Forte Biosciences(FBRX) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Forte Biosciences, Inc. presents unaudited condensed consolidated financial statements and notes for periods ended June 30, 2022, and December 31, 2021 Condensed Consolidated Balance Sheets | Metric (in thousands) | June 30, 2022 (unaudited) | December 31, 2021 | | :-------------------- | :------------------------ | :------------------ | | Cash and cash equivalents | $38,548 | $42,044 | | Total current assets | $38,846 | $42,520 | | Total assets | $39,720 | $43,306 | | Total current liabilities | $1,513 | $1,758 | | Total stockholders' equity | $38,207 | $41,548 | | Total liabilities, convertible preferred stock and stockholders' equity | $39,720 | $43,306 | Condensed Consolidated Statements of Operations | Metric (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Research and development | $1,034 | $3,523 | $1,727 | $6,845 | | General and administrative | $1,986 | $2,224 | $3,807 | $3,643 | | Total operating expenses | $3,020 | $5,747 | $5,534 | $10,488 | | Loss from operations | $(3,020) | $(5,747) | $(5,534) | $(10,488) | | Other expenses, net | $(15) | $(65) | $(68) | $(128) | | Net loss | $(3,035) | $(5,812) | $(5,602) | $(10,616) | Condensed Consolidated Statements of Stockholders' Equity | Metric (in thousands, except share data) | Balance — December 31, 2021 | Balance — June 30, 2022 | | :--------------------------------------- | :-------------------------- | :---------------------- | | Common Shares Outstanding | 14,754,447 | 14,761,261 | | Common Stock Amount | $15 | $15 | | Additional Paid-in Capital | $114,698 | $116,959 | | Accumulated Deficit | $(73,165) | $(78,767) | | Total Stockholders' Equity | $41,548 | $38,207 | - The company's accumulated deficit increased from $73,165 thousand at December 31, 2021, to $78,767 thousand at June 30, 2022, reflecting ongoing net losses Condensed Consolidated Statements of Cash Flows | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(3,352) | $(7,968) | | Net cash used in financing activities | $(144) | $(2) | | Net decrease in cash and cash equivalents | $(3,496) | $(7,970) | | Cash and cash equivalents — beginning of period | $42,044 | $58,765 | | Cash and cash equivalents — end of period | $38,548 | $50,795 | - Net cash used in operating activities significantly decreased from $7,968 thousand in 2021 to $3,352 thousand in 2022, primarily due to a lower net loss and higher stock-based compensation expense[18][120][121] Notes to Unaudited Condensed Consolidated Financial Statements 1. Organization and Description of Business - Forte Biosciences, Inc. is a biopharmaceutical company focused on developing its FB-102 program for autoimmune diseases, currently in preclinical development[21][87] - The company was incorporated in Delaware on May 3, 2017, and merged with Tocagen, Inc. on June 15, 2020, with its common stock trading on Nasdaq under 'FBRX'[22] - The company has incurred losses and negative cash flows from operations since inception, with an accumulated deficit of $78.8 million as of June 30, 2022[23] - Management believes existing cash and cash equivalents of $38.5 million as of June 30, 2022, will fund operations for at least 12 months, but additional capital will be needed[25][26] - The COVID-19 pandemic continues to pose risks to the company's operations, financial condition, and liquidity, with the full extent of impact remaining unpredictable[28][93] 2. Summary of Significant Accounting Policies - The unaudited condensed consolidated financial statements are prepared in conformity with GAAP and SEC rules, including all normal and recurring adjustments[29][30] - 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[33] - Fair value measurements are categorized into a three-level hierarchy, with $34.9 million in money market funds classified as Level 1 as of June 30, 2022, and December 31, 2021[34][35][38] - Research and development costs, including salaries, preclinical studies, clinical trials, and drug manufacturing, are expensed as incurred[40][41] - Comprehensive loss equals net loss for the periods presented, as there were no other comprehensive income (loss) items[43] - Diluted net loss per share excludes unexercised stock options, warrants, and restricted stock units due to their anti-dilutive effect[45] | Common Stock Equivalents | Three and Six Months Ended June 30, 2022 | Three and Six Months Ended June 30, 2021 | | :----------------------- | :--------------------------------------- | :--------------------------------------- | | Options | 2,338,736 | 1,395,904 | | Restricted stock units | 258,851 | 15,000 | | Warrants | 4,434 | 1,017,550 | | Total | 2,602,021 | 2,428,454 | - The company is evaluating ASU 2020-06, which eliminates certain accounting models for convertible instruments, but does not expect a material impact on its financial statements[47] 3. Balance Sheet Components | Prepaid Expenses and Other Current Assets (in thousands) | June 30, 2022 | December 31, 2021 | | :------------------------------------------------------- | :------------ | :---------------- | | Prepaid insurance | $204 | $387 | | Other | $94 | $89 | | Total | $298 | $476 | | Other Assets (in thousands) | June 30, 2022 | December 31, 2021 | | :-------------------------- | :------------ | :---------------- | | Prepaid insurance | $570 | $667 | | Prepaid offering costs | $291 | $106 | | Other | $13 | $13 | | Total | $874 | $786 | | Accrued Liabilities (in thousands) | June 30, 2022 | December 31, 2021 | | :--------------------------------- | :------------ | :---------------- | | Accrued legal and professional fees | $102 | $75 | | Accrued compensation | $454 | $681 | | Accrued manufacturing and clinical expenses | $208 | $40 | | Other | $51 | $16 | | Total | $815 | $812 | 4. Commitments and Contingencies - The company's cash accounts significantly exceed federally insured limits, indicating a concentration of credit risk[53] - The exclusive license agreement with DHHS for patent rights related to dermatological diseases was terminated effective April 2, 2022, without meeting any milestones[55] | Minimum Royalty Expenses (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Minimum royalty expenses | $0 | $25 | $25 | $50 | - The company has month-to-month lease agreements for office and laboratory space, with total rent expense of $3,000 for the three months and $6,000 for the six months ended June 30, 2022[57] - Estimated remaining commitments for preclinical services as of June 30, 2022, were approximately $199,000[59] 5. Equity - Warrants to purchase 978,858 shares, 760,572 shares, and 1,013,116 shares of common stock were exercised on a cashless basis in February 2021, June 2021, and September 2021, respectively, resulting in the issuance of 673,463, 560,402, and 655,409 shares[60] - As of June 30, 2022, 4,434 warrants to purchase common stock at $140.25 per share remained outstanding[60] - The company filed a shelf registration statement on Form S-3 in June 2021 to raise up to $300 million in additional capital, incurring $106,000 in offering costs[61] - An 'at-the-market' (ATM) equity offering program was established on March 31, 2022, allowing the sale of up to $25.0 million in common stock, with $7.0 million sold from July 1, 2022, through August 12, 2022[62][90] 6. Stock-Based Compensation - The 2018 Equity Incentive Plan was suspended post-Merger, and the 2017 Equity Incentive Plan was terminated and replaced by the 2021 Equity Incentive Plan in May 2021[63][67] - The 2021 Plan was amended in June 2022 to increase available shares for grant by 1,500,000, totaling 1,361,736 shares available as of June 30, 2022[67] | Stock Option Valuation Assumption | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | | :-------------------------------- | :------------------------------- | :----------------------------- | | Fair value of common stock | $1.28 | $1.49 | | Risk-free interest rate | 3.06% | 2.25% | | Dividend yield | 0.00% | 0.00% | | Expected term of options (years) | 5.78 | 5.88 | | Volatility | 71.45% | 68.57% | - The weighted average grant-date fair value of stock options decreased significantly from $23.40 (3 months) and $23.29 (6 months) in 2021 to $0.82 (3 months) and $0.92 (6 months) in 2022[73] | Stock Option Activity (Six Months Ended June 30, 2022) | Number of Shares Outstanding | Weighted Average Exercise Price | | :----------------------------------------------------- | :--------------------------- | :------------------------------ | | Balances at December 31, 2021 | 1,281,396 | $18.18 | | Granted | 1,149,166 | $1.49 | | Exercised | (1,098) | $1.06 | | Cancelled/Forfeited | (90,728) | $31.80 | | Balances at June 30, 2022 | 2,338,736 | $9.46 | - A change in accounting estimate for performance-based restricted stock units resulted in a $158,000 expense reversal in Q1 2022; 258,851 RSUs remained outstanding at June 30, 2022[75][76] - The 2017 Employee Stock Purchase Plan (ESPP) was reactivated in May 2021, with 170,978 shares available for future issuance as of June 30, 2022. 5,716 shares were issued under the ESPP during the six months ended June 30, 2022[76][78] | Stock-Based Compensation Expense (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :---------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Research and development | $380 | $364 | $666 | $668 | | General and administrative | $814 | $644 | $1,583 | $835 | | Total | $1,194 | $1,008 | $2,249 | $1,503 | - Unrecognized stock-based compensation expense related to stock options with service conditions was $8.0 million as of June 30, 2022, to be recognized over 2.56 years[79] 7. Related Party Transactions - Two board members received cash payments of $5,000 and $7,000 for scientific consulting services during Q1 and Q2 2022, respectively, with the latter remaining outstanding as of June 30, 2022[80] - There were no related party transactions during the three and six months ended June 30, 2021[80] 8. Subsequent Events - On July 11, 2022, the Board adopted a Rights Plan, declaring a dividend distribution of one right per common stock share to protect stockholders from coercive takeover tactics[81][82] - The Rights Plan imposes a significant penalty on any person or group acquiring 10% or more (or 20% for certain institutional investors) of common stock without Board approval[82] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Forte Biosciences, Inc.'s financial condition, operations, FB-102 program, capital, and COVID-19 impact Overview - Forte Biosciences is a biopharmaceutical company focused on developing its FB-102 program for autoimmune diseases, with $38.5 million in cash and cash equivalents as of June 30, 2022[87] - The company filed a shelf registration statement in June 2021 to raise up to $300 million and established an 'at-the-market' (ATM) equity offering program in March 2022 for up to $25.0 million[88][89] - As of August 12, 2022, the company had issued 5.6 million shares for gross proceeds of approximately $7.0 million under the ATM Facility[90] Intellectual Property - Forte terminated its exclusive license agreement with the DHHS for 12 patents related to dermatological diseases effective April 2, 2022[91] - The company owns one US patent for administering a combination of Gram-positive and Gram-negative bacteria for skin conditions, expiring in 2039, which is not material to the FB-102 program[92] COVID-19 - The COVID-19 pandemic continues to cause significant national and global economic disruption, potentially affecting Forte's operations, financial condition, liquidity, and workforce[93] - The full extent, consequences, and duration of the pandemic's impact on the company remain unpredictable[93] Components of Operating Results - Forte has no approved products or active development, thus no revenue from product sales. Future revenue is uncertain and may come from product sales, royalties, license fees, or milestones[94] - Research and development costs are expensed as incurred, including salaries, preclinical studies, clinical trials, and drug manufacturing. These costs are expected to increase with the development of FB-102[95][98] - General and administrative expenses primarily cover professional fees, personnel, and public company costs, and are expected to increase as infrastructure for FB-102 development is built[99] - Other expense, net, includes foreign exchange gains/losses and franchise taxes, partially offset by interest earned on cash[100] Critical Accounting Policies and Estimates - There have been no significant changes to critical accounting policies, judgments, and estimates during the six months ended June 30, 2022[101] Results of Operations | Metric (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Change (YoY) | | :-------------------- | :------------------------------- | :------------------------------- | :----------- | | Research and development | $1,034 | $3,523 | $(2,489) | | General and administrative | $1,986 | $2,224 | $(238) | | Total operating expenses | $3,020 | $5,747 | $(2,727) | | Net Loss | $3,035 | $5,812 | $(2,777) | | Metric (in thousands) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | Change (YoY) | | :-------------------- | :----------------------------- | :----------------------------- | :----------- | | Research and development | $1,727 | $6,845 | $(5,118) | | General and administrative | $3,807 | $3,643 | $164 | | Total operating expenses | $5,534 | $10,488 | $(4,954) | | Net Loss | $5,602 | $10,616 | $(5,014) | - Research and development expenses decreased by $2.5 million (QoQ) and $5.1 million (YoY) primarily due to the termination of the FB-401 program, reduced manufacturing, preclinical/clinical expenses, and lower payroll[105][106] - General and administrative expenses decreased by $0.2 million (QoQ) due to lower legal/professional fees, but increased by $0.2 million (YoY) primarily due to higher stock-based compensation[108][109] - Other expenses, net, decreased for both periods due to reduced foreign currency transaction and remeasurement losses[111] Liquidity and Capital Resources - Forte has never been profitable, incurring a net loss of $5.6 million for the six months ended June 30, 2022, and an accumulated deficit of $78.8 million[112] - The company had $38.5 million in cash and cash equivalents as of June 30, 2022, expected to fund operations for at least 12 months[112] - Future capital requirements are uncertain and depend on factors like preclinical/clinical study progress, strategic alliances, regulatory approvals, hiring, intellectual property costs, and manufacturing[116] - Raising additional funds through equity may dilute stockholders, while debt financing may impose restrictive covenants. Global economic conditions and geopolitical conflicts could adversely impact fundraising[117] Cash Flow Summary | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Operating activities | $(3,352) | $(7,968) | | Financing activities | $(144) | $(2) | | Net decrease in cash and cash equivalents | $(3,496) | $(7,970) | - Net cash used in operating activities for the six months ended June 30, 2022, was $3.4 million, primarily from a $5.6 million net loss offset by $2.2 million in non-cash stock-based compensation[120] - Net cash used in financing activities for the six months ended June 30, 2022, was $144,000, mainly due to $156,000 in deferred financing costs, partially offset by $12,000 from stock option exercises and ESPP[122] Off-Balance Sheet Arrangements - The company has not entered into any off-balance sheet arrangements and does not hold any variable interest entities[123] Contractual Obligations - Contractual obligations are detailed in Note 4 to the Condensed Consolidated Financial Statements[124] Recent Accounting Standards - Information on recent accounting standards is provided in Note 2 to the Condensed Consolidated Financial Statements[125] Item 3. Quantitative and Qualitative Disclosures About Market Risk Forte Biosciences, Inc., as a smaller reporting company, is exempt from market risk disclosures - Forte Biosciences is a smaller reporting company and is not required to provide quantitative and qualitative disclosures about market risk[127] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures, concluding they were effective as of June 30, 2022. No material changes to internal control over financial reporting occurred during the quarter, despite remote work due to COVID-19 Evaluation of Disclosure Controls and Procedures - The CEO and CFO concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2022[128] Changes in Internal Control over Financial Reporting - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2022[129] - The company has not experienced any material impact to internal controls despite employees working remotely due to the COVID-19 pandemic[129] PART II. OTHER INFORMATION Item 1. Legal Proceedings Forte Biosciences, Inc. is not currently involved in any material pending legal proceedings - The company is not currently involved in any material pending litigation or other material legal proceedings[132] - Litigation, regardless of outcome, can adversely impact the company due to defense and settlement costs and diversion of management resources[132] Item 1A. Risk Factors This section outlines significant risks to Forte Biosciences, Inc.'s business, covering FB-102 development, capital, competition, and IP Risks related to Forte's business, technology and industry - 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[134][146] - Results from early preclinical studies may not be predictive of later-stage studies or clinical trials, and the FDA may require additional testing[135][147] - The company has a limited operating history and no approved products, making it difficult to evaluate its technology and predict future performance[135][151] - Forte has incurred net losses since inception ($78.8 million accumulated deficit as of June 30, 2022) and anticipates continued losses as it develops FB-102[135][155] - Additional capital will be required to fund operations and complete development of FB-102, with no assurance of available funding on acceptable terms[136][159] - Clinical development is a lengthy, expensive, and uncertain process, with potential for delays, increased costs, or inability to complete development[136][170] - Planned preclinical studies or future clinical trials may reveal significant adverse events, potentially inhibiting regulatory approval or market acceptance[137][177] - The market opportunities for FB-102 may be limited, and estimates of target patient populations could be inaccurate[139][192] - Forte faces significant competition from major pharmaceutical and biotechnology companies with greater resources[194][195] - Even if approved, FB-102 may fail to achieve market acceptance due to factors like efficacy, safety, convenience, pricing, and reimbursement[199][200] - The COVID-19 pandemic and other public health threats could adversely impact Forte's business operations and financial results[143][201] - Forte will need to grow its organization and may experience difficulties in managing this growth, including recruiting and retaining skilled personnel[204][211] - Forte's internal computer systems and those of third parties are vulnerable to damage from viruses and unauthorized access, potentially disrupting operations[214][215] - Employees, contractors, and partners may engage in misconduct, including noncompliance with regulatory standards, leading to significant losses or penalties[218][219] - Comprehensive tax reform legislation could adversely affect Forte's business and financial condition[228] - The ability to use net operating losses (NOLs) and research and development credits may be limited by ownership changes or failure to generate future taxable income[229][230] - Unstable market and economic conditions, including geopolitical conflicts, may adversely affect Forte's business, financial condition, and stock price[231][232] Risks related to Forte's intellectual property - 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[290][291] - The scope of patent protection may not be broad enough, or future patents could be lost, adversely affecting the ability to prevent competitors[295][297] - Future patents may be challenged, narrowed, circumvented, or invalidated by third parties, leading to loss of exclusivity or inability to commercialize products[298][299] - Patent terms may be inadequate to protect competitive position, as patents could expire before or shortly after product commercialization[323] - Failure to obtain patent term extension or data exclusivity for FB-102 could materially harm the business by allowing competitors to enter the market sooner[324][326] - Forte may be subject to claims challenging the inventorship of its patents and other intellectual property, potentially leading to loss of rights or costly litigation[327] - Inability to protect the confidentiality of trade secrets could harm Forte's business and competitive position, as trade secrets are difficult to protect and monitor[328][330] - Third-party claims of intellectual property infringement or misappropriation could prevent or delay the development and commercialization of Forte's product candidates[335][339] - Litigation to protect or enforce patents and other intellectual property rights can be expensive, time-consuming, and potentially unsuccessful[344][346] - Intellectual property rights have limitations and may not adequately protect Forte's business or maintain its competitive advantage against similar products or technologies[347][348] Risks related to Forte's reliance on third parties - Forte relies on third parties (investigators, CROs, CMOs) for preclinical studies and future clinical trials, which reduces control and poses risks of unsatisfactory performance or delays[350][351][353] - Reliance on third-party manufacturers for product candidates increases the risk of insufficient quality or quantity, or unacceptable costs, potentially delaying development or commercialization[356][357] - Third-party manufacturers may fail to comply with cGMP regulations, leading to sanctions, delays, or withdrawal of approvals, severely impacting product supply[359][360] - If collaborations are not maintained or new relationships are not successful, Forte's business could be adversely affected due to limited internal capabilities for product development, sales, marketing, and distribution[361][362] General Risks - The market price of Forte's common stock is expected to be volatile, as demonstrated by an 82% decline following unfavorable FB-401 clinical trial results in September 2021[367][368] - Unstable market and economic conditions, including geopolitical events, may have serious adverse consequences on Forte's business, financial condition, and stock price[374] - Complying with public company laws and regulations (e.g., Sarbanes-Oxley Act) will incur significant costs and demands on management, potentially affecting investor confidence[375] - Anti-takeover provisions in charter documents and Delaware law, including the recently adopted shareholders' rights plan, could make an acquisition more difficult[377][378] - Forte does not anticipate paying cash dividends in the foreseeable future, meaning capital appreciation is the sole source of gain for stockholders[380] - Future sales of shares by existing stockholders could cause Forte's stock price to decline[382] - If equity research analysts do not publish research or publish unfavorable reports, Forte's stock price and trading volume could decline[383] - Forte has broad discretion in the use of proceeds from capital raising efforts, which may not align with stockholders' expectations or increase investment value[384] - Failure to maintain proper and effective internal controls could impair the ability to produce accurate financial statements on a timely basis, leading to stock price decline or regulatory sanctions[385][386] - As a smaller reporting company, Forte benefits from reduced disclosure and governance requirements, which might make its common stock less attractive to some investors[388] - Principal stockholders and management own a significant percentage of stock, allowing them to exert significant control over matters subject to stockholder approval[389] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported for the period - There were no unregistered sales of equity securities or use of proceeds to report[390] Item 3. Defaults Upon Senior Securities No defaults upon senior securities occurred during the reporting period - There were no defaults upon senior securities[391] Item 4. Mine Safety Disclosures No mine safety disclosures are reported - There are no mine safety disclosures[392] Item 5. Other Information No other information is reported - There is no other information to report[394] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including various agreements and executive certifications - Exhibits include Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock, Preferred Stock Rights Agreement, Offer Letter for Hubert Chen, M.D., Amended and Restated Non-Employee Director Compensation Policy, and At Market Issuance Sales Agreement[396] - Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Sarbanes-Oxley Act Sections 302 and 906 are also filed[396] SIGNATURES SIGNATURES The report was signed by Paul Wagner, Ph.D., CEO, and Antony Riley, CFO, on August 15, 2022 - The report was signed by Paul Wagner, Ph.D., Chief Executive Officer, and Antony Riley, Chief Financial Officer, on August 15, 2022[403]