0001564590-20-039294.txt : 20200811 0001564590-20-039294.hdr.sgml : 20200811 20200811160551 ACCESSION NUMBER: 0001564590-20-039294 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 66 CONFORMED PERIOD OF REPORT: 20200630 FILED AS OF DATE: 20200811 DATE AS OF CHANGE: 20200811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Fusion Pharmaceuticals Inc. CENTRAL INDEX KEY: 0001805890 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 000000000 STATE OF INCORPORATION: Z4 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-39344 FILM NUMBER: 201092441 BUSINESS ADDRESS: STREET 1: 270 LONGWOOD ROAD SOUTH CITY: HAMILTON STATE: A6 ZIP: L8P 0A6 BUSINESS PHONE: 289-799-0891 MAIL ADDRESS: STREET 1: 270 LONGWOOD ROAD SOUTH CITY: HAMILTON STATE: A6 ZIP: L8P 0A6 10-Q 1 fusn-10q_20200630.htm 10-Q fusn-10q_20200630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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 June 30, 2020

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: 001-39344

 

Fusion Pharmaceuticals Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Canada

Not Applicable

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

270 Longwood Rd., S.

Hamilton, ON, Canada 

L8P 0A6

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (289) 799-0891

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common shares, no par value per share

 

FUSN

 

The 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  ☐    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  ☒    No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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

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

 

As of August 4, 2020, the registrant had 41,664,044 common shares, with no par value per share, outstanding.

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

1

Item 1.

Financial Statements

1

 

Condensed Consolidated Balance Sheets (Unaudited)

1

 

Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)

2

 

Condensed Consolidated Statements of Non-controlling Interest, Convertible Preferred Shares and Shareholders’ Equity (Deficit) (Unaudited)

3

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

4

 

Notes to (Unaudited) Condensed Consolidated Financial Statements

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

38

Item 4.

Controls and Procedures

39

PART II.

OTHER INFORMATION

40

Item 1.

Legal Proceedings

40

Item 1A.

Risk Factors

40

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

89

Item 3.

Defaults Upon Senior Securities

89

Item 4.

Mine Safety Disclosures

89

Item 5.

Other Information

89

Item 6.

Exhibits

90

Signatures

91

 

 

 

i


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

FUSION PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

 

 

 

June 30,

2020

 

 

December 31,

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

318,892

 

 

$

65,344

 

Restricted cash

 

 

280

 

 

 

280

 

Prepaid expenses and other current assets

 

 

960

 

 

 

929

 

Total current assets

 

 

320,132

 

 

 

66,553

 

Property and equipment, net

 

 

1,403

 

 

 

1,272

 

Deferred tax assets

 

 

78

 

 

 

78

 

Restricted cash

 

 

1,497

 

 

 

1,497

 

Total assets

 

$

323,110

 

 

$

69,400

 

Liabilities, Non-Controlling Interest, Convertible Preferred Shares and

   Shareholders’ Equity (Deficit)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

703

 

 

$

830

 

Income taxes payable

 

 

278

 

 

 

117

 

Accrued expenses

 

 

6,629

 

 

 

3,326

 

Total current liabilities

 

 

7,610

 

 

 

4,273

 

Deferred rent, net of current portion

 

 

 

 

 

28

 

Preferred share tranche right liability

 

 

 

 

 

5,741

 

Income taxes payable, net of current portion

 

 

293

 

 

 

293

 

Special voting shares redemption right liability (Notes 2 and 6)

 

 

 

 

 

 

Total liabilities

 

 

7,903

 

 

 

10,335

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

Non-controlling interest in Fusion Pharmaceuticals (Ireland) Limited (Notes 2 and 6)

 

 

 

 

 

20,961

 

Convertible preferred shares, no par value; 0 shares and 132,207,290 shares

   authorized as of June 30, 2020 and December 31, 2019, respectively; 0 shares

   and 73,125,790 shares issued and outstanding as of June 30, 2020 and December 31,

   2019, respectively; aggregate liquidation preference of $0 and $77,965 as of

   June 30, 2020 and December 31, 2019, respectively

 

 

 

 

 

71,592

 

Shareholders’ equity (deficit):

 

 

 

 

 

 

 

 

Common shares, no par value, unlimited shares authorized

   as of June 30, 2020 and December 31, 2019; 41,664,044 and 1,929,555 shares issued and

   outstanding as of June 30, 2020 and December 31, 2019, respectively

 

 

 

 

 

 

Additional paid-in capital

 

 

405,032

 

 

 

1,286

 

Accumulated deficit

 

 

(89,825

)

 

 

(34,774

)

Total shareholders’ equity (deficit)

 

 

315,207

 

 

 

(33,488

)

Total liabilities, non-controlling interest, convertible preferred shares and

   shareholders’ equity (deficit)

 

$

323,110

 

 

$

69,400

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

1


 

FUSION PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

3,325

 

 

$

2,137

 

 

$

7,702

 

 

$

4,978

 

General and administrative

 

 

3,988

 

 

 

1,771

 

 

 

8,315

 

 

 

2,942

 

Total operating expenses

 

 

7,313

 

 

 

3,908

 

 

 

16,017

 

 

 

7,920

 

Loss from operations

 

 

(7,313

)

 

 

(3,908

)

 

 

(16,017

)

 

 

(7,920

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of preferred share tranche right liability

 

 

(31,604

)

 

 

222

 

 

 

(32,722

)

 

 

222

 

Change in fair value of preferred share warrant liability

 

 

(6,065

)

 

 

 

 

 

(6,399

)

 

 

 

Interest income

 

 

22

 

 

 

148

 

 

 

169

 

 

 

148

 

Refundable investment tax credits

 

 

52

 

 

 

44

 

 

 

98

 

 

 

88

 

Other income (expense), net

 

 

325

 

 

 

56

 

 

 

128

 

 

 

105

 

Total other income (expense), net

 

 

(37,270

)

 

 

470

 

 

 

(38,726

)

 

 

563

 

Loss before provision for income taxes

 

 

(44,583

)

 

 

(3,438

)

 

 

(54,743

)

 

 

(7,357

)

Provision for income taxes

 

 

(150

)

 

 

(18

)

 

 

(212

)

 

 

(32

)

Net loss and comprehensive loss

 

 

(44,733

)

 

 

(3,456

)

 

 

(54,955

)

 

 

(7,389

)

Dividends paid to preferred shareholders in the form of

   warrants issued

 

 

 

 

 

 

 

 

(1,382

)

 

 

 

Net loss attributable to common shareholders

 

$

(44,733

)

 

$

(3,456

)

 

$

(56,337

)

 

$

(7,389

)

Net loss per share attributable to common shareholders—basic and

   diluted

 

$

(18.91

)

 

$

(1.79

)

 

$

(26.23

)

 

$

(3.89

)

Weighted-average common shares outstanding—basic and diluted

 

 

2,366,198

 

 

 

1,928,933

 

 

 

2,147,876

 

 

 

1,901,109

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2


 

FUSION PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED STATEMENTS OF NON-CONTROLLING INTEREST, CONVERTIBLE PREFERRED SHARES

AND SHAREHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share amounts)

(Unaudited)

 

 

 

Non-Controlling

Interest in Fusion

Pharmaceuticals

(Ireland)

 

 

Class A and B

Convertible

Preferred Shares

 

 

 

Common Shares

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Total

Shareholders’

 

 

 

Limited

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity (Deficit)

 

Balances at December 31, 2019

 

$

20,961

 

 

 

73,125,790

 

 

$

71,592

 

 

 

 

1,929,555

 

 

$

 

 

$

1,286

 

 

$

(34,774

)

 

$

(33,488

)

Issuance of Class B convertible preferred shares and Class B preferred share tranche

   right, net of issuance costs of $93

 

 

 

 

 

6,598,917

 

 

 

9,907

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Initial fair value of Class B convertible preferred share tranche right liability

 

 

 

 

 

 

 

 

(1,105

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of warrants to purchase Class B convertible preferred shares and Class B

   preferred exchangeable shares as a non-cash dividend to preferred shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,286

)

 

 

(96

)

 

 

(1,382

)

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

358

 

 

 

 

 

 

358

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,222

)

 

 

(10,222

)

Balances at March 31, 2020

 

 

20,961

 

 

 

79,724,707

 

 

 

80,394

 

 

 

 

1,929,555

 

 

 

-

 

 

 

358

 

 

 

(45,092

)

 

 

(44,734

)

Issuance of Class B convertible preferred shares and Class B preferred share tranche

   right, net of issuance costs of $6

 

 

 

 

 

36,806,039

 

 

 

55,769

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of Class B preferred exchangeable shares of Fusion Pharmaceuticals

   (Ireland) Limited and Class B preferred share tranche right, net of issuance

   costs of $2

 

 

6,722

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification of Class B convertible preferred share and preferred exchangeable

   share tranche right liability upon settlement

 

 

4,257

 

 

 

 

 

 

35,311

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of Class A and B preferred exchangeable shares into Class A and B

   convertible preferred shares

 

 

(31,940

)

 

 

28,874,378

 

 

 

31,940

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of Class A and B convertible preferred shares into common shares

 

 

 

 

 

(145,405,124

)

 

 

(203,414

)

 

 

 

27,234,489

 

 

 

 

 

 

203,414

 

 

 

 

 

 

203,414

 

Conversion of convertible preferred share warrants into common share warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,781

 

 

 

 

 

 

7,781

 

Issuance of common shares upon closing of initial public offering,

   net of offering costs and underwriter fees of $19,447

 

 

 

 

 

 

 

 

 

 

 

 

12,500,000

 

 

 

 

 

 

193,053

 

 

 

 

 

 

193,053

 

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

426

 

 

 

 

 

 

426

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(44,733

)

 

 

(44,733

)

Balances at June 30, 2020

 

$

 

 

 

 

 

 

 

 

 

 

41,664,044

 

 

$

 

 

$

405,032

 

 

$

(89,825

)

 

$

315,207

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2018

 

$

15,168

 

 

 

42,918,661

 

 

$

32,371

 

 

 

 

1,872,975

 

 

$

 

 

$

668

 

 

$

(18,585

)

 

$

(17,917

)

Issuance of Class B convertible preferred shares and Class B preferred share tranche

   right, net of issuance costs of $299

 

 

 

 

 

30,207,129

 

 

 

45,476

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of Class B preferred exchangeable shares of Fusion Pharmaceuticals

   (Ireland) Limited and Class B preferred share tranche right, net of issuance

   costs of $13

 

 

6,711

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Initial fair value of Class B convertible preferred share

   and preferred exchangeable share tranche right liability

 

 

(918

)

 

 

 

 

 

(6,255

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

102

 

 

 

 

 

 

102

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,933

)

 

 

(3,933

)

Balances at March 31, 2019

 

 

20,961

 

 

 

73,125,790

 

 

 

71,592

 

 

 

 

1,872,975

 

 

 

-

 

 

 

770

 

 

 

(22,518

)

 

 

(21,748

)

Issuance of common shares upon exercise of stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

56,580

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

88

 

 

 

 

 

 

88

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,456

)

 

 

(3,456

)

Balances at June 30, 2019

 

$

20,961

 

 

 

73,125,790

 

 

$

71,592

 

 

 

 

1,929,555

 

 

$

 

 

$

858

 

 

$

(25,974

)

 

$

(25,116

)

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

3


FUSION PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(54,955

)

 

$

(7,389

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Share-based compensation expense

 

 

784

 

 

 

190

 

Depreciation and amortization expense

 

 

270

 

 

 

134

 

Non-cash rent expense

 

 

14

 

 

 

 

Change in fair value of preferred share tranche right liability

 

 

32,722

 

 

 

(222

)

Change in fair value of preferred share warrant liability

 

 

6,399

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(103

)

 

 

(46

)

Accounts payable

 

 

(319

)

 

 

(12

)

Accrued expenses

 

 

1,209

 

 

 

525

 

Income taxes payable

 

 

162

 

 

 

(9

)

Net cash used in operating activities

 

 

(13,817

)

 

 

(6,829

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(382

)

 

 

(151

)

Net cash used in investing activities

 

 

(382

)

 

 

(151

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of Class B convertible preferred shares and Class B preferred

   share tranche right, net of issuance costs

 

 

65,676

 

 

 

45,476

 

Proceeds from issuance of Class B preferred exchangeable shares of Fusion

   Pharmaceuticals (Ireland) Limited and Class B preferred share tranche right,

   net of issuance costs

 

 

6,722

 

 

 

6,711

 

Proceeds from the issuance of common shares upon closing of initial public offering,

     net of underwriter fees

 

 

197,625

 

 

 

 

Payment of offering costs

 

 

(2,276

)

 

 

 

Net cash provided by financing activities

 

 

267,747

 

 

 

52,187

 

Net increase in cash and restricted cash

 

 

253,548

 

 

 

45,207

 

Cash and restricted cash at beginning of period

 

 

67,121

 

 

 

29,080

 

Cash and restricted cash at end of period

 

$

320,669

 

 

$

74,287

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

50

 

 

$

40

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment included in accounts payable and accrued expenses

 

$

 

 

$

11

 

Issuance of common shares upon net settlement of stock option exercise

 

$

 

 

$

57

 

Issuance of warrants to purchase Class B preferred shares and Class B preferred

   exchangeable shares as a non-cash dividend to preferred shareholders

 

$

1,382

 

 

$

 

Offering costs included in accounts payable and accrued expenses

 

$

2,296

 

 

$

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 

4


 

FUSION PHARMACEUTICALS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.

Nature of the Business and Basis of Presentation

Fusion Pharmaceuticals Inc., together with its consolidated subsidiaries (“Fusion” or the “Company”), is a clinical-stage oncology company focused on developing next-generation radiopharmaceuticals as precision medicines. The Company was formed and subsequently incorporated as Fusion Pharmaceuticals Inc. in December 2014 under the Canada Business Corporations Act. The Company was founded to advance certain intellectual property relating to radiopharmaceuticals that had been developed by the Centre for Probe Development and Commercialization, a radiopharmaceutical research and good manufacturing practice production center. The Company is headquartered in Hamilton, Ontario, Canada.

The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, successful discovery and development of its product candidates, development by competitors of new technological innovations, dependence on key personnel, the ability to attract and retain qualified employees, protection of proprietary technology, compliance with governmental regulations, the impact of the COVID-19 coronavirus, the ability to secure additional capital to fund operations and commercial success of its product candidates. Product candidates currently under development will require extensive preclinical and clinical testing and regulatory approval prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel, and infrastructure and extensive compliance-reporting capabilities. Even if the Company’s drug development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its wholly-owned subsidiary, Fusion Pharmaceuticals US Inc., and majority-owned subsidiary, Fusion Pharmaceuticals (Ireland) Limited. As a result of consolidating this majority-owned subsidiary, the Company reflected a non-controlling interest on the consolidated balance sheets; however, the Company does not recognize a non-controlling interest in the consolidated statements of operations and comprehensive loss as the majority-owned subsidiary has no operating activities and is an extension of the parent company (see Note 2). All intercompany accounts and transactions have been eliminated in consolidation.

 

Closing of Class B Preferred Share Financing and Settlement of Class B Preferred Share Tranche Right Liability

On May 15, 2020, the Company achieved the specified regulatory milestone associated with the Class B preferred share tranche right (see Note 6), which triggered the requirement of the Class B shareholders to participate in the Milestone Financing. Upon closing of the Milestone Financing on June 2, 2020, the Company issued and sold 36,806,039 Class B preferred shares at a price of $1.5154 per share and 4,437,189 Class B special voting shares at a price of $0.000001 per share and the Company’s Ireland subsidiary issued and sold 4,437,189 Class B preferred exchangeable shares at a price of $1.5154 per share, for aggregate gross proceeds of $62.5 million.

The Class B preferred share tranche right liability (see Note 6) was settled in connection with the achievement of the regulatory milestone associated with the Class B preferred share tranche right. Specifically, the fair value of the Class B preferred share tranche right liability was remeasured for the last time as of the Milestone Financing closing date, resulting in the Company recognizing a loss in the condensed consolidated statements of operations and comprehensive loss for the three and six months ending June 30, 2020 of $31.6 million for the change in the fair value of the tranche right liability between March 31, 2020 and June 2, 2020. Immediately thereafter, the balance of the Class B preferred share tranche right liability of $39.6 million was reclassified to Class B convertible preferred shares in an amount of $35.3 million and to non-controlling interest in Fusion Pharmaceuticals (Ireland) Limited in an amount of $4.3 million on the consolidated balance sheet.

Reverse Share Split

On June 19, 2020, the Company effected a one-for-5.339 reverse share split of its issued and outstanding common shares and a proportional adjustment to the existing conversion ratios for each class of the Company’s Preferred Shares (see Note 6) and Preferred Exchangeable Shares (see Note 6). Accordingly, all share and per share amounts for all periods presented in the accompanying condensed consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this reverse share split and adjustment of the preferred share conversion ratios.

 

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Initial public offering

On June 25, 2020, the Company completed an initial public offering (“IPO”) of its common shares and issued and sold 12,500,000 common shares at a public offering price of $17.00 per share, resulting in net proceeds of $193.1 million after deducting underwriting fees, and after deducting offering costs.

Upon closing of the IPO, the Company’s outstanding Preferred Exchangeable Shares automatically converted into convertible preferred shares then the outstanding convertible preferred shares automatically converted into shares of common shares (see Note 6). Upon conversion of the convertible preferred shares, the Company reclassified the carrying value of the convertible preferred shares to common shares and additional paid-in capital.  In addition, the warrants to purchase the Company’s Series B convertible preferred shares and warrants to purchase preferred exchangeable shares of Fusion Pharmaceuticals (Ireland) Limited were converted into warrants to purchase the Company’s common shares upon the closing of the IPO. As a result, the warrant liability was remeasured a final time on the closing date of the IPO and reclassified to shareholders’ equity (deficit) (see Note 3).

In connection with the IPO on June 25, 2020, the Company filed an amended and restated articles of the corporation under laws governed by the Canada Business Corporations Act to authorize unlimited common shares with no par value.

Basis of presentation

The accompanying condensed consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the ordinary course of business. Since inception, the Company has funded its operations primarily with proceeds from sales of its convertible preferred shares, including borrowings under a convertible promissory note, which converted into convertible preferred shares, proceeds from sales of its Ireland subsidiary’s preferred exchangeable shares, and most recently with the proceeds from the IPO completed in June 2020. The Company has incurred recurring losses since its inception, including net losses of $44.7 million and $55.0 million for the three and six months ended June 30, 2020, respectively and net losses of $3.5 million and $7.4 million for the three and six months ended June 30, 2019, respectively. In addition, as of June 30, 2020, the Company had an accumulated deficit of $89.8 million. The Company expects to continue to generate operating losses for the foreseeable future. As of August 11, 2020, the issuance date of these condensed consolidated financial statements, the Company expects that its cash, including the net proceeds from the IPO, will be sufficient to fund its operating expenses and capital expenditure requirements into 2024. The future viability of the Company beyond that point is dependent on its ability to raise additional capital to finance its operations.

Impact of the COVID-19 Coronavirus

The COVID-19 pandemic, which began in December 2019 and has spread worldwide, has caused many governments to implement measures to slow the spread of the outbreak through quarantines, travel restrictions, heightened border security and other measures. The impact of this pandemic has been, and will likely continue to be, extensive in many aspects of society, which has resulted, and will likely continue to result, in significant disruptions to the global economy as well as businesses and capital markets around the world. The future progression of the pandemic and its effects on the Company’s business and operations are uncertain.

In response to public health directives and orders and to help minimize the risk of the virus to employees, the Company has taken precautionary measures, including implementing work-from-home policies for certain employees. The impact of the virus, including work-from-home policies, may negatively impact productivity, disrupt the Company’s business, and delay its preclinical research and clinical trial activities and its development program timelines, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on the Company’s ability to conduct its business in the ordinary course. Specifically, the Company may not be able to enroll additional patient cohorts on its planned timeline due to disruptions at its clinical trial sites. The Company is currently unable to predict when it will be able to resume normal clinical activities for its primary program, FPI-1434, or any other clinical programs. Other impacts to the Company’s business may include temporary closures of its suppliers and disruptions or restrictions on its employees’ ability to travel. Any prolonged material disruption to the Company’s employees or suppliers could adversely impact the Company’s preclinical research and clinical trial activities, financial condition and results of operations, including its ability to obtain financing.

The Company is monitoring the potential impact of the COVID-19 pandemic on its business and condensed consolidated financial statements. To date, the Company has not experienced material business disruptions or incurred impairment losses in the carrying values of its assets as a result of the pandemic and it is not aware of any specific related event or circumstance that would require it to revise its estimates reflected in these condensed consolidated financial statements.

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2.

Summary of Significant Accounting Policies

Use of Estimates

The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of expenses during the reporting periods. Significant estimates and assumptions reflected in these condensed consolidated financial statements include, but are not limited to, the accrual of research and development expenses and the valuations of common shares, stock options, preferred share tranche rights and preferred share warrants. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates when there are changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results may differ from those estimates or assumptions.

Unaudited Interim Financial Information

The accompanying condensed consolidated balance sheet as of June 30, 2020, the condensed consolidated statement of operations and comprehensive loss, and the condensed consolidated statement of non-controlling interest, convertible preferred shares and shareholders’ equity (deficit) for the three and six months ended June 30, 2020 and 2019, and the condensed consolidated statement of cash flows for the six months ended June 30, 2020 and 2019 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of June 30, 2020 and the results of its operations for the three and six months ended June 30, 2020 and 2019 and its cash flows for the six months ended June 30, 2020 and 2019. The financial data and other information disclosed in these notes related to the three and six months ended June 30, 2020 and 2019 are also unaudited. The results for the three and six month periods ended June 30, 2020 are not necessarily indicative of results to be expected for the year ending December 31, 2020, any other interim periods, or any future year or period.

The accompanying balance sheet as of December 31, 2019 has been derived from the Company’s audited financial statements for the year ended December 31, 2019. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements and notes thereto as of December 31, 2019 and for each of the three years in the period ended December 31, 2019 included in the Company’s Registration Statement on Form S-1, as amended, on file with the SEC.

Foreign Currency and Currency Translation

The reporting currency of the Company is the U.S. dollar. The functional currency of the Company’s operating company in Canada, operating company in the U.S. and non-operating company in Ireland is also the U.S. dollar. As a result, the Company records no cumulative translation adjustments related to translation of unrealized foreign exchange gains or losses.

For the remeasurement of local currencies to the U.S. dollar functional currency of the Canadian and Irish entities, assets and liabilities are translated into U.S. dollars at the exchange rate in effect on the balance sheet date, and income items and expenses are translated into U.S. dollars at the average exchange rate in effect during the period. Resulting transaction gains (losses) are included in other income (expense), net in the consolidated statements of operations and comprehensive loss, as incurred.

Adjustments that arise from exchange rate changes on transactions denominated in a currency other than the local currency are included in other income (expense), net in the consolidated statements of operations and comprehensive loss, as incurred.

During the three and six months ended June 30, 2020, the Company recorded $0.2 million and less than ($0.1) million, respectively, of foreign currency transaction gains (losses) in the consolidated statements of operations and comprehensive loss. During the three and six months ended June 30, 2019, the Company recorded $0.1 million of foreign currency transaction gains (losses) in the consolidated statements of operations and comprehensive loss for both periods.

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Restricted Cash

As of June 30, 2020 and December 31, 2019, the Company was required to maintain a separate cash balance of $0.3 million to collateralize corporate credit cards with a bank, which was classified as restricted cash (current) on its consolidated balance sheets.

In connection with the Company’s lease agreements entered into in January 2018 and October 2019 (see Note 11), the Company maintains letters of credit of less than $0.1 million and $1.5 million, respectively, for the benefit of the landlords. As of June 30, 2020 and December 31, 2019, the underlying cash balance collateralizing these letters of credit were classified as restricted cash (non-current) on its consolidated balance sheets based on the release dates of the restrictions of this cash. As of June 30, 2020 and 2019, the cash and restricted cash of $320.7 million and $74.3 million, respectively, presented in the consolidated statements of cash flows included cash of $318.9 million and $74.0 million, respectively, and restricted cash of $1.8 million and $0.3 million, respectively.

Deferred Offering Costs

The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity financings as deferred offering costs until such financings are consummated. After consummation of an equity financing, these costs are recorded as a reduction of the proceeds from the offering, either as a reduction to the carrying value of the preferred exchangeable shares or convertible preferred shares or in shareholders’ equity (deficit) as a reduction of additional paid-in capital generated as a result of the offering. Should an in-process equity financing be abandoned, the deferred offering costs would be expensed immediately as a charge to operating expenses in the consolidated statements of operations and comprehensive loss. The Company did not record any deferred offering costs as of June 30, 2020 or December 31, 2019. Offering costs of $4.6 million incurred during the first six months of 2020 have been recorded in shareholders’ equity (deficit) as a reduction of the gross proceeds generated from the Company’s initial public offering of common shares.

Business Combinations

In determining whether an acquisition should be accounted for as a business combination or asset acquisition, the Company first determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this is the case, the single identifiable asset or the group of similar assets is not deemed to be a business, and is instead deemed to be an asset. If this is not the case, the Company then further evaluates whether the single identifiable asset or group of similar identifiable assets and activities includes, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. If so, the Company concludes that the single identifiable asset or group of similar identifiable assets and activities is a business.

The Company accounts for business combinations using the acquisition method of accounting. Application of this method of accounting requires that (i) identifiable assets acquired (including identifiable intangible assets) and liabilities assumed generally be measured and recognized at fair value as of the acquisition date and (ii) the excess of the purchase price over the net fair value of identifiable assets acquired and liabilities assumed be recognized as goodwill, which is not amortized for accounting purposes but is subject to testing for impairment at least annually. Acquired in-process research and development (“IPR&D”) is recognized at fair value and initially characterized as an indefinite-lived intangible asset, irrespective of whether the acquired IPR&D has an alternative future use. Transaction costs related to business combinations are expensed as incurred. Determining the fair value of assets acquired and liabilities assumed in a business combination requires management to use significant judgment and estimates, especially with respect to intangible assets.

During the measurement period, which extends no later than one year from the acquisition date, the Company may record certain adjustments to the carrying value of the assets acquired and liabilities assumed with the corresponding offset to goodwill. After the measurement period, all adjustments are recorded in the consolidated statements of operations as operating expenses or income.

To date, the Company has not recorded any asset acquisitions as a business combination.

Asset Acquisitions

The Company measures and recognizes asset acquisitions that are not deemed to be business combinations based on the cost to acquire the assets, which includes transaction costs. Goodwill is not recognized in asset acquisitions. In an asset acquisition, the cost allocated to acquire IPR&D with no alternative future use is charged to expense at the acquisition date.

Contingent consideration in asset acquisitions payable in the form of cash is recognized when payment becomes probable and reasonably estimable, unless the contingent consideration meets the definition of a derivative, in which case the amount becomes part of the asset acquisition cost when acquired. Contingent consideration payable in the form of a fixed number of the Company’s own

8


 

shares is measured at fair value as of the acquisition date and recognized when the issuance of the shares becomes probable. Upon recognition of the contingent consideration payment, the amount is included in the cost of the acquired asset or group of assets, or, if related to IPR&D with no alternative future use, charged to expense.

Fair Value Measurements

Certain assets and liabilities of the Company are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

 

Level 1—Quoted prices in active markets for identical assets or liabilities.

 

Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.

 

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

Prior to the settlement of the Company’s preferred share tranche right liability and prior to the conversion of the Company’s preferred share warrant liability, these instruments were carried at fair value, determined according to Level 3 inputs in the fair value hierarchy described above (see Note 3). The carrying values of the Company’s amounts due for refundable investment tax credits and Canadian harmonized sales tax, accounts payable and accrued expenses approximate their fair values due to the short-term nature of these liabilities.

Preferred Share Tranche Right Liability

The subscription agreements for the Company’s Class B convertible preferred shares (see Note 6) and its Ireland subsidiary’s Class B preferred exchangeable shares (see Note 6) provides investors the right, or obligates investors, to participate in subsequent offerings of Class B convertible preferred shares or Class B preferred exchangeable shares together with Class B special voting shares in the event that specified development or regulatory milestones are achieved (the “Class B preferred share tranche right liability”).

The Company classifies these preferred share tranche rights as a liability on its consolidated balance sheets as each preferred share tranche right is a freestanding financial instrument that may require the Company to transfer assets upon the achievement of specified milestone events. Each preferred share tranche right liability was initially recorded at fair value upon the date of issuance of each preferred share tranche right and is subsequently remeasured to fair value at each reporting date. Changes in the fair value of the preferred share tranche right liability are recognized as a component of other income (expense) in the consolidated statement of operations and comprehensive loss. Changes in the fair value of the preferred share tranche right liability will continue to be recognized until the respective preferred share tranche right is settled upon achievement of the specified milestones or expires.

 

On May 15, 2020, the Company achieved the specified regulatory milestone associated with the Class B preferred share tranche right (see Note 6), which triggered the requirement of the Class B shareholders to participate in the Milestone Financing. Upon closing of the Milestone Financing on June 2, 2020, the Company issued and sold 36,806,039 Class B preferred shares at a price of $1.5154 per share and 4,437,189 Class B special voting shares at a price of $0.000001 per share and the Company’s Ireland subsidiary issued and sold 4,437,189 Class B preferred exchangeable shares at a price of $1.5154 per share, for aggregate gross proceeds of $62.5 million.

The Class B preferred share tranche right liability (see Note 6) was settled in connection with the achievement of the regulatory milestone associated with the Class B preferred share tranche right. Specifically, the fair value of the Class B preferred share tranche right liability was remeasured for the last time as of the Milestone Financing closing date, resulting in the Company recognizing a loss in the consolidated statement of operations and comprehensive loss for the three and six months ending June 30, 2020 of $31.6 million and $32.7 million, respectively, for the change in the fair value of the tranche right liability through June 2, 2020. Immediately thereafter, the balance of the Class B preferred share tranche right liability of $39.6 million was reclassified to Class B convertible preferred shares in an amount of $35.3 million and to non-controlling interest in Fusion Pharmaceuticals (Ireland) Limited in an amount of $4.3 million on the consolidated balance sheet.

9


 

Preferred Share Warrant Liability

The Company classifies warrants to purchase its convertible preferred shares and warrants to purchase preferred exchangeable shares of Fusion Pharmaceuticals (Ireland) Limited as a liability on its consolidated balance sheets as these warrants are freestanding financial instruments that may require the Company to transfer assets upon exercise (see Note 6). The preferred share warrant liability, which consists of warrants to purchase Class B convertible preferred shares of the Company and warrants to purchase Class B preferred exchangeable shares of Fusion Pharmaceuticals (Ireland) Limited, was initially recorded at fair value upon the date of issuance of each warrant and is subsequently remeasured to fair value at each reporting date. Changes in the fair value of the preferred share warrant liability are recognized as a component of other income (expense) in the consolidated statement of operations and comprehensive loss. Changes in the fair value of the preferred share warrant liability will continue to be recognized until each respective warrant is exercised, expires or qualifies for equity classification.

Upon the closing of the IPO, the warrants to purchase its convertible preferred shares and warrants to purchase preferred exchangeable shares of Fusion Pharmaceuticals (Ireland) Limited were converted into warrants to purchase shares of the Company’s common shares.  As a result, the warrant liability was remeasured a final time on the closing date of the IPO and reclassified to shareholders’ equity (deficit) as the warrants qualify for equity classification.

Research, Development and Manufacturing Contract Costs and Accruals

The Company has entered into various research, development and manufacturing contracts with research institutions and other companies. These agreements are generally cancelable, and related costs are recorded as research and development expenses as incurred. The Company records accruals for estimated ongoing research, development and manufacturing costs. When billing terms under these contracts do not coincide with the timing of when the work is performed, the Company is required to make estimates of outstanding obligations to those third parties as of period end. Any accrual estimates are based on a number of factors, including the Company’s knowledge of the progress towards completion of the research, development and manufacturing activities, invoicing to date under the contracts, communication from the research institutions and other companies of any actual costs incurred during the period that have not yet been invoiced and the costs included in the contracts. Significant judgments and estimates may be made in determining the accrued balances at the end of any reporting period. Actual results could differ from the estimates made by the Company. The historical accrual estimates made by the Company have not been materially different from the actual costs.

Net Loss per Share

The Company follows the two-class method when computing net income (loss) per share as the Company has issued shares that meet the definition of participating securities. The two-class method determines net income (loss) per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common shareholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed.

Basic net income (loss) per share attributable to common shareholders is computed by dividing the net income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted net income (loss) attributable to common shareholders is computed by adjusting net income (loss) attributable to common shareholders to reallocate undistributed earnings based on the potential impact of dilutive securities. Diluted net income (loss) per share attributable to common shareholders is computed by dividing the diluted net income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding for the period, including potential dilutive common shares. For purpose of this calculation, outstanding stock options, warrants and convertible preferred shares are considered potential dilutive common shares.

The Company’s convertible preferred shares contractually entitle the holders of such shares to participate in dividends but do not contractually require the holders of such shares to participate in losses of the Company. Accordingly, in periods in which the Company reports a net loss attributable to common shareholders, such losses are not allocated to such participating securities. In periods in which the Company reported a net loss attributable to common shareholders, diluted net loss per share attributable to common shareholders is the same as basic net loss per share attributable to common shareholders, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. The Company reported a net loss attributable to common shareholders for the three and six months ended June 30, 2020 and 2019.

Recently Adopted Accounting Pronouncements

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which modifies the existing disclosure requirements for fair value measurements in ASC 820. The new disclosure requirements include disclosure related to changes in unrealized gains or losses included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of each reporting

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period and the explicit requirement to disclose the range and weighted average of significant unobservable inputs used for Level 3 fair value measurements. The other provisions of ASU 2018-13 include eliminated and modified disclosure requirements. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU 2018-13 and delay adoption of the additional disclosures until their effective date. For all entities, this guidance is required to be adopted for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company adopted ASU 2018-13 as of January 1, 2020. The adoption of ASU 2018-13 had no impact on the Company’s consolidated financial statements and accompanying notes.

Recently Issued Accounting Pronouncements

The Company qualifies as “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 and has elected to “opt in” to the extended transition related to complying with new or revised accounting standards, which means that when a standard is issued or revised and it has different application dates for public and nonpublic companies, the Company will adopt the new or revised standard at the time nonpublic companies adopt the new or revised standard and will do so until such time that the Company either (i) irrevocably elects to “opt out” of such extended transition period or (ii) no longer qualifies as an emerging growth company. The Company may choose to early adopt any new or revised accounting standards whenever such early adoption is permitted for private companies.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. In addition, a lessee is required to record (i) a right-of-use asset and a lease liability on its balance sheet for all leases with accounting lease terms of more than 12 months regardless of whether it is an operating or financing lease and (ii) lease expense in its consolidated statement of operations for operating leases and amortization and interest expense in its consolidated statement of operations for financing leases. Leases with a term of 12 months or less may be accounted for similar to prior guidance for operating leases today. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), which added an optional transition method that allows companies to adopt the standard as of the beginning of the year of adoption as opposed to the earliest comparative period presented. This guidance is effective for the Company for annual periods beginning after December 15, 2021, including interim periods within that fiscal year. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition of credit losses. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, which narrowed the scope and changed the effective date for non-public entities for ASU 2016-13. The FASB subsequently issued supplemental guidance within ASU No. 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief (“ASU 2019-05”). ASU 2019-05 provides an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. This guidance is effective for the Company for annual periods beginning after December 15, 2022, including interim periods within that fiscal year. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-13 will have on its consolidated financial statements.

3.

Fair Value Measurements

The following table presents information about the Company’s financial assets and liabilities that are measured at fair value on a recurring basis and indicates the level of the fair value hierarchy used to determine such fair values (in thousands):

 

 

 

 

Fair Value Measurements at

December 31, 2019 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred share tranche right liability

 

$

 

 

$

 

 

$

5,741

 

 

$

5,741

 

 

 

$

 

 

$

 

 

$

5,741

 

 

$

5,741

 

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As of June 30, 2020, the Company did not have any instruments that are measured at fair value.

 

During the year ended December 31, 2019 and the six months ended June 30, 2020, there were no transfers between Level 1, Level 2 and Level 3.

Valuation of Preferred Share Tranche Right Liability

The preferred share tranche right liability in the table above is composed of the fair value of rights to purchase Class B convertible preferred shares and Class B preferred exchangeable shares with Class B special voting shares (see Note 6). The fair value of the preferred share tranche right liability was determined based on significant inputs not observable in the market, which represent a Level 3 measurement within the fair value hierarchy. The fair value of the preferred share tranche right liability was determined using the forward contract pricing model, which considered as inputs the probability and timing of achieving the specified milestones as of each valuation date, the estimated fair value of the preferred shares as of each valuation date, and the risk-free interest rate.

The most significant assumption in the forward contract pricing model impacting the fair value of the preferred share tranche right liability is the fair value of the Company’s Class B convertible preferred shares as of each measurement date. The Company determines the fair value per share of the underlying Class B convertible preferred shares by taking into consideration the most recent sales of its convertible preferred shares, results obtained from third-party valuations and additional factors the Company deems relevant. As of June 2, 2020, the date of final measurement as described below, and December 31, 2019, the fair value of each Class B convertible preferred share was $2.47 per share and $1.45 per share, respectively. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the remaining estimated time period of achievement of the specified milestones underlying the preferred share tranche rights.

The preferred share tranche right liability was initially recorded at fair value upon the date of issuance of each preferred share tranche right and is subsequently remeasured to fair value at each reporting date. Changes in the fair value of the preferred share tranche right liability are recognized as a component of other income (expense) in the consolidated statements of operations and comprehensive loss. Changes in the fair value of the preferred share tranche right liability will continue to be recognized until the respective preferred share tranche right is settled upon achievement of the specified milestones or expires.

 

On May 15, 2020, the Company achieved the specified regulatory milestone associated with the Class B preferred share tranche right (see Note 6), which triggered the requirement of the Class B shareholders to participate in the Milestone Financing. Upon closing of the Milestone Financing on June 2, 2020, the Company issued and sold 36,806,039 Class B preferred shares at a price of $1.5154 per share and 4,437,189 Class B special voting shares at a price of $0.000001 per share and the Company’s Ireland subsidiary issued and sold 4,437,189 Class B preferred exchangeable shares at a price of $1.5154 per share, for aggregate gross proceeds of $62.5 million.

The Class B preferred share tranche right liability (see Note 6) was settled in connection with the achievement of the regulatory milestone associated with the Class B preferred share tranche right. Specifically, the fair value of the Class B preferred share tranche right liability was remeasured for the last time as of the Milestone Financing closing date, resulting in the Company recognizing a loss in the consolidated statement of operations and comprehensive loss for the three and six months ending June 30, 2020 of $31.6 million for the change in the fair value of the tranche right liability between March 31, 2020 and June 2, 2020. Immediately thereafter, the balance of the Class B preferred share tranche right liability of $39.6 million was reclassified to Class B convertible preferred shares in an amount of $35.3 million and to non-controlling interest in Fusion Pharmaceuticals (Ireland) Limited in an amount of $4.3 million on the consolidated balance sheet.

Valuation of Preferred Share Warrant Liability

The preferred share warrant liability in the table above is composed of the fair value of warrants to purchase Class B convertible preferred shares of the Company and warrants to purchase Class B preferred exchangeable shares of Fusion Pharmaceuticals (Ireland) Limited that were issued in January 2020 in connection with the Company’s Class B preferred share financing (see Note 6). The fair value of the preferred share warrant liability was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy.

The fair value of the preferred share warrant liability was determined using a hybrid method, which is a probability-weighted expected return method, or PWERM, where the equity value in one or more of the scenarios is calculated using an option-pricing model, or OPM. The PWERM is a scenario-based methodology that estimates the fair value of the Company’s different classes of equity based upon an analysis of future values for the Company, assuming various outcomes. Under both models, assumptions and

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estimates are used to value the preferred share warrants. The Company assesses these assumptions and estimates on a quarterly basis as additional information impacting the assumptions is obtained. The quantitative elements associated with the Company’s Level 3 inputs impacting the fair value measurement of the preferred share warrant liability include the fair value per share of the underlying Class B convertible preferred shares, the timing, form and overall value of the expected exits for the shareholders, the risk-free interest rate, the expected dividend yield and the expected volatility of the Company’s shares. The most significant assumption impacting the fair value of the preferred share warrant liability is the fair value of the Company’s Class B convertible preferred shares as of each measurement date. The Company determines the fair value per share of the underlying Class B convertible preferred shares by taking into consideration the most recent sales of its preferred shares, results obtained from third-party valuations and additional factors it deems relevant. In January 2020, upon issuance of the preferred share warrants, the fair value of each Class B convertible preferred share was $1.45 per share. As of June 2, 2020, the date of final measurement of the preferred share tranche right liability as described below, the fair value of each Class B convertible preferred share was $2.47 per share. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the remaining contractual term of the warrants. The Company estimated a 0% dividend yield based on the expected dividend yield and the fact that the Company has never paid or declared cash dividends.

The preferred share warrant liability was initially recorded at fair value upon the date the warrants were issued and exercisable and is subsequently remeasured to fair value at each reporting date. Changes in the fair value of the preferred share warrant liability are recognized as a component of other income (expense) in the consolidated statements of operations and comprehensive loss. Changes in the fair value of the preferred share warrant liability will continue to be recognized until each respective warrant is exercised, expires or qualifies for equity classification.

Upon the closing of the IPO, the warrants to purchase its convertible preferred shares and warrants to purchase preferred exchangeable shares of Fusion Pharmaceuticals (Ireland) Limited were converted into warrants to purchase shares of the Company’s common shares.  As a result, the warrant liability was remeasured a final time on the closing date of the IPO and reclassified to shareholders’ equity (deficit) as the warrants qualify for equity classification.

The following table provides a roll-forward of the aggregate fair value of the Company’s preferred share tranche right liability and preferred share warrant liability, for which fair value is determined using Level 3 inputs (in thousands):

 

 

 

Preferred

Share Tranche

Right Liability

 

 

Preferred

Share Warrant

Liability

 

Balance as of December 31, 2019

 

$

5,741

 

 

$

 

Initial fair value of Class B preferred share tranche right liability

 

 

1,105

 

 

 

 

Initial fair value of Class B preferred share warrant liability

 

 

 

 

 

1,382

 

Change in fair value of Class B preferred share tranche right liability

 

 

32,722

 

 

 

 

Change in fair value of Class B preferred share warrant liability

 

 

 

 

 

6,399

 

Reclassification of Class B preferred share tranche right liability upon settlement

 

 

(39,568

)

 

 

 

Conversion of Class B preferred shares warrants into common share warrants

 

 

 

 

 

(7,781

)

Balance as of June 30, 2020

 

$

 

 

$

 

 

4.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):

 

 

 

June 30, 2020

 

 

December 31, 2019

 

Prepaid clinical trial expenses

 

$

 

 

$

94

 

Refundable investment tax credits

 

 

274

 

 

 

176

 

Canadian harmonized sales tax receivable

 

 

137

 

 

 

252

 

Prepaid software subscriptions

 

 

173

 

 

 

129

 

Other

 

 

376

 

 

 

278

 

 

 

$

960

 

 

$

929

 

 

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5.

Accrued Expenses

Accrued expenses consisted of the following (in thousands):

 

 

 

June 30, 2020

 

 

December 31, 2019

 

Accrued employee compensation and benefits

 

$

1,285

 

 

$

991

 

Accrued external research and development expenses

 

 

2,194

 

 

 

1,565

 

Accrued professional fees

 

 

791

 

 

 

641

 

Accrued public offering costs

 

 

2,080

 

 

 

 

Other

 

 

279

 

 

 

129