RECURSION PHARMACEUTICALS, INC. - Quarter Report: 2022 March (Form 10-Q)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2022 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 class | Trading symbol(s) | Name of each exchange on which registered | ||||||
| Class A Common Stock, par value $0.00001 | RXRX | 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. Yes x No ☐ 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 filer | ☐ | Non-accelerated filer | x | |||||||||||
| Accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||
| Emerging growth company | x | |||||||||||||
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 ☒ As of April 30, 2022, there were 163,834,157 and 8,173,209 of the registrant’s Class A and B common stock, par value $0.00001 per share, outstanding, respectively. | ||
TABLE OF CONTENTS
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Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” about us and our industry 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 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 may include without limitation those regarding:
•the initiation, timing, progress, results and cost of research and development programs, current and future preclinical and clinical studies, including statements regarding the design of, and the timing of initiation and completion of, studies and related preparatory work, as well as the period during which the results of the studies will become available;
•the ability of our clinical trials to demonstrate the safety and efficacy of our drug candidates, and other positive results;
•the ability and willingness of our 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, or likelihood of domestic and foreign regulatory filings and approvals, including our ability to maintain any such approvals;
•the size of the potential 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 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, technology tools and drug discovery platform, and our ability 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;
•our ability to successfully compete in a highly competitive market;
•our manufacturing, commercialization and marketing capabilities and strategies;
•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, if approved, and other drug candidates we may develop;
•our competitive position and the success of competing approaches 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 for 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, receipt of 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 intellectual property disputes and our ability to defend against claims of infringement, misappropriation, or other violations of intellectual property rights;
•our ability to keep pace with new technological developments;
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•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, global political instability or warfare, and the effect of such outbreak or natural disaster, global political instability or warfare on our business and financial results;
•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;
•the pricing and reimbursement of our current drug candidates and other drug candidates we may develop, if approved;
•Our ability to obtain and maintain collaboration, licensing or other arrangements required for the research, development and commercialization of our platform and drug candidates.
•our estimates regarding expenses, future revenue, capital requirements and need 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 our initial public offering; and
•other risks and uncertainties, including those listed in the section titled “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. These forward-looking statements are not guarantees of future performance or development. These 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 undertake no obligation to update or revise any forward-looking statements contained herein, 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. While we believe such information forms a reasonable basis for such statements, the 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.
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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, | |||||||
| 2022 | 2021 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 507,891 | $ | 285,116 | ||||
| Restricted cash | 1,521 | 1,552 | ||||||
| Accounts receivable | 34 | 34 | ||||||
| Other receivables | 11,363 | 9,056 | ||||||
| Investments | 83,214 | 231,446 | ||||||
| Other current assets | 15,432 | 7,514 | ||||||
| Total current assets | 619,455 | 534,718 | ||||||
| Restricted cash, non-current | 8,713 | 8,681 | ||||||
| Property and equipment, net | 70,704 | 64,725 | ||||||
| Operating lease right-of-use assets | 33,301 | — | ||||||
| Intangible assets, net | 1,309 | 1,385 | ||||||
| Goodwill | 801 | 801 | ||||||
| Other non-current assets | 36 | 35 | ||||||
| Total assets | $ | 734,319 | $ | 610,345 | ||||
| Liabilities and stockholders’ equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 4,162 | $ | 2,819 | ||||
| Accrued expenses and other liabilities | 23,118 | 32,333 | ||||||
| Unearned revenue | 54,247 | 10,000 | ||||||
| Notes payable | 92 | 90 | ||||||
| Operating lease liabilities | 4,086 | — | ||||||
| Lease incentive obligation | — | 1,416 | ||||||
| Total current liabilities | 85,705 | 46,658 | ||||||
| Deferred rent | — | 4,110 | ||||||
| Unearned revenue, non-current | 107,121 | 6,667 | ||||||
| Notes payable, non-current | 610 | 633 | ||||||
| Operating lease liabilities, non-current | 47,317 | — | ||||||
| Lease incentive obligation, non-current | — | 9,339 | ||||||
| Total liabilities | 240,753 | 67,407 | ||||||
| Commitments and contingencies (Note 7) | ||||||||
| Stockholders’ equity | ||||||||
Common stock, $0.00001 par value; 2,000,000,000 shares (Class A 1,989,032,117 and Class B 10,967,883) authorized as of March 31, 2022 and December 31, 2021; 171,078,088 shares (Class A 162,472,729 and Class B 8,605,359) and 170,272,462 shares (Class A 160,906,245 and Class B 9,366,217) issued and outstanding as of March 31, 2022 and December 31, 2021, respectively | 2 | 2 | ||||||
| Additional paid-in capital | 949,932 | 943,142 | ||||||
| Accumulated deficit | (456,059) | (400,080) | ||||||
| Accumulated other comprehensive loss | (309) | (126) | ||||||
| Total stockholders’ equity | 493,566 | 542,938 | ||||||
| Total liabilities and stockholders’ equity | $ | 734,319 | $ | 610,345 | ||||
See the accompanying notes to these condensed consolidated financial statements.
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Recursion Pharmaceuticals, Inc.
Condensed Consolidated Statements of Operations (unaudited)
(in thousands, except share and per share amounts)
| Three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenue | |||||||||||
| Operating revenue | $ | 5,299 | $ | 2,500 | |||||||
| Grant revenue | 34 | 62 | |||||||||
| Total revenue | 5,333 | 2,562 | |||||||||
| Operating costs and expenses | |||||||||||
| Cost of revenue | 7,799 | — | |||||||||
| Research and development | 32,441 | 24,109 | |||||||||
| General and administrative | 21,074 | 8,937 | |||||||||
| Total costs and operating expenses | 61,314 | 33,046 | |||||||||
| Loss from operations | (55,981) | (30,484) | |||||||||
| Other income (loss), net | 2 | (233) | |||||||||
| Net loss | $ | (55,979) | $ | (30,717) | |||||||
| Per share data | |||||||||||
| Net loss per share of Class A and B common stock, basic and diluted | $ | (0.33) | $ | (1.33) | |||||||
| Weighted-average shares (Class A and B) outstanding, basic and diluted | 170,690,392 | 23,035,623 | |||||||||
See the accompanying notes to these condensed consolidated financial statements.
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Recursion Pharmaceuticals, Inc.
Condensed Consolidated Statements of Comprehensive Loss (unaudited)
(in thousands)
| Three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net loss | $ | (55,979) | $ | (30,717) | |||||||
| Unrealized losses on investments | (222) | — | |||||||||
| Net realized losses on investments reclassified into net loss | 39 | — | |||||||||
| Other comprehensive loss | (183) | — | |||||||||
| Comprehensive loss | $ | (56,162) | $ | (30,717) | |||||||
See the accompanying notes to these condensed consolidated financial statements.
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Recursion Pharmaceuticals, Inc.
Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) (unaudited)
(in thousands, except share amounts)
Convertible Preferred Stock | Common Stock (Class A and B) | Additional Paid-in-Capital | Accumulated Deficit | Accumulated other comprehensive loss | Stockholders’ Equity | |||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||
| Balance as of December 31, 2021 | — | — | 170,272,462 | 2 | 943,142 | (400,080) | (126) | 542,938 | ||||||||||||||||||
| Net loss | — | — | — | — | — | (55,979) | — | (55,979) | ||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (183) | (183) | ||||||||||||||||||
| Stock option exercises and other | — | — | 805,626 | — | 1,158 | — | — | 1,158 | ||||||||||||||||||
| Stock-based compensation | — | — | — | — | 5,632 | — | — | 5,632 | ||||||||||||||||||
| Balance as of March 31, 2022 | — | $ | — | 171,078,088 | $ | 2 | $ | 949,932 | $ | (456,059) | $ | (309) | $ | 493,566 | ||||||||||||
Convertible Preferred Stock | Common Stock (Class A and B) | Additional Paid-in-Capital | Accumulated Deficit | Accumulated other comprehensive loss | Stockholders’ Deficit | |||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||
| Balance as of December 31, 2020 | 112,088,065 | 448,312 | 22,314,685 | — | 7,312 | (213,601) | — | (206,289) | ||||||||||||||||||
| Net loss | — | — | — | — | — | (30,717) | — | (30,717) | ||||||||||||||||||
| Stock option exercises | — | — | 1,722,040 | — | 2,154 | — | — | 2,154 | ||||||||||||||||||
| Stock-based compensation | — | — | — | — | 1,821 | — | — | 1,821 | ||||||||||||||||||
| Balance as of March 31, 2021 | 112,088,065 | 448,312 | 24,036,725 | — | 11,287 | (244,318) | — | (233,031) | ||||||||||||||||||
See the accompanying notes to these condensed consolidated financial statements.
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Recursion Pharmaceuticals, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)
| Three months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (55,979) | $ | (30,717) | ||||
| Adjustments to reconcile net loss to net cash from operating activities: | ||||||||
| Depreciation and amortization | 2,767 | 1,402 | ||||||
| Stock-based compensation | 5,632 | 1,821 | ||||||
| Lease expense | 1,742 | 1,268 | ||||||
| Other, net | 402 | 101 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Other receivables and assets | (7,551) | (2,830) | ||||||
| Unearned revenue | 144,701 | (2,500) | ||||||
| Accounts payable | 1,344 | 2,051 | ||||||
| Accrued development expense | 1,413 | (1,216) | ||||||
| Accrued expenses, deferred rent and other current liabilities | (15,903) | (135) | ||||||
| Operating lease liabilities | (1,265) | — | ||||||
| Other, net | 85 | — | ||||||
| Net cash provided by (used in) operating activities | 77,388 | (30,755) | ||||||
| Cash flows from investing activities | ||||||||
| Purchases of property and equipment | (4,342) | (19,416) | ||||||
| Sales and maturities of investments | 147,646 | — | ||||||
| Net cash provided by (used in) investing activities | 143,304 | (19,416) | ||||||
| Cash flows from financing activities | ||||||||
| Proceeds from equity incentive plans | 2,106 | 2,154 | ||||||
| Repayment of long-term debt | (22) | (20) | ||||||
| Net cash provided by financing activities | 2,084 | 2,134 | ||||||
Net change in cash, cash equivalents and restricted cash | 222,776 | (48,037) | ||||||
| Cash, cash equivalents and restricted cash, beginning of period | 295,349 | 267,167 | ||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 518,125 | $ | 219,130 | ||||
| Supplemental schedule of non-cash investing and financing activities | ||||||||
Accrued property and equipment | $ | 4,328 | $ | 705 | ||||
| Deferred issuance costs recorded in equity | — | 2,997 | ||||||
| Right-of-use asset additions | 1,548 | — | ||||||
| Supplemental schedule of cash flow information | ||||||||
| Cash paid for interest | $ | 14 | $ | 254 | ||||
| Cash paid for operating leases | 1,265 | — | ||||||
See the accompanying notes to these condensed consolidated financial statements.
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Recursion Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
Note 1. Description of the Business
Recursion Pharmaceuticals, Inc. (Recursion, the Company, we or our) was originally formed as a limited liability
company on November 4, 2013 under the name Recursion Pharmaceuticals, LLC. In September 2016, we converted to a Delaware corporation and 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, 2022, the Company had an accumulated deficit of $456.1 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 through the issuance of convertible preferred stock and the issuance of Class A common stock in an Initial Public Offering (IPO), which was completed in April 2021 (see Note 8, “Common Stock” for additional details). Recursion will likely be required to raise additional capital. As of March 31, 2022, 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.
The Company believes that the Company’s existing cash, cash equivalents and investments 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 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, 2021.
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 8, “Common Stock” for additional details.
In April 2021, the Company’s Board of Directors authorized two classes of common stock, Class A and Class B. Certain shares of Class A were exchanged for Class B on a one-for-one basis. The creation and issuance of the Class B common stock did not affect the loss per share for the Class A or Class B shares for any period. The Company presented the net loss per share amounts as if the authorization and exchange occurred as of the start of
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the 2021 reporting period. All share amounts presented prior to the authorization are referred to as Class A common stock. See Note 8, “Common Stock” for additional details.
It is management’s opinion that these condensed consolidated financial statements include all normal and recurring adjustments necessary for a fair presentation of the Company’s financial statements. Revenues and net loss for any interim period are not necessarily indicative of future or annual results.
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, although 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 the earlier of (1) December 31, 2026; (2) December 31 of the year in which we (a) become a “large accelerated filer;” or (b) have annual gross revenues of $1.07 billion or more; or (3) the date on which we have issued more than $1.0 billion of non-convertible debt over a three-year period.
Recent Accounting Pronouncements
On January 1, 2022, Recursion adopted Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). Under Topic 842, lessees are required to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with terms greater than 12 months. The guidance also expanded the disclosure requirements of lease arrangements. The Company adopted Topic 842 using the modified retrospective method. Recursion elected the following practical expedients when assessing the transition impact: i) not to reassess whether any expired or existing contracts as of the adoption date are or contain leases; ii) not to reassess the lease classification for any expired or existing leases as of the adoption date; and iii) not to reassess initial direct costs for any existing leases as of the adoption date.
Results for reporting periods beginning after December 31, 2021 are presented in accordance with the standard, while results for prior periods are not adjusted and continue to be reported in accordance with Recursion’s historical accounting. The January 1, 2022 adjustment to record lease right-of-use assets and lease liabilities was $32.9 million and $47.8 million, respectively. The impact to the condensed consolidated statements of income and cash flows was not material.
Note 3. Supplemental Financial Information
Property and Equipment
| March 31, | December 31, | |||||||
| (in thousands) | 2022 | 2021 | ||||||
| Lab equipment | $ | 36,111 | $ | 33,076 | ||||
| Leasehold improvements | 14,008 | 13,936 | ||||||
| Office equipment | 20,005 | 20,005 | ||||||
| Construction in progress | 22,008 | 16,445 | ||||||
| Property and equipment, gross | 92,132 | 83,462 | ||||||
| Less: Accumulated depreciation | (21,428) | (18,737) | ||||||
| Property and equipment, net | $ | 70,704 | $ | 64,725 | ||||
Depreciation expense on property and equipment was $2.7 million and $1.4 million during the three months ended March 31, 2022 and 2021 respectively.
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The construction in progress balance primarily relates to leasehold improvements under construction for several leased locations.
Accrued Expenses and Other Liabilities
| March 31, | December 31, | |||||||
| (in thousands) | 2022 | 2021 | ||||||
| Accrued compensation | $ | 5,922 | $ | 11,738 | ||||
| Accrued development expenses | 5,845 | 4,682 | ||||||
Accrued early discovery expenses | 2,318 | 2,114 | ||||||
Accrued construction | 3,570 | 4,665 | ||||||
Accrued professional fees | 424 | 1,793 | ||||||
| Accrued other expenses | 5,039 | 7,341 | ||||||
| Accrued expense and other liabilities | $ | 23,118 | $ | 32,333 | ||||
Notes Payable
In 2018, the Company borrowed $992 thousand, which was available as part of a lease agreement for use on tenant improvements. Under the terms of the lease, the note will be repaid over a 10-year period at an 8% interest rate.
In September 2019, the Company entered into a lending agreement with Midcap Financial Trust (Midcap) and the other lenders party thereto (the Midcap loan agreement) for borrowing $11.9 million. In July 2021, the Company paid the balance due under the Midcap loan agreement. The total amount paid was $12.7 million. The Company recorded an early extinguishment loss of $996 thousand, which was included in “Other expense, net” on the Condensed Consolidated Statements of Operations.
Interest Income (Expense), net
| Three months ended March 31, | |||||||||||
| (in thousands) | 2022 | 2021 | |||||||||
| Interest expense | $ | (14) | $ | (249) | |||||||
| Interest income | 87 | 16 | |||||||||
| Interest income (expense), net | $ | 73 | $ | (233) | |||||||
For the three months ended March 31, 2022, interest expense primarily related to the tenant improvement allowance notes and interest income primarily related to the investment portfolio. See Note 4, “Investments” for additional details on the investment portfolio. For the three months ended March 31, 2021, interest expense primarily related to the Midcap loan and tenant improvement allowance notes. Interest expense was included in “Other income (loss), net” on the Condensed Consolidated Statements of Operations.
Note 4. Investments
In August 2021, the Company invested cash in an investment portfolio. The primary objectives of the investment portfolio are to preserve principal, maintain prudent levels of liquidity and obtain investment returns. Recursion’s investment policy limits investments to certain types of debt and money market instruments issued by institutions with investment-grade credit ratings and it places restrictions on maturities and concentration by asset class and issuer.
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The following tables summarize the Company’s available-for-sale investments by type of security:
| March 31, 2022 | ||||||||||||||
| (in thousands) | Amortized cost | Gross unrealized gains | Gross unrealized losses | Fair values | ||||||||||
| Money market funds | $ | 316,385 | $ | — | $ | — | $ | 316,385 | ||||||
| U.S. government debt | 19,874 | — | (95) | 19,779 | ||||||||||
| Corporate bonds | 52,201 | 3 | (188) | 52,016 | ||||||||||
| Certificates of deposit | 11,448 | — | (29) | 11,419 | ||||||||||
| Total | $ | 399,908 | $ | 3 | $ | (312) | $ | 399,599 | ||||||
| December 31, 2021 | ||||||||||||||
| (in thousands) | Amortized cost | Gross unrealized gains | Gross unrealized losses | Fair values | ||||||||||
| Money market funds | $ | 155,731 | $ | — | $ | — | $ | 155,731 | ||||||
| U.S. government debt | 19,960 | — | (33) | 19,927 | ||||||||||
| Corporate bonds | 61,451 | — | (74) | 61,377 | ||||||||||
| Certificates of deposit | 21,450 | — | (10) | 21,440 | ||||||||||
| Commercial paper | 140,911 | 3 | (12) | 140,902 | ||||||||||
| Total | $ | 399,503 | $ | 3 | $ | (129) | $ | 399,377 | ||||||
The following table summarizes the classification of the Company’s available-for-sale investments on the Condensed Consolidated Balance Sheets:
| (in thousands) | March 31, 2022 | December 31, 2021 | ||||||
| Cash and cash equivalents | $ | 316,385 | $ | 167,931 | ||||
| Short-term investments | 83,214 | 231,446 | ||||||
| Total | $ | 399,599 | $ | 399,377 | ||||
As of March 31, 2022 and December 31, 2021, all of the Company’s available-for-sale investments mature in one year or less.
The Company held a total of 20 positions that were in an unrealized loss position as of March 31, 2022. The unrealized losses were primarily due to changes in interest rates. There were no significant unrealized losses during the three months ended March 31, 2022. Realized gains and losses on the Company’s investments were insignificant during the three months ended March 31, 2022. No impairments were recorded during the three months ended March 31, 2022. Realized gains and losses on interest-bearing securities are recorded in “Other income (loss), net,” in the Condensed Consolidated Statements of Income.
The Company did not have an investment portfolio as of March 31, 2021.
Note 5. Leases
The Company has entered into various long-term real estate leases primarily related to office, research and development and operating activities. The Company has elected to utilize the package of practical expedients under the transition guidance of Accounting Standards Codification (ASC) Topic 842, Leases, which allows Recursion to not reassess whether any existing contract contains a lease, the classification of any existing leases and initial direct costs for any existing leases. The Company’s leases have remaining terms from 2 to 10 years, and some of those leases include options that provide Recursion with the ability to extend the lease term for five years. Such options are included in the lease term when it is reasonably certain that the option will be exercised.
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Certain leases include provisions for variable lease payments which are based on, but not limited to, maintenance, insurance, taxes and usage-based amounts and Recursion will recognize these costs as they are incurred. The Company has also elected to apply the practical expedient for short-term leases whereby Recursion does not recognize a lease liability and right-of-use asset for leases with a term of less than 12 months. The Company has also elected to not separate consideration in the contract between lease and non-lease components of a contract that contains a lease.
Recursion classifies leases as operating or finance at the lease commencement date. All outstanding leases are operating leases. Certain leases have free rent periods or escalating rent payment provisions. The Company recognizes lease cost on a straight-line basis over the term of the lease.
Lease liabilities and right-of-use assets are calculated and recognized at the lease commencement date based on the present value of minimum lease payments over the lease term. The incremental borrowing rate is equal to the rate of interest that Recursion would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment. For operating leases that commenced prior to the Company’s adoption of Topic 842, Recursion measured the lease liabilities and right-of-use assets using the incremental borrowing rate as of January 1, 2022.
In February 2021, the Company entered into a lease agreement for laboratory and office space with approximately 51,869 square feet (the “Industry Lease”). The right of use is expected to begin in the third quarter of 2022 and the Industry Lease term is five years with a five-year renewal option. The lease includes provisions for escalating rent payments and a tenant improvement allowance of up to $1.8 million. Total fixed lease payments are expected to be approximately $7.6 million with additional variable expenses, including building and amenity expenses. The Company did not control the space or any of the assets being constructed as of March 31, 2022 and therefore no right of use asset or lease liability was recorded on the Condensed Consolidated Balance Sheet as of March 31, 2022.
The components of the lease cost are as follows:
(in thousands) | Three months ended March 31, 2022 | ||||
Operating lease cost | $ | 1,827 | |||
Variable lease cost | 204 | ||||
Lease cost | $ | 2,031 | |||
Lease term and discount rates as of March 31, 2022 were:
(in thousands) | March 31, 2022 | ||||
| Operating leases | |||||
| Weighted-average remaining lease term (years) | 8.1 | ||||
| Weighted-average discount rate | 5.1 | % | |||
Maturities of operating lease liabilities as of March 31, 2022 were:
| (in thousands) | Operating leases | ||||
| Remainder of 2022 | $ | 3,857 | |||
| 2023 | 8,480 | ||||
| 2024 | 7,672 | ||||
| 2025 | 7,838 | ||||
| 2026 | 8,073 | ||||
| Thereafter | 28,828 | ||||
| Total lease payments | 64,748 | ||||
| Less: imputed interest | (13,345) | ||||
| Present value of lease liabilities | $ | 51,403 | |||
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Prior to adoption of ASC 842, future minimum lease payments as of December 31, 2021, as disclosed in our 2021 Annual Report, were:
| (in thousands) | Amount | ||||
| 2022 | $ | 3,977 | |||
| 2023 | 7,053 | ||||
| 2024 | 7,325 | ||||
| 2025 | 7,513 | ||||
| 2026 | 7,739 | ||||
| Thereafter | 26,448 | ||||
| Total minimum payments | $ | 60,055 | |||
For the three months ended March 31, 2021, total rent expense was $1.3 million.
Note 6. Goodwill and Intangible Assets
Goodwill
There were no changes to the carrying amount of goodwill during the three months ended March 31, 2022 and 2021. No goodwill impairment was recorded during the three months ended March 31, 2022 and 2021.
Intangible Assets, Net
The following table summarizes intangible assets:
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| (in thousands) | Gross carrying amount | Accumulated Amortization | Net carrying amount | Gross carrying amount | Accumulated Amortization | Net carrying amount | |||||||||||||||||
| Definite-lived intangible asset | $ | 911 | $ | (506) | $ | 405 | $ | 911 | $ | (430) | $ | 481 | |||||||||||
| Indefinite-lived intangible asset | 904 | — | 904 | 904 | — | 904 | |||||||||||||||||
| Intangible assets, net | $ | 1,815 | $ | (506) | $ | 1,309 | $ | 1,815 | $ | (430) | $ | 1,385 | |||||||||||
Amortization expense was $76 thousand during the three months ended March 31, 2022 and 2021, respectively. Amortization expense was included in research and development in the Condensed Consolidated Statements of Operations.
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, 2022 and 2021.
Note 7. Commitments and Contingencies
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 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
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officers liability insurance coverage that provides for reimbursement to the Company for covered obligations and this is intended to limit the Company’s exposure and enable it to recover a portion of any amounts it pays under its indemnification obligations. The Company had no liabilities recorded for these agreements as of March 31, 2022 and December 31, 2021, as no amounts are probable or estimable.
Employee Agreements
The Company has signed employment agreements with certain key employees pursuant to which, if their employment is terminated 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. An unfavorable resolution of any such matter could materially affect the Company’s future financial position, results of operations or cash flows.
Note 8. Common Stock
Each share of Class A common stock entitles the holder to one vote per share and each share of Class B common stock entitles the holder to 10 votes per share 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, 2022 and December 31, 2021, no dividends had been declared.
Initial Public Offering
On April 20, 2021, the Company closed its IPO and issued 27,878,787 shares of its Class A common stock at a price of $18.00 per share for net proceeds of $462.4 million, after deducting underwriting discounts and commissions of $35.1 million and other offering costs of $4.3 million. In connection with the IPO, all shares of 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.
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 10 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., the Company’s Chief Executive Officer (CEO), or his affiliate. As of March 31, 2022, Dr. Gibson and his affiliate held outstanding shares of Class B common stock representing approximately 35% 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 March 31, 2022, Dr. Gibson and his affiliate would hold approximately 38% 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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Note 9. Collaborative Development Contracts
Roche and Genentech
Description
In December 2021, Recursion entered into a collaboration and license agreement with Roche and Genentech (collectively referred to as Roche). Recursion is constructing, using the Company’s imaging technology and proprietary machine-learning algorithms, unique maps of the inferred relationships amongst perturbation phenotypes in a given cellular context with the goal to discover and develop therapeutic small molecule programs in a gastrointestinal cancer indication and in key areas of neuroscience. Roche and Recursion will collaborate to select certain novel inferences with respect to small molecules or targets generated from the Phenomaps for further validation and optimization as collaboration programs. Roche and Recursion may also combine sequencing datasets from Roche with Recursion’s Phenomaps and collaborate to generate new algorithms to produce multi-modal maps from which additional collaboration programs may be initiated. For every collaboration program that successfully identifies potential therapeutic small molecules or validates a target, Roche will have an option to obtain an exclusive license to develop and commercialize such potential therapeutic small molecules or to exploit such target in the applicable exclusive field.
Pricing
In January 2022, Recursion received a $150.0 million non-refundable upfront payment from the Company’s collaboration with Roche. Recursion is eligible for additional milestone payments based on performance progress of the collaboration. Each of the Phenomaps requested by Roche and created by Recursion may be subject to either an initiation fee, acceptance fee or both. Such fees could exceed $250.0 million for 16 accepted Phenomaps. In addition, for a period of time after Roche’s acceptance of certain Phenomaps, Roche will have the option to obtain, subject to payment of an exercise fee, rights to use outside the collaboration the raw images generated in the course of creating those Phenomaps. If Roche exercises its external use option for all 12 eligible Phenomaps, Roche’s associated exercise fee payments to Recursion could exceed $250.0 million. Under the collaboration, Roche may initiate up to 40 programs, each of which, if successfully developed and commercialized, could yield more than $300.0 million in development, commercialization and net revenue milestones for Recursion, as well as tiered royalties on net revenue.
Accounting
This agreement represents a transaction with a customer and therefore will be accounted for in accordance with ASC 606. Recursion has determined that it has three performance obligations, one related to gastrointestinal cancer and two in neuroscience. These performance obligations are for performing research and development services for Roche to identify targets and medicines. The performance obligations also include potential licenses related to the intellectual property. The Company concluded that licenses within the contract are not distinct from the research and development services as they are interrelated due to the fact that the research and development services significantly impact the potential licenses. Any additional services are considered customer options and will be considered as separate contracts for accounting purposes.
The Company has determined the transaction price to be $150.0 million, comprised of the upfront payment. Recursion will fully constrain the amounts of variable consideration to be received from potential milestones considering the stage of development and the risks associated with the remaining development required to achieve each milestone. Recursion will re-evaluate the transaction price each reporting period.
The transaction price was allocated to the performance obligations based on the estimated relative stand-alone selling price of each performance obligation as determined using an expected cost plus margin approach. The Company recognizes revenue over time based on costs incurred relative to total expected costs to perform the research and development services. Recursion determined that this method provides a faithful depiction of the transfer of control to the customer. This method of recognizing revenue requires the Company to make estimates of total costs to provide the services required under the performance obligations. Significant inputs used to determine the total costs included the length of time required, service hours performed by Company employees and materials costs. A significant change in these estimates could have a material effect on the timing and amount of revenue recognized in future periods. Recursion has estimated the completion of the performance obligations by 2025.
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Bayer AG
Description
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 10 research projects related to fibrosis across multiple organ systems, including the lung, liver and heart. Under the agreement, the Company contributed compounds from its proprietary library and Bayer contributed compounds from its proprietary library and will contribute scientific expertise throughout the collaboration. 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.
Pricing
In October 2020, the Company received a $30.0 million non-refundable upfront payment. Each such license could potentially result in option exercise fees and development and commercial milestone payments payable 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.
Accounting
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 $30.0 million, comprised of the upfront payment. The Company allocated the amount to the single performance obligation. The Company is recognizing revenue over time by measuring progress towards completion of the performance obligation. This method of recognizing revenue requires the Company to make estimates of the total time 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, cost of revenue for this agreement was immaterial and was included within “Research and development” in the Condensed Consolidated Statement of Operations. Recursion has estimated the completion of the performance obligation by 2023.
Additional Revenue Disclosures
Recursion recognized $5.3 million of operating revenue during the three months ended March 31, 2022 of which $2.5 million was included in the unearned revenue balance as of December 31, 2021. All revenue recognized during the three months ended March 31, 2021 was included in the unearned revenue balance as of December 31, 2020. Revenue recognized was from upfront payments received at the inception of the related contracts, which decreased the initial unearned revenue recognized. Unearned revenue of $150.0 million was recorded on the Condensed Consolidated Balance Sheet during the three months ended March 31, 2022 related to the upfront payment from the Roche collaboration.
Unearned revenue was classified as short-term and long-term on the Condensed Consolidated Balance Sheets based on the Company’s estimate of revenue that will be recognized during the next twelve months.
Note 10. Stock-Based Compensation
In April 2021, the Board of Directors and the stockholders of the Company adopted the 2021 Equity Incentive Plan (the 2021 Plan). Under the 2021 Plan, 16,186,000 shares of Class A common stock were reserved. Additionally, shares were reserved for all outstanding awards under the previous 2016 Plan. The Company may grant stock options, restricted stock units (RSUs), stock appreciation rights, restricted stock awards and other forms of stock-based compensation.
As of March 31, 2022, 20,739,837 shares of Class A common stock were available for grant.
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The following table presents the classification of stock-based compensation expense for stock options and RSUs for employees and non-employees within the Condensed Consolidated Statements of Operations:
| Three months ended March 31, | ||||||||
(in thousands) | 2022 | 2021 | ||||||
Cost of revenue | $ | 348 | $ | — | ||||
| Research and development | 1,635 | 628 | ||||||
| General and administrative | 3,361 | 1,070 | ||||||
| Total | $ | 5,344 | $ | 1,698 | ||||
Stock Options
Stock options generally vest over four years and expire no later than 10 years from the date of grant. Stock option activity during the three months ended March 31, 2022 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 December 31, 2021 | 19,191,714 | $ | 3.78 | 8.1 | $ | 260,762 | ||||||||
| Granted | 1,871,946 | 12.56 | ||||||||||||
| Cancelled | (346,319) | 4.44 | ||||||||||||
| Exercised | (780,464) | 1.49 | 7,602 | |||||||||||
| Outstanding as of March 31, 2022 | 19,936,877 | $ | 4.68 | 8.1 | $ | 80,203 | ||||||||
| Exercisable as of March 31, 2022 | 8,626,521 | $ | 2.37 | 7.3 | $ | 43,833 | ||||||||
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, 2022 and 2021 were $7.42 and $2.63 respectively.
The following weighted-average assumptions were used to calculate the grant-date fair value of stock options:
| Three months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
Expected term (in years) | 6.2 | 6.1 | ||||||
Expected volatility | 63 | % | 66 | % | ||||
Expected dividend yield | — | — | ||||||
Risk-free interest rate | 1.7 | % | 0.8 | % | ||||
As of March 31, 2022, $40.9 million of unrecognized compensation cost related to stock options is expected to be recognized as expense over approximately the next three years.
RSUs
In April 2021, Recursion redesigned certain aspects of its long-term incentive program. As a result, equity awards granted to employees since the redesign generally consist of a combination of stock options and RSUs. RSUs awarded to employees pursuant to the 2021 Plan generally vest over four years. The weighted-average grant-date fair value of RSUs generally is determined based on the number of units granted and the quoted price of Recursion’s common stock on the date of grant.
The following table summarizes Recursion’s RSU activity during the three months ended March 31, 2022:
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| Stock units | Weighted-average grant date fair value | |||||||
| Outstanding as of December 31, 2021 | 478,136 | $ | 23.40 | |||||
| Granted | 931,490 | 12.58 | ||||||
| Vested | (25,162) | 16.35 | ||||||
| Forfeited | (25,914) | 16.16 | ||||||
| Outstanding as of March 31, 2022 | 1,358,550 | $ | 16.25 | |||||
The fair market value of RSUs vested was $398 thousand during the three months ended March 31, 2022. As of March 31, 2022, $19.6 million of unrecognized compensation cost related to RSUs is expected to be recognized as expense over approximately the next four years.
Note 11. Income Taxes
The Company did not record any income tax expense during the three months ended March 31, 2022 and 2021. The Company has historically incurred operating losses and maintains a full valuation allowance against its net deferred tax assets. Foreign taxes were insignificant during the three months ended March 31, 2022.
NOLs and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service (“IRS”) and may become subject to annual limitation due to ownership changes that have occurred previously or that could occur in the future under Section 382 of the Internal Revenue Code, as amended and similar state provisions. These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable income. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50% over a three-year period. 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. If the Company has experienced a change of control, as defined by Section 382, at any time since inception, utilization of the net operating loss carryforwards or research and development tax credit carryforwards would be subject to an annual limitation under Section 382, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term tax-exempt rate and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the net operating loss carryforwards 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, Canada, Utah, California and Massachusetts. 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 12. Net Loss Per Share
For the three months ended March 31, 2022, Recursion calculated net loss per share of Class A and Class B common stock using the two-class method. Basic net loss per share is computed using the weighted-average number of shares outstanding during the period. Diluted net loss per share is computed using the weighted-average number of shares and the effect of potentially dilutive securities outstanding during the period. Potentially dilutive securities consist of stock options and other contingently issuable shares. For periods presented in which the Company reports a net loss, all potentially dilutive shares are anti-dilutive and as such are excluded from the calculation.
The rights, including the liquidation and dividend rights, of the holders of the Company’s Class A and Class B common stock are identical, except with respect to voting. As a result, the undistributed earnings for each period are allocated based on the contractual participation rights of the Class A and Class B common shares as if the earnings for the period had been distributed. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis and the resulting amount per share for Class A and Class B common stock was the same during the three months ended March 31, 2022.
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Recursion issued certain shares of convertible preferred stock that were outstanding until April 2021 and were concluded to be participating securities. For the three months ended March 31, 2021, there was only one class of common stock outstanding. Due to the presence of participating securities, Recursion calculated 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. The preferred stock converted to common stock in April 2021 as part of the Company’s IPO. See Note 8, “Common stock” for additional details.
The following tables set forth the computation of basic and diluted net loss per share of Class A and Class B common stock during the three months ended March 31, 2022:
| Three months ended | ||||||||
| March 31, 2022 | ||||||||
| (in thousands, except share amount) | Class A | Class B | ||||||
| Numerator: | ||||||||
| Allocation of undistributed earnings | $ | (53,022) | $ | (2,957) | ||||
| Denominator: | ||||||||
| Weighted average common shares outstanding | 161,674,169 | 9,016,223 | ||||||
| Net loss per share, basic and diluted | $ | (0.33) | $ | (0.33) | ||||
The following table sets forth the computation of basic and diluted net loss per share during three months ended March 31, 2021:
| Three months ended | |||||
(in thousands, except share amounts) | March 31, 2021 | ||||
| Numerator: | |||||
| Net loss | $ | (30,717) | |||
| Denominator: | |||||
| Weighted average common shares outstanding | 23,035,623 | ||||
| Net loss per share, basic and diluted | $ | (1.33) | |||
For the three months ended March 31, 2022 and 2021, the Company reported a net loss and therefore basic and diluted loss per share are the same. 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, 2022 | March 31, 2021 | |||||||
| Convertible preferred stock | — | 115,598,018 | ||||||
Stock based compensation | 12,089,621 | 4,706,313 | ||||||
| Warrants | — | 122,358 | ||||||
| Total | 12,089,621 | 120,426,689 | ||||||
Note 13. 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
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•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.
The Company is required to maintain a cash 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 J.P. Morgan, which was obtained to secure certain Company obligations relating to tenant improvements.
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, 2022 | Level 1 | Level 2 | Level 3 | ||||||||||
| Assets | ||||||||||||||
| Cash equivalents: | ||||||||||||||
| Money market funds | $ | 316,385 | $ | — | $ | 316,385 | $ | — | ||||||
| Restricted cash | 10,233 | 10,233 | — | — | ||||||||||
| Investments: | ||||||||||||||
| U.S. government debt | 19,779 | — | 19,779 | — | ||||||||||
| Corporate bonds | 52,016 | — | 52,016 | — | ||||||||||
| Certificates of deposit | 11,419 | — | 11,419 | — | ||||||||||
| Total assets | $ | 409,832 | $ | 10,233 | $ | 399,599 | $ | — | ||||||
| Basis of fair value measurement | ||||||||||||||
| (in thousands) | December 31, 2021 | Level 1 | Level 2 | Level 3 | ||||||||||
| Assets | ||||||||||||||
| Cash equivalents: | ||||||||||||||
| Money market funds | $ | 155,731 | $ | — | $ | 155,731 | $ | — | ||||||
| Commercial paper | 12,000 | — | 12,000 | — | ||||||||||
| Corporate bonds | 200 | — | 200 | — | ||||||||||
| Restricted cash | 10,233 | 10,233 | — | — | ||||||||||
| Investments: | ||||||||||||||
| U.S. government debt | 19,927 | — | 19,927 | — | ||||||||||
| Corporate bonds | 61,177 | — | 61,177 | — | ||||||||||
| Certificates of deposit | 21,440 | — | 21,440 | — | ||||||||||
| Commercial paper | 128,902 | — | 128,902 | — | ||||||||||
| Total assets | $ | 409,610 | $ | 10,233 | $ | 399,377 | $ | — | ||||||
In addition to the financial instruments that are recognized at fair value on the Condensed Consolidated Balance Sheet, the Company has certain financial instruments that are recognized at amortized cost or some basis other than fair value. The carrying amount of these instruments are considered to be representative of their approximate fair values. Additionally, Recursion has short-term financial instruments including accounts receivable and accounts payable whose carrying amounts are considered representative of their approximate fair values.
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The following tables summarize the Company’s financial instruments that are not measured at fair value:
| Book values | Fair values | ||||||||||||||||
| (in thousands) | March 31, 2022 | December 31, 2021 | March 31, 2022 | December 31, 2021 | |||||||||||||
| Liabilities | |||||||||||||||||
| Current portion of notes payable | $ | 92 | $ | 90 | $ | 92 | $ | 90 | |||||||||
| Notes payable, net of current portion | 610 | 633 | 610 | 633 | |||||||||||||
| Total liabilities | $ | 702 | $ | 723 | $ | 702 | $ | 723 | |||||||||
Note 14. Subsequent Events
In May 2022, the Company entered into a lease agreement for office space with approximately 26,320 square feet (the “Toronto Lease”). The Toronto Lease term is 10 years with a five-year renewal option. The lease includes provisions for escalating rent payments and a tenant improvement allowance of up to $1.5 million. Total fixed lease payments are expected to be approximately $10.9 million with additional variable expenses, including building and amenity expenses.
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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, we, us or our) and the results of operations. 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 Annual Report on Form 10-K. 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 "Note About Forward-Looking Statements" in this Quarterly Report on Form 10-Q. You should review the disclosure under the heading "Risk Factors" in the Annual Report on Form 10-K 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 industrializing drug discovery by decoding biology. Central to our mission is the Recursion Operating System (OS), a platform built across diverse technologies that enables us to map and navigate hundreds of billions of biological and chemical relationships within one of the world’s largest proprietary biological and chemical datasets, the Recursion Data Universe. Scaled ‘wet-lab’ biology and chemistry tools are organized into an iterative loop with ‘dry-lab’ computational tools to rapidly translate map-based hypotheses into validated insights and novel chemistry, unconstrained by published literature or human bias. Our focus on novel technologies spanning target discovery through translation, as well as our ability to rapidly iterate between wet lab and dry lab in-house and at scale, differentiates us from other companies in our space. Further, 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 our decisions. To date, we have leveraged our Recursion OS to enable three value drivers: i) an expansive pipeline of internally-developed programs, including several clinical-stage assets, focused on genetically-driven rare diseases and oncology with significant unmet need and market opportunities, in some cases expected to be in excess of $1.0 billion in annual sales; ii) strategic partnerships with leading biopharma companies to map and navigate intractable areas of biology, including fibrosis with Bayer and neuroscience with Roche and Genentech, to identify novel targets and translate potential new medicines to resource-heavy clinical development overseen by our partners; and iii) Induction Labs, a growth engine created to explore new extensions of the Recursion OS both within and beyond therapeutics. We are a biotechnology company scaling more like a technology company.
Recursion finished the first quarter of 2022 with a portfolio of clinical stage, preclinical, late discovery and early discovery programs and continued scaling the total number of phenomic experiments to approximately 128 million, the size of its proprietary data universe to over 14 petabytes, and the number of biological and chemical relationships to approximately 247 billion. Data have been generated on the Recursion OS across 44 human cell types, an in-house chemical library of approximately 1.3 million compounds, and an in silico library of 12 billion
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small molecules, by a growing team of over 450 Recursionauts that is balanced between life scientists and computational and technical experts.
Summary of Business Highlights
Clinical Programs
•Cerebral cavernous malformation (CCM) (REC-994): In March 2022, we enrolled the first participant in our Phase 2 SYCAMORE clinical trial, which is a double-blind, placebo-controlled safety, tolerability and exploratory efficacy study of this drug candidate in 60 participants with CCM. At this time, multiple participants have been enrolled and dosed.
•Neurofibromatosis type 2 (NF2) (REC-2282): We plan to enroll the first participant in our Phase 2/3 POPLAR-NF2 clinical trial, which is a parallel group, two stage, randomized, multicenter study of this drug candidate in participants with progressive NF2-mutated meningiomas, in the second quarter of 2022.
•Familial adenomatous polyposis (FAP) (REC-4881): In April 2022, the U.S. Food and Drug Administration granted Fast Track designation for REC-4881 for the potential treatment of FAP. We plan to initiate a Phase 2, randomized, double-blind, placebo-controlled study to evaluate safety, pharmacokinetics and efficacy of this drug candidate in the third quarter of 2022.
Preclinical and Discovery Programs
•Clostridium difficile colitis (REC-3964): We made progress in IND-enabling studies for REC-3964 and plan to initiate a Phase 1 study in the second half of 2022.
•Oncology pipeline: We continued to make progress advancing numerous oncology programs discovered using our next generation mapping and navigating technology, including programs related to immune checkpoint resistance in STK11-mutant non-small cell lung cancer, cancer immunotherapy target ‘alpha’, HRD-negative ovarian cancer target ‘gamma’, hepatocellular carcinoma, small molecule MYC inhibition, ovarian cancer and other indications. We highlighted this progress at the annual meeting of the American Association for Cancer Research (AACR).
Roche and Genentech Collaboration
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We have initiated laboratory efforts and are scaling our pilot work to create our first partnership-specific maps in an oncology indication. We have also begun the initial work for development of phenomaps in neuroscience.
Bayer AG Collaboration
We have profiled Bayer’s compound library for next generation map-based drug discovery and are actively navigating the map to seed potential programs. We have multiple first-generation brute-force programs related to the potential treatment of fibrotic diseases progressing simultaneously with our partner.
Recursion OS
•Transcriptomics: We automated key processes in our transcriptomics platform, TrekSeq, to enable higher scale and robustness related to the acquisition of transcriptomics data for use as an industrialized orthogonal validation assay.
•InVivomics: We completed studies to enable the simultaneous monitoring of multiple mice and their respective individual digital biomarkers within the same cage and the tracking of digital biomarkers related to group social behaviors.
Financing and Operations
We were incorporated in November 2013. On April 20, 2021, we closed our Initial Public Offering (IPO) and issued 27,878,787 shares of Class A common stock at a price of $18.00 per share, raising gross and net proceeds of $501.8 million and $462.4 million, respectively. Prior to our IPO, we had raised approximately $448.9 million in equity financing from investors in addition to $30.0 million in an upfront payment from our collaboration with Bayer AG (Bayer). In December 2021, we announced a collaboration with Roche and received an upfront payment of $150.0 million in January 2022. See Note 9, “Collaborative Development Contracts” to the Condensed Consolidated Financial Statements for additional information.
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, cash equivalents and investments of $591.1 million as of March 31, 2022. Based on our current operating plan, we believe that our cash, cash equivalents and investments will be sufficient to fund our operations for at least the next twelve months.
Since inception, we have incurred significant operating losses. Our net losses were $56.0 million and $30.7 million during the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, our accumulated deficit was $456.1 million. We anticipate that our expenses and operating losses will increase substantially over the foreseeable future. The expected increase in expenses will be driven in large part by our ongoing activities, if and as we: continue to advance our platform; continue preclinical development of our current and future product candidates and initiate additional preclinical studies; commence clinical studies of our current and future product candidates; establish our manufacturing capability, including developing our contract development and manufacturing relationships and building our internal manufacturing facilities; acquire and license technologies aligned with our platform; seek regulatory approval of our current and future product candidates; expand our operational, financial and management systems and increase personnel, including personnel to support our preclinical and clinical development, manufacturing and commercialization efforts; continue to develop, grow, perfect and defend our intellectual property portfolio; and incur additional legal, accounting, or other expenses in operating our business, including the additional costs associated with operating as a public company.
We anticipate that we will need to raise additional financing in the future to fund our operations, including the commercialization of any approved product candidates. Until such time, if ever, as we can generate significant product revenue, we expect to finance our operations with our existing cash and cash equivalents, any future equity or debt financings and upfront, milestone and royalty payments, if any, received under current or future license or collaboration agreements. We may not be able to raise additional capital on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, results of operations and financial condition may be adversely affected.
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Components of Operating Results
Revenues
To date, our business has generated 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.
Operating Revenue—Operating revenue is generated through research and development agreements derived from strategic alliances. 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.
Cost of Revenue
Cost of revenue consist of the Company’s costs to provide services for drug discovery required under performance obligations with partnership customers. These primarily include materials costs, service hours performed by our employees and depreciation of property and equipment.
Research and Development
Research and development expenses account for a significant portion of our operating expenses. We recognize research and development expenses as they are incurred. Research and development expenses consist of costs incurred in performing activities including:
•costs to develop and operate our platform;
•costs of discovery efforts which may lead to development candidates, including research materials and external research;
•costs for clinical development of our investigational products;
•costs for materials and supplies associated with the manufacture of active pharmaceutical ingredients, investigational products 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
•other direct and allocated expenses incurred as a result of research and development activities, including those for facilities, depreciation, amortization and insurance.
We monitor research and development expenses directly associated with our clinical assets at the program level to some degree, 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 as they are incurred. Upon termination of contracts with third parties, our financial obligations are generally 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
We expense general and administrative costs as incurred. General and administrative expenses consist primarily of salaries; employee 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 for corporate and patent matters; professional fees for accounting, auditing, tax and administrative consulting services, insurance costs, facilities and depreciation expenses.
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We expect 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 drug candidates.
Other Income (loss), net
Other income (loss), net consists of interest earned primarily from investments, interest expense incurred under our loan agreements and gains and losses from investments.
Results of Operations
The following table summarizes our results of operations:
| (in thousands, except percentages) | Three months ended March 31, | Change | |||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||
| Revenue | |||||||||||||||||
| Operating revenue | $ | 5,299 | $ | 2,500 | $ | 2,799 | >100% | ||||||||||
| Grant revenue | 34 | 62 | (28) | (44.8) | % | ||||||||||||
| Total revenue | 5,333 | 2,562 | 2,771 | >100% | |||||||||||||
| Operating costs and expenses | |||||||||||||||||
| Cost of revenue | 7,799 | — | 7,799 | n/m | |||||||||||||
| Research and development | 32,441 | 24,109 | 8,332 | 34.6 | % | ||||||||||||
| General and administrative | 21,074 | 8,937 | 12,137 | >100% | |||||||||||||
| Total operating costs and expenses | 61,314 | 33,046 | 28,268 | 85.5 | % | ||||||||||||
| Loss from operations | (55,981) | (30,484) | (25,497) | (83.6) | % | ||||||||||||
| Other income (loss), net | 2 | (233) | 235 | 98.7 | % | ||||||||||||
| Net loss | $ | (55,979) | $ | (30,717) | $ | (25,262) | 82.2 | % | |||||||||
n/m = Not meaningful
Summary
Our financial performance during the three months ended March 31, 2022 compared to the prior period included; (i) a decrease in platform research and development costs due to partnership-related materials of $9.6 million, which has been capitalized on the Condensed Consolidated Balance Sheet; (ii) an increase in revenue recognized due to our strategic partnership with Roche; and (iii) cost of revenue due to the strategic partnership with Roche. Additionally, our financial results reflected added funding to support our emerging early- and mid-stage pipeline assets and continued growth of the Company.
Revenue
The following table summarizes our components of revenue:
| Three months ended March 31, | Change | ||||||||||||||||
| (in thousands, except percentages) | 2022 | 2021 | $ | % | |||||||||||||
| Revenue | |||||||||||||||||
| Operating revenue | $ | 5,299 | $ | 2,500 | $ | 2,799 | >100% | ||||||||||
| Grant revenue | 34 | 62 | (28) | (44.8) | % | ||||||||||||
| Total revenue | $ | 5,300 | $ | 2,500 | $ | 2,799 | >100% | ||||||||||
For the three months ended March 31, 2022, the increase in revenue compared to prior period was due to revenue recognized from our strategic partnership with Roche, which commenced in January 2022.
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Cost of Revenue
The following table summarizes our cost of revenue:
| (in thousands, except percentages) | Three months ended March 31, | Change | |||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||
| Total cost of revenue | $ | 7,799 | $ | — | $ | 7,799 | n/m | ||||||||||
For the three months ended March 31, 2022, the increase in cost of revenue compared to prior period was due to our strategic partnerships. For the three months ended March 31, 2021, cost of revenue was immaterial and was included within “Research and development” in the Condensed Consolidated Statement of Operations.
Research and Development
The following table summarizes our components of research and development expense:
| (in thousands, except percentages) | Three months ended March 31, | Change | |||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||
| Research and development expenses | |||||||||||||||||
| Platform | $ | 5,314 | $ | 10,532 | $ | (5,218) | (49.5) | % | |||||||||
| Discovery | 12,361 | 7,739 | 4,622 | 59.7 | % | ||||||||||||
| Clinical | 11,112 | 2,955 | 8,157 | >100% | |||||||||||||
| Stock based compensation | 1,764 | 628 | 1,136 | >100% | |||||||||||||
| Other | 1,890 | 2,255 | (365) | (16.2) | % | ||||||||||||
| Total research and development expenses | $ | 32,441 | $ | 24,109 | $ | 8,332 | 34.6 | % | |||||||||
Significant components of research and development expense include the following allocated by development phase: Platform, which refers primarily to expenses related to screening of product candidates through hit identification; Discovery, which refers primarily to expenses related to hit identification through development of candidates; and Clinical, which refers primarily to expenses related to development of candidates and beyond.
For the three months ended March 31, 2022, the increase in research and development expenses compared to prior period was due to an increased number of pre-clinical assets being validated and increased clinical costs as studies progressed. These increases were partially offset by a decrease in platform costs due to partnership-related materials of $9.6 million, now capitalized on the Condensed Consolidated Balance Sheet.
General and Administrative Expenses
The following table summarizes our general and administrative expense:
| (in thousands, except percentages) | Three months ended March 31, | Change | |||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||
| Total general and administrative expenses | $ | 21,074 | $ | 8,937 | $ | 12,137 | >100% | ||||||||||
For the three months ended March 31, 2022, the increase in general and administrative expenses compared to prior period was due to the growth in size of the Company’s operations including an increase in salaries and wages of $6.6 million, facilities costs, information technology and security costs and other administrative costs associated with operating a growth-stage company.
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Other income (loss), net
The following table summarizes our components of other income (loss), net:
| (in thousands, except percentages) | Three months ended March 31, | Change | |||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||
| Interest expense | $ | (14) | $ | (249) | $ | 235 | (94.3) | % | |||||||||
| Interest income | 87 | 16 | 71 | >100% | |||||||||||||
| Other | (71) | — | (71) | n/m | |||||||||||||
| Other income (loss), net | $ | 2 | $ | (233) | $ | 235 | (100.8) | % | |||||||||
For the three months ended March 31, 2022, the decrease in expense compared to the prior year was driven by a decrease in interest expense from the 2021 the Midcap loan settlement and an increase in interest income from our investment portfolio. See Note 3, “Supplemental Financial Information” to the Condensed Consolidated Financial Statements for additional details on the Midcap loan agreement and see Note 4, “Investments” for additional details on the investment portfolio.
Liquidity and Capital Resources
Sources of Liquidity
We have not yet commercialized any products and do not expect to generate revenue from the sales of any product candidates for at least several years. Cash, cash equivalents and investments totaled $591.1 million and $516.6 million as of March 31, 2022 and December 31, 2021, respectively.
We have incurred operating losses and experienced negative operating cash flows and we anticipate that the Company will continue to incur losses for at least the foreseeable future. Our net loss was $56.0 million and $30.7 million during the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022 and December 31, 2021, we had an accumulated deficit of $456.1 million and $400.1 million, respectively.
We have financed our operations through the private placements of preferred stock and an IPO. As of March 31, 2022, we have received proceeds of $448.9 million from the sale of preferred stock. We received net proceeds of $462.4 million from the IPO. See Note 8, “Common Stock” to the Condensed Consolidated Financial Statements for additional details on the IPO.
In January 2022, we received an upfront payment of payment of $150.0 million from our strategic partnership with Roche. In October 2020, we received a $30.0 million upfront payment from our strategic partnership with Bayer. See Note 9, “Collaborative Development Contracts” to the Condensed Consolidated Financial Statements for information on these collaborations.
Cash Flows
The following table is a summary of the Condensed Consolidated Statements of Cash Flows for each of the periods presented below:
| Three months ended March 31, | ||||||||
| (in thousands) | 2022 | 2021 | ||||||
| Cash provided by (used in) operating activities | $ | 77,388 | $ | (30,755) | ||||
| Cash provided by (used in) investing activities | 143,304 | (19,416) | ||||||
| Cash provided by financing activities | 2,084 | 2,134 | ||||||
| Net increase (decrease) in cash and cash equivalents | $ | 222,776 | $ | (48,037) | ||||
Operating Activities
Cash provided by operating activities increased during the three months ended March 31, 2022 as we received an upfront payment of payment of $150.0 million from our strategic partnership with Roche. Cash inflows were partially offset by cash used for research and development and general and administrative expenses. Cash used by
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operating activities increased during the three months ended March 31, 2021 as a result of higher costs incurred for research and development and general and administrative expenses due to the Company’s growth.
Investing Activities
Cash provided by investing activities during the three months ended March 31, 2022 was driven by sales and maturities of investments $147.6 million. Cash used by investing activities during the three months ended March 31, 2021 consisted of property and equipment purchases of $19.4 million, which included $17.9 million for the purchase of a Dell EMC supercomputer.
Financing Activities
Cash provided by financing activities during the three months ended March 31, 2022 and 2021 primarily included proceeds from equity incentive plans of $2.1 million and $2.2 million, respectively.
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 2021 Annual Report. There were no significant changes in the Company’s application of its critical accounting policies during the three months ended March 31, 2022.
Recently Issued and Adopted Accounting Pronouncements
See Note 2, “Basis of Presentation” in Item 1 of this Quarterly Report on Form 10-Q for information regarding recently issued and adopted accounting pronouncements.
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, among other things, exempts EGCs from compliance 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 during the period in which we remain an EGC. However, the Company may adopt certain new or revised accounting standards earlier. This could make comparisons of the Company’s financial statements with other public companies difficult because of the potential differences in applicable accounting standards.
Recursion may remain an EGC until the earlier of (1) December 31, 2026; (2) December 31 of the year in which we (a) become a “large accelerated filer;” or (b) have annual gross revenues of $1.07 billion or more; or (3) the date on which we have issued more than $1.0 billion of non-convertible debt over a three-year period.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
As of March 31, 2022, Recursion had an investment portfolio with a fair value of $399.6 million which included cash equivalents and available-for-sale investments. See Note 4, “Investments” to the Condensed Consolidated Financial Statements for additional details on the portfolio. Recursion’s investment portfolio is subject to interest rate risk and will fall in value if market interest rates increase. The Company does not believe it is materially exposed to changes in interest rates related to the investments and Recursion does not currently use interest rate derivative instruments to manage exposure to interest rate changes of the investments. A hypothetical 100 basis point increase in interest rates relative to interest rates as of March 31, 2022, would have resulted in a reduction in fair value of approximately $287 thousand of the investment portfolio. In addition, a hypothetical 100 basis point decrease in interest rates as of March 31, 2022 would have an insignificant effect on net loss in the ensuing year.
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 (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
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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 report. 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 as 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, 2022, 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, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company may, from time to time, be involved in various legal proceedings arising in the normal course of business. An unfavorable resolution of any such matter could materially affect the Company’s future financial position, results of operations or cash flows. For more information pertaining to legal proceedings, please see Part I, Item 1, Note 7, which is incorporated herein by reference.
Item 1A. Risk Factors.
We do not believe that there have been any material changes to the risk factors previously disclosed in Part I, Item 1A. “Risk Factors” of our 2021 Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) Sales of Unregistered Securities
Stock Option Exercises
For the three months ended March 31, 2022, we issued 70,000 shares of our Class A common stock to our employees, directors, advisors and consultants upon the exercise of stock options under our Key Personnel Incentive Stock Plan for aggregate consideration of approximately $21 thousand. The shares of Class A common stock issued upon the exercise of stock options were issued pursuant to written compensatory plans or arrangements with our employees, directors, advisors and consultants, in reliance on the exemption provided by Rule 701 promulgated under the Securities Act of 1933, as amended, or pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, relative to transactions by an issuer not involving any public offering, to the extent an exemption from such registration was required. All recipients either received adequate information about our company or had access, through employment or other relationships, to such information.
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Item 6. Exhibits.
Exhibit Index:
| Incorporated by Reference | ||||||||||||||||||||
| Exhibit number | Description | Form | File No. | Exhibit No. | Filing Date | Filed / Furnished Herewith | ||||||||||||||
| 3.1 | 8-K | 001-40323 | 3.1 | April 21, 2021 | ||||||||||||||||
| 3.2 | 8-K | 001-40323 | 3.2 | April 21, 2021 | ||||||||||||||||
| 4.1 | S-1/A | 333-254576 | 4.1 | April 15, 2021 | ||||||||||||||||
| 4.2 | S-1/A | 333-254576 | 4.2 | April 15, 2021 | ||||||||||||||||
| 10.1 | X | |||||||||||||||||||
| 10.2 | X | |||||||||||||||||||
| 23.1 | X | |||||||||||||||||||
| 23.2 | X | |||||||||||||||||||
| 31.1 | X | |||||||||||||||||||
| 31.2 | X | |||||||||||||||||||
| 32.1* | X | |||||||||||||||||||
| 101.INS | XBRL Instance Document | X | ||||||||||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | X | ||||||||||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||||||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | X | ||||||||||||||||||
| * | The certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. Such certifications will not be deemed to be incorporated by reference into any filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Registrant specifically incorporates it by reference. | |||||||||||||||||||
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on May 10, 2022.
| RECURSION PHARMACEUTICALS, INC. | ||||||||
| By: | /s/ Christopher Gibson | |||||||
| Christopher Gibson | ||||||||
| Chief Executive Officer | ||||||||
| (Principal Executive Officer) | ||||||||
| By: | /s/ Michael Secora | |||||||
| Michael Secora | ||||||||
| Chief Financial Officer | ||||||||
| (Principal Financial and Accounting Officer) | ||||||||
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