RECURSION PHARMACEUTICALS, INC. The following is a discussion and analysis of the financial condition ofRecursion Pharmaceuticals, Inc. (Recursion, the Company, we, us or our) as ofSeptember 30, 2021 andDecember 31, 2020 and the results of operations during the three and nine months endedSeptember 30, 2021 and 2020. This commentary should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and accompanying notes appearing in Item 1, "Financial Statements" and the Company's audited consolidated financial statements and accompanying notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the final prospectus for our initial public offering (IPO), which was filed with theSecurities and Exchange Commission (SEC), pursuant to Rule 424(b)(4) onApril 16, 2021 (the Final Prospectus). This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading "Note About Forward-Looking Statements" in this Quarterly Report on Form 10-Q. You should review the disclosure under the heading "Risk Factors" in this Quarterly Report on Form 10-Q for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements. Overview We are a clinical-stage biotechnology company decoding biology by integrating technological innovations across biology, chemistry, automation, data science, and engineering, with the goal of radically improving the lives of patients and industrializing drug discovery. Central to our mission is the Recursion Operating System, or the Recursion OS, that combines an advanced infrastructure layer to generate what we believe is one of the world's largest and fastest-growing proprietary biological and chemical datasets, and the Recursion Map, a suite of custom software, algorithms, and machine learning tools that we use to explore foundational biology unconstrained by human bias and navigate to new biological insights which may accelerate our programs. We believe that the combination of wet-lab biology and in silico tools in our closed-loop system differentiates us from others within the industry. Similarly, our balanced team of life scientists and computational and technical experts creates an environment where empirical data, statistical rigor, and creative thinking are brought to bear on our decisions. To date, we have leveraged our Recursion OS, which is depicted below, to create three value drivers: i) advancement of our internally-developed programs, including four clinical-stage assets, focused on areas of significant unmet need, several of which have market opportunities in excess of$1.0 billion in annual sales, ii) strategic partnerships with leading biopharmaceutical companies, and iii)Induction Labs , a growth engine created to explore new extensions of the Recursion OS both within and beyond therapeutics. The number of programs we are advancing in research and development has more than doubled since 2019. Although we cannot provide any guarantee that we will achieve similar timelines with future product candidates, we believe we will be able to continue accelerating the pace of program additions in the future. As such, we are a biotechnology company scaling more like a technology company. 24
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Recursion finished the third quarter of 2021 with a portfolio of 4 clinical
stage programs, 4 preclinical programs, 7 late discovery programs, and 41 early
discovery programs. Additionally, Recursion continued scaling the total number
of executed phenomic experiments to approximately 95 million, the size of its
proprietary data universe to over 11 petabytes, and the number of biological
inferences to approximately 200 billion. Data have been generated on the
Recursion OS across 38 human cell types, an in-house chemical library of over
717 thousand compounds, and an in silico library of 12 billion small molecules,
by a growing team of more than 330 Recursionauts that is balanced between life
scientists and computational and technical experts.
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Summary of Business Highlights
Clinical Programs
•Neurofibromatosis type 2 (NF2) (REC-2282): In early October, we received Fast Track Designation for REC-2282 from the FDA for the potential treatment of NF2 meningiomas. We plan to initiate a parallel group, two stage, Phase 2/3, randomized, multicenter study in early 2022. •Cerebral cavernous malformation (CCM) (REC-994): We plan to initiate a Phase 2, double-blind, placebo-controlled safety, tolerability and exploratory efficacy study of this candidate in early 2022. •Familial adenomatous polyposis (FAP) (REC-4881): In September we received Orphan Drug Designation for REC-4881 from the FDA for the potential treatment of Familial Adenomatous Polyposis. We plan to initiate a Phase 2, randomized, double-blind, placebo-controlled study to evaluate safety, pharmacokinetics, and efficacy in the first half of 2022. •GM2 gangliosidosis (REC-3599): We plan to initiate a Phase 2 study of this candidate in the first half of 2022.
Preclinical Programs
•Clostridium difficile colitis (REC-3964): We expanded our medicinal chemistry team and digital chemistry tools and made progress in IND-enabling studies for REC-3964, which is the most advanced New Chemical Entity developed by the Recursion OS.
We continue to advance our collaboration with Bayer to discover small molecule drug candidates with the potential to treat fibrotic diseases. We have multiple programs progressing simultaneously with our partner.
Recursion OS
•Biological Contexts: We advanced our capabilities to model diseases in multiple biological contexts, including new types of biological perturbations beyond CRISPR-based knockouts, complex cell type
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onboarding, and organoid model systems. Moreover, we made progress on multiple
maps in iPSC-derived neural cell types.
•Mechanisms of Action: We improved our computational methods to identify
mechanisms of action and used this technology to increase our ability to screen
out compounds with potentially toxic effects for multiple programs earlier than
is possible with traditional approaches. We believe that such methods will
better enable us to advance the most promising novel chemical compounds through
discovery.
•Transcriptomics Validation: We made significant improvements to our
transcriptomics protocols to enable increases in throughput. Additionally, we
have been optimizing our ability to use transcriptomics signatures for compound
characterization.
Facilities and Manufacturing
We continued to make progress in expanding our current headquarters and creating a chemistry, manufacturing and controls (CMC) site inSalt Lake City . These spaces are designed with flexibility in mind to enable next generation automated workflows and instruments for compound, tissue culture, and biobank management to further industrialize the drug discovery and development process.
Financing and Operations
We were incorporated inNovember 2013 . OnApril 20, 2021 , we closed our 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 strategic partnership with Bayer AG (Bayer). We use the capital we have raised to fund operations and investing activities across platform research operations, drug discovery, clinical development, digital and other infrastructure, creation of our portfolio of intellectual property and administrative support. We do not have any products approved for commercial sale and have not generated any revenues from product sales. We had cash, cash equivalents and investments of$578.9 million as ofSeptember 30, 2021 . Based on our current operating plan, we believe that our existing cash and cash equivalents will be sufficient to meet our working capital and capital expenditure needs at least into 2023. Since inception, we have incurred significant operating losses. Our net losses were$47.4 million and$121.5 million during the three and nine months endedSeptember 30, 2021 , respectively. Our net losses were$23.9 million and$61.2 million during the three and nine months endedSeptember 30, 2020 , respectively. As ofSeptember 30, 2021 , our accumulated deficit was$335.1 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 invest in new technologies to expand our platform and plan to build world class capabilities in key areas of manufacturing sciences and operations, including small molecule production, novel chemical entity development, product characterization and process analytics. Our investments may also include scaled research solutions, scaled infrastructure, as well as novel technologies to improve efficiency, characterization and scalability of manufacturing. 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. 27
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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. Grant revenue was generated from grants awarded by theNational Institute of Health .
Operating Revenue-Operating revenue is primarily generated through funded research and development agreements derived from strategic alliances, such as our strategic partnership with Bayer. We are entitled to receive variable consideration as certain milestones are achieved. The timing of revenue recognition is not directly correlated to the timing of cash receipts.
Research and Development
Research and development expenses account for a significant portion of our operating expenses. We recognize research and development expenses as they are incurred. Research and development expenses consist of costs incurred in performing research and development 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
The Company expenses 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.
28-------------------------------------------------------------------------------- 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. We also expect to incur increased expenses associated with operating as a public company, including costs of accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing andSEC requirements, director and officer insurance costs and investor and public relations costs.
Other Loss, net
Other loss, net consists of interest earned on our cash and cash equivalents, interest expense incurred under our loan agreements, changes in the fair value of warrant liabilities and debt extinguishment costs. Results of Operations
The following table summarizes the Company's results of operations:
Three months ended Nine months ended
(in thousands, except September 30, Change September 30, Change
percentages) 2021 2020 $ % 2021 2020 $ %
Revenue
Grant revenue $ 34 $ 163 $ (129) (79.4) % $ 145 $ 409 $ (264) (64.5) %
Operating revenue 2,500 862 1,638 >100% 7,500 862 6,638 >100%
Total revenue 2,534 1,025 1,509 >100% 7,645 1,271 6,374 >100%
Operating expenses
Research and development 33,246 16,535 16,711 >100% 86,979 42,621 44,358 >100%
General and administrative 15,690 6,964 8,726 >100% 38,481 17,684 20,798 >100%
Total operating expenses 48,936 23,499 25,437 >100% 125,460 60,305 65,156 >100%
Loss from operations (46,402) (22,474) (23,928) >100% (117,815) (59,034) (58,782) 99.6 %
Other loss, net (1,026) (1,399) 373 (26.6) % (3,731) (2,206) (1,524) 69.1 %
Net loss $ (47,428) $ (23,873) $ (23,555) 98.7 % $ (121,546) $ (61,240) $ (60,306) 98.5 %
Revenue
The following table summarizes Recursion's components of revenue:
Three months ended Nine months ended
September 30, Change September 30, Change
(in thousands, except
percentages) 2021 2020 $ % 2021 2020 $ %
Revenue
Grant revenue $ 34 $ 163 $ (129) (79.4) % $ 145 $ 409 $ (264) (64.5) %
Operating revenue 2,500 862 1,638 >100% 7,500 862 6,638 >100% Total revenue$ 2,534 $ 1,025 $ 1,509 >100%$ 7,645 $ 1,271 $ 6,374 >100% Revenue increased by$1.5 million and$6.4 million during the three and nine months endedSeptember 30, 2021 , respectively, compared to the prior year. The increase in revenue was due to revenue recognized from our strategic partnership with Bayer entered into inAugust 2020 . 29 --------------------------------------------------------------------------------
Research and Development
The following table summarizes Recursion's components of research and development expense:
Three months ended Nine months ended
(in thousands, except September 30, Change September 30, Change
percentages) 2021 2020 $ % 2021 2020 $ %
Research and development
expenses
Platform $ 13,212 $ 6,854 $ 6,358 92.8 % $ 35,082 $ 18,891 $ 16,191 85.7 %
Discovery 10,302 4,656 5,646 >100% 26,888 12,088 14,800 >100%
Clinical 4,944 1,901 3,043 >100% 13,480 6,433 7,047 >100%
Stock based compensation 1,386 351 1,035 >100% 3,157 1,357 1,800 >100%
Other 3,402 2,773 629 22.7 % 8,372 3,852 4,520 >100%
Total research and
development expenses
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. Research and development expenses increased by$16.7 million and$44.4 million during the three and nine months endedSeptember 30, 2021 , respectively, compared to the prior year. The increase in research and development expenses was due to an increased number of experiments screened on our platform, an increased number of pre-clinical assets being validated and increased clinical costs as studies progressed.
General and Administrative Expenses
The following table summarizes Recursion's general and administrative expense:
Three months ended Nine months ended
(in thousands, except September 30, Change September 30, Change
percentages) 2021 2020 $ % 2021 2020 $ %
Total general and
administrative expenses $ 15,690 $ 6,964 $ 8,726 >100% $ 38,481 $ 17,684 $ 20,797 >100%
General and administrative expenses increased by $8.7 million and $20.8 million
during the three and nine months ended September 30, 2021 , respectively,
compared to the prior year. The increase in general and administrative expenses
was due to the growth in size of the Company's operations including an increase
in salaries and wages of $3.7 million and $10.6 million during the three and
nine months ended September 30, 2021 , respectively, equipment costs, human
resources costs, facilities costs and other administrative costs associated with
operating a growth-stage company.
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--------------------------------------------------------------------------------Other loss, net
The following table summarizes Recursion's components of other loss, net:
Three months ended Nine months ended
(in thousands, except September 30, Change September 30, Change percentages) 2021 2020 $ % 2021 2020 $ % Interest expense$ 220 $ 401 $ (181) (45.2) %$ 2,971 $ 1,129 $ 1,841 >100% Interest income (50) (46) (4) 8.9 % (94) (290) 196 (67.5) %
Loss on debt extinguishment 827 883 (56) (6.3) %
827 883 (56) (6.3) %
Derivative fair value
adjustment - 161 (161) (100.0) % - 484 (484) (100.0) %
Other 29 - 29 n/m 27 - 27 n/m
Other loss, net $ 1,026 $ 1,399 $ (373) (26.7) % $ 3,731 $ 2,206 $ 1,524 69.1 %
n/m = Not meaningful
Other loss, net decreased by$373 thousand during the three months endedSeptember 30, 2021 compared to the prior year. The decrease in Other loss, net during the three months endedSeptember 30, 2021 was due to the fair value adjustment on the derivative liability for the convertible notes during the three months endedSeptember 30, 2020 and a decrease in interest expense due to the payment inJuly 2021 of the balance due on the Midcap loan. See Note 7, "Notes Payable" to the Condensed Consolidated Financial Statements for additional details on the Midcap loan payment and the derivative. Other loss, net increased by$1.5 million during the nine months endedSeptember 30, 2021 compared to the prior year. The increase in Other loss, net during the nine months endedSeptember 30, 2021 was primarily due to an increase in the fair value of the Series A and B warrants. See Note 12, "Stock-Based Compensation" to the Condensed Consolidated Financial Statements for additional details on the warrants. This increase was partially offset by the fair value adjustment on the derivative liability for the convertible notes. See Note 7, "Notes Payable" to the Condensed Consolidated Financial Statements for additional details on the derivative.
Liquidity and Capital Resources
Sources of Liquidity
The Company has not yet commercialized any products and does not expect to generate revenue from the sales of any product candidates for at least several years. Cash and cash equivalents totaled$394.7 million as ofSeptember 30, 2021 and$262.1 million as ofDecember 31, 2020 . The Company has 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$47.4 million and$121.5 million during the three and nine months endedSeptember 30, 2021 , respectively. The Company's net loss was$23.9 million and$61.2 million during the three and nine months endedSeptember 30, 2020 , respectively. As ofSeptember 30, 2021 andDecember 31, 2020 , Recursion had an accumulated deficit of$335.1 million and$213.6 million , respectively. Recursion has financed its operations through the private placements of preferred stock and an IPO. As ofSeptember 30, 2021 , the Company had received proceeds of$448.9 million from the sale of its preferred stock. The Company received net proceeds of$462.4 million from the IPO. See Note 10, "Common Stock" to the Condensed Consolidated Financial Statements for additional details on the IPO.
In
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--------------------------------------------------------------------------------Midcap Credit and Security Agreement
InSeptember 2019 , the Company entered into a Credit and Security Agreement withMidcap Financial Trust (Midcap) and the other lenders party thereto (the Midcap loan agreement). The Midcap loan agreement provided for a term loan facility that included an initial tranche of$11.9 million . InJuly 2021 , the Company paid the balance due on the loan outstanding with Midcap. See Note 7, "Notes Payable" to the Condensed Consolidated Financial Statements for additional details. Cash Flows The following table is a summary of the Condensed Consolidated Statements of Cash Flows for each of the periods presented below: Nine months ended September 30, (in thousands) 2021 2020 Cash used in operating activities$ (97,456) $ (53,972) Cash used in investing activities (219,501) (4,149) Cash provided by financing activities 454,744 236,100 Net increase (decrease) in cash and cash equivalents$ 137,787 $ 177,979 Operating Activities Cash used in operating activities was$97.5 million during the nine months endedSeptember 30, 2021 . Cash used in operating activities increased from the nine months endedSeptember 30, 2020 as a result of higher costs incurred for research and development and general and administrative due to the Company's growth. Cash used in operating activities was$54.0 million during the nine months endedSeptember 30, 2020 . Cash used in operating activities increased from the nine months endedSeptember 30, 2019 due to higher costs incurred for research and development and general and administrative due to the Company's growth. Investing Activities Cash used in investing activities was$219.5 million during the nine months endedSeptember 30, 2021 . Cash used in investing activities primarily consisted of investment purchases of$184.2 million and property and equipment purchases of$35.3 million , which included$17.9 million for the purchase of a Dell EMC supercomputer. Cash used in investing activities was$4.1 million during the nine months endedSeptember 30, 2020 . Cash used in investing activities included$2.6 million for the Acquisition ofVium, Inc (Vium) and$2.1 million of capital expenditures primarily for the purchase of lab equipment and leasehold improvements. The cash outflows were partially offset by the proceeds from the note receivable. See Note 3, "Acquisitions" to the Condensed Consolidated Financial Statements for additional details on the Vium acquisition. Financing Activities Cash provided by financing activities was$454.7 million during the nine months endedSeptember 30, 2021 . Cash provided by financing activities primarily included$462.4 million of net proceeds from the IPO. Financing cash flows also included an outflow of$12.7 million for the repayment of long-term debt on the Midcap loan. Cash provided by financing activities was$236.1 million during the nine months endedSeptember 30, 2020 , which consisted primarily of proceeds from the sale of preferred stock of$229.5 million . Financing cash flows also included$6.4 million of proceeds from the issuance of convertible notes. See Note 7, "Notes Payable" to the Condensed Consolidated Financial Statements for additional detail on the convertible notes.
Critical Accounting Estimates and Policies
A summary of the Company's significant accounting estimates and policies is
included in Note 2, "Summary of Significant Accounting Policies" in our Final
Prospectus filed with the
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IPO. There were no significant changes in the Company's application of its
critical accounting policies during the nine months ended
Recently Issued and Adopted Accounting Pronouncements
Refer to Note 2 in Item 1 of this Quarterly Report on Form 10-Q for information regarding recently issued and adopted accounting pronouncements.
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, amount other things, exempts EGCs from being required to comply with new or revised financial accounting standards until private companies are required to comply. Recursion as elected to use the extended transition period for new or revised financial accounting standards during the period in which we remain an EGC. However, the Company may adopt certain new or revised accounting standards early. This may make comparisons 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)
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