FUSION PHARMACEUTICALS INC. Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes appearing in Part I, Item I of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and notes thereto for the year ended December 31, 2021, included in our Annual Report on Form 10-K filed on March 17, 2022 with the U.S. Securities and Exchange Commission, or the SEC.

Some of the statements contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We have based these forward-looking statements on our current expectations and projections about future events. The following information and any forward-looking statements should be considered in light of factors discussed elsewhere in this Quarterly Report on Form 10-Q, particularly including those risks identified in Part II, Item 1A "Risk Factors" and our other filings with the SEC.

Our actual results and timing of certain events may differ materially from the results discussed, projected, anticipated, or indicated in any forward-looking statements. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. Statements made herein are as of the date of the filing of this Form 10-Q with the SEC and should not be relied upon as of any subsequent date. Even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report on Form 10-Q, they may not be predictive of results or developments in future periods. We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

Overview

We are a clinical-stage oncology company focused on developing next-generation radiopharmaceuticals as precision medicines. We have developed our Targeted Alpha Therapies, or TAT, platform to enable us to connect alpha particle emitting isotopes to various targeting molecules to selectively deliver the alpha particle payloads to tumors. Our TAT platform is underpinned by our ability to radiolabel various classes of targeting molecules (including antibodies, small molecules and peptides), our research and insights into the underlying chemistry and biology of alpha emitting radiopharmaceuticals, our differentiated capabilities in target identification, candidate generation, manufacturing and supply chain, our proprietary Fast-ClearTM linker technology used in conjunction with antibody-based targeting molecules, and development of imaging diagnostics. We believe that our TATs have the potential to build on the successes of currently available radiopharmaceuticals and be broadly applicable across multiple targets and tumor types.

Our lead product candidate, FPI-1434, utilizes our Fast-Clear linker to connect a humanized monoclonal antibody that targets the insulin-like growth factor 1 receptor, or IGF-1R, with actinium-225, or 225Ac. IGF-1R is a well-established tumor target that is found on numerous types of cancer cells, but historical attempts to suppress tumors by inhibiting the IGF-1R signaling pathway have been unsuccessful in the clinic. For FPI-1434, we have designed the product candidate to rely on the IGF-1R antibody only as a way to identify and deliver our alpha emitting payload to the tumor, and the mechanism of action does not depend on blocking the IGF-1R signaling pathway to kill the tumor. We are currently evaluating FPI-1434 as a monotherapy in the dose escalation portion of a Phase 1 clinical trial in patients with IGF-1R positive solid tumors to assess its safety, tolerability and pharmacokinetics as well as to identify the recommended Phase 2 dose. As part of the screening process, patients are administered the imaging analogue of FPI-1434, which utilizes the same linker and targeting molecule, but replaces 225Ac with the radioactive isotope indium-111, or 111In, and only those patients who meet predefined tumor uptake and dosimetry, and show organ radiation exposure within the limits of established standards for normal organ radiation tolerability, are advanced into the trial. In our ongoing Phase 1 trial, we are exploring various dosing levels of FPI-1434 in two dosing regimens: one with FPI-1434 alone, and another in which a small dose of cold antibody (naked IGF-1R antibody without the isotope) is administered prior to the imaging analogue and prior to each dose of FPI-1434. We are exploring the impact of administering the cold IGF-1R antibody prior to the imaging analogue and prior to each dose of FPI-1434 on the biodistribution, safety and tumor uptake. We refer to this dosing regimen as the "cold/hot" dosing regimen; we refer to the dosing regimen of FPI-1434 without pre-administration of the cold antibody as the "hot only" dosing regimen. The introduction of the cold/hot dosing regimen resulted, in part, from a cold antibody sub-study (CASS) that was performed as part of the Phase 1 study, whereby a small amount of cold IGF-1R antibody was administered prior to administration of the imaging analogue only. We anticipate reporting Phase 1 safety, pharmacokinetics, and imaging data, including any evidence of anti-tumor activity, and details on the dosing regimen in the second half of 2022.

--------------------------------------------------------------------------------

In preclinical studies, FPI-1434 has been evaluated in combination with approved checkpoint inhibitors and DNA damage response inhibitors, or DDRis, such as PARP inhibitors. Based on preclinical data, we believe that the synergies observed with either class of agent could expand the addressable patient populations for FPI-1434 and allow for potential use in earlier lines of treatment. We anticipate initiation of a Phase 1 combination study with FPI-1434 and KEYTRUDA (pembrolizumab) to occur six to nine months following determination of the recommended Phase 2 dose of FPI-1434 monotherapy in connection with a collaboration agreement executed in May 2021 with Merck.

We submitted investigational new drug applications, or INDs, to the U.S. Food and Drug Administration, or FDA, for FPI-1966 and FPI-1967, the imaging analogue, for the treatment of head and neck and bladder cancers expressing fibroblast growth factor receptor 3, or FGFR3, in the second quarter of 2021 and announced FDA clearance of the INDs in July 2021. The Phase 1, non-randomized, open-label clinical trial of FPI-1966 in patients with solid tumors expressing FGFR3, intended to investigate safety, tolerability and pharmacokinetics and to establish the recommended Phase 2 dose, has been initiated with the first study site open to patient recruitment. We expect to dose the first patient in the second quarter of 2022 and expect preliminary pharmacokinetic, imaging and safety data from the first patient cohort in the second quarter of 2023.

In November 2020, we announced a strategic collaboration agreement with AstraZeneca UK Limited, or AstraZeneca, to jointly discover, develop and commercialize next-generation alpha-emitting radiopharmaceuticals and combination therapies for the treatment of cancer. The collaboration leverages Fusion's TAT platform and expertise in radiopharmaceuticals with AstraZeneca's leading portfolio of antibodies and cancer therapeutics, including DDRis. Under the terms of the collaboration agreement, we and AstraZeneca will jointly discover, develop and commercialize up to three novel TATs, which will utilize Fusion's Fast-Clear linker technology platform with antibodies in AstraZeneca's oncology portfolio. In January 2022, we announced the nomination of the first TAT candidate under the strategic collaboration agreement, a bispecific antibody owned by AstraZeneca radiolabeled with 225Ac utilizing our Fast-Clear linker technology, which we refer to as FPI-2068. In addition, we and AstraZeneca will exclusively explore up to five combination strategies between our TATs and AstraZeneca therapeutics, for the treatment of various cancers. Each party will retain full rights to their respective assets.

In April 2021, we entered into an asset purchase agreement with Ipsen Pharma SAS, or Ipsen, to acquire Ipsen's intellectual property and assets related to IPN-1087. IPN-1087 is a small molecule targeting neurotensin receptor 1, or NTSR1, a protein expressed on multiple solid tumor types. IPN-1087 was previously studied as a beta-emitting radiopharmaceutical and showed promising human imaging and early clinical safety data. Using our TAT platform, we combined IPN-1087 with 225Ac to create an alpha-emitting radiopharmaceutical, FPI-2059, targeting solid tumors expressing NTSR1, including neuroendocrine differentiated prostate cancer. We expect to submit an IND for FPI-2059 in the second quarter of 2022.

In January 2022, we entered into two separate strategic research collaborations to discover novel, peptide-based radiopharmaceuticals for the treatment of various solid tumors. Under the agreements, Fusion has global rights to develop and commercialize any peptides discovered under either collaboration.

--------------------------------------------------------------------------------

Since our inception in 2014, we have devoted substantially all of our efforts and financial resources to organizing and staffing our company, business planning, raising capital, acquiring or discovering product candidates and securing related intellectual property rights and conducting discovery, research and development activities for our product candidates. We do not have any products approved for sale and have not generated any revenue from product sales. On June 30, 2020, we completed our initial public offering, or IPO, of our 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 approximately $193.1 million after deducting underwriting fees and offering costs. Prior to our IPO, we funded our operations primarily with proceeds from sales of equity securities (including borrowings under a convertible promissory note, which converted into preferred shares). Through March 31, 2022, we had received net proceeds of $365.8 million from sales of equity securities (including borrowings under a convertible promissory note, which converted into preferred shares). On July 2, 2021, we entered into an Open Market Sales AgreementSM, or the Sales Agreement, with Jefferies LLC to issue and sell up to $100.0 million of our common shares, from time to time during the term of the Sales Agreement, through an "at-the-market" equity offering program under which Jefferies LLC will act as our agent. As of March 31, 2022, we had received net proceeds of $1.6 million from sales of common shares under the Sales Agreement. In April 2022, we received net proceeds of $9.8 million from our loan and security agreement with Oxford Finance LLC.

We have incurred significant operating losses since our inception. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our current or future product candidates. Our net losses were $19.9 million and $17.5 million for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, we had an accumulated deficit of $214.2 million. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We expect that our expenses and capital expenditure requirements will increase substantially in connection with our ongoing activities, particularly if and as we:

   •  continue our research and development efforts and submit biologics license
      applications, or BLAs, for our lead product candidate and submit INDs and
      BLAs and new drug applications, or NDAs, for our other biologic and drug
      product candidates;


   •  conduct preclinical studies and clinical trials for our current and future
      product candidates;


   •  continue to develop our library of proprietary linkers for our Fast-Clear
      technology;


  • seek to identify additional product candidates;


   •  acquire or in-license other product candidates, targeting molecules and
      technologies;


   •  continue strategic investments in manufacturing and supply chain
      capabilities, including the production and supply of 225Ac;


   •  add operational, financial and management information systems and personnel,
      including personnel to support the development of our product candidates;


   •  hire and retain additional personnel, such as clinical, quality control,
      scientific, commercial and administrative personnel;


   •  seek marketing approvals for any product candidates that successfully
      complete clinical trials;


   •  establish a sales, manufacturing, marketing and distribution infrastructure
      and scale-up manufacturing capabilities, whether alone or with third
      parties, to commercialize any product candidates for which we may obtain
      regulatory approval, if any;


  • expand, maintain and protect our intellectual property portfolio; and


  • operate as a public company.

We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates. If we obtain regulatory approval for any of our product candidates and do not enter into a commercialization partnership, we expect to incur significant expenses related to developing our internal commercialization capabilities to support product sales, marketing and distribution.

As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through the sale of equity, debt financings or other capital sources, which may include collaborations with other companies or other strategic transactions. We may not be able to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as and when needed, we would have to significantly delay, reduce or eliminate the development and commercialization of one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions.

--------------------------------------------------------------------------------

Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

As of March 31, 2022, we had cash, cash equivalents and investments of $206.7 million. We believe that our existing cash, cash equivalents and investments, together with the proceeds available under the first tranche of the loan and security agreement with Oxford Finance LLC executed in April 2022, will be sufficient to fund our operating expenses and capital expenditure requirements into the first quarter of 2024.

Impact of the COVID-19 Pandemic

We are closely monitoring how the spread of COVID-19, including new variants thereof, is affecting our employees, business, preclinical studies and clinical trials. In response to the COVID-19 pandemic, most of our employees transitioned to working remotely and continue to do so and travel between the United States and Canada remains limited. Despite efforts to mitigate the impacts of the COVID-19 pandemic, including the addition of new trial sites, we have seen patient enrollment rates decline primarily as a result of resourcing and reduced staffing issues at the trial sites. Longer timelines to enroll patients have persisted and therefore we shifted our expectation with respect to timing for FPI-1434 Phase 1 multiple-dose safety and imaging data to the second half of 2022 as well as our expectation for the timing for the dosing of the first patient in our FPI-1966 Phase 1 clinical trial to the second quarter of 2022. The COVID-19 pandemic is also affecting the operations of third parties upon whom we rely. We are unable to predict how the COVID-19 pandemic may affect our ability to successfully progress our Phase 1 clinical trials of FPI-1434, FPI-1966 or any other clinical programs in the future. Moreover, there remains uncertainty relating to the trajectory of the pandemic, hospital staffing and resource issues, and whether they may cause further delays in study site initiation and patient study recruitment. The impact of related responses and disruptions caused by the COVID-19 pandemic may result in further difficulties or delays in initiating, enrolling, conducting or completing our planned and ongoing trials and the incurrence of unforeseen costs as a result of disruptions in clinical supply or preclinical study or clinical trial delays. The continued impact of COVID-19 on results will largely depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease or variants thereof, the duration of the pandemic, vaccination rates, travel restrictions and social distancing in the United States, Canada and other countries, business closures or business disruptions, the ultimate impact on financial markets and the global economy, and the effectiveness of actions taken in the United States, Canada and other countries to contain and treat the disease.

Components of Results of Operations

Revenue from Product Sales

To date, we do not have any approved product candidates and as such, have not generated any revenue from product sales, and we do not expect to generate any revenue from the sale of products for the foreseeable future. If our development efforts for our current or future product candidates are successful and result in regulatory approval, we may generate revenue in the future from product sales. We cannot predict if, when or to what extent we will generate revenue from the commercialization and sale of our product candidates. We may never succeed in obtaining regulatory approval for any of our product candidates.

Collaboration Revenue

On October 30, 2020, we and AstraZeneca entered into a strategic collaboration agreement, or the AstraZeneca Agreement, pursuant to which we and AstraZeneca will work to jointly discover, develop and commercialize next-generation alpha-emitting radiopharmaceuticals and combination therapies for the treatment of cancer globally by leveraging our TAT platform and expertise in radiopharmaceuticals with AstraZeneca's leading portfolio of antibodies and cancer therapeutics, including DDRis. The AstraZeneca Agreement consists of two distinct collaboration programs: novel TATs and combination therapies. In January 2022, we announced the nomination of the first novel TAT candidate, a bispecific antibody owned by AstraZeneca radiolabeled with 225Ac utilizing our Fast-Clear linker technology. Each party retains full ownership over its existing assets.

--------------------------------------------------------------------------------

We received an upfront payment of $5.0 million from AstraZeneca in December 2020 associated with the combination therapies program. AstraZeneca will fully fund all research and development activities for the combination strategies, until such point as we may opt-in to the clinical development activities. We also have the right to opt-out of clinical development activities relating to these combination therapies. In such instance, we will be responsible for repaying our share of the development costs via a royalty on the additional combination sales only if our drug is approved on the basis of clinical development solely conducted by AstraZeneca, in which case the royalty payments shall also include a variable risk premium based on the number of our product candidates that have received regulatory approval at that time. We are eligible to receive future payments of up to $40.0 million, including those for the achievement of certain clinical milestones and exclusivity fees.

We determined the research and development activities associated with the combination therapies, or the Combination Therapies Collaboration, are a key component of our central operations and AstraZeneca has contracted with us to obtain goods and services which are an output of our ordinary activities in exchange for consideration. Further, we do not share the risks and rewards of the underlying research activities making AstraZeneca a customer for the Combination Therapies Collaboration which falls within the scope of ASC 606, Revenue from Contracts with Customers, or ASC 606.

Under ASC 606 we account for (i) the license we conveyed to AstraZeneca with respect to certain intellectual property and (ii) the obligations to perform research and development services as part of the Combination Therapies Collaboration as a single performance obligation under the AstraZeneca Agreement. We recognize revenue using the cost-to-cost method, which we believe best depicts the transfer of control to the customer. Under the cost-to-cost method, the extent of progress towards completion is measured based on the ratio of actual costs incurred to the total estimated costs expected upon satisfying the identified performance obligation. Under this method, revenue is recorded as a percentage of the estimated transaction price based on the extent of progress towards completion. We recognize adjustments in revenue for changes in the estimated extent of progress towards completion under the cumulative catch-up method. Under this method, the impact of this adjustment on revenue recorded to date is recognized in the period the adjustment is identified.

During the three months ended March 31, 2022, we recognized $0.6 million in collaboration revenue under the AstraZeneca Agreement in the condensed consolidated statement of operations and comprehensive loss. During the three months ended March 31, 2021, we did not recognize any collaboration revenue under the AstraZeneca Agreement in the condensed consolidated statement of operations and comprehensive loss.

Operating Expenses

Research and Development Expenses

Research and development expenses consist primarily of costs incurred in connection with the discovery and development of our product candidates. These expenses include:

   •  employee-related expenses, including salaries, related benefits and
      share-based compensation expense, for employees engaged in research and
      development functions;


   •  expenses incurred in connection with the preclinical and clinical
      development of our product candidates, including under agreements with third
      parties, such as consultants and contract research organizations, or CROs;


   •  the cost of manufacturing drug products for use in our preclinical studies
      and clinical trials, including under agreements with third parties, such as
      consultants and contract manufacturing organizations, or CMOs;


   •  facilities, depreciation and other expenses, which include direct or
      allocated expenses for rent, maintenance of facilities and insurance;


  • costs related to compliance with regulatory requirements; and


   •  payments made in connection with third-party licensing agreements and asset
      acquisitions of incomplete technology.

We expense research and development costs as incurred. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. Such amounts are recognized as an expense when the goods have been delivered or the services have been performed, or when it is no longer expected that the goods will be delivered or the services rendered. Upfront payments under license agreements are expensed upon receipt of the license, and annual maintenance fees under license agreements are expensed in the period in which they are incurred. Milestone payments under license agreements are accrued, with a corresponding expense being recognized, in the period in which the milestone is determined to be probable of achievement and the related amount is reasonably estimable.

--------------------------------------------------------------------------------

In connection with the AstraZeneca Agreement, we and AstraZeneca are both active participants in the research and development activities of the collaboration and we are exposed to significant risks and rewards that are dependent on commercial success of the activities of the arrangement with respect to the novel TATs program, or the Novel TATs Collaboration. As this arrangement falls within the scope of ASC 808, Collaborative Arrangements, or ASC 808, all payments received or amounts due from AstraZeneca for reimbursement of shared costs are accounted for as an offset to research and development expense. For the three months ended March 31, 2022 and 2021, we incurred $0.7 million and $0.1 million, respectively, in gross research and development expenses relating to the Novel TATs Collaboration which was offset by $0.3 million and $0.1 million, respectively, in amounts due from AstraZeneca for reimbursement of shared costs.

Our direct research and development expenses are tracked on a program-by-program basis for our product candidates and consist primarily of external costs, such as fees paid to outside consultants, CROs, CMOs and research laboratories in connection with our preclinical development, process development, manufacturing and clinical development activities. Our direct research and development expenses by program also include fees incurred under third-party license agreements. We do not allocate employee costs and costs associated with our discovery efforts, laboratory supplies and facilities, including depreciation or other indirect costs, to specific programs because these costs are deployed across multiple programs and our TAT platform and Fast-Clear linker technology and, as such, are not separately classified. We use internal resources primarily to conduct our research and discovery activities as well as for managing our preclinical development, process development, manufacturing and clinical development activities. These employees work across multiple programs and our technology platform and, therefore, we do not track these costs by program.

Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. As a result, we expect that our research and development expenses will increase substantially over the next several years as we complete a Phase 1 clinical trial of FPI-1434 as a monotherapy in patients with solid tumors expressing IGF-1R, complete preclinical development and pursue initial stages of clinical development of our FPI-1434 combination therapies, complete a Phase 1 clinical trial of FPI-1966 as a monotherapy in patients with solid tumors expressing FGFR3, and continue to progress our other early-stage programs.

The successful development and commercialization of our product candidates are highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical and clinical development of any of our product candidates. This is due to the numerous risks and uncertainties associated with product development, including the following:

• timely completion of our preclinical studies and our current and future

      clinical trials, which may be significantly slower or more costly than we
      currently anticipate and will depend substantially upon the performance of
      third-party contractors;

• our ability to complete IND-enabling studies and successfully submit INDs or

comparable applications to allow us to initiate clinical trials for our

current or any future product candidates;

• whether we are required by the U.S. Food and Drug Administration, or FDA, or

      similar foreign regulatory authorities to conduct additional clinical trials
      or other studies beyond those planned to support the approval and
      commercialization of our product candidates or any future product
      candidates;

• our ability to demonstrate to the satisfaction of the FDA or other foreign

      regulatory authorities the safety, potency, purity and acceptable
      risk-to-benefit profile of our product candidates or any future product
      candidates;

• the prevalence, duration and severity of potential side effects or other

safety issues experienced with our product candidates or future product

candidates, if any;

• the timely receipt of necessary marketing approvals from the FDA or similar

foreign regulatory authorities;

• the willingness of physicians, operators of clinics and patients to utilize

or adopt any of our product candidates or future product candidates as

potential cancer treatments;

• our ability and the ability of third parties with whom we contract to

      manufacture adequate clinical supplies of our product candidates or any
      future product candidates, remain in good standing with regulatory
      authorities and develop, validate and maintain manufacturing processes that
      are compliant with current good manufacturing practices; and

• our ability to establish and enforce intellectual property rights in and to

our product candidates or any future product candidates.

A change in the outcome of any of these variables with respect to the development of our product candidates could significantly change the costs and timing associated with the development of these product candidates. We may elect to discontinue, delay or

--------------------------------------------------------------------------------

modify clinical trials of some product candidates or focus on others. In addition, we may never succeed in obtaining regulatory approval for any of our product candidates.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related costs, including share-based compensation, for personnel in executive, finance and administrative functions. General and administrative expenses also include direct and allocated facility-related costs as well as professional fees for legal, patent, consulting, investor and public relations, accounting and audit services.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research activities and development of our product candidates and technology platform. We also anticipate that we will incur increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses associated with our continued growth as a public company.

Other Income (Expense)

Interest Income (Expense), Net

Interest income (expense), net consists primarily of interest income earned on our cash, cash equivalents and investment balances and the amortization of premiums or accretion of discounts associated with our investments. We expect that our interest income will fluctuate based on the timing and ability to raise additional funds as well as the amount of expenditures for our clinical development of FPI-1434 and FPI-1966 and ongoing business operations.

Other Income (Expense), Net

Other income (expense), net primarily consists of foreign currency transaction gains and losses as well as miscellaneous income and expense unrelated to our core operations.

Income Taxes

We are domiciled in Canada and are primarily subject to taxation in that country. Since our inception, we have recorded no income tax benefits for the net operating losses incurred or for the research and development tax credits generated in each year by our operations in Canada due to our uncertainty of realizing a benefit from those items. As of December 31, 2021, we had $102.6 million of Canadian net operating loss carryforwards that begin to expire in 2035. In addition, as of December 31, 2021, we had $3.8 million of Canadian tax credit carryforwards that begin to expire in 2037 as well as Canadian capitalized research and development expenditures of $19.9 million that can be carried forward indefinitely. We have recorded a full valuation allowance against our Canadian net deferred tax assets as of December 31, 2021.

In prior periods, we have recorded an insignificant amount of income tax provision or benefit for our operating company in Canada and our operating company in the U.S., which typically generates a profit for tax purposes.

--------------------------------------------------------------------------------

Results of Operations

Comparison of the Three Months Ended March 31, 2022 and 2021

The following table summarizes our results of operations for the three months ended March 31, 2022 and 2021 (in thousands):

                                         Three Months Ended
                                              March 31,
                                         2022          2021         Change
Collaboration revenue                  $     585     $       -     $    585
Operating expenses:
Research and development                  12,661        10,716        1,945
General and administrative                 8,449         6,964        1,485
Total operating expenses                  21,110        17,680        3,430
Loss from operations                     (20,525 )     (17,680 )     (2,845 )
Other income (expense):
Interest income, net                          83            96          (13 )
Other income, net                            478            48          430
Total other income (expense), net            561           144          417
Loss before benefit for income taxes     (19,964 )     (17,536 )     (2,428 )
Income tax benefit                            55             7           48
Net loss                               $ (19,909 )   $ (17,529 )   $ (2,380 )


Collaboration Revenue

Collaboration revenue was $0.6 million for the three months ended March 31, 2022 for services provided under the AstraZeneca Agreement. We did not recognize any collaboration revenue for the three months ended March 31, 2021.

Research and Development Expenses


                                                    Three Months Ended
                                                        March 31,
                                                   2022            2021          Change
                                                            (in thousands)
Direct research and development expenses by
program:
FPI-1434                                        $     3,406     $    2,533     $      873
FPI-1966                                              1,001              -          1,001
Platform development and unallocated research
and development expenses:
TAT platform                                          2,659          5,419         (2,760 )
Personnel related (including share-based
compensation)                                         5,000          2,477          2,523
Other                                                   595            287            308

Total research and development expenses $ 12,661 $ 10,716 $ 1,945

Research and development expenses were $12.7 million for the three months ended March 31, 2022, compared to $10.7 million for the three months ended March 31, 2021. The increase of $1.9 million due to an increase of $1.9 million in direct costs related to our FPI-1434 and FPI-1966 product candidates. The increase in FPI-1434 of $0.9 million is due to the continued expenditures related to our Phase 1 clinical trial of FPI-1434 as a monotherapy in patients with solid tumors expressing IGF-1R as well as preclinical research and manufacturing costs. Direct costs of $1.0 million for the three months ended March 31, 2022 for our FPI-1966 are related to the initiation of a Phase 1 clinical trial of FPI-1966 with the first study site open to patient recruitment, as well as preclinical research and manufacturing costs.

--------------------------------------------------------------------------------

Platform development and unallocated research and development expenses were $8.3 million for the three months ended March 31, 2022, compared to $8.2 million for the three months ended March 31, 2021. The increase of $0.1 million was due to an increase of $2.5 million in personnel-related costs and an increase of $0.3 million in other costs, offset by a decrease of $2.8 million in costs related to our TAT platform. The increase in personnel-related costs was primarily due to the hiring of additional personnel in our research and development functions, particularly those responsible for managing our Phase 1 clinical trials of FPI-1434 and FPI-1966 and for conducting preclinical research. Personnel-related costs for the three months ended March 31, 2022 and 2021 included share-based compensation of $0.9 million and $0.6 million, respectively. The increase in other costs was primarily due to an increase in depreciation expense and facilities-related costs. The decrease in TAT platform costs was primarily due to a payment of $3.5 million to Rainier Therapeutics, Inc. under the asset acquisition agreement, as amended, which was paid and recorded as research and development expense during the three months ended March 31, 2021, offset by an increase in external costs for preclinical studies and activities associated with our advancement of our TAT platform.

General and Administrative Expenses

General and administrative expenses were $8.4 million for the three months ended March 31, 2022, compared to $7.0 million for the three months ended March 31, 2021. The increase of $1.5 million was primarily due to a $1.3 million increase in personnel-related costs and a $0.5 million increase in corporate and other costs, partially offset by a decrease of $0.3 million in professional fees. The increase in personnel-related costs was primarily due to the hiring of additional personnel in our general and administrative functions, including in finance, legal, human resources and business development. Personnel-related costs for the three months ended March 31, 2022 and 2021 included share-based compensation of $1.7 million and $1.1 million, respectively.

Other Income (Expense)

Interest Income, Net. Interest income, net for the three months ended March 31, 2022 and 2021 was $0.1 million for each of the periods.

Other Income, Net. Other income, net for the three months ended March 31, 2022 and 2021 was $0.5 million and less than $0.1 million, respectively. The net increase of $0.4 million was primarily related to a net increase in realized and unrealized foreign exchange gains.

Income Tax Benefit

The income tax benefit was $0.1 million and less than $0.1 million for the three months ended March 31, 2022 and 2021, respectively. During the three months ended March 31, 2022 and 2021, our tax benefits were primarily related to discrete share-based compensation items arising during the period.

--------------------------------------------------------------------------------

Liquidity and Capital Resources

Since our inception in 2014, we have not generated any revenue from product sales, and have incurred significant operating losses and negative cash flows from our operations. On June 30, 2020, we completed our IPO of our common shares and issued and sold 12,500,000 shares of our common shares at a public offering price of $17.00 per share, resulting in net proceeds of approximately $193.1 million after deducting underwriting fees and offering costs. Prior to our IPO, we funded our operations primarily with proceeds from sales of equity securities (including borrowings under a convertible promissory note, which converted into preferred shares). From our inception through March 31, 2022, we had received net proceeds of $365.8 million from sales of equity securities (including borrowings under a convertible promissory note, which converted into preferred shares). On July 2, 2021, we entered into the Sales Agreement with Jefferies LLC to issue and sell our common shares up to $100.0 million in gross proceeds, from time to time during the term of the Sales Agreement, through an "at-the-market" equity offering program under which Jefferies LLC will act as our agent and/or principal, or the ATM Facility. The ATM Facility provides that Jefferies LLC will be entitled to compensation for its services in an amount of up to 3.0% of the gross proceeds of any shares sold under the ATM Facility. We have no obligation to sell any shares under the ATM Facility and may, at any time, suspend solicitation and offers under the Sales Agreement. As of March 31, 2022, we had received net proceeds of $1.6 million from sales of common shares under the Sales Agreement. In April 2022, we received net proceeds of $9.8 million from our loan and security agreement with Oxford Finance LLC.

Cash Flows


The following table summarizes our sources and uses of cash for each of the
periods presented:

                                                             Three Months Ended
                                                                  March 31,
                                                            2022             2021
Net cash used in operating activities                   $    (14,971 )   $    (20,596 )
Net cash provided by (used in) investing activities           19,131          (28,998 )
Net cash provided by financing activities                      1,709              130

Effect of exchange rate fluctuations on cash and cash equivalents held

                                                   -               17
Net increase (decrease) in cash, cash equivalents and
restricted cash                                         $      5,869     $    (49,447 )


Operating Activities

During the three months ended March 31, 2022, operating activities used $15.0 million of cash, resulting from our net loss of $19.9 million, partially offset by non-cash charges of $3.0 million and net cash provided by changes in our operating assets and liabilities of $1.9 million. Net cash provided by changes in our operating assets and liabilities for the three months ended March 31, 2022 primarily consisted of a $2.7 million decrease in prepaid expenses and other current assets and a $0.4 million increase in accrued expenses, partially offset by a $0.6 million decrease in accounts payable, a $0.4 million decrease in deferred revenue and a $0.3 million decrease in operating lease liabilities.

During the three months ended March 31, 2021, operating activities used $20.6 million of cash, primarily resulting from our net loss of $17.5 million and net cash used by changes in our operating assets and liabilities of $5.6 million, partially offset by non-cash charges of $2.5 million. Net cash used by changes in our operating assets and liabilities for the three months ended March 31, 2021 consisted of a $2.6 million decrease in income tax payable, a $2.3 million decrease in accounts payable, a $0.7 million increase in prepaid expenses and other current assets, a $0.6 million decrease in accrued expenses and a $0.2 million decrease in operating lease liabilities, partially offset by a $0.8 million decrease in other non-current assets.

Investing Activities

During the three months ended March 31, 2022, net cash provided by investing activities was $19.1 million, consisting of maturities of investments of $37.1 million, offset by purchases of investments of $17.3 million and purchases of property and equipment of $0.6 million.

During the three months ended March 31, 2021, net cash used in investing activities was $29.0 million, consisting of purchases of investments of $66.1 million and purchases of property and equipment of $0.6 million, offset by maturities of investments of $37.7 million.

Financing Activities

During the three months ended March 31, 2022, net cash provided by financing activities was $1.7 million, consisting of $1.6 million in proceeds from the issuance of common shares from our ATM Facility, net of issuance costs, and $0.1 million in proceeds from the issuance of common shares upon exercise of stock options.

--------------------------------------------------------------------------------

During the three months ended March 31, 2021, net cash provided by financing activities was $0.1 million, consisting of proceeds from issuance of common shares upon exercise of stock options.

Funding Requirements

We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the preclinical activities and clinical trials of our product candidates in development. In addition, we expect to incur additional costs associated with operating as a public company. The timing and amount of our operating expenditures will depend largely on:

   •  the scope, progress, results and costs of researching and developing
      FPI-1434, FPI-1966 and our other product candidates;


   •  the timing of, and the costs involved in, obtaining marketing approvals for
      our current and future product candidates;


   •  the number of future product candidates and potential additional indications
      that we may pursue and their development requirements;


   •  the cost of manufacturing our product candidates for clinical trials in
      preparation for regulatory approval and in preparation for
      commercialization;


   •  the cost of strategic investments in manufacturing and supply chain, in
      particular for the production and supply of actinium-225;


   •  the cost and availability of actinium-225 or any other medical isotope we
      may incorporate into our product candidates;


   •  if approved, the costs of commercialization activities for any approved
      product candidate to the extent such costs are not the responsibility of any
      future collaborators, including the costs and timing of establishing product
      sales, marketing, distribution and manufacturing capabilities;


   •  subject to receipt of regulatory approval and revenue, if any, received from
      commercial sales for any approved indications for any of our product
      candidates;


   •  the extent to which we enter into collaborations with third parties,
      in-license or acquire rights to other products, product candidates or
      technologies;


   •  our headcount growth and associated costs as we expand our research and
      development capabilities and establish a commercial infrastructure;


   •  the costs of preparing, filing and prosecuting patent applications and
      maintaining and protecting our intellectual property rights, including
      enforcing and defending intellectual property related claims; and


  • the costs of operating as a public company.

On July 2, 2021, we entered into the Sales Agreement to issue and sell our common shares up to $100.0 million in gross proceeds, from time to time during the term of the Sales Agreement, through an "at-the-market" equity offering program. As of March 31, 2022, we had received net proceeds of $1.6 million from sales of common shares under the Sales Agreement.

In April 2022, we received net proceeds of $9.8 million from our loan and security agreement with Oxford Finance LLC.

We believe that our existing cash, cash equivalents and investments as of March 31, 2022, together with the proceeds available under the first tranche of the loan and security agreement with Oxford Finance LLC executed in April 2022, will be sufficient to fund our operating expenses and capital expenditure requirements into the first quarter of 2024. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect.

Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances, and marketing, distribution or licensing arrangements with third parties. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest may be materially diluted, and the terms of such securities could include liquidation or other preferences that adversely affect your rights as a common shareholder. Debt financing and preferred equity financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures, creating liens, redeeming shares or declaring dividends. If we raise funds through collaborations, strategic alliances, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we would be required to delay,

--------------------------------------------------------------------------------

limit, reduce or terminate our product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Critical Accounting Policies and Significant Judgments and Estimates

Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States. The preparation of our condensed consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses, and the disclosure of contingent assets and liabilities in our condensed consolidated financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in Note 2 to our condensed consolidated financial statements, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our condensed consolidated financial statements.

Collaborative Arrangements

We consider the nature and contractual terms of arrangements and assess whether an arrangement involves a joint operating activity pursuant to which we are an active participant and are exposed to significant risks and rewards dependent on the commercial success of the activity. If we are an active participant and are exposed to significant risks and rewards dependent on the commercial success of the activity, we account for such arrangement as a collaborative arrangement under ASC 808. ASC 808 describes arrangements within its scope and considerations surrounding presentation and disclosure, with recognition matters subjected to other authoritative guidance, in certain cases by analogy.

For arrangements determined to be within the scope of ASC 808 where a collaborative partner is not a customer for certain research and development activities, we account for payments received for the reimbursement of research and development costs as a contra-expense in the period such expenses are incurred. This reflects the joint risk sharing nature of these activities within a collaborative arrangement. We classify payments owed or receivables recorded as other current liabilities or prepaid expenses and other current assets, respectively, in our consolidated balance sheets.

If payments from the collaborative partner to us represent consideration from a customer in exchange for distinct goods and services provided, then we account for those payments within the scope of ASC 606.

Revenue Recognition

In accordance with ASC 606, we recognize revenue when a customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations within the contract and (v) recognize revenue when (or as) we satisfy a performance obligation.

We only apply the five-step model to contracts when we determine that it is probable we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer.

At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within the contract to determine whether each promised good or service is a performance obligation. The promised goods or services in our arrangements typically consist of a license to our intellectual property and/or research and development services. We may provide customers with options to additional items in such arrangements, which are accounted for separately when the customer elects to exercise such options, unless the option provides a material right to the customer. Performance obligations are promises in a contract to transfer a distinct good or service to the customer that (i) the customer can benefit from on its own or together with other readily available resources, and (ii) is separately identifiable from other promises in the contract. Goods or services that are not individually distinct performance obligations are combined with other promised goods or services until such combined group of promises meet the requirements of a performance obligation.

We determine transaction price based on the amount of consideration we expect to receive for transferring the promised goods or services in the contract. Consideration may be fixed, variable, or a combination of both. At contract inception for arrangements that include variable consideration, we estimate the probability and extent of consideration we expect to receive under the contract utilizing either the most likely amount method or expected amount method, whichever best estimates the amount expected to be

--------------------------------------------------------------------------------

received. We then consider any constraints on the variable consideration and include in the transaction price variable consideration to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

We then allocate the transaction price to each performance obligation based on the relative standalone selling price and recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) control is transferred to the customer and the performance obligation is satisfied. For performance obligations which consist of licenses and other promises, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

We record amounts as accounts receivable when the right to consideration is deemed unconditional. Amounts received, or that are unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a contract are recognized as deferred revenue. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as the current portion of deferred revenue. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, net of current portion.

Our revenue generating arrangements typically include upfront license fees, milestone payments and/or royalties.

If a license is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenue from nonrefundable, up-front fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

At the inception of an agreement that includes research and development milestone payments, we evaluate each milestone to determine when and how much of the milestone to include in the transaction price. We first estimate the amount of the milestone payment that we could receive using either the expected value or the most likely amount approach. We primarily use the most likely amount approach as this approach is generally most predictive for milestone payments with a binary outcome. Then, we consider whether any portion of the estimated amount is subject to the variable consideration constraint (that is, whether it is probable that a significant reversal of cumulative revenue would not occur upon resolution of the uncertainty). We update the estimate of variable consideration included in the transaction price at each reporting date which includes updating the assessment of the likely amount of consideration and the application of the constraint to reflect current facts and circumstances.

For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we will recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).

Accrued Research and Development Expenses

As part of the process of preparing our condensed consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advance payments. We make estimates of our accrued expenses as of each balance sheet date in the consolidated financial statements based on facts and circumstances known to us at that time. At each end period, we confirm the accuracy of these estimates with the service providers and make adjustments, if necessary. Examples of estimated accrued research and development expenses include those related to fees paid to:

• vendors in connection with preclinical development activities;

--------------------------------------------------------------------------------


  • CROs in connection with preclinical studies and clinical trials; and


   •  CMOs in connection with the production of preclinical and clinical trial
      materials.

We record the expense and accrual related to contract research and manufacturing based on our estimates of the services received and efforts expended considering a number of factors, including our knowledge of the progress towards completion of the research, development and manufacturing activities, invoicing to date under the contracts, communication from the CROs, CMOs and other companies of any actual costs incurred during the period that have not yet been invoiced and the costs included in the contracts and purchase orders. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or the amount of prepaid expenses accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses.

Share-Based Compensation

We measure all share-based awards granted to employees, directors and non-employee consultants based on their fair value on the date of the grant using the Black-Scholes option-pricing model and recognize compensation expense for those awards over the requisite service period, which is generally the vesting period of the respective award. We issue share-based awards with only service-based vesting conditions and record the expense for these awards using the straight-line method. We have not issued any share-based awards with performance-based vesting conditions that are within our control and that may be considered probable prior to occurrence or with market-based vesting conditions.

The Black-Scholes option-pricing model uses as inputs the fair value of our common shares and assumptions we make for the volatility of our common shares, the expected term of our stock options, the risk-free interest rate for a period that approximates the expected term of our stock options and our expected dividend yield. We have historically been a private company and continue to lack sufficient company-specific historical and implied volatility information. Therefore, we estimate our expected share volatility based on the historical volatility of a publicly traded set of peer companies and expect to continue to do so until such time as we have adequate historical data regarding the volatility of our own traded share price.

Emerging Growth Company Status

The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, permits an "emerging growth company" such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies and our financial statements may not be comparable to other public companies that comply with new or revised accounting pronouncements as of public company effective dates. We may choose to early adopt any new or revised accounting standards whenever such early adoption is permitted for private companies.

We will cease to be an emerging growth company on the date that is the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more, (ii) the last day of our fiscal year following the fifth anniversary of the date of the closing of our IPO, (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the Securities and Exchange Commission.

--------------------------------------------------------------------------------

FUSN PHAR

FUSION PHARMACEUTICALS INC. Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

Send by mail :