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

FORM 10-Q

(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
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 filerxNon-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

As of October 31, 2023, there were 208,283,925, 7,589,871 and 749,445 of the registrant’s Class A, B and exchangeable common stock outstanding, respectively.


Table of Contents
TABLE OF CONTENTS
Page
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 5.
Item 6.

i

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Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” about us and our industry within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “would,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this report may include without limitation those regarding:

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, or 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 and potential annual sales;
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 supercomputer, including our planned expansion of the BioHive supercomputer capabilities;
our ability to realize a return on our investment of resources and cash in our drug discovery collaborations;
our ability to integrate acquired businesses with our existing programs and platform and realize a return on acquired assets;
our ability to leverage datasets acquired through licenses with third parties, including with Tempus, into increased machine learning capabilities, novel genetic associations and mechanisms, innovative therapeutics, or other beneficial outcomes;
our ability to derive value from our Recursion OS by licensing subsets of data and key tools;
the ability to construct and apply more and increasingly sophisticated foundation models and large language models across biology, chemistry and translation and to use these models to drive new, better programs into clinical development both in our own pipeline and with our current and future partners at scale;
our ability to scale like a technology company, including scaling our Recursion OS, and to add more programs to our pipeline each year;
our ability to successfully compete in a highly competitive market;
our manufacturing, commercialization and marketing capabilities and strategies;
our plans relating to commercializing our drug candidates, if approved, including the geographic areas of focus and sales strategy;
our expectations regarding the approval and use of our drug candidates in combination with other drugs;
the rate and degree of market acceptance and clinical utility of our current drug candidates, if approved, and other drug candidates we may develop;
our competitive position and the success of competing approaches that are or may become available;
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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, global political instability or warfare, and the effect of such outbreak or natural disaster, global political instability or warfare on our business and financial results;
our 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;
the need to raise additional capital may cause dilution to our stockholders, restrict our operations, require us to relinquish rights to our technologies or drug candidates, and divert management’s attention from our core business;
our anticipated use of our existing resources and the net proceeds from our initial public offering; and
other risks and uncertainties, including those listed in the section titled “Risk Factors.”

We have based these forward-looking statements largely on our current expectations and projections about our business, the industry in which we operate, and financial trends that we believe may affect our business, financial condition, results of operations and prospects. These forward-looking statements are not guarantees of future performance or development. These statements speak only as of the date of this report and are subject to a number of risks, uncertainties and assumptions described in the section titled “Risk Factors” and elsewhere in this report. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, we undertake no obligation to update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, or otherwise.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report. While we believe such information forms a reasonable basis for such statements, the information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all
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potentially available relevant information. These statements are inherently uncertain and you are cautioned not to unduly rely upon them.
iv

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Recursion Pharmaceuticals, Inc.
Condensed Consolidated Balance Sheets (unaudited)
(in thousands, except share and per share amounts)
 September 30,December 31,
 20232022
Assets  
Current assets  
Cash and cash equivalents$387,322 $549,912 
Restricted cash2,256 1,280 
Other receivables3,164 2,753 
Other current assets17,780 15,869 
Total current assets410,522 569,814 
Restricted cash, non-current7,629 7,920 
Property and equipment, net86,248 88,192 
Operating lease right-of-use assets34,062 33,255 
Intangible assets, net39,459 1,306 
Goodwill52,750 801 
Other assets, non-current155  
Total assets$630,825 $701,288 
Liabilities and stockholders’ equity
Current liabilities
Accounts payable$4,265 $4,586 
Accrued expenses and other liabilities39,806 32,904 
Unearned revenue43,997 56,726 
Notes payable695 97 
Operating lease liabilities5,355 5,952 
Total current liabilities94,118 100,265 
Unearned revenue, non-current51,383 70,261 
Notes payable, non-current1,126 536 
Operating lease liabilities, non-current44,300 44,420 
Deferred tax liabilities1,931  
Total liabilities192,858 215,482 
Commitments and contingencies (Note 7)
Stockholders’ equity
Common stock, $0.00001 par value; 2,000,000,000 shares (Class A 1,989,032,117 and Class B 10,967,883) authorized as of September 30, 2023 and December 31, 2022; 216,313,682 shares (Class A 207,964,366, Class B 7,599,871 and Exchangeable 749,445) and 191,022,864 shares (Class A 183,209,655, Class B 7,813,209 and Exchangeable 0) issued and outstanding as of September 30, 2023 and December 31, 2022, respectively
2 2 
Additional paid-in capital1,312,591 1,125,360 
Accumulated deficit(874,626)(639,556)
Total stockholders’ equity437,967 485,806 
Total liabilities and stockholders’ equity$630,825 $701,288 




See the accompanying notes to these condensed consolidated financial statements.

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Recursion Pharmaceuticals, Inc.
Condensed Consolidated Statements of Operations (unaudited)
(in thousands, except share and per share amounts)

Three months ended
September 30,
Nine months ended
September 30,
2023202220232022
Revenue
Operating revenue$10,102 $13,053 $33,252 $26,005 
Grant revenue431 107 432 162 
Total revenue10,533 13,160 33,684 26,167 
Operating costs and expenses
Cost of revenue10,877 15,409 32,706 37,435 
Research and development70,007 40,836 171,744 111,716 
General and administrative29,199 19,488 80,364 61,761 
Total operating costs and expenses110,083 75,733 284,814 210,912 
Loss from operations(99,550)(62,573)(251,130)(184,745)
Other income, net6,533 2,128 16,060 2,761 
Net loss$(93,017)$(60,445)$(235,070)$(181,984)
Per share data
Net loss per share of Class A, B and Exchangeable common stock, basic and diluted$(0.43)$(0.35)$(1.16)$(1.06)
Weighted-average shares (Class A, B and Exchangeable) outstanding, basic and diluted214,327,186 173,435,970 203,090,637 172,122,974 






























See the accompanying notes to these condensed consolidated financial statements.

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Recursion Pharmaceuticals, Inc.
Condensed Consolidated Statements of Comprehensive Loss (unaudited)
(in thousands)

Three months ended
September 30,
Nine months ended
September 30,
2023202220232022
Net loss$(93,017)$(60,445)$(235,070)$(181,984)
Unrealized gain on investments 197  87 
Net realized loss on investments reclassified into net loss   39 
Other comprehensive income 197  126 
Comprehensive loss$(93,017)$(60,248)$(235,070)$(181,858)



















































See the accompanying notes to these condensed consolidated financial statements.

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Recursion Pharmaceuticals, Inc.
Condensed Consolidated Statements of Stockholders’ Equity (unaudited)
(in thousands, except share amounts)

Common Stock
Additional Paid-in-Capital
Accumulated
Deficit
Accumulated other comprehensive loss
Stockholders’
Equity
(Class A, B and Exchangeable)
Shares
Amount
Balance as of June 30, 2023206,737,332 $2 $1,250,570 $(781,609)$ $468,963 
Net loss— — — (93,017)— (93,017)
Stock option exercises and other2,814,903 — 2,995 — — 2,995 
Stock-based compensation— — 16,792 — — 16,792 
Common stock issuance for private placement, net of issuance costs7,706,363 — 50,000 — — 50,000 
Class A shares and stock options issued for acquisitions558,605 — — — — — 
Exchangeable shares issued for acquisitions(1,503,521)— (7,766)— — (7,766)
Class A shares issued for exchangeable shares1,921,693 — — — — — 
Exchangeable shares redeemed(1,921,693)— — — — — 
Balance as of September 30, 2023216,313,682 $2 $1,312,591 $(874,626)$ $437,967 

Common Stock
Additional Paid-in-Capital
Accumulated
Deficit
Accumulated other comprehensive loss
Stockholders’
Equity
(Class A, B and Exchangeable)
Shares
Amount
Balance as of December 31, 2022191,022,864 $2 $1,125,360 $(639,556)$ $485,806 
Net loss— — — (235,070)— (235,070)
Stock option exercises and other6,417,024 — 8,789 — — 8,789 
Stock-based compensation— — 37,417 — — 37,417 
Common stock issuance for private placement, net of issuance costs7,706,363 — 50,000 — — 50,000 
Class A shares and stock options issued for acquisitions7,437,258 — 68,499 — — 68,499 
Exchangeable shares issued for acquisitions3,730,173 — 22,526 — — 22,526 
Class A shares issued for exchangeable shares3,148,938 — — — — — 
Exchangeable shares redeemed(3,148,938)— — — — — 
Balance as of September 30, 2023216,313,682 $2 $1,312,591 $(874,626)$ $437,967 
















See the accompanying notes to these condensed consolidated financial statements.

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Recursion Pharmaceuticals, Inc.
Condensed Consolidated Statements of Stockholders’ Equity (unaudited)
(in thousands, except share amounts)

Common Stock
Additional Paid-in-Capital
Accumulated
Deficit
Accumulated other comprehensive loss
Stockholders’
Equity
(Class A, B and Exchangeable)
Shares
Amount
Balance as of June 30, 2022172,815,409 $2 $959,393 $(521,619)$(197)$437,579 
Net loss— — — (60,445)— (60,445)
Other comprehensive gain— — — — 197 197 
Stock option exercises and other1,257,497 — 1,794 — — 1,794 
Stock-based compensation— — 8,909 — — 8,909 
Balance as of September 30, 2022174,072,906 $2 $970,096 $(582,064)$ $388,034 

Common Stock
Additional Paid-in-Capital
Accumulated
Deficit
Accumulated other comprehensive loss
Stockholders’
Equity
(Class A, B and Exchangeable)
Shares
Amount
Balance as of December 31, 2021170,272,462 $2 $943,142 $(400,080)$(126)$542,938 
Net loss— — — (181,984)— (181,984)
Other comprehensive loss— — — — 126 126 
Stock option exercises and other3,800,444 — 6,740 — — 6,740 
Stock-based compensation— — 20,214 — — 20,214 
Balance as of September 30, 2022174,072,906 $2 $970,096 $(582,064)$ $388,034 





























See the accompanying notes to these condensed consolidated financial statements.

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Recursion Pharmaceuticals, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)
Nine months ended
September 30,
 20232022
Cash flows from operating activities
Net loss$(235,070)$(181,984)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization16,849 8,542 
Stock-based compensation37,417 20,214 
Fixed asset impairment1,188 2,806 
Lease expense6,014 5,747 
Other, net(1,114)377 
Changes in operating assets and liabilities:
Other receivables and assets(1,334)(5,574)
Unearned revenue(33,360)123,995 
Accounts payable(670)1,072 
Accrued development expense391 3,696 
Accrued expenses and other current liabilities3,936 (12,740)
Operating lease liabilities(7,950)(4,927)
Net cash used in operating activities(213,703)(38,776)
Cash flows from investing activities
Net cash and restricted cash acquired in the acquisition of a business1,915  
Purchases of property and equipment(9,888)(29,080)
Purchase of an intangible asset(247)(300)
Sales and maturities of investments480 230,608 
Net cash provided by (used in) investing activities(7,740)201,228 
Cash flows from financing activities
Proceeds from private placement of stock50,000  
Proceeds from equity incentive plans9,546 7,156 
Repayment of long-term debt(72)(67)
Net cash provided by financing activities59,474 7,089 
Effect of exchange rate changes on cash, cash equivalents and restricted cash64  
Net change in cash, cash equivalents and restricted cash
(161,905)169,541 
Cash, cash equivalents and restricted cash, beginning of period559,112 295,349 
Cash, cash equivalents and restricted cash, end of period$397,207 $464,890 
Supplemental schedule of non-cash investing and financing activities
Issuance of shares for the acquisitions of businesses$91,025 $ 
Accrued property and equipment
 3,093 
Right-of-use asset additions and modifications4,324 3,950 
Financed equipment purchase1,214  
Supplemental schedule of cash flow information
Cash paid for operating leases$7,950 $4,927 
Cash paid for interest36 42 



See the accompanying notes to these condensed consolidated financial statements.

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

Recursion Pharmaceuticals, Inc. (Recursion, the Company, we or our) was originally formed as a limited liability
company on November 4, 2013 under the name Recursion Pharmaceuticals, LLC. In September 2016, the Company converted to a Delaware corporation and changed its name to Recursion Pharmaceuticals, Inc.

Recursion is a clinical stage TechBio company decoding biology to industrialize drug discovery. The Recursion Operating System (OS), a platform built across diverse technologies, enables the Company to map and navigate trillions of biological and chemical relationships within the Recursion Data Universe, one of the world’s largest proprietary biological and chemical datasets. The Company integrates physical and digital components as iterative loops of atoms and bits scaling wet lab biology and chemistry data organized into virtuous cycles with computational tools to rapidly translate in silico hypotheses into validated insights and novel chemistry.

As of September 30, 2023, the Company had an accumulated deficit of $874.6 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 primarily through the issuance of convertible preferred stock and the issuance of Class A common stock (see Note 8, “Common Stock” for additional details). Additionally, we have received payments from our strategic partnerships (see Note 9, “Collaborative Development Contracts” for additional details). Recursion will likely be required to raise additional capital. As of September 30, 2023, 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.

Recursion believes that the Company’s existing cash and cash equivalents will be sufficient to fund the Company’s operating expenses and capital expenditures for at least the next 12 months.

Note 2. Basis of Presentation

Basis of Presentation

The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) have been condensed or omitted. These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes for the year ended December 31, 2022.

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. Revenue and net loss for any interim period are not necessarily indicative of future or annual results.

Recent Accounting Pronouncements

New accounting pronouncements are routinely issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies and adopted by Recursion as of the specified effective date. The Company does not expect
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the impact of recently issued standards that are not yet effective will have a material impact on its condensed consolidated financial statements and disclosures.

Note 3.    Supplemental Financial Information

Property and Equipment

September 30,December 31,
(in thousands)20232022
Lab equipment$58,790 $47,524 
Leasehold improvements45,791 41,872 
Office equipment22,098 20,164 
Construction in progress416 8,747 
Property and equipment, gross127,095 118,307 
Less: Accumulated depreciation(40,847)(30,115)
Property and equipment, net$86,248 $88,192 

Depreciation expense on property and equipment was $4.2 million and $11.7 million during the three and nine months ended September 30, 2023, respectively, and $2.9 million and $8.3 million during the three and nine months ended September 30, 2022, respectively. The Company recorded an impairment of $1.2 million and $2.8 million during the nine months ended September 30, 2023 and 2022, respectively, related to construction projects for leasehold improvements as the Company no longer intended to use them. The impairments were recorded in “General and Administrative” in the Condensed Consolidated Statements of Operations.

For the nine months ended September 30, 2023, the Company initiated and completed a project to upgrade the BioHive supercomputer for $1.7 million. The supercomputer was classified as office equipment in the above table. The increase in lab equipment from the prior year was driven by the completion of several labs in the headquarters expansion. The majority of the balance was included in construction in progress in the prior year.

Accrued Expenses and Other Liabilities

September 30,December 31,
(in thousands)20232022
Accrued compensation$22,231 $20,433 
Accrued development expenses3,763 3,372 
Accrued early discovery expenses
2,936 3,192 
Materials received not invoiced
3,516 2,028 
Accrued other expenses7,360 3,879 
Accrued expense and other liabilities$39,806 $32,904 

Notes Payable

In January 2023, the Company entered into a financing agreement for borrowing $1.9 million as part of the supercomputer upgrade project. The debt will be repaid over a three-year period at a 7% interest rate. As of September 30, 2023, the outstanding balance was $1.3 million.

In 2018, the Company borrowed $992 thousand, which was available as part of a lease agreement for use on tenant improvements. The note will be repaid over a 10-year period at an 8% interest rate. As of September 30, 2023, the outstanding balance was $561 thousand.

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Interest Income, net

Three months ended
September 30,
Nine months ended
September 30,
(in thousands)2023202220232022
Interest income$4,977 $1,833 $14,594 $2,572 
Interest expense(25)(13)(71)(42)
Interest income, net$4,952 $1,820 $14,523 $2,530 

For the three and nine months ended September 30, 2023 and 2022, interest income primarily related to earnings on cash and cash equivalents in money market funds. Interest income was included in “Other income, net” on the Condensed Consolidated Statements of Operations.

Note 4. Acquisitions

Results of operations of acquired companies are included in the Recursion results of operations as of the respective acquisition dates. The purchase price of each acquisition is allocated to the net assets acquired based on estimates of their fair values at the date of acquisition. Any purchase price in excess of these net assets is recorded as goodwill. The allocation of purchase price in certain cases may be subject to revision based on the final determination of fair values during the measurement period, which may be up to one year from the acquisition date.

Valence Discovery Inc.

On May 16, 2023, Recursion acquired all of the outstanding equity interests in Valence Discovery Inc. (Valence), a privately-held machine learning (ML) / artificial intelligence (AI) digital chemistry company. The integration of Valence’s AI-based chemistry engine into Recursion’s operating system will allow Recursion to expand its technology-enabled drug discovery process. This will accelerate Recursion’s digital chemistry capabilities and its drug discovery process.

The acquisition of Valence was accounted for as a business combination using the acquisition method of accounting. The aggregate upfront consideration for the acquisition of Valence consisted of 2,168,020 shares of Recursion Class A common stock, 4,390,939 shares of a subsidiary of Recursion, exchangeable for shares of Recursion’s Class A common stock, 792,011 shares issuable upon exercise of stock options held by Valence equity award holders and deferred liabilities for additional consideration. An insignificant number of the aforementioned shares of consideration had not yet been issued as of September 30, 2023.The final number of shares to be issued has not yet been finalized and so are subject to change.

The following table summarizes total consideration:

(in thousands)
Fair value of Recursion Class A common stock $11,122 
Fair value of Exchangeable stock22,526 
Fair value of equity awards issued to Valance equity award holders1,933 
Deferred liabilities for additional consideration358 
Total consideration$35,939 

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The following table summarizes the fair value of assets acquired and liabilities assumed as of the acquisition date:

(in thousands)
Cash$4,235 
Other receivables485 
Intangible asset - technology15,000 
Accounts payable and accrued liabilities(872)
Deferred income taxes(2,892)
Total identifiable net assets$15,956 
Goodwill19,983 
Total assets acquired and liabilities assumed$35,939 

The intangible asset related to Valence’s ML and AI digital chemistry platform. The estimated fair value of the intangible asset was determined using a cost approach. This valuation technique provides the fair value of an asset based on estimates of the total costs to develop the technology. Significant inputs used to determine the total cost includes the length of time required and service hours performed by Company employees. The technology intangible asset is being amortized on a straight-line basis over its four-year useful life.

Goodwill was calculated as the excess of the consideration transferred over the net assets recognized. The goodwill recognized represents the assembled workforce and expected synergies, including the ability to: (i) leverage Valence’s digital chemistry platform across Recursion’s business; (ii) leverage Valence’s ML and AI capabilities; (iii) integrate Recursion’s data and operating system into Valence’s platform; and (iv) accelerate Recursion’s pipeline. Goodwill was also impacted by the establishment of a deferred tax liability for the acquired identifiable intangible assets which have no tax basis. The goodwill is not deductible for tax purposes.

Subsequent to the acquisition date, the Company made certain adjustments to decrease the fair value of consideration transferred by $7.8 million, which also resulted in a decrease to goodwill of $7.8 million. These adjustments have been reflected in the tables above. The Company made these adjustments to reflect facts and circumstances that existed as of the acquisition date and did not result from intervening events subsequent to such date. These adjustments did not have a material impact on Recursion's results of operations.

Recursion’s condensed consolidated statement of operations included no net revenue and an immaterial operating loss associated with Valence’s operations. As the acquisition occurred in May 2023, the Company is still finalizing the allocation of the purchase price to the individual assets acquired and liabilities assumed. The allocation of the purchase price included in the current period balance sheet is based on the best estimate of management and is preliminary and subject to change. The primary areas subject to change relate to the valuation of the intangible asset, other receivables and deferred taxes. To assist management in the allocation, the Company engaged external specialists. The Company will finalize the amounts recognized as the information necessary to complete the analysis is obtained. The Company expects to finalize these amounts as soon as possible but no later than one year from the acquisition date.

Cyclica Inc.

On May 25, 2023, Recursion acquired all of the outstanding equity interests in Cyclica Inc. (Cyclica), a privately-held Company that has built a digital chemistry software suite which enables mechanism of action deconvolution and generative chemistry suggestions based on desired targets. Cyclica’s platform is expected to enhance the optimization of Recursion’s compounds for efficacy while minimizing liabilities through generative machine learning approaches.

The acquisition of Cyclica was accounted for as a business combination using the acquisition method of accounting. The aggregate upfront consideration for the acquisition of Cyclica consisted of 5,706,089 shares of Recursion Class A common stock, cash payments, 1,000,873 shares issuable upon exercise of stock options held by Cyclica equity award holders and deferred liabilities for additional consideration. Approximately 194 thousand of the aforementioned shares of Class A common stock consideration had not yet been issued as of September 30, 2023.

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The following table summarizes total consideration:

(in thousands)
Fair value of Recursion Class A common stock $49,415 
Cash6,434 
Fair value of equity awards issued to Cyclica equity award holders6,030 
Deferred liabilities for additional consideration341 
Total consideration$62,220 

The following table summarizes the fair value of assets acquired and liabilities assumed as of the acquisition date:

(in thousands)
Cash$2,429 
Restricted cash1,685 
Other receivables736 
Investments1,000 
Other current assets385 
Intangible assets - technology28,000 
Accounts payable and accrued liabilities(579)
Unearned revenue(1,754)
Deferred income taxes(1,443)
Other liabilities, current(66)
Other liabilities, non-current(139)
Total identifiable net assets$30,254 
Goodwill31,965 
Total assets acquired and liabilities assumed$62,219 

The intangible assets are related to Cyclica’s digital chemistry platforms. The estimated fair value of the intangible assets were determined using a cost approach. This valuation technique provides the fair value of an asset based on estimates of the total costs to develop the technology. Significant inputs used to determine the total cost includes the length of time required and service hours performed by Company employees. The technology intangible assets are being amortized on a straight-line basis over their three-year useful lives.

Goodwill was calculated as the excess of the consideration transferred over the net assets recognized. The goodwill recognized represents the assembled workforce and expected synergies, including the ability to: (i) leverage Cyclica’s digital chemistry platform across Recursion’s business; (ii) leverage Cyclica’s ML and AI capabilities; (iii) integrate Recursion’s data and operating system into Cyclica’s platform; and (iv) accelerate Recursion’s pipeline. Goodwill was also impacted by the establishment of a deferred tax liability for the acquired identifiable intangible assets. The goodwill is not deductible for tax purposes.

Recursion’s condensed consolidated statement of operations for the nine months ended September 30, 2023 included immaterial net revenue and a $6.0 million operating loss associated with Cyclica’s operations. As the acquisition occurred in May 2023, the Company is still finalizing the allocation of the purchase price to the individual assets acquired and liabilities assumed. The allocation of the purchase price included in the current period balance sheet is based on the best estimate of management and is preliminary and subject to change. The primary areas subject to change relate to the valuation of the intangible assets, other receivables and deferred taxes. To assist management in the allocation, the Company engaged external specialists. The Company will finalize the amounts recognized as the information necessary to complete the analysis is obtained. The Company expects to finalize these amounts as soon as possible but no later than one year from the acquisition date.

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Pro forma financial information

The following table presents the unaudited pro forma combined results of operations of Recursion, Valence and Cyclica as if the acquisitions had occurred on January 1, 2022:

Three months ended
September 30,
Nine months ended
September 30,
(in thousands)2023202220232022
Net revenue
$10,534 $13,478 $33,970 $26,942 
Net loss
(92,553)(66,836)(245,391)(207,131)

The unaudited pro forma financial information was prepared using the acquisition method of accounting and was based on the historical financial information of Recursion, Valence and Cyclica. In order to reflect the occurrence of the acquisition on January 1, 2022 as required, the unaudited pro forma financial information includes adjustments to reflect the incremental amortization expense to be incurred based on the fair values of the identifiable intangible assets acquired, the additional stock compensation expense associated with the issuance of equity compensation related to the acquisitions and the reclassification of acquisition costs incurred during the nine months ended September 30, 2023 to the nine months ended September 30, 2022. The unaudited pro forma financial information is not necessarily indicative of what the consolidated results of operations would have been had the acquisition been completed on January 1, 2022. In addition, the unaudited pro forma financial information is not a projection of the future results of operations of the combined company nor does it reflect the expected realization of any cost savings or synergies associated with the acquisition.

Note 5.    Leases

The Company has entered into various long-term real estate leases primarily related to office, research and development and operating activities. The Company’s leases have remaining terms from under 1 year to 9 years and some of those leases include options that provide Recursion with the ability to extend the lease term for five years. The options are included in the lease term when it is reasonably certain that the option will be exercised.

For the nine months ended September 30, 2023, Recursion entered into lease modifications resulting in an increase to the right-of-use asset and lease liability of $3.4 million. The modifications had no impact to the Condensed Consolidated Statements of Operations.

In May 2022, the Company entered into a lease agreement for laboratory and office space in Toronto, Ontario with approximately 28,110 square feet (the “Toronto Lease”). This lease was separated into multiple lease components based on the intended use of the portions of the space. For some of those components, the right of use began May 2022 when the control of the assets was obtained. The right of use for the remaining component began June 2023 when the control of the asset was obtained. The Toronto Lease terms for each component are ten years with a five-year renewal option. The Toronto Lease includes provisions for escalating rent payments and a tenant improvement allowance of up to $1.6 million. Total fixed payments are expected to be approximately $11.1 million with additional variable expenses, including building expenses.

See Note 7, “Commitments and Contingencies” for information on the Industry lease.

The components of the lease cost are as follows:

Three months ended
September 30,
Nine months ended
September 30,
(in thousands)
2023202220232022
Operating lease cost
$2,024 $2,017 $6,042 $5,801 
Variable lease cost
532 102 1,689 772 
Short-term lease cost
66  107  
Lease cost
$2,622 $2,119 $7,838 $6,573 

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Lease term and discount rates as of September 30, 2023 were:

(in thousands)
September 30, 2023
Operating leases
Weighted-average remaining lease term (years)6.9
Weighted-average discount rate7.8 %

Maturities of operating lease liabilities as of September 30, 2023 were:

(in thousands)
Operating leases
Remainder of 2023$1,750 
202410,005 
202510,204 
202610,332 
202710,575 
Thereafter24,182 
Total lease payments67,048 
Less: imputed interest(17,393)
Present value of lease liabilities$49,655 

Note 6.    Goodwill and Intangible Assets

Goodwill

The following table summarizes the changes in the carrying amount of goodwill:

(in thousands)
Balance as of December 31, 2022
$801 
Additions from acquisitions51,949 
Balance as of September 30, 2023
$52,750 

The additions to goodwill relate to the acquisition of Cyclica and Valence during the nine months ended September 30, 2023. See Note 4, “Acquisitions” for additional details. No goodwill impairment was recorded during the three and nine months ended September 30, 2023 and 2022.

Intangible Assets, Net

The following table summarizes intangible assets:

September 30, 2023December 31, 2022
(in thousands)Gross carrying amountAccumulated AmortizationNet carrying amountGross carrying amountAccumulated AmortizationNet carrying amount
Definite-lived intangible assets$44,376 $(5,903)$38,473 $1,211 $(809)$402 
Indefinite-lived intangible asset 986 — 986 904 — 904 
Intangible assets, net$45,362 $(5,903)$39,459 $2,115 $(809)$1,306 

The definite-lived intangible assets balance increased during the nine months ended September 30, 2023 due to the Company’s acquisitions. See Note 4, “Acquisitions” for additional details on the intangible assets acquired.

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Amortization expense was $3.4 million and $5.1 million during the three and nine months ended September 30, 2023, respectively. Amortization expense was $76 thousand and $228 thousand during the three and nine months ended September 30, 2022, respectively. Amortization expense was included in research and development in the Condensed Consolidated Statements of Operations. No indefinite-lived intangible asset impairment charges were recorded during the three and nine months ended September 30, 2023 and 2022.

Note 7. Commitments and Contingencies

Contract Obligations

In the normal course of business, the Company enters into contracts with clinical research organizations, drug manufacturers and other vendors for preclinical and clinical research studies, research and development supplies and other services and products for operating purposes. These contracts generally provide for termination on notice and are cancellable contracts.

Indemnification

The Company has agreed to indemnify its officers and directors for certain events or occurrences, while the officer or director is or was serving at the Company’s request in such capacity. The Company purchases directors and 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, 2023 and December 31, 2022, as no amounts were probable.

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

In February 2021, the Company entered into a lease agreement for laboratory and office space (the Industry Lease) with Industry Office SLC, LLC (the landlord). In March 2023, the Company sent a letter to the landlord detailing numerous construction delays and irregularities, deficiencies and deviations from applicable structural drawings and/or non-conforming conditions with applicable building codes. On June 23, 2023, the landlord filed a lawsuit against the Company (Industry Office SLC, LLC v. Recursion Pharmaceuticals, Inc., Case No. 230904627) in the Third District Court for Salt Lake County, State of Utah (the Court), alleging anticipatory repudiation and breach of contract. The Plaintiff seeks monetary damages and attorney’s fees. In July 2023, the Company filed a motion to dismiss. In September 2023, Recursion was granted its motion to dismiss, and the Court provided the landlord until October 23, 2023, to amend and re-file the dismissed complaint. On October 23, 2023, the landlord filed an amended complaint again alleging anticipatory repudiation, breach of contract, and breach of the implied covenant of good faith and fair dealing (the Amended Complaint), and seeks monetary damages and attorney’s fees. On November 6, 2023, the Company filed a motion to dismiss the Amended Complaint. As of September 30, 2023, the Company had no liability recorded for these events as an unfavorable outcome was not probable.

In connection with the Industry Lease, on September 15, 2023, the Company filed claims in the Court against the landlord alleging, among other things, breach of contract and fraudulent misrepresentation (the Counterclaims). On October 6, 2023, the landlord filed an answer and denied the Company’s allegations asserted in the Counterclaims. The Company and the landlord are currently engaged in discovery. The Company is unable to estimate the possible damages or range of damages associated with the Counterclaims.

Note 8. Common Stock

Each share of Class A common stock entitles the holder to one vote per share and each share of Class B common stock entitles the holder to 10 votes per share on all matters submitted to a vote of the Company’s stockholders. Common stockholders are entitled to receive dividends, as may be declared by the Company’s Board of Directors. As of September 30, 2023 and December 31, 2022, no dividends had been declared.
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At-The-Market Offering

In August 2023, the Company entered into an Open Market Sales Agreement (the “Sales Agreement”) with Jefferies LLC (the “Sales Agent”), to provide for the offering, issuance and sale of up to an aggregate amount of $300.0 million of our Class A common stock from time to time in “at-the-market” offerings. As of September 30, 2023, the Company may sell and issue $300.0 million in Class A common stock. There have been no sales of shares under the agreement as of September 30, 2023. We are not required to sell shares under the Sales Agreement. We will pay the Sales Agent a commission of up to 3% of the aggregate gross proceeds we receive from all sales of our Class A common stock under the Sales Agreement. The Sales Agreement continues until the earlier of selling all shares available under the Sales Agreement or terminated by written notice from either of the parties. The ATM Offering is being made under a prospectus supplement dated August 8, 2023, and related prospectus to be filed with the Securities and Exchange Commission pursuant to our automatically effective shelf registration statement on Form S-3ASR (Registration No. 333-264845).

NVIDIA Private Placement

On July 11, 2023, Recursion entered into a Stock Purchase Agreement for a private placement with NVIDIA Corporation (2023 Private Placement), pursuant to which the Company sold an aggregate of 7,706,363 shares of the Company’s Class A common stock at a price of $6.49 per share for net proceeds of approximately $50.0 million.

Valence Acquisition Exchangeable Shares

In May 2023, in connection with the acquisition of Valence, the Company entered into an agreement to issue up to 5,904,827 shares of Class A common stock (the “Exchange Shares”), that may be issued upon exchange, retraction or redemption of exchangeable shares of 14998685 Canada Inc., a corporation governed by the laws of Canada and an indirect wholly-owned subsidiary of Recursion. Each exchangeable share of a subsidiary of Recursion entitles the holder to exchange those shares on a one-for-one basis for Recursion’s Class A common stock. The shares are entitled to receive dividends economically equivalent to dividends declared by Recursion, are non-voting and are subject to customary adjustments for stock splits or other reorganizations. In addition, the Company may require all outstanding exchangeable shares to be exchanged into an equal number of Class A common stock upon the occurrence of certain events and at any time following the seventh anniversary of the closing of the Valence acquisition. The exchangeable shares are substantially the economic equivalent of the Class A shares. The Company’s calculation of weighted-average shares outstanding includes the exchangeable shares.

2022 Private Placement

In October 2022, Recursion issued 15,336,734 shares of the Company’s Class A common stock (the Shares) at a purchase price of $9.80 per share in a private placement (the 2022 Private Placement) to qualified institutional buyers and institutional accredited investors (the Purchasers) for net proceeds of $143.7 million, after deducting fees and offering costs of $6.6 million.

Registration Rights Agreements

Acquisitions
In May 2023, in connection with the acquisition of Valence, the Company entered into a Registration Agreement providing for the registration for resale of the shares of Class A common stock and Exchange Shares issued or issuable in such transaction. A registration statement on Form S-3ASR (File No. 333-272281) was filed to register the resale shares by the Sellers. The agreement must remain effective for a period of not less than three years.

In May 2023, in connection with the acquisition of Cyclica, the Company entered into a Registration Agreement providing for the registration for resale of the shares of Class A common stock issued in such transaction. A prospectus supplement to a registration statement (File No. 333-264845) was subsequently filed in June 2023 to register the resale shares by the Sellers. The agreement must be continuously effective until the earlier of the date
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that all shares have been sold thereunder or are able to be publicly sold by relying on Rule 144 of the Securities Act without registration.

NVIDIA Private Placement
In July 2023, in connection with the 2023 Private Placement with NVIDIA, the Company entered into a Registration Rights Agreement providing for the registration for resale of the shares of Class A common stock issued in such transaction. A prospectus supplement to a registration statement (File No. 333-264845) was subsequently filed in August 2023 to register the resale of the shares of Class A common stock by the Purchasers. The Company has agreed to use commercially reasonable efforts to keep the registration statement continuously effective until such date that all Registrable Securities covered by the agreement have been sold. In the event the holders cannot sell their shares due to certain circumstances causing the agreement to be ineffective, the Company must pay each holder of shares outstanding on the date and each month thereafter 1.0% of the aggregate purchase price with the maximum payable amount of 5.0% of the aggregate purchase price. As of September 30, 2023, there was no accrued liability related to this agreement, as it was not probable that a payment would be required.

2022 Private Placement
In October 2022, in connection with the 2022 Private Placement, the Company entered into a Registration Rights Agreement providing for the registration for resale of the shares of Class A common stock issued in such transaction. A prospectus supplement to a registration statement (File No. 333-264845) was subsequently filed in October 2022 to register the resale of the shares of Class A common stock by the Purchasers. The agreement must remain effective until registrable securities covered by the agreement have been publicly sold by the holders or all shares cease to be registrable securities. In the event the holders cannot sell their shares due to certain circumstances causing the agreement to be ineffective, the Company must pay each holder of shares outstanding on the date and each month thereafter 1.0% of the aggregate purchase price paid by the holder without limit until the agreement is cured. As of September 30, 2023, there was no accrued liability related to this agreement, as it was not probable that a payment would be required.

Class A and B Common Shares Authorization

In April 2021, the Company’s Board of Directors authorized two classes of common stock, Class A and Class B. The rights of the holders of Class A and B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to 10 votes per share and is convertible at any time into one share of Class A common stock.

All Class B common stock is held by Christopher Gibson, Ph.D., the Company’s Chief Executive Officer (CEO), or his affiliates. As of September 30, 2023, Dr. Gibson and his affiliates held outstanding shares of Class B common stock representing approximately 28% 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 exchangeable equity awards held by Dr. Gibson had been fully vested, exercised and exchanged for shares of Class B common stock as of September 30, 2023, Dr. Gibson and his affiliates would hold approximately 29% 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 Development Contracts

Roche and Genentech

Description
In December 2021, Recursion entered into a collaboration and license agreement with Roche and Genentech (collectively referred to as Roche). Recursion is constructing, using the Company’s imaging technology and proprietary machine-learning algorithms, unique maps of the inferred relationships amongst perturbation phenotypes in a given cellular context with the goal to discover and develop therapeutic small molecule programs in a gastrointestinal cancer indication and in key areas of neuroscience. Roche and Recursion will collaborate to select certain novel inferences with respect to small molecules or targets generated from the Phenomaps for further validation and optimization as collaboration programs. Roche and Recursion may also combine sequencing datasets from Roche with Recursion’s Phenomaps and collaborate to generate new algorithms to produce multi-
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modal maps from which additional collaboration programs may be initiated. For every collaboration program that successfully identifies potential therapeutic small molecules or validates a target, Roche will have an option to obtain an exclusive license to develop and commercialize such potential therapeutic small molecules or to exploit such target in the applicable exclusive field.

Pricing
In January 2022, Recursion received a $150.0 million non-refundable upfront payment from the Company’s collaboration with Roche. Recursion is eligible for additional milestone payments based on performance progress of the collaboration. Each of the Phenomaps requested by Roche and created by Recursion may be subject to either an initiation fee, acceptance fee or both. Such fees could exceed $250.0 million for 16 accepted Phenomaps. In addition, for a period of time after Roche’s acceptance of certain Phenomaps, Roche will have the option to obtain, subject to payment of an exercise fee, rights to use outside the collaboration the raw images generated in the course of creating those Phenomaps. If Roche exercises its external use option for all 12 eligible Phenomaps, Roche’s associated exercise fee payments to Recursion could exceed $250.0 million. Under the collaboration, Roche may initiate up to 40 programs, each of which, if successfully developed and commercialized, could yield more than $300.0 million in development, commercialization and net revenue milestones for Recursion, as well as tiered royalties on net revenue.

Accounting
This agreement represents a transaction with a customer and therefore is accounted for in accordance with Accounting Standards Codification (ASC) 606. Recursion has determined that it has three performance obligations, one related to gastrointestinal cancer and two in neuroscience. These performance obligations are for performing research and development services for Roche to identify targets and medicines. The performance obligations also include potential licenses related to the intellectual property. The Company concluded that licenses within the contract are not distinct from the research and development services as they are interrelated due to the fact that the research and development services significantly impact the potential licenses. Any additional services are considered customer options and will be considered as separate contracts for accounting purposes.

The Company has determined the transaction price to be $150.0 million, comprised of the upfront payment. Recursion will fully constrain the amounts of variable consideration to be received from potential milestones considering the stage of development and the risks associated with the remaining development required to achieve each milestone. Recursion will re-evaluate the transaction price each reporting period.

The transaction price was allocated to the performance obligations based on the estimated relative stand-alone selling price of each performance obligation as determined using an expected cost plus margin approach. The Company recognizes revenue over time based on costs incurred relative to total expected costs to perform the research and development services. Recursion determined that this method provides a faithful depiction of the transfer of control to the customer. This method of recognizing revenue requires the Company to make estimates of total costs to provide the services required under the performance obligations. Significant inputs used to determine the total costs included the length of time required, service hours performed by Company employees and materials costs. A significant change in these estimates could have a material effect on the timing and amount of revenue recognized in future periods. Recursion has estimated the completion of the performance obligations by 2025.

Bayer AG

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

Pricing
In October 2020, the Company received a $30.0 million non-refundable upfront payment. Each such license could potentially result in option exercise fees and development and commercial milestone payments payable to the Company, with an aggregate value of up to approximately $100.0 million (for an option on a lead series) or up to
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approximately $120.0 million (for an option on a development candidate), as well as tiered royalties for each such license, ranging from low- to mid-single digit percentages of sales, depending on commercial success.

Accounting
The Company determined that it has one performance obligation under the agreement, which is to perform research and development services for Bayer. Recursion determined the transaction price to be $30.0 million, comprised of the upfront payment. The Company allocated the amount to the single performance obligation. The Company is recognizing revenue over time by measuring progress towards completion of the performance obligation. This method of recognizing revenue requires the Company to make estimates of the total time to provide the services required under the performance obligation. A significant change in these estimates could have a material effect on the timing and amount of revenue recognized in future periods. Recursion has estimated the completion of the performance obligation by 2023.

Additional Revenue Disclosures

Recursion recognized $10.1 million and $33.3 million of operating revenue during the three and nine months ended September 30, 2023, respectively, primarily all of which was included in the unearned revenue balance as of December 31, 2022. Of the revenue recognized during the three and nine months ended September 30, 2022, $2.5 million and $7.5 million, respectively, were included in the unearned revenue balance as of December 31, 2021. Revenue recognized was from upfront payments received at the inception of the related contracts, which decreased the initial unearned revenue recognized. As of September 30, 2023, the Company had $7.9 million of costs incurred to fulfill a contract on its Condensed Consolidated Balance Sheet within “Other current assets.”

Unearned revenue was classified as short-term and long-term on the Condensed Consolidated Balance Sheets based on the Company’s estimate of revenue that will be recognized during the next twelve months.

Note 10. Stock-Based Compensation

In April 2021, the Board of Directors and the stockholders of the Company adopted the 2021 Equity Incentive Plan (the 2021 Plan). Under the 2021 Plan, 16,186,000 shares of Class A common stock were reserved. Additionally, shares were reserved for all outstanding awards under the previous 2016 Plan. The Company may grant stock options, restricted stock units (RSUs), stock appreciation rights, restricted stock awards and other forms of stock-based compensation.

As of September 30, 2023, 8,868,107 shares of Class A common stock were available for grant.

The following table presents the classification of stock-based compensation expense for employees and non-employees within the Condensed Consolidated Statements of Operations:

Three months ended
September 30,
Nine months ended
September 30,
(in thousands)
2023202220232022
Cost of revenue
$2,123 $732 $4,549 $1,560 
Research and development6,579 3,674 13,590 7,404 
General and administrative7,640 4,247 17,861 10,534 
Total$16,342 $8,653 $36,000 $19,498 

Stock Options

Stock options are primarily granted to executive leaders at the Company, generally vest over four years and expire no later than 10 years from the date of grant.

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Stock option activity during the nine months ended September 30, 2023 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, 202216,154,924 $5.10 7.5$67,997 
Granted5,083,268 6.23 
Cancelled(910,758)8.54 
Exercised(3,547,071)2.19 25,887 
Outstanding as of September 30, 202316,780,363 $5.90 7.2$55,896 
Exercisable as of September 30, 20239,897,994 $4.70 6.5$43,681 

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, 2023 and 2022 were $5.64 and $6.57, respectively.

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

Nine months ended September 30,
 20232022
Expected term (in years)
5.86.2
Expected volatility
66 %63 %
Expected dividend yield
  
Risk-free interest rate
3.6 %1.9 %

As of September 30, 2023, $39.6 million of unrecognized compensation cost related to stock options is expected to be recognized as expense over approximately the next two years.

RSUs

Equity awards granted to employees primarily consist of RSUs and 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, 2023:

Stock unitsWeighted-average grant date fair value
Outstanding as of December 31, 20226,894,525 $8.17 
Granted13,950,469 8.65 
Vested(2,360,411)4.03 
Forfeited(765,227)8.27 
Outstanding as of September 30, 202317,719,356 $8.45 

The fair market value of RSUs vested was $19.8 million during the nine months ended September 30, 2023. As of September 30, 2023, $141.4 million of unrecognized compensation cost related to RSUs is expected to be recognized as expense over approximately the next four years.

Note 11. Income Taxes

The Company did not record any U.S. income tax expense during the three and nine months ended September 30, 2023 and 2022. The Company has historically incurred operating losses and maintains a full valuation allowance
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against its net deferred tax assets. Foreign taxes were insignificant during the three and nine months ended September 30, 2023 and 2022.

Net operating losses (NOLs) and tax credit carry-forwards are subject to review and possible adjustment by the Internal Revenue Service (“IRS”) and may become subject to annual limitation due to ownership changes that have occurred previously or that could occur in the future under Section 382 of the Internal Revenue Code, as amended and similar state provisions. These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable income. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50% over a three-year period. The Company is conducting a study to assess whether a change of ownership has occurred or whether there have been multiple ownership changes since inception. If the Company has experienced a change of ownership, as defined by Section 382, at any time since inception, utilization of the net operating loss carryforwards or research and development tax credit carryforwards would be subject to an annual limitation under Section 382, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term tax-exempt rate and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the net operating loss carryforwards or research and development tax credit carryforwards before utilization. Further, until a study is completed and any limitation is known, no amounts are being presented as an uncertain tax position.

The Company files income tax returns in the United States, Canada, United Kingdom, Utah, California and Massachusetts. The Company is not currently under examination in any of these jurisdictions. The Company is subject to income tax examinations on all federal returns since the 2016 tax return.

Note 12. Net Loss Per Share

For the three and nine months ended September 30, 2023 and 2022, Recursion calculated net loss per share of Class A, Class B and Exchangeable 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 nine months ended September 30, 2023 and 2022, the Company reported a net loss and therefore basic and diluted loss per share were the same.

The rights, including the liquidation and dividend rights, of the holders of the Company’s Class A, Class B and Exchangeable common stock are substantially 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, Class B and Exchangeable 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, Class B and Exchangeable common stock was the same during the three and nine months ended September 30, 2023 and 2022.
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The following tables set forth the computation of basic and diluted net loss per share of Class A, Class B and Exchangeable common stock:

Three months endedNine months ended
September 30, 2023September 30, 2023
(in thousands, except share amount)Class AClass BExchangeableClass AClass BExchangeable
Numerator:
Allocation of undistributed earnings$(88,975)$(3,313)$(729)$(222,990)$(8,911)$(3,169)
Denominator:
Weighted average common shares outstanding205,013,368 7,633,893 1,679,925 192,653,702 7,698,790 2,738,145 
Net loss per share, basic and diluted$(0.43)$(0.43)$(0.43)$(1.16)$(1.16)$(1.16)

Three months endedNine months ended
September 30, 2022September 30, 2022
(in thousands, except share amounts)
Class AClass BClass AClass B
Numerator:
Allocation of undistributed earnings$(57,685)$(2,759)$(173,167)$(8,817)
Denominator:
Weighted average common shares outstanding165,518,152 7,917,818 163,783,626 8,339,348 
Net loss per share, basic and diluted$(0.35)$(0.35)$(1.06)$(1.06)

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

Three months ended September 30,Nine months ended September 30,
 2023202220232022
Stock based compensation
12,162,449 12,570,320 9,022,502 10,849,853 

Note 13. Fair Value Measurements

The fair value hierarchy consists of the following three levels:

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

The Company is required to maintain a cash balance in a collateralized account to secure the Company’s credit cards. Additionally, the Company holds restricted cash related to an outstanding letter of credit issued by J.P. Morgan, which was obtained to secure certain Company obligations relating to tenant improvements. Recursion also holds restricted cash related to a Bill and Melinda Gates Foundation grant.

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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)September 30, 2023Level 1Level 2Level 3
Assets
Cash equivalents:
Money market funds$368,215 $368,215 $ $ 
Restricted cash9,885 9,885   
Total assets$378,100 $378,100 $ $ 

Basis of fair value measurement
(in thousands)December 31, 2022Level 1Level 2Level 3
Assets
Cash equivalents:
Money market funds$404,613 $404,613 $ $ 
Restricted cash9,200 9,200   
Total assets$413,813 $413,813 $ $ 

In addition to the financial instruments that are recognized at fair value on the Condensed Consolidated Balance Sheet, the Company has certain financial instruments that are recognized at amortized cost or some basis other than fair value. The carrying amount of these instruments are considered to be representative of their approximate fair values.

The following tables summarize the Company’s financial instruments that are not measured at fair value:

Book valuesFair values
(in thousands)September 30, 2023December 31, 2022September 30, 2023December 31, 2022
Liabilities
Current portion of notes payable$695 $97 $695 $97 
Notes payable, net of current portion1,126 536 1,126 536 
Total liabilities$1,821 $633 $1,821 $633 

Note 14. Subsequent Events

Tempus license

On November 3, 2023, Recursion entered into a five-year license agreement with Tempus Labs, Inc. (Tempus) for access to their patient-centric multimodal oncology data and use rights for therapeutic development purposes. This data will be used to improve the training of Recursion’s artificial intelligence and machine learning models and is expected to accelerate Recursion’s drug discovery process. Recursion will make annual payments, ranging between $22.0 million and $42.0 million, up to $160.0 million in aggregate, to Tempus in cash or equity.

Supercomputer upgrade

On October 31, 2023 Recursion entered into an agreement to upgrade its Supercomputer (BioHive-1) for approximately $30.0 million.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following is a discussion and analysis of the financial condition of Recursion Pharmaceuticals, Inc. (Recursion, the Company, we, us or our) and the results of operations. This commentary should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and accompanying notes appearing in Item 1, “Financial Statements” and the Company’s audited consolidated financial statements and accompanying notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Annual Report on Form 10-K for the year ended December 31, 2022. This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading "Note About Forward-Looking Statements" in this Quarterly Report on Form 10-Q. You should review the disclosure under the heading "Risk Factors" in the Annual Report on Form 10-K for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements. We assume no obligation to revise or publicly release any revision to any forward-looking statements contained in this Quarterly Report on Form 10-Q, unless required by law.

Investors and others should note that we announce material financial and other information to our investors using our investor relations website (https://ir.recursion.com/), SEC filings, press releases, public conference calls and webcasts. We use these channels as well as social media and blogs to communicate with our stakeholders and the public about our company, our services and other issues. It is possible that the information we post on social media and blogs could be deemed to be material information. Therefore, we encourage investors, the media and others interested in our company to review the information we post on the social media channels and blogs listed on our investor relations website. Information contained in, or that can be accessed through, our website is not a part of, and is not incorporated into, this report.

Overview

Recursion is a clinical stage TechBio company leading this burgeoning space by decoding biology and chemistry to industrialize drug discovery. Central to our mission is the Recursion Operating System (OS), a platform built across diverse technologies that enables us to map and navigate trillions of biological and chemical relationships within the Recursion Data Universe, one of the world’s largest proprietary biological and chemical datasets. We frame this integration of the physical and digital components as iterative loops of atoms and bits. Scaled ‘wet-lab’ biology and chemistry data built in-house (atoms) are organized into virtuous cycles with ‘dry-lab’ computational tools (bits) to rapidly translate in silico hypotheses into validated insights and novel chemistry. Our focus on mapping and navigating the complexities of biology and chemistry beyond the published literature and in a target-agnostic way differentiates us from other companies in our space and leads us to confront a fundamental cause of failure for the majority of clinical-stage programs - the wrong target is chosen due to an incomplete and reductionist view of biology. Our balanced team of life scientists and computational and technical experts creates an environment where empirical data, statistical rigor and creative thinking are brought to bear on our decisions.

We leverage our Recursion OS to enable three key value drivers:
1.An expansive pipeline of internally-developed clinical and preclinical programs focused on genetically-driven rare diseases and oncology with significant unmet need and market opportunities in some cases potentially in excess of $1 billion in annual sales
2.Transformational partnerships with leading biopharma companies to map and navigate intractable areas of biology, identify novel targets and develop potential new medicines that are further developed in resource-heavy clinical trials overseen by our partners
3.Development of one of the largest fit-for-purpose proprietary biological and chemical datasets in the world at a time when advances in AI paired with the right training data are creating disruptive value.

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https://cdn.kscope.io/255066c47076f4a1e6dd34d6f0e3fa5d-Recursion OS.jpg

Recursion has a portfolio of clinical-stage, preclinical and discovery programs and continues scaling its Recursion OS with more than 200 million total phenomics experiments, multi-timepoint live-cell microscopy, transcriptomics, proteomics, inVivomics, data related to multi-target compound interactions and physicochemical properties, as well as large language model derived disease relevance and target-compound relationships. Data have been generated in-house by the Recursion OS across approximately 50 human cell types, an in-house chemical library of approximately 1.7 million compounds, and an in silico library of over 1 trillion small molecules, by a team of approximately 550 Recursionauts that is balanced between life scientists and computational and technical experts. The collaboration with Tempus gives Recursion access to over 20 petabytes of multimodal oncology data. Recursion’s in-house data generation and Tempus collaboration will coalesce approximately 50 petabytes of proprietary biology, chemistry, and patient-centric data for the purpose of training causal AI models and designing biomarker and patient stratification strategies for clinical programs.

https://cdn.kscope.io/255066c47076f4a1e6dd34d6f0e3fa5d-PipelineQ3-23.jpg

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Summary of Business Highlights

Platform

Tempus Collaboration
Oncology-Focused, Precision Medicine Data: Tempus has built one of the world’s largest oncology-focused clinical and DNA/RNA molecular observational datasets. Our new collaboration with Tempus gives Recursion preferred access to these data. When combined with Recursion’s proprietary dataset of over 25 petabytes of interventional biological and chemical data, Recursion will now have approximately 50 petabytes of proprietary data fit for the purpose of machine learning at its disposal, enabling us to improve the training of causal AI/ML models of biology. When applied to our genome-wide reverse genetics platform, these data could facilitate the discovery of novel associations and mechanisms not otherwise identifiable in the clinical and forward genetics data from Tempus. Additionally, this patient-linked data will be used to support translating innovative therapeutics from Recursion’s platform directly to patients using novel biomarker and patient stratification strategies.
Terms of the Tempus Collaboration: Recursion entered into an agreement with Tempus to access its patient-centric data as part of a 5-year licensing agreement. Recursion will make annual payments to Tempus in cash or equity ranging between $22.0 million and $42.0 million each year, up to $160.0 million in aggregate, over the next 5 years in exchange for continued and updated data access and use rights for therapeutic development purposes.
Supercomputer Expansion: We have committed to working with NVIDIA to expand BioHive-1, our on-premise supercomputer. After the expansion, which will be completed in the first half of 2024, BioHive-1 computational capacity will increase by over 4x (adding more than 500 NVIDIA H100 GPUs to the more than 300 NVIDIA A100s already in place). We project that upon completion and benchmarking, BioHive-1 will be in the top 50 most powerful supercomputers in the world across any industry (according to the Top500 list) and will be the most powerful supercomputer owned and operated by any biopharma company. These additional computational resources will continue to support the construction of the largest foundation models across biology and chemistry using Recursion’s vast datasets and data generation capabilities as well as tools based on interactive large language models and autonomous agents.
Foundation Models: Our supercomputer expansion is meant to build on the deployment of our first Phenomics Foundation Model, PHENOM-1, which is a vision transformer utilizing hundreds of millions of parameters trained on billions of biological images from our proprietary phenomics library. PHENOM-1 demonstrated the scaling hypothesis within a biological context, namely that larger models trained on more diverse datasets lead to increased performance and emergent properties. With our recent acquisitions of digital chemistry company Cyclica and the deep-learning research team at Valence Discovery (now Valence Labs), the vast patient-centric data from Tempus and our own growing proprietary multi-omic datasets, we anticipate the construction and application of more foundation models and large language models across biology, chemistry and translation. Together, we believe these increasingly sophisticated models will enable us to drive new, better programs into clinical development both in our own pipeline and with our current and future partners at scale.

Pipeline

Cerebral Cavernous Malformation (CCM) (REC-994): Our Phase 2 SYCAMORE clinical trial is a double-blind, placebo-controlled safety, tolerability and exploratory efficacy study of this drug candidate in participants with CCM. This study was fully enrolled as of June 2023 with 62 participants and the vast majority of participants who have thus far finished their first year of treatment have enrolled in the long-term extension study. We expect to share Phase 2 proof-of-concept data in H2 2024.
Neurofibromatosis Type 2 (NF2) (REC-2282): Our Phase 2/3 POPLAR clinical trial is a two part study of REC-2282 in participants with progressive NF2-mutated meningiomas due either to syndromic disease or initiating mutations in the meningiomas. Part 1 of the study is ongoing and is exploring two doses of REC-2282 in approximately 23 adults and 9 adolescents. We expect to share Phase 2 safety, tolerability, pharmacokinetics and preliminary efficacy in H2 2024.
Familial Adenomatous Polyposis (FAP) (REC-4881): Our Phase 2 TUPELO clinical trial is a two part study of REC-4881 in participants with FAP. Evaluation of three dose levels is ongoing, thereafter a dose expansion phase will commence evaluating the recommended Phase 2 dose in approximately 30
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participants. We expect to share Phase 2 safety, tolerability, pharmacokinetics and preliminary efficacy in H1 2025.
AXIN1 or APC Mutant Cancers (REC-4881): Our Phase 2 LILAC clinical trial is a biomarker enriched two part study of REC-4881 in participants with unresectable, locally advanced or metastatic cancer with AXIN1 or APC mutations. The study will initiate in late Q4 2023 or early Q1 2024 and will explore the safety and efficacy of REC-4881 across three dose levels in 30-40 participants.
Clostridioides difficile Infection (REC-3964): In early September 2023, we announced completion of our Phase 1 clinical trial and reported that REC-3964 had been well tolerated in healthy volunteers with no serious adverse events. We expect to initiate a Phase 2 proof-of-concept study in patients with recurrent Clostridioides difficile infection in 2024.
RBM39 HR-Proficient Ovarian Cancer: RBM39 is a novel CDK12-adjacent target identified by the Recursion OS. We believe we can modulate this target to produce a therapeutic effect in HR-proficient ovarian cancer and potentially in other tumor types. This program is in the preclinical stage and IND-enabling studies are progressing.

Partnerships

Bayer: Bayer and Recursion have signed an update to their collaboration around a select set of oncology programs. This decision allows Bayer to leverage Recursion’s capabilities to identify novel targets and compounds applicable to traditionally undruggable oncology indications as well as Recursion’s access to expansive oncology-focused, patient-centric data from Tempus for their closely partnered programs. Under the amended and restated agreement, Bayer will pay Recursion increased per program milestones which may be up to $1.5 billion for up to 7 oncology programs as well as royalties on net sales. In this oncology-focused collaboration, Recursion will use many of the new tools it has developed since the collaboration was first signed to potentially identify and nominate programs rapidly.
Roche-Genentech: In October 2023, Recursion announced that Roche-Genentech optioned its first partnership program in GI-oncology. This milestone represents a critical step in our joint efforts to initiate and advance new therapeutic programs using Recursion’s approach to map and navigate biology and chemistry. In the near-term, there is the potential for option exercises associated with map building or data sharing initiatives as well as option exercises associated with additional partnership programs.

Financing and Operations

We were incorporated in November 2013. On April 20, 2021, we closed our Initial Public Offering (IPO) and issued 27,878,787 shares of Class A common stock at a price of $18.00 per share, raising net proceeds of $462.4 million. Prior to our IPO, we had raised approximately $448.9 million in equity financing from investors in addition to $30.0 million in an upfront payment from our collaboration with Bayer AG (Bayer). In January 2022, we received an upfront payment of $150.0 million from our collaboration with Roche. See Note 9, “Collaborative Development Contracts” to the Condensed Consolidated Financial Statements for additional information on the collaborations. In October 2022, we issued 15,336,734 shares of our Class A common stock at a purchase price of $9.80 per share in the 2022 Private Placement to qualified institutional buyers and institutional accredited investors (the Purchasers) for net proceeds of $143.7 million, after deducting fees and offering costs of $6.6 million. On July 11, 2023, we issued an aggregate of 7,706,363 shares of our Class A common stock at a purchase price of $6.49 per share in the 2023 Private Placement with NVIDIA Corporation for net proceeds of approximately $50.0 million. See Note 8, “Common Stock” to the Condensed Consolidated Financial Statements for additional information on the 2023 Private Placement.

We use the capital we have raised to fund operations and investing activities across platform research operations, drug discovery, clinical development, digital and other infrastructure, creation of our portfolio of intellectual property and administrative support. We do not have any products approved for commercial sale and have not generated any revenues from product sales. We had cash and cash equivalents of $387.3 million as of September 30, 2023. Based on our current operating plan, we believe that our cash and cash equivalents will be sufficient to fund our operations for at least the next twelve months.

Since inception, we have incurred significant operating losses. Our net losses were $93.0 million and $235.1 million during the three and nine months ended September 30, 2023, respectively. Our net losses were $60.4 million and $182.0 million during the three and nine months ended September 30, 2022, respectively. As of September 30, 2023, our accumulated deficit was $874.6 million.
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We anticipate that we will need to raise additional financing in the future to fund our operations, including the potential commercialization of any approved product candidates. Until such time, if ever, as we can generate significant product revenue, we expect to finance our operations with our existing cash and cash equivalents, any future equity or debt financings and upfront, milestone and royalty payments, if any, received under current or future license or collaboration agreements. We may not be able to raise additional capital on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, results of operations and financial condition may be adversely affected.

Components of Operating Results

Revenue

Operating revenue is generated through research and development agreements derived from strategic alliances. We are entitled to receive variable consideration as certain milestones are achieved. The timing of revenue recognition is not directly correlated to the timing of cash receipts.

Cost of Revenue

Cost of revenue consists of the Company’s costs to provide services for drug discovery required under performance obligations with partnership customers. These primarily include materials costs, service hours performed by our employees and depreciation of property and equipment.

Research and Development

Research and development expenses account for a significant portion of our operating expenses. We recognize research and development expenses as they are incurred. Research and development expenses consist of costs incurred in performing activities including:

costs to develop and operate our platform;
costs of discovery efforts which may lead to development candidates, including research materials and external research;
costs for clinical development of our investigational products;
costs for materials and supplies associated with the manufacture of active pharmaceutical ingredients, investigational products for preclinical testing and clinical trials;
personnel-related expenses, including salaries, benefits, bonuses and stock-based compensation for employees engaged in research and development functions;
costs associated with operating our digital infrastructure; and
other direct and allocated expenses incurred as a result of research and development activities, including those for facilities, depreciation, amortization and insurance.

We recognize expenses associated with third-party contracted services as they are incurred. Upon termination of contracts with third parties, our financial obligations are generally limited to costs incurred or committed to date. Any advance payments for goods or services to be used or rendered in future research and product development activities pursuant to a contractual arrangement are classified as prepaid expenses until such goods or services are rendered.

General and Administrative

We expense general and administrative costs as incurred. General and administrative expenses consist primarily of salaries; including employee benefits and stock-based compensation. General and administrative expenses also include facilities, depreciation, information technology, professional fees for auditing and tax, legal fees for corporate and patent matters and insurance costs.

Other Income, Net

Other income, net consists primarily of interest earned on cash and cash equivalents.

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Results of Operations

The following table summarizes our results of operations:

(in thousands, except percentages)Three months ended September 30,ChangeNine months ended September 30,
Change
20232022$%20232022
$
%
Revenue
Operating revenue$10,102 $13,053 $(2,951)(23)%$33,252 $26,005 $7,247 28 %
Grant revenue431 107 324 >100%432 162 271 >100%
Total revenue10,533 13,160 (2,627)(20)%33,684 26,167 7,518 29 %
Operating costs and expenses
Cost of revenue10,877 15,409 (4,532)(29)%32,706 37,435 (4,729)(13)%
Research and development70,007 40,836 29,171 71 %171,744 111,716 60,028 54 %
General and administrative29,199 19,488 9,711 50 %80,364 61,761 18,603 30 %
Total operating costs and expenses110,083 75,733 34,350 45 %284,814 210,912 73,902 35 %
Loss from operations(99,550)(62,573)(36,977)59 %(251,130)(184,745)(66,384)36 %
Other income, net6,533 2,128 4,405 >100%16,060 2,761 13,300 >100%
Net loss$(93,017)$(60,445)$(32,572)54 %$(235,070)$(181,984)$(53,084)29 %

Summary

Our financial performance during the three and nine months ended September 30, 2023 compared to the prior periods included an increase in research and development costs due to increased platform costs as we have expanded and upgraded our capabilities, additionally for the three and nine months ended September 30, 2022 platform costs decreased due to a reallocation of spending to cost of revenue for our strategic partnerships.

Revenue

The following table summarizes our components of revenue:
Three months ended September 30,ChangeNine months ended September 30,Change
(in thousands, except percentages)20232022
$
%
20232022
$
%
Revenue
Operating revenue$10,102 $13,053 $(2,951)(23)%$33,252 $26,005 $7,247 28 %
Grant revenue431 107 324 >100%432 162 271 >100%
Total revenue$10,533 $13,160 $(2,627)(20)%$33,684 $26,167 $7,518 29 %

For the three months ended September 30, 2023, the decrease in revenue compared to prior period was due to the timing of workflows from our strategic partnership with Roche. For the nine months ended September 30, 2023, the increase in revenue compared to prior period was due to revenue recognized from our strategic partnership with Roche, which has progressed from primarily cell type evaluation work to inference based Phenomap building and additional cell type evaluation work.

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Cost of Revenue

The following table summarizes our cost of revenue:

(in thousands, except percentages)Three months ended September 30,ChangeNine months ended September 30,Change
20232022
$
%
20232022
$
%
Total cost of revenue$10,877 $15,409 $(4,532)(29)%$32,706 $37,435 $(4,729)(13)%

For the three and nine months ended September 30, 2023, the decrease in cost of revenue compared to prior period was due to our strategic partnership with Bayer, for which less brute-force work was required.

Research and Development

The following table summarizes our components of research and development expense:

(in thousands, except percentages)Three months ended September 30,ChangeNine months ended September 30,Change
20232022
$
%
20232022
$
%
Research and development expense
Platform$28,908 $11,376 $17,532 >100%$68,914 $27,376 $41,538 >100%
Discovery15,513 12,119 3,394 28 %45,467 36,878 8,589 23 %
Clinical18,590 11,927 6,663 56 %42,591 35,590 7,001 20 %
Stock based compensation6,748 3,772 2,976 79 %14,063 7,702 6,361 83 %
Other248 1,642 (1,394)(85)%709 4,170 (3,461)(83)%
Total research and development expense$70,007 $40,836 $29,171 71 %$171,744 $111,716 $60,028 54 %

Significant components of research and development expense include the following allocated by development phase: Platform, which refers primarily to expenses related to screening of product candidates through hit identification; Discovery, which refers primarily to expenses related to hit identification through development of candidates; and Clinical, which refers primarily to expenses related to development of candidates and beyond.

For the three and nine months ended September 30, 2023, the increase in research and development expenses compared to the prior period was due to increased platform costs as we have expanded and upgraded our capabilities in platform including our chemical technology, machine learning and transcriptomics platform. Additionally, for the three and nine months ended September 30, 2022 platform costs decreased due to a reallocation of spending to cost of revenue for our strategic partnerships.

General and Administrative Expense

The following table summarizes our general and administrative expense:

(in thousands, except percentages)Three months ended September 30,ChangeNine months ended September 30,Change
20232022
$
%
20232022
$
%
Total general and administrative expense$29,199 $19,488 $9,711 50 %$80,364 $61,761 $18,603 30 %

For the three and nine months ended September 30, 2023, the increase in general and administrative expense compared to prior period was primarily driven by an increase in salaries and wages of $5.8 million and $10.0 million, respectively, and increases in software and depreciation expense.
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Other Income, Net

The following table summarizes our components of other income, net:

(in thousands, except percentages)Three months ended September 30,ChangeNine months ended September 30,Change
20232022
$
%
20232022
$
%
Interest income4,977 1,833 3,144 >100%14,594 2,572 12,022 >100%
Interest expense(25)(13)(12)87.6 %(71)(42)(29)69.5 %
Other1,581 308 1,273 n/m1,537 231 1,306 n/m
Other income, net$6,533 $2,128 $4,405 >100%$16,060 $2,761 $13,299 >100%
n/m = Not meaningful

For the three and nine months ended September 30, 2023, the increase in interest income related to earnings on cash and cash equivalents in money market funds.

Liquidity and Capital Resources

Sources of Liquidity

We have not yet commercialized any products and do not expect to generate revenue from the sales of any product candidates for at least several years. Cash and cash equivalents totaled $387.3 million and $549.9 million as of September 30, 2023 and December 31, 2022, respectively.

We have incurred operating losses and experienced negative operating cash flows and we anticipate that the Company will continue to incur losses for at least the foreseeable future. Our net loss was $93.0 million and $235.1 million during the three and nine months ended September 30, 2023, respectively. Our net loss was $60.4 million and $182.0 million during the three and nine months ended September 30, 2022, respectively. As of September 30, 2023 and December 31, 2022, we had an accumulated deficit of $874.6 million and $639.6 million, respectively.

We have financed our operations through the private placements of preferred stock and Class A common stock issuances. As of September 30, 2023, we have received net proceeds of $448.9 million from the sale of preferred stock and $656.1 million from Class A common stock issuances. See Note 8, “Common Stock” to the Condensed Consolidated Financial Statements for additional details on Class A common stock issuances. Additionally, as of September 30, 2023, we have received proceeds of $180.0 million from our strategic partnerships. See Note 9, “Collaborative Development Contracts” to the Condensed Consolidated Financial Statements for additional details on the collaborations.

Cash Flows

The following table is a summary of the Condensed Consolidated Statements of Cash Flows for each of the periods presented below:

Nine months ended
September 30,
(in thousands)20232022
Cash used in operating activities$(213,703)$(38,776)
Cash provided by (used in) investing activities(7,740)