stages of preclinical development. We expect our expenses to increase in connection with our ongoing
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activities, particularly as we continue the research and development of, initiate clinical trials of, and potentially seek marketing approval for, our drug candidates, and add to our pipeline what we believe will be an accelerating number of additional programs. In addition, depending on the status of potential regulatory approval, or if we obtain marketing approval for any current or future drug candidates, we could expect to incur significant expenses related to product sales, marketing, manufacturing and distribution. We may also need to raise additional funds sooner if we choose to pursue additional indications and/or geographies for our drug candidates or otherwise expand more rapidly than we presently anticipate. Furthermore, , we have incurred, and expect to continue to incur, additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce, or eliminate certain of our research and development programs or potential future commercialization efforts.

We expect that the net proceeds from our initial public offering completed on April 20, 2021, together with our existing cash and cash equivalents, borrowings available to us and short-term investments as of the date of this Quarterly Report on Form 10-Q, will be sufficient to fund our operating expenses and capital expenditures for at least the next 12 months. Our future capital requirements will depend on and could increase significantly as a result of many factors, including:
•    the impact of any business interruptions to our operations, including the timing and enrollment of participants in our planned clinical trials, or to operations of our manufacturers, suppliers, or other vendors resulting from the COVID-19 pandemic or a similar public health crisis or other force majeure event;
•    the scope, progress, results and costs of our current and future clinical trials and additional preclinical research for our programs;
•    the number of future drug candidates that we pursue and their development requirements;
•    the costs, timing, and outcome of regulatory review of our drug candidates;
•    our ability to establish and maintain collaborations on favorable terms, if at all;
•    the success of any collaborations that we may enter into with third parties;
•    the extent to which we acquire or invest in businesses, products, and technologies, including entering into licensing or collaboration arrangements for drug candidates;
•    the costs of preparing, filing, and prosecuting patent applications, maintaining, protecting, and enforcing our intellectual property rights and defending intellectual property-related claims;
•    our headcount growth and associated costs as we expand our business operations and our research and development activities; and
•    the costs of operating as a public company.
Identifying potential drug candidates and conducting preclinical development testing and clinical trials is a time-consuming, expensive, and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our drug candidates, if approved, may not achieve commercial success. We anticipate that our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for many years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives.

Any additional fundraising efforts may divert our management from day-to-day activities, which may adversely affect our ability to develop and commercialize our drug candidates and technologies, and we can provide no assurance that such funding will be available on terms that are acceptable to us, or at all.

Until such time, if ever, as we can generate substantial revenues, we expect to finance our cash needs through a combination of private and public equity offerings, debt financings, strategic collaborations, strategic alliances, and licensing arrangements. We do not have any committed external source of funds. Disruptions in the financial markets in general and more recently due to the COVID-19 pandemic may make equity and debt financing more difficult to obtain and may have a material adverse effect on our ability to meet our fundraising needs. We cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. Moreover, the terms of any financing may adversely affect the holdings or the rights of our stockholders and the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our shares to decline. To the extent that we raise additional capital through the sale of Class A common stock or securities convertible or exchangeable into Class A common stock, our stockholders’ ownership interest will be diluted, and the terms of those securities may include liquidation or other preferences that materially adversely affect our stockholders’ rights as a common stockholder. The incurrence of indebtedness would result in
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increased fixed payment obligations and we may be required to agree to certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to make capital expenditures, declare dividends, or otherwise conduct our business. We could also be required to seek funds through arrangements with collaborators or otherwise at an earlier stage than otherwise would be desirable and we may be required to relinquish rights to some of our technologies or drug candidates, future revenue streams, or research programs or otherwise agree to terms unfavorable to us. If we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay or discontinue one or more of our research or development programs or the commercialization of any drug candidate or be unable to expand our operations or otherwise capitalize on our business opportunities, as desired, which could materially affect our business, financial condition, and results of operations.

We have no products approved for commercial sale and have not generated any revenue from product sales.

Our ability to become profitable depends upon our ability to generate substantial revenue in an amount necessary to offset our expenses. To date, we have not generated any revenue from our drug candidates or technologies, other than limited grant revenues, milestone payments from Takeda Pharmaceutical Company Limited and a technology access fee from Bayer, and we do not expect to generate any revenue from the sale of products in the near future. We do not expect to generate significant revenue unless and until we progress our drug candidates through clinical trials and obtain marketing approval of, and begin to sell one or more of our drug candidates, or otherwise receive substantial licensing or other payments. Our ability to generate revenue depends on a number of factors, including, but not limited to, our ability to:
•    successfully complete preclinical studies;
•    have Investigational New Drug, or IND, applications approved by the U.S. Food Drug Administration, or FDA, allowing us to commence clinical trials;
•    successfully enroll subjects in, and complete, clinical trials;
•    receive regulatory approvals from applicable regulatory authorities;
•    initiate and successfully complete all safety and other studies required to obtain U.S. and foreign marketing approval for our drug candidates;
•    establish commercial manufacturing capabilities or make arrangements with third-party manufacturers for clinical supply and commercial manufacturing;
•    obtain and maintain patent and trade secret protection or regulatory exclusivity for our drug candidates;
•    launch commercial sales of our drug candidates, if and when approved, whether alone or in collaboration with others;
•    obtain and maintain acceptance of the drug candidates, if and when approved, by patients, the medical community, and third-party payors;
•    effectively compete with other therapies;
•    obtain and maintain healthcare coverage and adequate reimbursement;
•    protect and enforce our intellectual property rights and defend against intellectual property claims;
•    take temporary precautionary measures to help minimize the impact of the COVID-19 pandemic or other force majeure event on our business; and
•    maintain a continued acceptable safety profile of the drug candidates following approval.

If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfully commercialize our drug candidates, which would materially harm our business. If we do not receive regulatory approvals for our drug candidates, we may not be able to continue our operations.

We or our current and future collaborators may never successfully develop and commercialize drug products, which would negatively affect our results of operation and our ability to continue our business operations.

We may not succeed in producing drug candidates that can be commercialized. To achieve success with our drug candidates, we or our current or future collaborators must develop, and eventually commercialize, a drug product or drug products that generate significant revenue. We currently generate revenues primarily from our collaboration relationships and expect to continue to derive most of our revenue from these relationships until such time as our or our collaborators’ drug development and commercialization efforts are successful, if ever.
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Achieving success in drug development will require us or our current or future collaborators to be effective in a range of challenging activities, including completing preclinical testing and clinical trials of drug candidates, obtaining regulatory approval for these drug candidates, and manufacturing, marketing, and selling any products for which we or they may obtain regulatory approval. We and our current drug discovery collaborators are only in the preliminary stages of most of these activities. We and they may never succeed in these activities and, even if we do, we may never generate revenues that are significant enough to achieve profitability, or even if our collaborators do, we may not receive option fees, milestone payments, or royalties from them that are significant enough for us to achieve profitability. Because of the intense competition in the market for our data solutions and the numerous risks and uncertainties associated with biopharmaceutical product development, we are unable to accurately predict when, or if, we will be able to achieve or sustain profitability.
Even if we achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would eventually depress the value of our company and could impair our ability to raise capital, expand our business, maintain our research and development efforts, develop a pipeline of drug candidates, enter into collaborations, or even continue our operations. A decline in the value of our company could also cause our Class A common stock to decline substantially and our stockholders to lose all or part of their value in our Class A common stock.
Our quarterly and annual operating results may fluctuate significantly in the future due to a variety of factors, many of which are outside of our control and may be difficult to predict.

The amount of our future losses is uncertain and our quarterly and annual operating results may fluctuate significantly or may fall below the expectations of investors or securities analysts, each of which may cause our stock price to fluctuate or decline. The reasons our quarterly and annual operating results may fluctuate include the following:
•    the cost to continue to maintain, develop, and integrate technological advancements;
•    the timing, quality, regulatory compliance, and success or failure of clinical trials for our drug candidates or competing drug candidates, or any other change in the competitive landscape of our industry, including consolidation among our competitors or partners;
•    our ability to successfully recruit and retain subjects, sites, and staff for clinical trials, and any delays caused by difficulties in such efforts;
•    our ability to obtain marketing approval for our drug candidates, and the timing and scope of any such approvals we may receive;
•    the timing and cost of, and level of investment in, research and development activities relating to our drug candidates, which may change from time to time;
•    the timing, complexity, and cost of manufacturing our drug candidates, which may vary depending on the quantity of production and the terms of our agreements with manufacturers;
•    our ability to attract, hire, and retain qualified personnel, including highly specialized scientists, clinicians, and engineers;
•    expenditures that we will or may incur to develop additional drug candidates;
•    the level of demand for our drug candidates should they receive approval, which may vary significantly;
•    the risk/benefit profile, cost, and reimbursement policies with respect to our drug candidates, if approved, and existing and potential future therapeutics that compete with our drug candidates;
•    the changing and volatile U.S. and global economic environments, including as a result of the COVID-19 pandemic and terrorism; and
•    future accounting pronouncements or changes in our accounting policies.

The cumulative effects of these and other factors could result in large fluctuations and unpredictability in our quarterly and annual operating results. As a result, comparing our operating results on a period-to-period basis may not be meaningful. This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our revenue or operating results fall below the expectations of analysts or investors or below any forecasts we may provide to the market, or if the forecasts we provide to the market are below the expectations of analysts or investors, the price of our Class A common stock could decline substantially. Such a stock price decline could occur even when we have met any previously publicly stated guidance we may have provided or provide in the future.