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

FORM 10-Q

(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 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 classTrading symbol(s)Name of each exchange on which registered
Class A Common Stock, par value $0.00001RXRX
Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.         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 filerNon-accelerated filer
Accelerated filerSmaller 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 July 31, 2021, there were 159,015,551 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



SUMMARY RISK FACTORS

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

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

Special Note Regarding Forward-Looking Information

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



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

our research and development programs
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 needs for additional financing
our financial performance;
the period over which we estimate our existing cash and cash equivalents will be sufficient to fund our future operating expenses and capital expenditure requirements;
our ability to raise substantial additional funding;
the impact of current and future laws and regulations, and our ability to comply with all regulations that we are, or may become, subject to;
the need to hire additional personnel and our ability to attract and retain such personnel;
the impact of any current or future litigation, which may arise during the ordinary course of business and be costly to defend;
our expectations regarding the period during which we will qualify as an emerging growth company under the JOBS Act;
our anticipated use of our existing resources and the net proceeds from our Initial Public Offering in April 2021; and
other risks and uncertainties, including those listed under the caption “Risk Factors.”

We have based these forward-looking statements largely on our current expectations and projections about our business, the industry in which we operate, and financial trends that we believe may affect our business, financial condition, results of operations, and prospects, and these forward-looking statements are not guarantees of future performance or development. These forward-looking statements speak only as of the date of this report and are subject to a number of risks, uncertainties and assumptions described in the section titled “Risk Factors” and elsewhere in this report. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, we 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)
 June 30,December 31,
 20212020
Assets  
Current assets  
Cash and cash equivalents$632,738 $262,126 
Restricted cash10,232 5,041 
Accounts receivable49 156 
Other current assets4,616 2,155 
Total current assets647,635 269,478 
Property and equipment, net48,549 25,967 
Intangible assets, net2,338 2,490 
Other non-current assets68 650 
Total assets$698,590 $298,585 
Liabilities, convertible preferred stock and stockholders’ equity (deficit)
Current liabilities
Accounts payable$3,196 $1,074 
Accrued expenses and other liabilities12,710 10,485 
Current portion of unearned revenue10,000 10,000 
Current portion of notes payable3,135 1,073 
Current portion of lease incentive obligation499 467 
Total current liabilities29,540 23,099 
Deferred rent2,819 2,674 
Unearned revenue, net of current portion11,667 16,667 
Notes payable, net of current portion9,423 11,414 
Lease incentive obligation, net of current portion2,427 2,708 
Total liabilities55,876 56,562 
Commitments and contingencies (Note 6)
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 June 30, 2021 and December 31, 2020, respectively; 0 and 112,088,065 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively; Liquidation preference of $0 and $450,850 as of June 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 June 30, 2021 and December 31, 2020, respectively; 168,425,907 (Class A 158,958,024, Class B 9,467,883) and 22,314,685 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively
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Additional paid-in capital930,431 7,312 
Accumulated deficit(287,719)(213,601)
Total stockholders’ equity (deficit)642,714 (206,289)
Total liabilities, convertible preferred stock and stockholders’ equity (deficit)$698,590 $298,585 
See the accompanying notes to these condensed consolidated financial statements.
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Recursion Pharmaceuticals, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited)
(in thousands, except share and per share amounts)
Three months endedSix months ended
June 30,June 30,
2021202020212020
Revenue
Grant revenue$49 $186 $111 $246 
Operating revenue2,500  5,000  
Total revenue2,549 186 5,111 246 
Operating expenses
Research and development29,624 13,244 53,733 26,086 
General and administrative13,854 5,159 22,791 10,720 
Total operating expenses43,478 18,403 76,524 36,806 
Loss from operations(40,929)(18,217)(71,413)(36,560)
Other loss, net(2,472)(726)(2,705)(807)
Net loss and comprehensive loss$(43,401)$(18,943)$(74,118)$(37,367)
Per share data
Net loss per share of Class A and B common stock, basic and diluted$(0.31)$(0.88)$(0.91)$(1.73)
Weighted-average shares (Class A and B) outstanding, basic and diluted138,360,646 21,652,277 81,022,240 21,646,118 






















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


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
Stockholders’
Equity (Deficit)
Shares
Amount
Shares
Amount
Balance as of March 31, 2021112,088,065 $448,312 24,036,725 $ $11,287 $(244,318)$(233,031)
Net loss— — — — — (43,401)(43,401)
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— — 782,414 — 823 — 823 
Stock-based compensation— — — — 5,317 — 5,317 
Balance as of June 30, 2021 $ 168,425,907 $2 $930,431 $(287,719)$642,714 

Convertible Preferred Stock
Common Stock
(Class A and B)
Additional Paid-in-Capital
Accumulated
Deficit
Stockholders’
Equity (Deficit)
Shares
Amount
Shares
Amount
Balance as of December 31, 2020112,088,065 $448,312 22,314,685 $ $7,312 $(213,601)$(206,289)
Net loss— — — — — (74,118)(74,118)
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— — 2,504,454 — 2,977 — 2,977 
Stock-based compensation— — — — 7,138 — 7,138 
Balance as of June 30, 2021 $ 168,425,907 $2 $930,431 $(287,719)$642,714 










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


Recursion Pharmaceuticals, Inc.
Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit (unaudited)
(in thousands, except share amounts)

Convertible Preferred StockCommon StockAdditional Paid-in-CapitalAccumulated DeficitStockholders’ Deficit
SharesAmountSharesAmount
Balance as of March 31, 202075,189,517 $201,109 21,652,277 $ $3,632 $(145,019)$(141,387)
Net loss— — — — — (18,943)(18,943)
Stock-based compensation— — — — 892 — 892 
Balance as of June 30, 202075,189,517 $201,109 21,652,277 $ $4,524 $(163,962)$(159,438)


Convertible Preferred StockCommon StockAdditional Paid-in-CapitalAccumulated DeficitStockholders’ Deficit
SharesAmountSharesAmount
Balance as of December 31, 201975,189,517 $201,109 21,637,609 $ $2,330 $(126,595)$(124,265)
Net loss— — — — — (37,367)(37,367)
Stock option exercises— — 14,668 — 16 — 16 
Stock-based compensation— — — — 2,178 — 2,178 
Balance as of June 30, 202075,189,517 $201,109 21,652,277 $ $4,524 $(163,962)$(159,438)




















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


Recursion Pharmaceuticals, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)
Six months ended
June 30,
 20212020
Cash flows from operating activities
Net loss$(74,118)$(37,367)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization3,733 1,961 
Stock-based compensation7,138 2,034 
Other, net2,476 (144)
Changes in operating assets and liabilities:
Accounts receivable98 142 
Other assets(2,460)(850)
Unearned revenue(5,000) 
Accounts payable2,122 92 
Accrued development expense606 (574)
Accrued expenses, deferred rent and other current liabilities997 190 
Net cash used in operating activities(64,408)(34,516)
Cash flows from investing activities
Purchases of property and equipment(25,628)(1,318)
Proceeds from note receivable 595 
Net cash used in investing activities(25,628)(723)
Cash flows from financing activities
Proceeds from initial public offering of common stock, net of issuance costs462,901  
Proceeds from exercise of stock options2,978 16 
Repayment of long-term debt(40)(37)
Proceeds from convertible notes 6,400 
Net cash provided by financing activities465,839 6,379 
Net change in cash, cash equivalents and restricted cash
375,803 (28,860)
Cash, cash equivalents and restricted cash, beginning of period267,167 75,171 
Cash, cash equivalents and restricted cash, end of period$642,970 $46,311 
Supplemental disclosure of non—cash investing and financing information
Conversion of preferred stock to common stock$448,312 $ 
Deferred issuance costs recorded in equity547  
Accrued property and equipment
763 11 
Supplemental disclosure of cash flow information
Cash paid for interest$540 $722 





See the accompanying notes to these condensed consolidated financial statements.
5


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

Recursion Pharmaceuticals, Inc. (Recursion, the Company, we or us) 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 June 30, 2021, the Company had an accumulated deficit of $287.7 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 7, “Convertible Preferred Stock” for additional information) and the issuance of Class A common stock in an Initial Public Offering (IPO), which was completed in April 2021 (see Note 8, “Common Stock” for additional details). Recursion will likely be required to raise additional capital. As of June 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 8, “Common Stock” for additional details.

In April 2021, the Company’s Board of Directors authorized two classes of common stock, Class A and Class B. Certain shares of Class A were exchanged for Class B on a one for one basis. The creation and issuance of the
6


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 8, “Common Stock” for additional details.

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

Emerging Growth Company

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

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

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases - Topic 842 (ASU 2016-02). Under ASC 842, the Company will be required to recognize a lease liability and a right-of-use asset for all leases (with the exception of short-term leases) on its balance sheet at the commencement date of each lease. ASU 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 Balance Sheets under current GAAP. The Company is continuing to evaluate the effect that ASU 842 will have on its consolidated financial statements and related disclosures. The Company will adopt the new standard on January 1, 2022.

Note 3.    Supplemental Financial Information

Property and Equipment

June 30,December 31,
(in thousands)20212020
Lab equipment$25,562 $19,701 
Leasehold improvements13,312 13,792 
Office equipment20,005 1,075 
Construction in progress3,427 1,361 
Property and equipment, gross62,306 35,929 
Less: Accumulated depreciation(13,757)(9,962)
Property and equipment, net$48,549 $25,967 

Depreciation expense on property and equipment was $2.4 million and $3.8 million during the three and six months ended June 30, 2021, respectively, and $1.0 million and $2.0 million during the three and six months ended June 30, 2020, respectively.

7


For the six months ended June 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

June 30,December 31,
(in thousands)20212020
Accrued compensation$4,396 $3,085 
Accrued development expenses2,895 2,289 
Accrued early discovery expenses
1,113 338 
Accrued other expenses4,306 4,773 
Accrued expense and other liabilities$12,710 $10,485 

Interest Expense, net

Three months ended June 30,Six months ended June 30,
(in thousands)2021202020212020
Interest expense$2,501 $426 $2,750 $727 
Interest income(29)(24)(45)(244)
Interest expense, net$2,472 $402 $2,705 $483 

For the three and six months ended June 30, 2021, interest expense primarily related to changes in fair value of the Series A and B warrants (see Note 10, “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 5, “Notes Payable” for additional details.) Interest expense was included in “Other loss, net” on the Condensed Consolidated Statements of Operations and Comprehensive Loss.

Note 4.    Goodwill and Intangible Assets

Goodwill

The carrying amount of goodwill was $801 thousand as of June 30, 2021. There were no changes to the carrying amount of goodwill during the three and six months ended June 30, 2021. There was no goodwill balance outstanding during the three and six months ended June 30, 2020. As of June 30, 2021, there were no reductions in goodwill relating to impairment losses.

Intangible Assets, Net

The following table summarizes intangible assets:

June 30, 2021December 31, 2020
(in thousands)Gross carrying amountAccumulated AmortizationNet carrying amountGross carrying amountAccumulated AmortizationNet carrying amount
Definite-lived intangible asset$911 $(278)$633 $911 $(127)$784 
Indefinite-lived intangible asset 904 — 904 904 — 904 
Intangible assets, net$1,815 $(278)$1,537 $1,815 $(127)$1,688 
Amortization expense was $76 thousand and $152 thousand during the three and six months ended June 30, 2021, respectively. There was no amortization expense during the three and six months ended June 30, 2020. Amortization expense was included in research and development in the Condensed Consolidated Statements of Operations and Comprehensive Loss. No definite-lived intangible asset impairment charges were recorded during
8


the three and six months ended June 30, 2021. There were no intangible asset balances outstanding during the three and six months ended June 30, 2020.

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 six months ended June 30, 2021.

Note 5.    Notes Payable

Midcap Financial

In September 2019, the Company entered into a new Credit and Security Agreement with Midcap Financial Trust (Midcap) and the other lenders party thereto (the Midcap Loan Agreement). The Midcap Loan Agreement provides for a term loan facility that includes: i) an initial tranche of $11.9 million; and ii) a second tranche of up to $15.0 million, which if drawn would result in a maximum outstanding amount of $26.9 million. The Company used $11.2 million of the proceeds from the initial tranche to fully repay a previously outstanding term loan with Pacific Western Bank (Pacific). Proceeds from the term loans may be used for general corporate purposes. As of June 30, 2021 and December 31, 2020, the outstanding principal balance under the Midcap loan agreement was $11.9 million.

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

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

The debt is secured against substantially all of the Company’s assets. The Midcap Loan Agreement includes standard affirmative and restrictive covenants, including covenants limiting the ability of the Company and its subsidiaries to, among other things, dispose of assets, grant certain licenses, make investments, consummate mergers or acquisitions, incur debt, grant liens and make dividends or distributions, in each case subject to certain exceptions. The loan agreement also includes standard events of default, including, subject to grace periods in certain instances, payment defaults; breaches of covenants; breaches of representations and warranties; cross-defaults with certain other indebtedness; insolvency and bankruptcy defaults; a change of control of the Company or any subsidiary; or a material adverse change in the business, operations or conditions of the Company. Upon the occurrence of an event of default, Midcap may declare all outstanding obligations immediately due and payable, increase the applicable interest rate by 2% and take such other actions as set forth in the Midcap Loan Agreement. As of June 30, 2021 and 2020, the Company was in compliance with all debt covenants.

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

Pacific Western

In May 2018, Pacific issued a standby letter of credit of $3.8 million for the benefit of the Company’s landlord, securing certain Company obligations relating to tenant improvements. This letter of credit was transferred to J.P. Morgan during the three and six months ended June 30, 2021. See Note 14, “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

For the six months ended June 30, 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. Changes in the fair value of the derivative were
9


recorded in “Other loss, net” in the Condensed Consolidated Statements of Operations and Comprehensive Loss and were $323 thousand during the three and six months ended June 30, 2020.

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

Notes Payable for Tenant Improvement Allowance

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

June 30,December 31,
(in thousands)
20212020
Current portion of notes payable$3,135 $1,073 
Long-term portion of notes payable9,595 11,615 
Less: unamortized issuance costs
(172)(201)
Notes payable, net$12,558 $12,487 

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

(in thousands)
Amount
2021$1,033 
20224,052 
20234,059 
20243,059 
2025112 
Thereafter346 
Total debt principal payments$12,661 

Note 6. Commitments and Contingencies

Lease Obligations

The Company has entered into various long-term real estate leases primarily related to office, research and development (R&D) and operating activities. For the three and six months ended June 30, 2021, total rent expense was $1.4 million and $2.7 million, respectively. For the three and six months ended June 30, 2020, total rent expense was $1.1 million and $2.1 million, respectively. The Komas, Station 41 and Milpitas 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 June 30, 2021, the related unamortized lease incentive obligation was $313 thousand.
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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 exercisable by the Company. 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. In conjunction with the allowance for tenant improvements, the Company recorded a leasehold obligation, which is being amortized over the term of the lease as a reduction to rent expense. As of June 30, 2021, the related unamortized lease incentive obligation was $2.6 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 7 years. This amendment for the extra space includes provisions for escalating rent payments. Rent expense is recognized straight-line over the term of the lease.

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

Milpitas Lease
In August 2019, the Company entered 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.

Future Minimum Lease Payments
Future minimum commitments as of June 30, 2021 under the Company’s lease agreements are as follows:

(in thousands)
Amount
2021$1,952 
20224,963 
20237,344 
20247,371 
20257,560 
Thereafter33,214 
Total Minimum Payments$62,404 

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

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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 June 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 7.    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 8, “Common Stock” for additional details on the IPO). There was no convertible preferred stock outstanding as of June 30, 2021.

No new convertible preferred stock was issued during the three and six months ended June 30, 2021 and 2020. As of June 30, 2020, there were no cumulative dividends owed or in arrears on the preferred stock.

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 A30,078,402 29,965,754 $21,281 $21,281 29,965,754 
Series A-14,975,521 4,975,520   4,975,520 
Series B21,497,667 21,471,898 59,913 60,000 21,471,898 
Series C18,956,354 18,776,345 119,915 122,058 22,286,298 
Series D45,926,769 36,898,548 247,203 247,511 36,898,548 
Total convertible preferred stock121,434,713 112,088,065 $448,312 $450,850 115,598,018 
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 8.    Common Stock

Each share of Class A common stock entitles the holder to one vote per share and each share of Class B common stock entitles the holder to 10 votes per share on all matters submitted to a vote of the Company’s stockholders.
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Common stockholders are entitled to receive dividends, as may be declared by the Company’s board of directors. As of June 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 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 Series A, A-1, B, C and D convertible preferred stock converted into 115,598,018 shares of Class A common stock.

Stock Split

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

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 June 30, 2021, Dr. Gibson and his affiliate held outstanding shares of Class B common stock representing approximately 38% of the voting power of the Company’s outstanding shares. This voting power may increase over time as Dr. Gibson vests in and exercises equity awards outstanding. If all the equity awards held by Dr. Gibson had been fully vested and exercised and exchanged for shares of Class B common stock as of June 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 9. Collaborative and Other Research and Development Contracts

Bayer AG

In August 2020, the Company entered into a Research Collaboration and Option Agreement (the Bayer Agreement) with Bayer AG (Bayer) for a five-year term pursuant to which the Company and Bayer may initiate approximately 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 six months ended June 30, 2021, the Company recognized $2.5 million and $5.0 million, respectively, of revenue resulting from the collaboration. There was $10.0 million and $11.7 million of current and
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non-current unearned revenue, respectively, remaining as of June 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.

The National Institute of Health

During the year ended December 31, 2018, the Company was awarded a grant by the National Institute of Health, which included potential funding of $1.4 million. Revenue recognized related to this grant during the three and six months ended June 30, 2021 was $49 thousand and $111 thousand, respectively. Revenue recognized during the three and six months ended June 30, 2020 was $186 thousand and $246 thousand, respectively. As of June 30, 2021, $346 thousand of the potential funding remained available.

As of June 30, 2021 and December 31, 2020, the Company had $49 thousand and $140 thousand of outstanding receivables, respectively with the National Institute of Health, which was deemed to be collectible.

Note 10. Stock-Based Compensation

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

Three months ended June 30,Six months ended June 30,
(in thousands)
2021202020212020
Research and development$1,067 $288 $1,696 $976 
General and administrative3,910 481 4,980 1,058 
Total$4,977 $769 $6,676 $2,034 

Key Personnel Incentive Plan
In November 2013, the Company adopted the Key Personnel Incentive Plan (the KPI Plan). The KPI Plan provides for the grant of restricted units and non-statutory option awards to employees, non-employee directors and consultants of the Company. As of June 30, 2021, there were no shares of common stock available for grant under the KPI Plan.

2016 Equity Incentive Plan
In August 2016, the Board of Directors and the stockholders of the Company adopted the 2016 Equity Incentive Plan. Under the 2016 Plan, 25,686,958 shares of common stock were reserved. As of June 30, 2021 there were no shares of common stock available for grant under the 2016 Equity Incentive Plan.

2021 Equity Incentive Plan
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 2016 Plan. The Company may grant stock options, RSUs, stock appreciation rights, restricted stock awards and other forms of stock-based compensation.

As of June 30, 2021, 15,507,871 shares of Class A common stock were available for grant.

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 six months ended June 30, 2021 was as follows:
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 (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, 202020,937,443 $1.85 8.5$12,956 
Granted2,722,835 10.02 
Cancelled(680,666)2.28 
Exercised(2,504,497)1.18 9,629 
Outstanding as of June 30, 202120,475,115 $2.84 8.6$647,397 
Exercisable as of June 30, 20217,146,350 $1.79 7.6$213,533 

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 six months ended June 30, 2021 and 2020 were $5.96 and $1.49, respectively.

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

Six months ended June 30,
 20212020
Expected term (in years)
6.26.2
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 six months ended June 30, 2021, $1.6 million of expense was recorded as several of the conditions were met. For the three and six months ended June 30, 2020, no expense was recorded as the performance conditions were not considered probable.

During the years ended December 31, 2020 and 2017, the Company granted options to purchase 120,000 and 330,000 shares, respectively, of common stock to non-employee consultants. These options were granted in exchange for consulting services and vest over a period that approximates the term of the services to be provided by the Company. The fair value of the options granted prior to 2020 were remeasured in each period until they were fully vested. Following the adoption of ASU 2018-07 on January 1, 2020, the fair value of options granted to non-employees were no longer remeasured subsequent to the grant date. The fair value of each option on the date of grant was calculated using the Black-Scholes option model. There were no grants to non-employee consultants during the three and six months ended June 30, 2021 and 2020.

As of June 30, 2021, $28.6 million of unrecognized compensation cost related to stock options is expected to be recognized as expense over approximately the next 3 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 six months ended June 30, 2021:
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Stock unitsWeighted-average grant date fair value
Outstanding as of December 31, 2020$ 
Granted76,76230.42
Vested
Forfeited
Outstanding as of June 30, 202176,762$30.42 

As of June 30, 2021, $2.1 million of unrecognized compensation cost related to RSUs is expected to be recognized as expense over approximately the next 2.75 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 will be 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 last 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.

Fair value of the ESPP grants are 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:

Three months endedSix months ended
 June 30, 2021
Expected term (in years)
0.60.6
Expected volatility
69 %69 %
Expected dividend yield
  
Risk-free interest rate
0.04 %0.04 %

As of June 30, 2021, no shares have been issued under the 2021 ESPP. For the three and six months ended June 30, 2021, Recursion recognized expense of $216 thousand for the 2021 ESPP. As of June 30, 2021, $407 thousand of unrecognized compensation cost related to the 2021 ESPP is expected to be recognized as expense over approximately the next 5 months.

Warrants

In connection with the execution of the Pacific loan agreement (see Note 5, “Notes Payable” for additional details), the Company issued to Pacific fully vested warrants to purchase 84,486 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 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 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
16


months. The Series C warrants remained outstanding and 170,000 were vested and exercisable as of June 30, 2021. The grant date fair value was $4.10 per share. As of June 30, 2021, $35 thousand of unrecognized compensation cost related to the unvested warrants is expected to be recognized over 1 month.

The FASB has issued accounting guidance on the classification of freestanding warrants and other similar instruments on shares that are redeemable (either puttable or mandatorily redeemable). The guidance requires liability classification for certain warrants that are exercisable into convertible preferred stock. The initial fair values of Series A and B warrants were recorded as debt issuance costs, which resulted in a reduction in the carrying value of the debt and subsequent accretion. The Company 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 and Comprehensive Loss 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 is being 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 six months ended June 30, 2021 and 2020:

(in thousands)
Balance as of December 31, 2019$128 
Net increase in fair value of warrants
5 
Balance as of June 30, 2020$133 
Balance as of December 31, 2020$125 
Increase in fair value of warrants
2,215 
Recorded in equity upon exercise(2,340)
Balance as of June 30, 2021$ 

Note 11. Employee Benefit Plans

The Company has an employee benefit plan under Section 401(k) of the Internal Revenue Code. The plan allows employees to make contributions up to a specified percentage of their compensation. The Company is currently contributing up to 4% of employee base salary, by matching 100% of the first 4% of annual base salary contributed by each employee. Employer expenses were $372 thousand and $653 thousand during the three and six months ended June 30, 2021, respectively. For the three and six months ended June 30, 2020, employer expenses were $201 thousand and $400 thousand, respectively.

Note 12. Income Taxes

The Company did not record any income tax expense during the three and six months ended June 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.
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The Company files income tax returns in the United States, Utah and California. The Company is not currently under examination in any of these jurisdictions. The Company is subject to income tax examinations on all federal returns since the 2018 tax return.

Note 13. Net Loss Per Share

For the three and six months ended June 30, 2021, Recursion calculated net loss per share of Class A and Class B common stock using the two-class method. Basic net loss per share is computed using the weighted-average number of shares outstanding during the period. Diluted net loss per share is computed using the weighted-average number of shares and the effect of potentially dilutive securities outstanding during the period. Potentially dilutive securities consist of stock options and other contingently issuable shares. For periods presented in which the Company reports a net loss, all potentially dilutive shares are anti-dilutive and as such are excluded from the calculation. For the three and six months ended June 30, 2021, the Company reported a net loss and therefore basic and diluted loss per share are the same.

The rights, including the liquidation and dividend rights, of the holders of the Company’s Class A and Class B common stock are identical, except with respect to voting. As a result, the undistributed earnings for each period are allocated based on the contractual participation rights of the Class A and Class B common shares as if the earnings for the period had been distributed. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis and the resulting amount per share for Class A and Class B common stock was the same for three and six months ended June 30, 2021.

Recursion issued certain convertible preferred stock that were outstanding until April 2021 and was concluded to be participating securities. For the three and six months ended June 30, 2020, there was only one class of common stock outstanding. Due to the presence of participating securities, Recursion calculated net loss per share for the three and six months ended June 30, 2020 using the more dilutive of the treasury stock or the two-class method. For periods presented in which the Company reports a net loss, the losses are not allocated to the participating securities. As the Company reported a net loss during the three and six months ended June 30, 2020, diluted net loss per share was the same as basic net loss per share, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. The preferred stock converted to common stock in April 2021 as part of the Company’s IPO. See Note 8, “Common stock” for additional details.

The following tables set forth the computation of basic and diluted net loss per share of Class A and Class B common stock during 2021:

Three months endedSix months ended
June 30, 2021June 30, 2021
(in thousands, except share amount)Class AClass BClass AClass B
Numerator:
Allocation of undistributed earnings$(40,432)$(2,970)$(65,457)$(8,661)
Denominator:
Weighted average common shares outstanding128,892,763 9,467,883 71,554,357 9,467,883 
Net loss per share, basic and diluted$(0.31)$(0.31)$(0.91)$(0.91)

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

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Three months endedSix months ended
June 30, 2021June 30, 2021
Class AClass BClass AClass B
Convertible preferred stock25,406,15870,001,023 
Stock options and RSUs17,115,90315,445,067 
Warrants178,208193,773 
ESPP13,334   
Total42,713,60385,639,863  

The following table sets forth the computation of basic and diluted net loss per share during 2020:
Three months endedSix months ended
(in thousands, except share amounts)
June 30, 2020
Numerator:
Net loss$(18,943)$(37,367)
Denominator:
Weighted average common shares outstanding21,652,277 21,646,118 
Net loss per share, basic and diluted$(0.88)$(1.73)

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

Three months endedSix months ended
 June 30, 2020
Convertible preferred stock78,699,470 78,699,470 
Stock options4,557,396 4,087,585 
Warrants194,037 183,807 
Total83,450,903 82,970,862 

Potential shares related to the convertible note outstanding as of June 30, 2020 were not included in the above table as the necessary conditions for conversion had not been satisfied as of the end of the reporting period assuming the end of the reporting period was the end of the contingency period.

Note 14. Fair Value Measurements

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

As of June 30, 2021 and December 31, 2020, cash and cash equivalents (including restricted cash) included bank deposits held in checking and savings accounts. The Company is required to maintain a balance in a collateralized account to secure the Company’s credit cards. Additionally, the Company holds restricted cash related to an outstanding letter of credit issued by J.P. Morgan, which was obtained to secure certain Company obligations relating to tenant improvements.

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

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

Basis of fair value measurement
(in thousands)June 30, 2021Level 1Level 2Level 3
Assets
Cash and equivalents$632,738 $632,738 $ $ 
Restricted cash10,232 10,232   
Total assets$642,970 $642,970 $ $ 
Basis of fair value measurement
(in thousands)December 31, 2020Level 1Level 2Level 3
Assets
Cash and equivalents$