RECURSION PHARMACEUTICALS, INC. The following is a discussion and analysis of the financial condition ofRecursion Pharmaceuticals, Inc. (Recursion, the Company, or we) as ofMarch 31, 2021 andDecember 31, 2020 and the results of operations during the three months endedMarch 31, 2021 and 2020. This commentary should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and accompanying notes appearing in Item 1, "Financial Statements" and the Company's audited consolidated financial statements and accompanying notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the final prospectus for our initial public offering (IPO), which was filed with theSecurities and Exchange Commission (SEC), pursuant to Rule 424(b)(4) onApril 16, 2020 (the Final Prospectus). This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans, and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading "Special Note About Forward-Looking Statements" in this Quarterly Report on Form 10-Q. You should review the disclosure under the heading "Risk Factors" in this Quarterly Report on Form 10-Q for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements. Overview We are a clinical-stage biotechnology company decoding biology by integrating technological innovations across biology, chemistry, automation, data science and engineering to radically improve the lives of patients and industrialize drug discovery. Central to our mission is the Recursion Operating System (Recursion OS) that combines an advanced infrastructure layer to generate what we believe is one of the world's largest and fastest-growing proprietary biological and chemical datasets, and the Recursion Map, a suite of custom software, algorithmic and machine learning tools that we use to explore foundational biology unconstrained by human bias, navigate to new biological insights, and accelerate programs. The combination of wet-lab biology and in silico tools in our closed-loop system accelerates our drug discovery process and differentiates us from others within the industry. Similarly, our balanced team of life scientists and computational and technical experts creates an environment where empirical data, statistical rigor, and creative thinking are brought to bear on every decision. Thus far, we have leveraged our Recursion OS to create three value drivers: i) advancement of 37 internally-developed programs focused on areas of significant unmet need, several of which have market opportunities in excess of$1.0 billion in annual sales, ii) strategic partnerships with leading biopharmaceutical companies, and iii)Induction Labs , a growth engine created to explore new extensions of the Recursion OS both within and beyond therapeutics. The number of programs we are advancing has more than doubled in size since 2019. Although we cannot provide any guarantee that we will achieve similar development timelines with future product candidates, we believe we will be able to continue accelerating the pace of program additions in the future. As such, we are a biotechnology company scaling more like a technology company. Integrating technological innovations across biology, chemistry, automation, data science and engineering in order to industrialize the discovery of therapeutics has required us to raise significant capital and adopt a long-term approach to capital allocation that balances near-term risks and long-term value creation. Of our 37 internally developed programs, we have four drug candidates that we expect will be entering clinical trials in the next four to five quarters. Our rapidly growing team of more than 200 employees is balanced between life scientists (approximately 40% of employees) and computational and technical expects (approximately 35% of employees). From inception throughMarch 31, 2021 , we have raised approximately$448.9 million in equity financing from investors in addition to$30.0 million in an upfront payment from our strategic partnership with Bayer. We use the capital we have raised to fund operations and investing activities across platform research operations, drug discovery, clinical development, digital and other infrastructure, creation of our portfolio of intellectual property, and administrative support. We do not have any products approved for commercial sale and have not generated any revenues from product sales. We had cash and cash equivalents of$214.1 million as ofMarch 31, 2021 . Since inception, we have incurred significant operating losses. Our net losses were$30.7 million and$18.4 million during the three months endedMarch 31, 2021 and 2020, respectively. As ofMarch 31, 2021 , our accumulated deficit was$244.3 million . We expect to continue to incur significant expenses and operating losses for the 20 -------------------------------------------------------------------------------- foreseeable future. In addition, we anticipate that our expenses will increase significantly in connection with our ongoing activities, as we: •continue our platform research and drug discovery and clinical development efforts; •continue to invest in the scale and scope of our platform research capabilities in order to identify novel biology and therapeutics; •continue to invest in expansions of the modality capabilities across our platform including large molecules and RNA therapeutics; •invest in or acquire companies or intellectual property that achieves our platform objectives; •accelerate investments in mechanisms to significantly expand our total addressable markets throughInduction Labs ; •utilize our platform to identify and validate additional therapeutic candidates, technologies, and business opportunities; •initiate additional preclinical studies or clinical or other trials for our product candidates, including under our collaboration agreements; •continue or expand the scope of our clinical trials for our product candidates; •conduct the above and below development activities on an extensive pipeline of therapeutic candidates across diverse areas of biology; •establish agreements with contract research organizations (CROs) and contract manufacturing organizations (CMOs) in connection with our preclinical studies and clinical trials; •change or add to internal manufacturing capacity or capability; •change or add additional suppliers; •seek regulatory approval for our therapeutic candidates; •seek marketing approvals and reimbursement for our therapeutic candidates; •establish a sales, marketing, and distribution infrastructure to commercialize any products for which we may obtain marketing approval; •acquire or in-license other therapeutic candidates and technologies; •make milestone or other payments under any in-license agreements; •maintain, protect, defend, enforce, and expand our intellectual property portfolio; •add additional infrastructure to our quality control, quality assurance, legal, compliance, and other groups to support our operations as we progress our therapeutics candidates toward commercialization; •add additional infrastructure to support our operations as a public company and our product development and future commercialization efforts, including expansion of company sites; •attract and retain world-class talent, including in competitive areas; and •experience any delays or encounter issues with any of the above. 21 --------------------------------------------------------------------------------
Components of Operating Results
Revenues
To date, our business generates revenue from two sources: i) grant revenue and ii) operating revenue.
Grant Revenue-We recognize grant revenue in the period in which the revenue is earned in accordance with the associated grant agreement, which is the period in which corresponding reimbursable expenses under the grant agreement are incurred. Grant revenue was generated from grants awarded by 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 incurred. Research and development expenses comprise costs incurred in performing research and development activities, including: •cost to develop and operate our platform; •discovery efforts leading to development candidates; •clinical development costs for our programs; •costs associated with discovery as well as clinical development efforts, including research materials and external research; •materials and supply costs associated with the manufacture of drug substance and drug product for preclinical testing and clinical trials; •personnel-related expenses, including salaries, benefits, bonuses, and stock-based compensation for employees engaged in research and development functions; •costs associated with operating our digital infrastructure; and •facilities, depreciation and amortization, insurance and other direct and allocated expenses incurred as a result of research and development activities.
We monitor research and development expenses directly associated with our clinical assets to some degree at the program level, however, indirect costs associated with clinical development and the balance of our research and development expenses are not tracked at the program or candidate level.
We recognize expenses associated with third-party contracted services based on the completion of activities as specified in the applicable contracts. Upon termination of contracts with third parties, our financial obligations are limited to costs incurred or committed to date. Any advance payments for goods or services to be used or rendered in future research and product development activities pursuant to a contractual arrangement are classified as prepaid expenses until such goods or services are rendered.
General and Administrative
The Company expenses general and administrative costs as incurred. General and
administrative expenses consist primarily of salaries, benefits, stock-based
compensation, and outsourced labor for personnel in executive, finance, human
resources, legal and other corporate administrative functions. General and
administrative expenses also include legal fees incurred relating to corporate
and patent matters, professional fees incurred for accounting, auditing, tax and
administrative consulting services, insurance costs, facilities and depreciation
expenses.
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Recursion expects that our general and administrative expenses will increase in
the future to support personnel in research and development and to support our
operations as we increase our research and development activities and activities
related to the potential commercialization of our initial drug candidates
REC-4881, REC-3599, REC-2282, and REC-994. The Company also expects to incur
increased expenses associated with operating as a public company, including
costs of accounting, audit, legal, regulatory, and tax-related services
associated with maintaining compliance with exchange listing and Securities and
Exchange Commission , or SEC , requirements, director and officer insurance costs,
and investor and public relations costs.
Other Income, Net
Other income, net primarily consists of interest earned on our cash and cash equivalents and interest expense incurred under our loan agreements. Results of Operations
Comparison of the three months ended
The following table summarizes the Company's results of operations:
Three months ended March 31, Change
(in thousands, except percentages) 2021 2020 $ %
Revenue
Grant revenue $ 62 $ 60 $ 2 3.5 %
Operating revenue 2,500 - 2,500 n/m
Total revenue 2,562 60 2,502 >100%
Operating expenses
Research and development 24,109 12,842 11,267 87.7 %
General and administrative 8,937 5,561 3,376 60.7 %
Total operating expenses 33,046 18,403 14,643 79.6 %
Loss from operations (30,484) (18,343) (12,141) 66.2 %
Other loss, net (233) (81) (152) >100%
Net loss and comprehensive loss $ (30,717) $ (18,424) $ (12,293) 66.7 %
n / m = Not meaningful
Revenue
The following table summarizes the components of revenue recognized during the
three months ended March 31, 2021 and 2020:
Three months ended March
31, Change
(in thousands, except percentages) 2020 2019 $ %
Revenue
Grant revenue $ 62 $ 60 $ 2 3.5 %
Operating revenue 2,500 - 2,500 n/m
Total revenue $ 2,562 $ 60 $ 2,502 >100%
Revenue increased by $2.5 million , or >100%, to $2.6 million during the three
months ended March 31, 2021 compared to $60 thousand during the three months
ended March 31, 2020 . The increase in revenue was due to revenue recognized from
our strategic partnership with Bayer entered into in August 2020 .
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Research and Development
The following table summarizes the components of research and development
expense during the three months ended
Three months ended March 31, Change
(in thousands, except percentages) 2021 2020 $ %
Research and development expenses
Platform $ 10,532 $ 6,319 $ 4,212 66.7 %
Discovery 7,739 4,047 3,692 91.2 %
Clinical 2,955 1,323 1,632 >100%
Stock based compensation 628 688 (60) (8.7) %
Other 2,255 465 1,789 >100%
Total research and development expenses
87.7 %
Significant components of research and development expense include the
following: Platform, which refers primarily to expenses related to screening
through hit identification; Discovery, which refers primarily to expenses
related to hit identification through development candidate; and Clinical, which
refers primarily to expenses related to development candidate and beyond.
Research and development expenses increased by $11.3 million , or 87.7%, to $24.1
million during the three months ended March 31, 2021 compared to $12.8 million
during the three months ended March 31, 2020 . The increase in research and
development expenses was due to an increased number of experiments screened on
the platform, an increased number of pre-clinical assets being validated and
increased clinical costs as studies progress.
General and Administrative Expenses
The following table summarizes the components of general and administrative
expense during the three months ended
Three months ended March 31, Change
(in thousands, except percentages) 2021 2020 $ %
Total general and administrative expenses
60.7 %
General and administrative expenses increased by $3.4 million , or 60.7%, to $8.9
million during the three months ended March 31, 2021 compared to $5.6 million
during the three months ended March 31, 2020 . The increase in general and
administrative expenses was due to growth in size of the Company's operations
including an increase in salaries and wages of $1.2 million , human resources
costs, facilities costs, finance costs and other administrative costs associated
with operating a growth-stage Company.
Other loss, net
The following table summarizes the components of Other loss, net during the
three months ended
Three months ended March 31, Change
(in thousands, except percentages) 2021 2020 $ %
Interest expense $ 249 $ 301 $ (52) (17.2) %
Interest income (16) (220) 204 (92.8) %
Other loss, net $ 233 $ 81 $ 152 >100%
24-------------------------------------------------------------------------------- Other loss, net increased by$152 thousand to$233 thousand during the three months endedMarch 31, 2021 compared to$81 thousand during the three months endedMarch 31, 2020 . The increase in Other loss, net was primarily due to a decrease in interest earned from the Company's checking accounts.
Liquidity and Capital Resources
Sources of Liquidity
The Company has not yet commercialized any products and does not expect to generate revenue from the sales of any product candidates for several years. Cash and cash equivalents totaled$214.1 million as ofMarch 31, 2021 and$262.1 million as ofDecember 31, 2020 . The Company has incurred operating losses, experienced negative operating cash flows and Recursion anticipates that the Company will continue to incur losses for at least the foreseeable future. Our net loss totaled$30.7 million during the three months endedMarch 31, 2021 and$18.4 million during the three months endedMarch 31, 2020 . As ofMarch 31, 2021 andDecember 31, 2020 , Recursion had an accumulated deficit of$244.3 million and$213.6 million , respectively. To date, Recursion has financed the Company's operations primarily through private placements of preferred stock. ThroughMarch 31, 2021 , the Company has received gross proceeds of$448.9 million from sales of our preferred stock. InApril 2021 , the Company completed an IPO receiving an approximate net proceeds of$462.6 million . See Note 16, "Subsequent Events" to the Condensed Consolidated Financial Statements for additional detail.
Over September and
Midcap Credit and Security Agreement
InSeptember 2019 , we entered into a Credit and Security Agreement withMidcap Financial Trust (Midcap), which we refer to as our Credit Agreement. The Credit Agreement includes: i) an initial term loan in an aggregate principal amount of$11.9 million ; and ii) a second tranche term loan, which if drawn would result in an aggregate outstanding maximum principal amount of$26.9 million . The second tranche will become available to be drawn upon the achievement of certain drug development milestones. We are required to make interest-only payments fromSeptember 2019 toSeptember 2021 , and thereafter, 36 monthly principal payments of$330 thousand plus interest commencing inOctober 2021 and continuing until the maturity date inSeptember 2024 . The interest-only period will be extended an additional 12 months upon achievement of certain fundraising related milestones. Interest accrues on the principal amount outstanding at a floating per annum rate equal to the LIBOR (floor of 2.00%) rate plus 5.75%. The debt is secured against all of our assets. The Credit Agreement includes standard affirmative and restrictive covenants and standard events of default, including payment defaults, breaches of covenants following any applicable cure period, a material impairment in the perfection or priority of Midcap's security interest or in the value of the collateral and a material adverse change in our business, operations, or conditions. Upon the occurrence of an event of default and following any applicable cure periods, Midcap may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the Credit Agreement. As ofMarch 31, 2021 , the Company was in compliance with all debt covenants under the Credit Agreement. In 2019, we paid fees of approximately$298 thousand in connection with the origination of the Credit Agreement. These fees were deferred and recorded as a direct deduction from the carrying value of the loan payable and are amortized to interest expense over the remaining term of the Credit Agreement. 25 -------------------------------------------------------------------------------- Cash Flows The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below: Three months ended March
31,
(in thousands) 2021
2020
Cash used in operating activities$ (30,755) $
(17,817)
Cash used in investing activities (19,416)
(684)
Cash provided by financing activities 2,134
5,997
Net decrease in cash and cash equivalents$ (48,037) $ (12,504) Operating Activities Net cash used in operating activities was$30.8 million during the three months endedMarch 31, 2021 . Net cash used in operating activities increased from the three months endedMarch 31, 2020 due to higher costs incurred for research and development and general and administrative due to the Company's growth as well as the timing of working capital cash flows for the three months endedMarch 31, 2021 . Net cash used in operating activities was$17.8 million during the three months endedMarch 31, 2020 . Cash used in operating activities increased from the three months endedMarch 31, 2019 due to higher costs incurred for research and development and general and administrative due to the Company's growth which was partially offset by the timing of working capital cash flows for the three months endedMarch 31, 2020 . Investing Activities Net cash used in investing activities was$19.4 million during the three months endedMarch 31, 2021 . Cash used in investing activities was primarily for the purchase of a Dell EMC supercomputer as well as accessories and parts for a total of$17.9 million . Net cash used in investing activities was$684 thousand during the three months endedMarch 31, 2020 . Cash used in investing activities was primarily for the purchase of lab equipment and leasehold improvements. Financing Activities Net cash provided by financing activities was$2.1 million during the three months endedMarch 31, 2021 . Cash provided by financing activities primarily consisted of$2.2 million of proceeds from the exercise of stock options. Net cash provided by financing activities was$6.0 million during the three months endedMarch 31, 2020 , which consisted primarily of$6.0 million of proceeds from the issuance of convertible notes. See Note 5, "Notes Payable" to the Condensed Consolidated Financial Statements for additional detail on the convertible notes. Future Funding Requirements
Since inception, the Company has incurred significant operating losses. Given our broad and ambitious mission, we expect to continue to incur significant expenses and operating losses for the foreseeable future.
The Company believes that the net proceeds from the IPO, together with the
Company's existing cash, and cash equivalents and borrowings available to us
will be sufficient to fund the Company's operating expenses and capital
expenditures for at least the next 12 months. The Company's assumptions that may
be incorrect and we could exhaust our available capital resources sooner than we
expect.
Recursion does not expect to generate significant revenue from out-licensing
transactions, development milestones, or royalties until successfully completing
significant drug development milestones, whether on our own or in
collaboration with third parties, which Recursion expects will take a number of
years. In order to commercialize the Company's drug candidates, we or our
partners need to complete clinical development and comply with comprehensive
regulatory requirements. Recursion is subject to a number of risks and
uncertainties similar to those of other companies of the same size within the
biotechnology industry, such as uncertainty of clinical trial outcomes,
uncertainty of additional funding, and history of operating losses.
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Developing pharmaceutical products, including conducting preclinical studies and
clinical trials, is a time-consuming, expensive, and uncertain process that
takes years to complete, and we may never generate the necessary data or results
required to obtain marketing approval for any product candidates or generate
revenue from the sale of any product candidate for which we may obtain marketing
approval. In addition, our drug candidates, if approved, may not achieve
commercial success. Our commercial revenues, if any, will be derived from sales
of drugs that we do not expect to be commercially available for many years, if
ever. Accordingly, we will need to obtain substantial additional funds to
achieve our business objectives.
Adequate additional funds may not be available to us on acceptable terms, or at
all. We do not currently have any committed external source of funds. To the
extent that we raise additional capital through the sale of equity or
convertible debt securities, your ownership interest may be diluted, and the
terms of these securities may include liquidation or other preferences and
anti-dilution protections that could adversely affect your rights as a common
stockholder. Additional debt or preferred equity financing, if available, may
involve agreements that include restrictive covenants that may limit our ability
to take specific actions, such as incurring debt, making capital expenditures,
or declaring dividends, which could adversely impact our ability to conduct our
business, and may require the issuance of warrants, which could potentially
dilute your ownership interest further.
If we raise additional funds through collaborations, strategic alliances, or
licensing arrangements with third parties, we may have to relinquish valuable
rights to our technology, future revenue streams, research programs, or product
candidates or grant licenses on terms that may not be favorable to us. If we are
unable to raise additional funds through equity or debt financings or
collaborations, strategic alliances, or licensing arrangements with third
parties when needed, we may be required to delay, limit, reduce, and/or
terminate our product development programs or any future commercialization
efforts or grant rights to develop and market product candidates that we would
otherwise prefer to develop and market ourselves.
Critical Accounting Estimates and Policies
A summary of the Company's significant accounting estimates and policies is included in Note 2, "Summary of Significant Accounting Policies" in our Final Prospectus. There have been no significant changes in the company's application of its critical accounting policies during the three months endedMarch 31, 2021 .
Impact of the COVID-19 Pandemic
InMarch 2020 , theWorld Health Organization declared the outbreak of novel coronavirus disease, or COVID-19, as a pandemic. The COVID-19 pandemic is evolving, and to date has led to the implementation of various responses, including government-imposed quarantines, travel restrictions and other public health safety measures. COVID-19 has caused market volatility and uncertainty around the world in various industries and, as a result, we expect our operations may also be affected. The Company is closely monitoring the impact of the pandemic of COVID-19 on all aspects of Recursion's business. The extent to which COVID-19 ultimately impacts our operations and financial position will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the duration of the outbreak, new information that may emerge concerning the severity of COVID-19 or the effectiveness of actions to contain COVID-19 or treat its impact, among others. In addition, recurrences or additional waves of COVID-19 cases could cause other widespread or more severe impacts depending on where infection rates are highest. The Company has not incurred any significant impairment losses in the carrying values of our assets as a result of the pandemic and we are not aware of any specific related event or circumstance that would require us to revise our estimates reflected in our audited consolidated financial statements.
Emerging Growth Company
The Company is an emerging growth company (EGC), as defined by the Jumpstart Our
Business Startups Act of 2012 (the JOBS act). The JOBS Act, exempts EGCs from
being required to comply with new or revised financial accounting standards
until private companies are required to comply. Recursion as elected to use the
extended transition period for new or revised financial accounting standards
during the period in which we remain an EGC. However, the Company may adopt
certain new or revised accounting standards early. This may make comparisons
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Recursion may remain an EGC untilDecember 31, 2026 although if we: (1) become a "large accelerated filer;" (2) have annual gross revenues of$1.07 billion or more in any fiscal year; or (3) issue more than$1.0 billion of non-convertible debt over a three-year period, the Company would cease to be an EGC as ofDecember 31 of the applicable year.
Recently Issued and Adopted Accounting Pronouncements
Refer to Note 2 in Item 1 of this Quarterly Report on Form 10-Q for information regarding recently issued and adopted accounting pronouncements.
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