Forte Biosciences(US:FBRX)2023-11-12 16:00markdown PART I. FINANCIAL INFORMATION [Financial Statements](index=2&type=section&id=Item%201.%20Financial%20Statements) Q3 2023 financials show increased operating expenses and net loss from FB-102 R&D, with cash boosted by July 2023 financing Condensed Consolidated Balance Sheet Data (in thousands) | Account | September 30, 2023 (unaudited) | December 31, 2022 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $46,185 | $41,100 | | Total current assets | $47,102 | $41,511 | | Total assets | $47,879 | $41,997 | | **Liabilities & Stockholders' Equity** | | | | Accounts payable | $5,354 | $1,153 | | Total current liabilities | $7,471 | $3,179 | | Accumulated deficit | $(112,648) | $(87,044) | | Total stockholders' equity | $40,408 | $38,818 | Condensed Consolidated Statements of Operations Data (in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Research and development | $6,369 | $1,379 | $18,295 | $3,106 | | General and administrative | $3,847 | $2,044 | $7,810 | $5,851 | | Loss from operations | $(10,216) | $(3,423) | $(26,105) | $(8,957) | | Net loss | $(9,955) | $(3,400) | $(25,604) | $(9,002) | | Net loss per share | $(0.26) | $(0.18) | $(0.96) | $(0.56) | Condensed Consolidated Statements of Cash Flows Data (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(19,737) | $(5,292) | | Net cash provided by investing activities | $63 | $0 | | Net cash provided by financing activities | $24,759 | $7,296 | | **Net increase in cash and cash equivalents** | **$5,085** | **$2,004** | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=18&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the FB-102 program, increased R&D and G&A expenses, and a $25M private placement for future operations [Overview](index=19&type=section&id=Overview) Forte Biosciences advances preclinical FB-102 for autoimmune diseases, with **$46.2M** cash as of Sep 2023, boosted by a **$25M** private placement - The company is advancing its product candidate, **FB-102**, a proprietary molecule with potential applications in autoimmune diseases such as graft-versus-host disease (GvHD), vitiligo, and alopecia areata (AA)[101](index=101&type=chunk) - In July 2023, the company raised approximately **$25 million** in gross proceeds through a private placement of common stock and pre-funded warrants[109](index=109&type=chunk) - The company's ability to raise capital through its "at-the-market" (ATM) facility is currently restricted because the market value of its common stock held by non-affiliates is below the **$75 million** threshold required by Form S-3[110](index=110&type=chunk) [Results of Operations](index=22&type=section&id=Results%20of%20Operations) Operating expenses significantly increased in Q3 2023 due to FB-102 R&D and litigation, resulting in a **$25.6M** net loss for the nine months Comparison of Operating Results (in thousands) | Expense Category | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | Change | | :--- | :--- | :--- | :--- | | Research and development | $18,295 | $3,106 | $15,189 | | General and administrative | $7,810 | $5,851 | $1,959 | | **Total operating expenses** | **$26,105** | **$8,957** | **$17,148** | | **Net Loss** | **$(25,604)** | **$(9,002)** | **$(16,602)** | - The increase in R&D expenses for the nine months ended Sep 30, 2023 was primarily due to a **$9.1 million** increase in manufacturing costs and a **$5.5 million** increase in preclinical expenses for the **FB-102** program[124](index=124&type=chunk) - The increase in G&A expenses for the nine months ended Sep 30, 2023 was mainly due to a **$1.9 million** increase in legal expenses, which includes litigation costs[127](index=127&type=chunk) [Liquidity and Capital Resources](index=23&type=section&id=Liquidity%20and%20Capital%20Resources) As of Sep 2023, the company had **$46.2M** cash, sufficient for 12 months, with **$19.7M** net cash used in operations and **$24.8M** from financing - The company had cash and cash equivalents of approximately **$46.2 million** as of September 30, 2023, and believes this is sufficient to fund operations for at least 12 months from the filing date[130](index=130&type=chunk) - On July 31, 2023, the company raised gross proceeds of approximately **$25 million** from a private placement of common stock and pre-funded warrants[133](index=133&type=chunk) - Net cash used in operating activities increased to **$19.7 million** for the nine months ended September 30, 2023, from **$5.3 million** in the same period of 2022, primarily due to a higher net loss[139](index=139&type=chunk)[141](index=141&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=26&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) As a smaller reporting company, Forte Biosciences is not required to provide market risk disclosures - As a smaller reporting company, Forte Biosciences is not required to provide quantitative and qualitative disclosures about market risk[149](index=149&type=chunk) [Controls and Procedures](index=26&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls were ineffective due to a material weakness in income tax provision review, with remediation steps underway - The Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were not effective due to a material weakness in internal control over the review of the annual income tax provision[150](index=150&type=chunk) - The company is taking steps to remediate the material weakness, including augmenting third-party resources for tax accounting review and strengthening its internal review process[152](index=152&type=chunk) PART II. OTHER INFORMATION [Legal Proceedings](index=27&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in multiple legal proceedings with Camac Fund LP, including books and records actions and fiduciary duty claims - Camac Fund LP has filed a books and records action against the company in the Delaware Court of Chancery, which remains pending[155](index=155&type=chunk) - Camac Fund LP filed a complaint against the company's directors, alleging breaches of fiduciary duty related to the July 2023 private placement and the timing of the 2023 annual meeting[156](index=156&type=chunk)[159](index=159&type=chunk) - On October 28, 2023, Forte filed a complaint against Camac and other defendants, alleging they issued false and misleading proxy statements and failed to disclose they were acting as a group, in violation of Exchange Act Sections 14(a) and 13(d)[162](index=162&type=chunk)[163](index=163&type=chunk) [Risk Factors](index=28&type=page&id=Item%201A.%20Risk%20Factors) The company faces substantial risks, primarily from its single preclinical product FB-102, requiring significant capital, and ongoing litigation and control weaknesses [Risks related to Forte's business, technology and industry](index=30&type=section&id=Risks%20related%20to%20Forte%27s%20business%2C%20technology%20and%20industry) The company's success depends on preclinical FB-102, has incurred **$112.6M** accumulated deficit, and requires substantial additional capital for operations - The company's business is almost entirely dependent on the success of developing **FB-102**, which is currently in preclinical development, after discontinuing its prior candidate FB-401 in 2021[169](index=169&type=chunk)[170](index=170&type=chunk) - Forte has incurred net losses every year since inception, with an accumulated deficit of **$112.6 million** as of September 30, 2023, and expects to continue incurring significant losses[179](index=179&type=chunk) - The company will require additional capital to fund its operations beyond the next twelve months. Failure to obtain necessary financing will prevent the completion of development and commercialization of **FB-102**[183](index=183&type=chunk) [Risks related to Government Regulation](index=47&type=section&id=Risks%20related%20to%20government%20regulation) FB-102 development faces lengthy, expensive, and uncertain regulatory approval, with no guarantee of success or freedom from ongoing compliance obligations - **FB-102** requires significant additional preclinical and clinical development before seeking regulatory approval, and there is no guarantee of success[244](index=244&type=chunk) - The process of obtaining regulatory approvals is expensive, may take many years, and is highly uncertain. The FDA has substantial discretion and may require additional studies or reject the application[267](index=267&type=chunk) - Even if approved, the company will be subject to ongoing regulatory requirements for manufacturing (cGMP), labeling, promotion, and post-marketing studies, with potential for significant penalties for non-compliance[277](index=277&type=chunk)[279](index=279&type=chunk) [Risks related to Intellectual Property](index=57&type=section&id=Risks%20related%20to%20Forte%27s%20intellectual%20property) Success hinges on obtaining and maintaining patent protection for FB-102, facing challenges to validity and potential costly infringement litigation - The company's success depends on its ability to obtain and maintain patent protection for **FB-102**, but there is no assurance that patent applications will be granted or that they will provide meaningful protection[295](index=295&type=chunk) - The patent position of healthcare companies is highly uncertain, and any patents Forte obtains may be challenged, invalidated, or circumvented by competitors[299](index=299&type=chunk)[301](index=301&type=chunk) - The company may be subject to third-party claims of intellectual property infringement, which could prevent or delay the development and commercialization of its product candidates and lead to expensive litigation[333](index=333&type=chunk) [Risks related to Reliance on Third Parties](index=67&type=section&id=Risks%20related%20to%20Forte%27s%20reliance%20on%20third%20parties) Forte heavily relies on third parties for preclinical studies, clinical trials, and manufacturing, exposing it to risks of non-performance and delays - The company relies on third parties (CROs, medical institutions) to conduct its preclinical studies and planned clinical trials, which limits its control over the timing and execution of these activities[346](index=346&type=chunk) - Forte contracts with third-party manufacturers (CMOs) for its product candidates and does not have its own manufacturing capabilities. This reliance creates risks related to supply sufficiency, quality, cost, and regulatory compliance (cGMP)[352](index=352&type=chunk) - If third-party collaborators fail to perform their obligations, terminate agreements, or prioritize other projects, Forte's development programs could be delayed or halted, and its business could be adversely affected[356](index=356&type=chunk) [General Risks](index=71&type=section&id=General%20Risks) The company faces Nasdaq delisting risk, high stock price volatility, ongoing litigation, and a material weakness in internal financial controls - The company is currently non-compliant with **Nasdaq's** minimum **$1.00** bid price requirement, which could result in the delisting of its common stock if not resolved by the **March 12, 2024** deadline[361](index=361&type=chunk) - The company's stock price is highly volatile, influenced by clinical development news, financial results, and market conditions. The company is also facing litigation related to its recent private placement[365](index=365&type=chunk)[370](index=370&type=chunk) - A material weakness has been identified in the company's internal control over financial reporting related to the review of its annual income tax provision, which could impact the ability to report financial results accurately and timely[385](index=385&type=chunk)[386](index=386&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=77&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) No unregistered sales of equity securities occurred beyond those previously disclosed in the August 1, 2023 Form 8-K - No unregistered sales of securities occurred other than those previously disclosed in the Form 8-K filed on August 1, 2023[393](index=393&type=chunk) [Defaults Upon Senior Securities](index=77&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) None - The company reports no defaults upon senior securities[394](index=394&type=chunk) [Mine Safety Disclosures](index=78&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) None - The company reports no mine safety disclosures[396](index=396&type=chunk) [Other Information](index=78&type=section&id=Item%205.%20Other%20Information) None - The company reports no other information for this item[397](index=397&type=chunk) [Exhibits](index=79&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with Form 10-Q, including agreements for the recent private placement and officer certifications - Exhibits filed include the Securities Purchase Agreement and Registration Rights Agreement from the July 2023 financing, an amendment to the Preferred Stock Rights Agreement, and the Amended and Restated 2021 Equity Incentive Plan[398](index=398&type=chunk)