UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-40323

Recursion Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

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

41 S Rio Grande Street

Salt Lake City, UT 84101

(Address of principal executive offices) (Zip code)

(385) 269 - 0203

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each 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	☒
Accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☒

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

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

As of October 31, 2021, there were 159,525,190 and 9,467,883 of the registrant’s Class A and B common stock, par value $0.00001 per share, outstanding, respectively.

TABLE OF CONTENTS

		Page
Part I - Financial Information		1
	Item 1. Financial Statements (unaudited)	1
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	24
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	33
	Item 4. Controls and Procedures	33
Part II - Other Information		35
	Item 1. Legal Proceedings	35
	Item 1A. Risk Factors	35
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	82
	Item 6. Exhibits	83
	Signatures	84

RISK FACTOR SUMMARY

Below is a summary of the principal factors that make an investment in the common stock of Recursion Pharmaceuticals, Inc. (Recursion, the Company, we, us, or our) risky or speculative. This summary does not address all of the risks we face. Additional discussion of the risks summarized below, and other risks that we face, can be found in the section titled “Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q.

•We are a clinical-stage biotechnology company with a limited operating history. We have no products approved for commercial sale and have not generated any revenue from product sales.

•Our drug candidates are in preclinical or clinical development, which are lengthy and expensive processes with uncertain outcomes and the potential for substantial delays.

•We have incurred significant operating losses since our inception, we expect to incur substantial and increasing operating losses for the foreseeable future, and we may not be able to achieve or maintain profitability.

•Our mission is broad and expensive to achieve and we will need to raise substantial additional funding, which may not be available on commercially reasonable terms or at all.

•We expect to finance our cash needs for the foreseeable future potentially through a combination of private and public equity offerings and debt financings, as well as strategic collaborations. If we are unable to raise capital when needed, we would be forced to delay, reduce, or eliminate at least some of our product development programs and other activities, and to possibly cease operations.

•Raising additional capital entails risks, including that it may adversely affect the rights, or dilute the holdings, of our existing stockholders; increase our fixed payment obligations; require us to relinquish rights to our technologies or drug candidates; and/or divert management’s attention from our core business.

•If we are unable to establish additional strategic collaborations on commercially reasonable terms or at all, or if current or future collaborations are not successful, we may have to alter our drug development plans.

•We or our current and future collaborators may never successfully develop and commercialize drug candidates, or the market for approved drug candidates may be less than anticipated, which in either case would materially and adversely affect our financial results and our ability to continue our business operations.

•Our approach to drug discovery is unique and may not lead to successful drug products for various reasons, including potential challenges identifying mechanisms of action for our candidates.

•Although we intend to explore other therapeutic opportunities in addition to the drug candidates we are currently developing, we may fail to identify viable new candidates or we may need to prioritize candidates and, as a result, we may fail to capitalize on profitable market opportunities.

•We may experience delays in initiating and completing clinical trials, including due to difficulties in enrolling patients or maintaining compliance with trial protocols, or our trials may produce inconclusive or negative results.

•If we are unable to obtain or there are delays in obtaining regulatory approvals for our drug candidates in the U.S. or other jurisdictions, or if approval is subject to limitations, we will be unable to commercialize, or delayed or limited in commercializing, the products in that jurisdiction and our ability to generate revenue may be materially impaired.

•Our quarterly and annual operating results may fluctuate significantly due to a variety of factors, a number of which are outside our control or may be difficult to predict, which could cause our stock price to fluctuate or decline.

•If we are not able to develop new solutions and enhancements to our drug discovery platform that keep pace with technological developments, or if we experience breaches or malfunctions affecting our platform, our ability to identify and validate viable drug candidates would be adversely impacted.

•Third parties that provide supplies or equipment, or that manufacture our drug products or drug substances, may not provide sufficient quantities at an acceptable cost or may otherwise fail to perform.

•We or third parties on which we depend may experience system failures, cyber-attacks, and other disruptions to information technology or cloud-based infrastructure, which could harm our business and subject us to liability for disclosure of confidential information.

•Force majeure events, such as the continuing COVID-19 pandemic or a natural disaster, could materially disrupt our business and the development of our drug candidates.

•If we are unable to adequately protect and enforce our intellectual property rights, including obtaining and maintaining patent protection for our key technology and products that is sufficiently broad, our competitors could develop and commercialize technology and products similar or identical to ours and our ability to successfully commercialize our technology and products may be impaired.

•If we are unable to protect the confidentiality of our trade secrets and know-how, our business and competitive position may be harmed.

•If we fail to comply with our obligations in the agreements under which we collaborate with and/or license intellectual property rights from third parties, or otherwise experience disruptions to our business relationships with our partners, we could lose rights that are important to our business.

•We face substantial competition, which may result in others discovering, developing, or commercializing competing products before we do.

•If we are unable to attract and retain key executives, experienced scientists, and other qualified personnel, our ability to discover and develop drug candidates and pursue our growth strategy could be impaired.

•We are subject to comprehensive and ongoing statutory and regulatory requirements, noncompliance with which may delay or prevent our ability to market our products or result in fines or other liabilities.

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:

•our research and development programs

•the initiation, timing, progress, results, and cost of our 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, and likelihood of regulatory filings and approvals, including the timing of Investigational New Drug applications and final approval by the U.S. Food and Drug Administration, or FDA, of our current drug candidates and any other future drug candidates, as well as our ability to maintain any such approvals;

•the timing, scope, or likelihood of foreign regulatory filings and approvals, including our ability to maintain any such approvals;

•the size of the 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 than in the prior;

•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;

•our ability to utilize third-party open source software and cloud-based infrastructure, on which we are dependent;

•the adequacy of our insurance policies and the scope of their coverage;

•the potential impact of a pandemic, epidemic, or outbreak of an infectious disease, such as COVID-19, or natural disaster, and the effect of such outbreak or natural disaster on our business and financial results;

•our ability to maintain our technical operations infrastructure to avoid errors, delays, or cybersecurity breaches;

•our continued reliance on third parties to conduct additional clinical trials of our drug candidates, and for the manufacture of our drug candidates for preclinical studies and clinical trials;

•our ability to obtain, and negotiate favorable terms of, any collaboration, licensing or other arrangements that may be necessary or desirable to research, develop, manufacture, or commercialize our platform and drug candidates;

•the pricing and reimbursement of our current drug candidates and other drug candidates we may develop, if approved;

•our estimates regarding expenses, future revenue, capital requirements, and 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 in April 2021; 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.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Recursion Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets (unaudited)

(in thousands, except share and per share amounts)

	September 30,		December 31,
	2021		2020
Assets
Current assets
Cash and cash equivalents	$	394,721	$	262,126
Restricted cash	10,233		5,041
Accounts receivable	34		156
Other receivables	2,248		—
Investments	184,189		—
Other current assets	9,445		2,155
Total current assets	600,870		269,478
Property and equipment, net	55,439		25,967
Intangible assets, net	2,262		2,490
Other non-current assets	35		650
Total assets	$	658,606	$	298,585
Liabilities, convertible preferred stock and stockholders’ equity (deficit)
Current liabilities
Accounts payable	$	6,326	$	1,074
Accrued expenses and other liabilities	25,113		10,485
Current portion of unearned revenue	10,000		10,000
Current portion of notes payable	88		1,073
Current portion of lease incentive obligation	1,416		467
Total current liabilities	42,943		23,099
Deferred rent	3,348		2,674
Unearned revenue, net of current portion	9,167		16,667
Notes payable, net of current portion	656		11,414
Lease incentive obligation, net of current portion	3,460		2,708
Total liabilities	59,574		56,562
Commitments and contingencies (Note 8)
Convertible preferred stock (series A, A-1, B, C and D), $0.00001 par value; 200,000,000 and 121,434,713 shares authorized as of September 30, 2021 and December 31, 2020, respectively; 0 and 112,088,065 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively; liquidation preference of $0 and $450,850 as of September 30, 2021 and December 31, 2020, respectively	—		448,312
Stockholders’ equity (deficit)
Common stock (Class A and B), $0.00001 par value; 2,000,000,000 (Class A 1,989,032,117, Class B 10,967,883) and 188,400,000 shares authorized as of September 30, 2021 and December 31, 2020, respectively; 168,634,959 (Class A 159,167,076, Class B 9,467,883) and 22,314,685 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively	2		—
Additional paid-in capital	934,175		7,312
Accumulated deficit	(335,147)		(213,601)
Accumulated other comprehensive income	2		—
Total stockholders’ equity (deficit)	599,032		(206,289)
Total liabilities, convertible preferred stock and stockholders’ equity (deficit)	$	658,606	$	298,585

See the accompanying notes to these condensed consolidated financial statements.

1

Recursion Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations (unaudited)

(in thousands, except share and per share amounts)

	Three months ended				Nine months ended
	September 30,				September 30,
	2021		2020		2021		2020
Revenue
Grant revenue	$	34	$	163	$	145	$	409
Operating revenue	2,500		862		7,500		862
Total revenue	2,534		1,025		7,645		1,271
Operating expenses
Research and development	33,246		16,535		86,979		42,621
General and administrative	15,690		6,964		38,481		17,684
Total operating expenses	48,936		23,499		125,460		60,305
Loss from operations	(46,402)		(22,474)		(117,815)		(59,034)
Other loss, net	(1,026)		(1,399)		(3,731)		(2,206)
Net loss	$	(47,428)	$	(23,873)	$	(121,546)	$	(61,240)
Per share data
Net loss per share of Class A and B common stock, basic and diluted	$	(0.28)	$	(1.09)	$	(1.10)	$	(2.82)
Weighted-average shares (Class A and B) outstanding, basic and diluted	168,533,550		21,817,900		110,513,231		21,704,008

See the accompanying notes to these condensed consolidated financial statements.

2

Recursion Pharmaceuticals, Inc.

Condensed Consolidated Statements of Comprehensive Loss (unaudited)

(in thousands)

	Three months ended				Nine months ended
	September 30,				September 30,
	2021		2020		2021		2020
Net loss	$	(47,428)	$	(23,873)	$	(121,546)	$	(61,240)
Unrealized gains on investments	2		—		2		—
Net realized losses (gains) on investments reclassified into net loss	—		—		—		—
Other comprehensive income	2		—		2		—
Comprehensive loss	$	(47,426)	$	(23,873)	$	(121,544)	$	(61,240)

See the accompanying notes to these condensed consolidated financial statements.

3

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 income		Stockholders’ Equity
	Shares	Amount	Shares	Amount
Balance as of June 30, 2021	—	—	168,425,907	$	2	$	930,431	$	(287,719)	$	—	$	642,714
Net loss	—	—	—	—		—		(47,428)		—		(47,428)
Other comprehensive income	—	—	—	—		—		—		2		2
Stock option exercises and other	—	—	209,052	—		382		—		—		382
Stock-based compensation	—	—	—	—		3,362		—		—		3,362
Balance as of September 30, 2021	—	—	168,634,959	$	2	$	934,175	$	(335,147)	$	2	$	599,032

	Convertible Preferred Stock			Common Stock (Class A and B)			Additional Paid-in-Capital		Accumulated Deficit		Accumulated other comprehensive income		Stockholders’ Equity (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	—	—		—	—		—		(121,546)		—		(121,546)
Other comprehensive income	—	—		—	—		—		—		2		2
Common stock issuance for initial public offering, net of issuance costs	—	—		27,878,787	1		462,353		—		—		462,354
Conversion of preferred stock to common stock	(112,088,065)	(448,312)		115,598,018	1		448,311		—		—		448,312
Stock warrant exercises	—	—		129,963	—		2,340		—		—		2,340
Stock option exercises and other	—	—		2,713,506	—		3,359		—		—		3,359
Stock-based compensation	—	—		—	—		10,500		—		—		10,500
Balance as of September 30, 2021	—	$	—	168,634,959	$	2	$	934,175	$	(335,147)	$	2	$	599,032

See the accompanying notes to these condensed consolidated financial statements.

4

Recursion Pharmaceuticals, Inc.

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit (unaudited)

(in thousands, except share amounts)

	Convertible Preferred Stock			Common Stock			Additional Paid-in-Capital		Accumulated Deficit		Stockholders’ Deficit
	Shares	Amount		Shares	Amount
Balance as of June 30, 2020	75,189,517	$	201,109	21,652,277	$	—	$	4,524	$	(163,962)	$	(159,438)
Net loss	—	—		—	—		—		(23,873)		(23,873)
Stock option exercises	—	—		282,215	—		211		—		211
Issuance of Series D convertible preferred stock inclusive of the convertible notes, net of issuance costs of $228	35,349,630	236,813		—	—		—		—		—
Stock-based compensation	—	—		—	—		1,025		—		1,025
Balance as of September 30, 2020	110,539,147	$	437,922	21,934,492	$	—	$	5,760	$	(187,835)	$	(182,075)

	Convertible Preferred Stock			Common Stock			Additional Paid-in-Capital		Accumulated Deficit		Stockholders’ Deficit
	Shares	Amount		Shares	Amount
Balance as of December 31, 2019	75,189,517	$	201,109	21,637,609	$	—	$	2,330	$	(126,595)	$	(124,265)
Net loss	—	—		—	—		—		(61,240)		(61,240)
Stock option exercises	—	—		296,883	—		227		—		227
Issuance of Series D convertible preferred stock inclusive of the convertible notes, net of issuance costs of $228	35,349,630	236,813		—	—		—		—		—
Stock-based compensation	—	—		—	—		3,203		—		3,203
Balance as of September 30, 2020	110,539,147	$	437,922	21,934,492	$	—	$	5,760	$	(187,835)	$	(182,075)

See the accompanying notes to these condensed consolidated financial statements.

5

Recursion Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited) (in thousands)

	Nine months ended
	September 30,
	2021		2020
Cash flows from operating activities
Net loss	$	(121,546)	$	(61,240)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	6,169		2,818
Stock-based compensation	10,501		3,104
Asset impairment	—		874
Loss on debt extinguishment	827		883
Other, net	2,940		309
Changes in operating assets and liabilities:
Accounts receivable	114		(30,048)
Other receivables and assets	(6,860)		(677)
Unearned revenue	(7,500)		29,167
Accounts payable	5,252		37
Accrued development expense	1,524		(195)
Accrued expenses, deferred rent and other current liabilities	11,123		996
Net cash used in operating activities	(97,456)		(53,972)
Cash flows from investing activities
Purchases of property and equipment	(35,334)		(2,144)
Acquisition of a business	—		(2,600)
Purchases of investments	(184,167)		—
Proceeds from note receivable	—		595
Net cash used in investing activities	(219,501)		(4,149)
Cash flows from financing activities
Proceeds from initial public offering of common stock, net of issuance costs	462,901		—
Proceeds from sale of preferred stock, net of issuance costs	—		229,530
Proceeds from equity incentive plans	4,620		227
Repayment of long-term debt	(12,777)		(57)
Proceeds from convertible notes	—		6,400
Net cash provided by financing activities	454,744		236,100
Net change in cash, cash equivalents and restricted cash	137,787		177,979
Cash, cash equivalents and restricted cash, beginning of period	267,167		75,171
Cash, cash equivalents and restricted cash, end of period	$	404,954	$	253,150
Supplemental disclosure of non—cash investing and financing information
Conversion of preferred stock to common stock	$	448,312	$	—
Conversion of convertible notes to equity	—		8,071
Deferred issuance costs recorded in equity	547		—
Accrued property and equipment	413		42
Supplemental disclosure of cash flow information
Cash paid for interest	$	665	$	823

See the accompanying notes to these condensed consolidated financial statements.

6

Recursion Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

Note 1.    Description of the Business

Recursion Pharmaceuticals, Inc. (Recursion, the Company, we, us 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 September 30, 2021, the Company had an accumulated deficit of $335.1 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 (see Note 9, “Convertible Preferred Stock” for additional details) and the issuance of Class A common stock in an Initial Public Offering (IPO), which was completed in April 2021 (see Note 10, “Common Stock” for additional details). Recursion will likely be required to raise additional capital. As of September 30, 2021, the Company did not have any unconditional outstanding commitments for additional funding. If the Company is unable to access additional funds when needed, it may not be able to continue the development of its products or the Company could be required to delay, scale back or abandon some or all of its development programs and other operations. The Company’s ability to access capital when needed is not assured and, if not achieved on a timely basis, could materially harm its business, financial condition and results of operations.

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

Note 2.    Basis of Presentation

Basis of Presentation

The unaudited interim condensed consolidated financial statements of Recursion have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) have been condensed or omitted. These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes for the year ended December 31, 2020 included in the Company’s final prospectus dated as of April 15, 2021 and filed with the SEC pursuant to Rule 424(b)(4) on April 16, 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 10, “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

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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 2021 net loss per share amounts as if the authorization and exchange occurred as of the start of the 2021 reporting period. See Note 10, “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

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases (ASU 2016-02). Under ASC (Accounting Standards Codification) 842 - Leases, the Company will be required to recognize a lease liability and a right-of-use asset for all leases (with the exception of short-term leases) on its Condensed Consolidated Balance Sheet at the commencement date of each lease. ASC 842 is effective for annual and interim periods beginning on or after December 15, 2021 and early adoption is permitted. The Company must adopt the standard using the modified retrospective approach either: (1) as of the earliest period presented and through the comparative periods in the entity’s financial statements or (2) as of the effective date of ASC 842, with a cumulative-effect adjustment to equity. The Company expects the adoption to materially increase assets and liabilities on the Condensed Consolidated Balance Sheets related to those leases classified as operating and not recognized on the Condensed Consolidated Balance Sheets under current GAAP. The Company is continuing to evaluate the effect that ASC 842 will have on its consolidated financial statements and related disclosures. The Company will adopt the new standard on January 1, 2022.

Note 3. Acquisitions

In July 2020, the Company entered into an asset purchase agreement to purchase 100% of the assets of Vium, Inc. (Vium) for a total cash consideration of $2.6 million. The primary purpose of the acquisition was to obtain Vium’s technology. This was a related party transaction, see Note 16, “Related Party Transactions” for additional details. The acquisition of Vium has been accounted for as a business combination using the acquisition method of accounting.

The following table summarizes fair values of assets acquired as of the July 2020 acquisition date:

(in thousands)
Inventory	$	232
Property and equipment	14
Technology intangible asset	911
Other intangibles assets	642
Total identifiable net assets	1,799
Goodwill	801
Total assets acquired	$	2,600

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The results of operations of Vium have been included in our Condensed Consolidated Statements of Operations since the date the business was acquired and were not significant. The technology intangible asset is being amortized on a straight-line basis over its three-year useful life. The inventory and other intangible assets were fully impaired at the time they were acquired as the Company did not intend to use them.

The goodwill includes the value of potential future technologies as well as the overall strategic benefits provided to the business.

Note 4.    Supplemental Financial Information

Property and Equipment

	September 30,		December 31,
(in thousands)	2021		2020
Lab equipment	$	29,664	$	19,701
Leasehold improvements	13,795		13,792
Office equipment	20,005		1,075
Construction in progress	8,198		1,361
Property and equipment, gross	71,662		35,929
Less: Accumulated depreciation	(16,223)		(9,962)
Property and equipment, net	$	55,439	$	25,967

Depreciation expense on property and equipment was $2.5 million and $6.3 million during the three and nine months ended September 30, 2021, respectively, and $1.1 million and $3.1 million during the three and nine months ended September 30, 2020, respectively.

For the nine months ended September 30, 2021, the Company purchased a Dell EMC supercomputer for $17.9 million. The purchase was classified as office equipment in the above table.

Accrued Expenses and Other Liabilities

	September 30,		December 31,
(in thousands)	2021		2020
Accrued compensation	$	7,261	$	3,085
Accrued development expenses	3,813		2,289
Accrued early discovery expenses	1,520		338
Accrued investment purchases	5,898		—
Accrued construction	996		—
Accrued other expenses	5,625		4,773
Accrued expense and other liabilities	$	25,113	$	10,485

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Interest Expense, net

	Three months ended September 30,				Nine months ended September 30,
(in thousands)	2021		2020		2021		2020
Interest expense	$	220	$	401	$	2,971	$	1,129
Interest income	(50)		(46)		(94)		(290)
Interest expense, net	$	170	$	355	$	2,877	$	839

For the nine months ended September 30, 2021, interest expense primarily related to changes in fair value of the Series A and B warrants (see Note 12, “Stock-based Compensation” for additional details on the warrants). The Company also had expenses for the Midcap loan and tenant improvement allowance notes (see Note 7, “Notes Payable” for additional details.) For the nine months ended September 30, 2020, interest expense included expenses on the Midcap loan, convertible notes and tenant improvement allowance notes (see Note 7, “Notes Payable” for additional details). Interest expense was included in “Other loss, net” on the Condensed Consolidated Statements of Operations.

Note 5. 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.

The Company reviews the investments for declines in fair value below their cost basis each quarter or whenever circumstances indicate that the cost basis of an asset may not be recoverable and assesses whether the decline was due to credit-related factors or other factors. The evaluation is based on a number of factors, including the extent to which the fair value is below the cost basis; adverse conditions related specifically to the security, such as any changes to the credit rating of the security; and the intent to sell, or whether Recursion will more likely than not be required to sell the security before recovery of its amortized cost basis. The assessment of whether a security is impaired could change in the future based on new developments or changes in assumptions related to that particular security.

The following table summarizes the Company’s available-for-sale investments by type of security:

	September 30, 2021
(in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair values
Money market funds	$	187,225	$	—	$	—	$	187,225
Corporate bonds	5,886		—		(1)		5,885
Certificates of deposit	21,450		1		(1)		21,450
Commercial paper	191,348		10		(7)		191,351
Total	$	405,909	$	11	$	(9)	$	405,911

The following table summarizes the classification of the Company’s available-for-sale investments on the Condensed Consolidated Balance Sheets:

(in thousands)	September 30, 2021
Cash and cash equivalents	$	221,722
Short-term investments	184,189
Total	$	405,911

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As of September 30, 2021, all of the Company’s available-for-sale investments mature in one year or less.

The Company held a total of 16 positions, which were in an unrealized loss position as of September 30, 2021. The unrealized losses were primarily due to changes in interest rates. There were no significant unrealized losses as of September 30, 2021. Realized gains and losses on the Company’s investments were insignificant during the three and nine months ended September 30, 2021. No impairments were recorded during the three and nine months ended September 30, 2021. Realized gains and losses on interest-bearing securities are recorded in Other income, net, in the Condensed Consolidated Statements of Income.

Note 6.    Goodwill and Intangible Assets

Goodwill

The carrying amount of goodwill was $801 thousand as of September 30, 2021. There were no changes to the carrying amount of goodwill during the three and nine months ended September 30, 2021. For the three and nine months ended September 30, 2020, the goodwill addition related to the purchase of Vium (see Note 3, “Acquisitions” for additional details on the acquisition). No goodwill impairment was recorded during the three and nine months ended September 30, 2021 and 2020.

Intangible Assets, Net

The following table summarizes intangible assets:

	September 30, 2021						December 31, 2020
(in thousands)	Gross carrying amount		Accumulated Amortization		Net carrying amount		Gross carrying amount		Accumulated Amortization		Net carrying amount
Definite-lived intangible asset	$	911	$	(354)	$	557	$	911	$	(127)	$	784
Indefinite-lived intangible asset	904		—		904		904		—		904
Intangible assets, net	$	1,815	$	(354)	$	1,461	$	1,815	$	(127)	$	1,688

Amortization expense was $76 thousand and $228 thousand during the three and nine months ended September 30, 2021, respectively. Amortization expense was $51 thousand during the three and nine months ended September 30, 2020. 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 and nine months ended September 30, 2021. There were no indefinite-lived intangible assets on the Condensed Consolidated Balance Sheet as of September 30, 2020.

Note 7.    Notes Payable

Midcap Financial

In September 2019, the Company entered into a new Credit and Security Agreement with Midcap Financial Trust (Midcap) and the other lenders party thereto (the Midcap loan agreement). The Midcap loan agreement provided for a term loan facility that included an initial tranche of $11.9 million. The Company used $11.2 million of the proceeds from the initial tranche to fully repay a previously outstanding term loan with Pacific Western Bank (Pacific). 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. As of December 31, 2020, the outstanding principal balance under the Midcap loan agreement was $11.9 million.

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

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Pacific Western

In May 2018, Pacific issued a standby letter of credit of $3.8 million for the benefit of the Company’s landlord, securing certain Company obligations relating to tenant improvements. This letter of credit was transferred to J.P. Morgan during the nine months ended September 30, 2021. See Note 15, “Fair Value Measurements” for additional details. As of December 31, 2020, the outstanding letter of credit was $3.8 million, for which the Company held $4.0 million of restricted cash as collateral.

Convertible Notes

In March and April of 2020, the Company issued convertible promissory notes for an aggregate principal amount of $6.4 million. Under certain conditions, the principal was convertible into an amount of equity with a fair value that exceeded the amount of the notes’ principal on the conversion date. This feature of the notes was accounted for separately at fair value as a derivative liability. These notes converted to 1,203,231 shares of Series D Preferred Stock in September 2020. Upon conversion of the notes, the Company recorded the $1.6 million fair value of the derivative liability as equity on the Condensed Consolidated Balance Sheet. Changes in the fair value of the derivative were recorded in “Other loss, net” in the Condensed Consolidated Statements of Operations and were $161 thousand and $484 thousand during the three and nine months ended September 30, 2020.

Notes Payable for Tenant Improvement Allowance

In 2018, the Company borrowed $992 thousand, which was available as part of the Station 41 lease from its landlord for use on tenant improvements (see Note 8, “Commitments and Contingencies” for additional details). Under the terms of the lease, the note will be repaid over a 10-year period at an 8% interest rate.

Notes payable consisted of the following:

	September 30,		December 31,
(in thousands)	2021		2020
Current portion of notes payable	$	88	$	1,073
Long-term portion of notes payable	656		11,615
Less: unamortized issuance costs	—		(201)
Notes payable, net	$	744	$	12,487

The following table presents information regarding the Company’s debt principal repayment obligations as of September 30, 2021:

(in thousands)	Amount
2021	$	21
2022	90
2023	97
2024	105
2025	114
Thereafter	317
Total debt principal payments	$	744

Note 8. Commitments and Contingencies

Lease Obligations

The Company has entered into various long-term real estate leases primarily related to office, research and development (R&D) and operating activities. For the three and nine months ended September 30, 2021, total rent

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expense was $1.7 million and $4.4 million, respectively. For the three and nine months ended September 30, 2020, total rent expense was $1.1 million and $3.2 million, respectively. The leases described below are classified as operating leases.

Komas Lease

In August 2016, the Company entered into a new facilities lease, with the right of use and payments beginning in January 2017. The term of the lease is 7 years. This lease includes provisions for escalating rent payments. Rent expense is recognized on a straight-line basis over the term of the lease. This lease included an allowance for tenant improvements. Tenant improvements were recorded as property and equipment and are being depreciated over the term of the lease. In conjunction with the allowance for tenant improvements, the Company recorded a lease incentive obligation of $847 thousand which is being amortized over the term of the lease as a reduction to rent expense. As of September 30, 2021, the unamortized lease incentive obligation was $282 thousand.

Station 41 Lease

In August 2017, the Company entered into a new facilities lease, with the right of use beginning in December 2017 and payments beginning in June 2018. The term of the lease is 10 years, with one five-year renewal option. This lease includes provisions for escalating rent payments. Rent expense is recognized straight-line over the term of the lease. This lease included an allowance for tenant improvements of $4.0 million, the full amount of which was drawn in 2017. Tenant improvements were recorded as property and equipment and are being depreciated over the remaining term of the lease. The Company recorded a leasehold obligation for tenant improvements, which is being amortized over the term of the lease as a reduction to rent expense. As of September 30, 2021, the unamortized lease incentive obligation was $2.5 million.

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

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

Milpitas Lease

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

Station 56 Lease

In January 2021, the Company entered into a new facilities lease with 91,478 square feet adjacent to the Station 41 lease. The right of use began in August 2021 and the term of the lease is approximately 11 years with a five-year renewal option. The lease includes provisions for escalating rent payments, with total minimum payments of $32.0 million. Rent expense is recognized straight-line over the term of the lease.

The lease includes a tenant improvement allowance of up to approximately $10.1 million. As of September 30, 2021, $2.2 million of the tenant improvement allowance has been utilized. Tenant improvements were recorded as property and equipment and are being depreciated over the remaining term of the lease. The Company recorded a leasehold obligation for the tenant improvements, which is being amortized over the term of the lease as a reduction to rent expense. As of September 30, 2021, the unamortized lease incentive obligation was $2.1 million.

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Future Minimum Lease Payments

Future minimum commitments as of September 30, 2021 under the Company’s lease agreements are as follows:

(in thousands)	Amount
2021	$	977
2022	3,977
2023	7,053
2024	7,325
2025	7,513
Thereafter	34,187
Total Minimum Payments	$	61,032

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 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 September 30, 2021 and December 31, 2020, as no amounts in excess of insurance coverage 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 9.    Convertible Preferred Stock

The Company has issued preferred stock as part of various financing events. In April 2021, all outstanding shares of convertible preferred stock converted into 115,598,018 shares of Class A common stock as part of the IPO (see Note 10, “Common Stock” for additional details on the IPO). There was no convertible preferred stock outstanding as of September 30, 2021.

No convertible preferred stock was issued during the three and nine months ended September 30, 2021. The Company issued 35,349,630 shares of Series D convertible preferred stock for an aggregate purchase price of $235.2 million ($6.70 per purchased share and $5.37 per converted share) during the three and nine months ended September 30, 2020. As part of the Series D issuance, outstanding convertible notes were converted into Series D shares. As of September 30, 2020, there were no cumulative dividends owed or in arrears on the preferred stock.

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Convertible preferred stock consisted of the following as of December 31, 2020:

(in thousands except share data)	Preferred Shares Authorized	Preferred Shares Issued and Outstanding	Carrying Value		Liquidation Preferences		Shares of Common Stock Issuable Upon Conversion
Series A	30,078,402	29,965,754	$	21,281	$	21,281	29,965,754
Series A-1	4,975,521	4,975,520	—		—		4,975,520
Series B	21,497,667	21,471,898	59,913		60,000		21,471,898
Series C	18,956,354	18,776,345	119,915		122,058		22,286,298
Series D	45,926,769	36,898,548	247,203		247,511		36,898,548
Total convertible preferred stock	121,434,713	112,088,065	$	448,312	$	450,850	115,598,018

Balance Sheet Classification

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

Note 10. 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 September 30, 2021 and December 31, 2020, 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., our Chief Executive Officer (CEO), or his affiliate. As of September 30, 2021, Dr. Gibson and his affiliate held outstanding shares of Class B common stock representing approximately 37% 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

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Dr. Gibson had been fully vested and exercised and exchanged for shares of Class B common stock as of September 30, 2021, Dr. Gibson and his affiliate would hold approximately 41% 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.

Note 11. Collaborative Development Contracts

Bayer AG

In August 2020, the Company entered into a Research Collaboration and Option Agreement (the Bayer Agreement) with Bayer AG (Bayer) for a five-year term pursuant to which the Company and Bayer may initiate approximately 10 research projects related to fibrosis across multiple organ systems, including the lung, liver and heart. Under the agreement, the Company contributed compounds from our proprietary library and Bayer contributed compounds from its proprietary library and will contribute scientific expertise throughout the collaboration.

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

For the three and nine months ended September 30, 2021, the Company recognized $2.5 million and $7.5 million, respectively, of revenue resulting from the collaboration. There was $10.0 million and $9.2 million of current and non-current unearned revenue, respectively, remaining as of September 30, 2021. The allocation of unearned revenue between current and non-current is based on Recursion’s estimates of when the Company expects to incur the related costs.

Under each research project, the Company will work with Bayer to identify potential candidates for development. Under the agreement, Bayer has the first option for licenses to potential candidates. Each such license could potentially result in option exercise fees and development and commercial 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.

Note 12. 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 September 30, 2021, 15,580,505 shares of Class A common stock were available for grant.

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 September 30,				Nine months ended September 30,
(in thousands)	2021		2020		2021		2020
Research and development	$	1,305	$	312	$	3,000	$	1,288
General and administrative	1,791		512		6,771		1,570
Total	$	3,096	$	824	$	9,771	$	2,858

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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 nine months ended September 30, 2021 was as follows:

(in thousands except share data)	Shares	Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life (In Years)	Aggregate Intrinsic Value
Outstanding as of December 31, 2020	20,937,443	$	1.85	8.5	$	12,956
Granted	2,840,467	10.77
Cancelled	(1,203,239)	2.24
Exercised	(2,711,021)	1.22			14,376
Outstanding as of September 30, 2021	19,863,650	$	3.03	8.2	$	396,084
Exercisable as of September 30, 2021	7,963,568	$	1.71	7.2	$	169,803

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 nine months ended September 30, 2021 and 2020 were $6.41 and $1.49, respectively.

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

	Nine months ended September 30,
	2021		2020
Expected term (in years)	6.2		6.2
Expected volatility	66	%	65	%
Expected dividend yield	—		—
Risk-free interest rate	0.97	%	1.00	%

In February 2021, the Company granted 150,000 shares of stock options with a performance and service condition that had a fair value of $358 thousand. The grant was fully expensed during the three months ended June 30, 2021 as the performance and service conditions were met.

In March 2020, the Company granted 1,500,000 shares of stock options with performance, market and service conditions. At grant date, the Company estimated that the fair value of the options was approximately $2.0 million. For the three and nine months ended September 30, 2021, $41 thousand and $1.6 million of expense was recorded, respectively, as several of the conditions were met during the three months ended June 30, 2021. For the three and nine months ended September 30, 2020, no expense was recorded as the performance conditions were not considered probable.

As of September 30, 2021, $27.9 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 nine months ended September 30, 2021:

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	Stock units	Weighted-average grant date fair value
Outstanding as of December 31, 2020	—	$	—
Granted	143,723	29.46
Vested	(2,528)	34.82
Forfeited	(673)	29.42
Outstanding as of September 30, 2021	140,522	$	29.36

As of September 30, 2021, $3.6 million of unrecognized compensation cost related to RSUs is expected to be recognized as expense over approximately the next three years.

Employee Share Purchase Plan (ESPP)

In April 2021, the Board of Directors and stockholders of the Company adopted the 2021 Employee Stock Purchase Plan (the 2021 ESPP). Under the 2021 ESPP, 3,238,000 shares of Class A common stock were reserved. The 2021 ESPP has consecutive six-month offering periods. The offering periods are scheduled to start on the first trading day on or after May 20 and November 20 of each year, except the first offering period, which commenced on the Plan Effectiveness Date and will end on the first trading day on or after November 20, 2021. The second offering period will commence on the first trading day on or after November 20, 2021. The per share purchase price will be 85% of the lower of the fair market value on (1) the first trading day of the offering period or (2) the exercise date.

The fair value of the ESPP grants is measured at grant date. The fair value is determined considering the purchase discount and the fair value of the look-back feature. Black-Scholes pricing models are used to calculate the fair value of the look-back feature. The weighted-average assumptions used in the Black-Scholes models were as follows:

	Nine months ended September 30, 2021
Expected term (in years)	0.6
Expected volatility	69	%
Expected dividend yield	—
Risk-free interest rate	0.04	%

As of September 30, 2021, no shares were issued under the 2021 ESPP. For the three and nine months ended September 30, 2021, Recursion recognized expense of $233 thousand and $450 thousand, respectively. As of September 30, 2021, $136 thousand of unrecognized compensation cost related to the 2021 ESPP is expected to be recognized as expense over approximately the next two months.

Warrants

In connection with the execution of the Pacific loan agreement (see Note 7, “Notes Payable” for additional details), the Company issued to Pacific fully vested warrants to purchase 84,486 shares of Series A Preferred Stock (Series A warrants) at a purchase price of $0.71 per share. In May 2017, the Company drew on additional borrowing capacity under the Pacific loan agreement, which required the Company to issue additional fully vested warrants for 28,161 shares of Series A Preferred Stock at a purchase price of $0.71 per share. These Series A warrants were exercised in April 2021. As of December 31, 2020, their fair value was $77 thousand.

In July 2018, the Company drew on additional borrowing capacity under an amended agreement. This required the Company to issue fully vested warrants to purchase 25,762 shares of Series B Preferred Stock (Series B warrants) at a purchase price of $2.79 per share. These Series B warrants were exercised in April 2021. As of December 31, 2020, their fair value was $48 thousand.

In January 2020, the Company issued warrants to purchase 180,000 shares of Series C Preferred Stock (Series C warrants) at a purchase price of $6.51 per share as part of a services agreement. The warrants vest ratably over 18

18

months. The Series C warrants remained outstanding and were fully vested and exercisable as of September 30, 2021. The grant date fair value was $4.10 per share.

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

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

The following is a summary of the changes in the Company’s Series A and B warrant liability balance during the nine months ended September 30, 2021 and 2020:

(in thousands)
Balance as of December 31, 2019	$	128
Net increase in fair value of warrants	2
Balance as of September 30, 2020	$	130
Balance as of December 31, 2020	$	125
Increase in fair value of warrants	2,215
Recorded in equity upon exercise	(2,340)
Balance as of September 30, 2021	$	—

Note 13. Income Taxes

The Company did not record any income tax expense during the three and nine months ended September 30, 2021 and 2020. The Company has historically incurred operating losses and maintains a full valuation allowance against its net deferred tax assets. Valuation allowances are recorded when the expected realization of the deferred tax assets does not meet a “more likely than not” criterion. Realization of the Company’s deferred tax assets are dependent upon the generation of future taxable income, the amount and timing of which are uncertain.

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

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

Note 14. Net Loss Per Share