Forte Biosciences(FBRX) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents Forte Biosciences, Inc.'s unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Financial Statements This section presents Forte Biosciences, Inc.'s unaudited condensed consolidated financial statements, including the balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes explaining the company's organization, accounting policies, balance sheet components, commitments, equity changes, stock-based compensation, and related party transactions for the periods ended September 30, 2022, and December 31, 2021 Condensed Consolidated Balance Sheets Presents the company's financial position, including assets, liabilities, and equity, at specific reporting dates Condensed Consolidated Balance Sheets (in thousands) | Metric | Sep 30, 2022 (unaudited) | Dec 31, 2021 | | :-------------------------- | :----------------------- | :----------- | | Cash and cash equivalents | $44,048 | $42,044 | | Total current assets | $44,594 | $42,520 | | Total assets | $45,128 | $43,306 | | Total current liabilities | $2,293 | $1,758 | | Additional paid-in capital | $124,981 | $114,698 | | Accumulated deficit | $(82,167) | $(73,165) | | Total stockholders' equity | $42,835 | $41,548 | | Total liabilities, convertible preferred stock and stockholders' equity | $45,128 | $43,306 | Condensed Consolidated Statements of Operations Details the company's revenues, expenses, and net loss over specific interim periods Condensed Consolidated Statements of Operations (in thousands) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :-------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Research and development | $1,379 | $5,656 | $3,106 | $12,501 | | General and administrative | $2,044 | $2,043 | $5,851 | $5,686 | | Total operating expenses | $3,423 | $7,699 | $8,957 | $18,187 | | Loss from operations | $(3,423) | $(7,699) | $(8,957) | $(18,187) | | Other income (expense), net | $23 | $(52) | $(45) | $(180) | | Net loss | $(3,400) | $(7,751) | $(9,002) | $(18,367) | - Net loss for the three months ended September 30, 2022, decreased by $4.351 million (from $7.751 million to $3.400 million) compared to the same period in 2021[99] - For the nine months ended September 30, 2022, net loss decreased by $9.365 million (from $18.367 million to $9.002 million) compared to the same period in 2021[100] Condensed Consolidated Statements of Stockholders' Equity Outlines changes in the company's equity accounts, including common stock, additional paid-in capital, and accumulated deficit Changes in Stockholders' Equity (in thousands, except share data) | Metric | Balance — December 31, 2021 | Balance — September 30, 2022 | | :------------------------------------------------------------------- | :-------------------------- | :--------------------------- | | Common Shares | 14,754,447 | 21,000,069 | | Common Stock Amount | $15 | $21 | | Additional Paid-in Capital | $114,698 | $124,981 | | Accumulated Deficit | $(73,165) | $(82,167) | | Total Stockholders' Equity | $41,548 | $42,835 | | Issuance of common stock through public equity offering, net of costs | N/A | 6,142,158 shares, $7,122 | | Stock-based compensation (9 months) | N/A | $3,155 | | Net loss (9 months) | N/A | $(9,002) | - The company issued 6,142,158 shares of common stock through a public equity offering (ATM Facility) from July 1, 2022, through September 30, 2022, generating gross proceeds of approximately $7.7 million and net proceeds of $7.122 million after $595,000 in offering costs[14][59] Condensed Consolidated Statements of Cash Flows Reports the cash inflows and outflows from operating, investing, and financing activities over specific periods Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :---------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(5,292) | $(13,095) | | Net cash provided by financing activities | $7,296 | $(5) | | Net increase (decrease) in cash and cash equivalents | $2,004 | $(13,100) | | Cash and cash equivalents — beginning of period | $42,044 | $58,765 | | Cash and cash equivalents — end of period | $44,048 | $45,665 | - Net cash used in operating activities significantly decreased from $13.1 million in 2021 to $5.3 million in 2022, primarily due to a lower net loss and non-cash adjustments[17][111][112][114] - Financing activities provided $7.3 million in 2022, mainly from common stock issuance, a substantial increase from a net use of $5 thousand in 2021[17][115] Notes to Unaudited Condensed Consolidated Financial Statements Provides detailed explanations and additional information supporting the condensed consolidated financial statements 1. Organization and Description of Business Describes the company's primary business activities, development programs, and financial outlook - Forte Biosciences, Inc. is a biopharmaceutical company focused on developing its FB-102 program for autoimmune diseases, currently in preclinical development[19] - The company has incurred an accumulated deficit of $82.2 million as of September 30, 2022, and used $5.3 million in operating activities during the nine months ended September 30, 2022, with management expecting to continue incurring losses[21] - As of September 30, 2022, the company had $44.0 million in cash and cash equivalents, which are believed to be sufficient to fund operations for at least 12 months from the 10-Q filing date[23] 2. Summary of Significant Accounting Policies Outlines the key accounting principles and methods used in preparing the financial statements - The financial statements are prepared in conformity with GAAP and include all normal and recurring adjustments for fair presentation, with interim results not indicative of full-year results[27][28] - Cash and cash equivalents include money market funds and deposits with commercial banks, defined as highly liquid investments with original maturities of 90 days or less[31] - Research and development costs are expensed as incurred, including salaries, preclinical studies, clinical trials, and drug manufacturing, with non-refundable advance payments deferred and expensed when goods or services are received or performed[38][39] 3. Balance Sheet Components Provides detailed breakdowns of specific asset and liability accounts on the balance sheet Prepaid Expenses and Other Current Assets (in thousands) | Item | Sep 30, 2022 | Dec 31, 2021 | | :---------------------------------- | :----------- | :----------- | | Prepaid insurance | $427 | $387 | | Other | $119 | $89 | | Total prepaid expenses and other current assets | $546 | $476 | Accrued Liabilities (in thousands) | Item | Sep 30, 2022 | Dec 31, 2021 | | :---------------------------------- | :----------- | :----------- | | Accrued legal and professional fees | $150 | $75 | | Accrued compensation | $642 | $681 | | Accrued manufacturing and clinical expenses | $276 | $40 | | Other | $34 | $16 | | Total accrued liabilities | $1,102 | $812 | 4. Commitments and Contingencies Details the company's contractual obligations and potential future liabilities - The company terminated its exclusive license agreement with the Department of Health and Human Services (DHHS) effective April 2, 2022, without meeting any milestones[53] - Estimated remaining commitments for preclinical services as of September 30, 2022, were approximately $134,000[57] 5. Equity Discusses changes in the company's equity structure, including stock offerings and rights plans - From July 1, 2022, through September 30, 2022, the company issued 6.1 million shares of common stock under an 'at-the-market' (ATM) equity offering program, generating approximately $7.7 million in gross proceeds[59] - On July 11, 2022, the company authorized a Rights Plan, distributing one right for each outstanding common stock share, exercisable under certain conditions (e.g., 10% beneficial ownership acquisition) at $16.00 per one one-thousandth of a preferred share, with rights expiring on July 12, 2023, or upon redemption or exchange[60][61] 6. Stock-Based Compensation Explains the company's equity incentive plans and the accounting for stock-based awards - The company operates under the 2020 Inducement Equity Incentive Plan (115,000 shares available) and the 2021 Equity Incentive Plan (1,370,554 shares available after a June 2022 amendment adding 1,500,000 shares)[65][66] Stock-Based Compensation Expense (in thousands) | Expense Category | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :-------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Research and development | $327 | $522 | $993 | $1,191 | | General and administrative | $579 | $951 | $2,162 | $1,785 | | Total | $906 | $1,473 | $3,155 | $2,976 | - As of September 30, 2022, unrecognized stock-based compensation expense related to service conditions was $7.1 million, to be recognized over a weighted-average period of 2.35 years, with an additional $233,000 unrecognized for performance-based awards[78] 7. Related Party Transactions Discloses transactions between the company and its related parties, such as board members - Two board members received $4 thousand for scientific consulting services during the three months ended September 30, 2022, and $16 thousand for the nine months ended September 30, 2022[79] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Forte Biosciences, Inc.'s financial condition and results of operations, highlighting the company's focus on the FB-102 program, liquidity, and the factors influencing its operating expenses and future capital needs; it also discusses the impact of the COVID-19 pandemic and the company's intellectual property strategy Overview Provides a high-level summary of the company's business, financial position, and strategic focus - Forte Biosciences is a biopharmaceutical company focused on developing its FB-102 program for autoimmune diseases, with $44.0 million in cash and cash equivalents as of September 30, 2022[84] - The company has an 'at-the-market' (ATM) equity offering program allowing it to sell up to $25.0 million of common stock, having issued 6.1 million shares for $7.7 million gross proceeds from July 1 to September 30, 2022[85][87] Intellectual Property Discusses the company's intellectual property assets and licensing agreements - Forte terminated its exclusive license agreement with the DHHS effective April 2, 2022[88] - The company owns one US patent for administering Gram-positive and Gram-negative bacteria for skin conditions, with an estimated expiration date of 2039, though this patent is not material to the FB-102 program[89] COVID-19 Addresses the ongoing impact of the COVID-19 pandemic on the company's operations and financial condition - The company is actively monitoring the impact of COVID-19 on its financial condition, liquidity, operations, suppliers, industry, and workforce, acknowledging the full extent and duration of the pandemic's impact cannot currently be predicted[90] Components of Operating Results Explains the key drivers and categories of the company's revenues and expenses - The company has no approved products or active development, thus no revenue from product sales, with future revenue expected to fluctuate based on collaborations, license fees, and milestones[91] - Research and development costs are expensed as incurred, including salaries, preclinical studies, clinical trials, and drug manufacturing, with costs for FB-401 wind-down and property write-offs incurred in 2021[92] - General and administrative expenses primarily cover professional fees (legal, auditing, tax, consulting), personnel, travel, and public company costs (Sarbanes-Oxley compliance, D&O insurance)[96] Critical Accounting Policies and Estimates Highlights the accounting policies and estimates that require significant management judgment - There have been no significant changes to the company's critical accounting policies, significant judgments, and estimates during the nine months ended September 30, 2022[98] Results of Operations Analyzes the company's financial performance, including changes in expenses and net loss, over specific periods Operating Expenses Comparison (in thousands) | Operating Expenses | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | Change (YoY) | | :-------------------------- | :-------------------------- | :-------------------------- | :----------- | | Research and development | $1,379 | $5,656 | $(4,277) | | General and administrative | $2,044 | $2,043 | $1 | | Total operating expenses | $3,423 | $7,699 | $(4,276) | | Other income (expense), net | $23 | $(52) | $75 | | Net Loss | $(3,400) | $(7,751) | $(4,351) | Operating Expenses Comparison (in thousands) | Operating Expenses | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change (YoY) | | :-------------------------- | :-------------------------- | :-------------------------- | :----------- | | Research and development | $3,106 | $12,501 | $(9,395) | | General and administrative | $5,851 | $5,686 | $165 | | Total operating expenses | $8,957 | $18,187 | $(9,230) | | Other income (expense), net | $(45) | $(180) | $135 | | Net Loss | $(9,002) | $(18,367) | $(9,365) | - Research and development expenses decreased by $4.3 million for the three months and $9.4 million for the nine months ended September 30, 2022, primarily due to reduced manufacturing, preclinical/clinical expenses (following FB-401 termination), and lower payroll[99][102] - General and administrative expenses remained flat for the three months but increased by $0.2 million for the nine months ended September 30, 2022, mainly due to higher stock-based compensation expenses[103][104] Liquidity and Capital Resources Assesses the company's ability to meet its short-term and long-term financial obligations and fund future operations - The company has never been profitable, with a net loss of $9.0 million for the nine months ended September 30, 2022, and an accumulated deficit of $82.2 million; cash and cash equivalents were $44.0 million as of September 30, 2022, expected to fund operations for at least 12 months[105] - Future capital requirements are uncertain and depend on preclinical/clinical study progress, strategic alliances, regulatory approvals, hiring, intellectual property costs, and manufacturing, with dilution from equity offerings or restrictive covenants from debt financing being potential risks[109][110] Summary of Cash Flows (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :---------------------------------- | :----------------------------- | :----------------------------- | | Operating activities | $(5,292) | $(13,095) | | Financing activities | $7,296 | $(5) | | Net increase (decrease) in cash and cash equivalents | $2,004 | $(13,100) | Off-Balance Sheet Arrangements Confirms the absence of material off-balance sheet transactions or variable interest entities - The company has not entered into any off-balance sheet arrangements and does not have any holdings in variable interest entities[116] Contractual Obligations Refers to detailed information on the company's binding financial commitments - Contractual obligations are detailed in Note 4 to the Condensed Consolidated Financial Statements[117] Recent Accounting Standards References disclosures regarding newly adopted or pending accounting pronouncements - Information on recent accounting standards is provided in Note 2 to the Condensed Consolidated Financial Statements[118] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Forte Biosciences, Inc. is not required to provide quantitative and qualitative disclosures about market risk - Forte Biosciences, Inc. is a smaller reporting company and is not required to provide quantitative and qualitative disclosures about market risk[120] Item 4. Controls and Procedures This section details management's evaluation of the company's disclosure controls and procedures and reports on any changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures Assesses the effectiveness of the company's controls designed to ensure timely and accurate public disclosures - The CEO and CFO concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2022[121] Changes in Internal Control over Financial Reporting Reports on any material modifications to the company's internal controls impacting financial reporting - There has been no material change in internal control over financial reporting during the quarter ended September 30, 2022, with the company monitoring the impact of the COVID-19 pandemic on internal controls[122] PART II. OTHER INFORMATION This section provides additional legal, risk, and administrative information not covered in the financial statements Item 1. Legal Proceedings Forte Biosciences, Inc. is not currently a party to any material pending litigation or other material legal proceedings, though it may become involved in various claims from time to time - The company is not currently a party to any material pending litigation or other material legal proceeding[125] Item 1A. Risk Factors This section outlines significant risks that could materially and adversely affect Forte Biosciences, Inc.'s business, financial condition, results of operations, and future growth prospects; these risks are categorized into those related to the company's business, technology, and industry; government regulation; intellectual property; reliance on third parties; and general risks Risks related to Forte's business, technology and industry Highlights inherent risks associated with the company's core operations, product development, and competitive landscape - Forte's business is almost entirely dependent on the success of developing FB-102, which is currently in preclinical development and may not be successful, especially after discontinuing the FB-401 program[127][137][139][141][143] - The company has a limited operating history and has incurred net losses since inception, with an accumulated deficit of $82.2 million as of September 30, 2022, and anticipates continued losses[128][144][145][148] - Forte will require additional capital to fund operations, and failure to obtain necessary financing could delay or prevent the development and commercialization of FB-102 or future product candidates[129][152][153][157] - Clinical development is a lengthy, expensive, and uncertain process; delays or failures in trials, or the emergence of significant adverse events, could inhibit regulatory approval or market acceptance[129][130][162][166][170][175] - The company faces significant competition from major pharmaceutical and biotechnology companies with greater resources, which could adversely affect its operating results[187][188][190][191] - The COVID-19 pandemic and other public health threats may cause significant national and global economic disruption, adversely affecting the company's operations, preclinical studies, and financial results[136][195][196] - Forte relies on key management personnel and must recruit additional highly skilled personnel; the loss of such individuals or failure to manage growth effectively could impair its ability to develop new products[197][203][204][205] Risks related to government regulation Addresses potential adverse impacts from evolving regulatory frameworks, compliance requirements, and agency oversight - Forte is in early development for FB-102 and requires significant additional preclinical and clinical development before seeking regulatory approval, which is a lengthy, expensive, and uncertain process[225][226][227] - Changes in the legal and regulatory environment, including FDA regulations, labeling laws, and consumer protection laws, could limit business activities, increase costs, or reduce demand for product candidates[228][229][230] - Inadequate funding or staffing disruptions at regulatory agencies (FDA, SEC) could delay product review and approval, negatively impacting the business[232][233][234] - Relationships with healthcare providers and third-party payors are subject to federal and state healthcare fraud and abuse laws, false claims laws, and privacy laws, exposing the company to significant penalties for non-compliance[235][236][238][240][243][244] - Obtaining regulatory approval in one jurisdiction does not guarantee approval in others, and foreign approval processes can be more complex and time-consuming, potentially limiting market potential[216][246][247][248] - If FB-102 or future product candidates cause undesirable side effects, it could delay or prevent regulatory approval, limit commercialization, or result in market withdrawal and penalties[259][260][261] - Ongoing regulatory compliance obligations, including cGMP and GCP requirements, will incur significant expense, and failure to comply could lead to labeling restrictions, market withdrawal, and penalties[264][265][266][267][268] - Expanding international operations subjects the company to the FCPA and similar anti-bribery laws, as well as export controls and trade sanctions, which could limit foreign market competition and incur liability for violations[273][274][275][276][278][279][280] Risks related to Forte's intellectual property Examines challenges in securing, maintaining, and enforcing patent protection and trade secrets - Forte's success depends on obtaining and maintaining patent protection for its product candidates; failure to do so could allow competitors to commercialize similar products, adversely affecting its business[281][282][283][286] - The scope, validity, and enforceability of patent rights are highly uncertain and subject to litigation and challenges, which could narrow or invalidate Forte's patents, limiting its ability to prevent competition[287][288][289][291][292] - Patent terms may be inadequate to protect competitive position due to the lengthy development and regulatory review process, potentially leading to patent expiration before or shortly after commercialization[316][318][319] - Forte relies on trade secrets and confidentiality agreements to protect unpatented know-how; failure to protect this information due to breaches or independent development by competitors would harm its competitive position[321][323][324] - Third-party claims of intellectual property infringement or misappropriation could prevent or delay development and commercialization, leading to substantial litigation expenses, damages, or the need for costly licenses[330][331][333][335][336][337] - Litigation to protect or enforce patents is expensive, time-consuming, and may be unsuccessful, potentially leading to invalidation of patents, monetary damages, or diversion of management resources[338][339][340] Risks related to Forte's reliance on third parties Discusses vulnerabilities arising from dependence on external partners for research, manufacturing, and clinical activities - Forte relies on third parties (CROs, CMOs) for preclinical studies, clinical trials, and manufacturing; their unsatisfactory performance, failure to meet deadlines, or non-compliance with regulations could delay or impair development and commercialization efforts[343][344][345][347][348][350][351][352] - Reliance on third-party manufacturers increases risks related to quality, quantity, cost, and timely supply of product candidates, potentially leading to delays, disruptions, or termination of studies[348][349][350][351][352] - Unsuccessful collaborations or termination of agreements with third parties could result in loss of funding, delayed development, and difficulty attracting new partners, adversely affecting the business[353][354][356][358][359][360] General Risks Covers broad risks including market volatility, economic conditions, corporate governance, and stock performance - The market price of Forte's common stock is expected to be volatile, influenced by factors such as strategic decisions, regulatory approvals, clinical trial results, competition, and general market conditions; past volatility, like the 82% drop after FB-401 trial results, indicates this risk[361][362][364] - Unstable market and economic conditions, including global credit and financial market volatility, military conflicts, and sanctions, may adversely affect Forte's business, financial condition, and stock price, making financing more difficult and costly[224][369][370] - Complying with public company laws and regulations (e.g., Sarbanes-Oxley Act) incurs significant legal, accounting, and other expenses, and demands substantial management time, potentially making it difficult to attract and retain qualified directors and officers[371] - Anti-takeover provisions in charter documents, Delaware law, and the adopted shareholders' rights plan could make an acquisition more difficult and may prevent stockholders from replacing management, even if an offer is beneficial[372][374][375] - Forte does not anticipate paying cash dividends in the foreseeable future, meaning capital appreciation is the sole source of gain for stockholders[377] - Future sales of common stock by existing stockholders could cause the stock price to decline, and a lack of equity research analyst coverage or unfavorable reports could also negatively impact stock price and trading volume[378][380] - Failure to maintain proper and effective internal controls could impair the ability to produce accurate financial statements, leading to a decline in stock price and potential sanctions[382][383] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section states that there were no unregistered sales of equity securities or use of proceeds to report for the period - There were no unregistered sales of equity securities or use of proceeds to report[387] Item 3. Defaults Upon Senior Securities This section indicates that there were no defaults upon senior securities during the reporting period - There were no defaults upon senior securities[388] Item 4. Mine Safety Disclosures This section confirms that there are no mine safety disclosures to report - There are no mine safety disclosures to report[389] Item 5. Other Information This section details the approval and adoption of new change in control and severance agreements for executive officers, outlining the benefits provided under various termination scenarios Severance Agreements Outlines the terms and benefits of executive severance and change in control agreements - On November 10, 2022, the board approved new change in control and severance agreements for executive officers, superseding prior arrangements[390] - For termination without cause or for good reason outside a Change in Control (CIC) Period, executives receive 12-18 months base salary, 100-150% target bonus, and 12-18 months COBRA coverage; the CEO also gets 12 months accelerated equity vesting[392] - For termination without cause or for good reason during a CIC Period, executives receive 150-200% base salary, 150-200% target bonus, 18-24 months COBRA coverage, and 100% accelerated equity vesting[393] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including the form of change in control and severance agreement, certifications from executive officers, and XBRL-related documents - Key exhibits include the Form of Change in Control and Severance Agreement (10.1), Certifications of Principal Executive and Financial Officers (31.1, 31.2, 32.1, 32.2), and Inline XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[397] SIGNATURES Confirms the official endorsement and submission of the report by authorized company officers SIGNATURES The report is duly signed on behalf of Forte Biosciences, Inc. by Paul Wagner, Ph.D., Chief Executive Officer, and Antony Riley, Chief Financial Officer, on November 14, 2022 - The report was signed by Paul Wagner, Ph.D., Chief Executive Officer, and Antony Riley, Chief Financial Officer, on November 14, 2022[403]