UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2020

OR

For the transition period from    to

Commission File Number: 001-38052

FORTE BIOSCIENCES, INC.

(Exact Name of Registrant as Specified in its Charter)

Registrant’s telephone number, including area code: (310) 618-6994

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  ☒    No  ☐

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

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

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

As of November 3, 2020, the registrant had 12,830,598 shares of common stock, $0.001 par value per share, outstanding.

Table of Contents

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PART I – FINANCIAL INFORMATION

Item 1: Financial Statements

FORTE BIOSCIENCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and par value data)

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

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FORTE BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share amounts)

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

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FORTE BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(unaudited)

(in thousands, except share data)

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

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FORTE BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

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

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FORTE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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Item 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations should be read together with the consolidated financial statements of Forte Biosciences, Inc.  (“Forte”, “we”, “our”) and the accompanying notes appearing in our Registration Statement on Form S-4 as (Registration No. 333-237371), initially filed on March 25, 2020, as amended, and declared effective by the Securities and Exchange Commission, or SEC, on May 13, 2020. This discussion of the financial condition and results of operations regarding matters that are not historical facts, are forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended, and the Private Securities Litigation Act of 1995 and, known as the PSLRA.  These include statements regarding management’s intention, plans, beliefs, expectations or forecasts for the future, and, therefore, you are cautioned not to place undue reliance on them.  No forward-looking statement can be guaranteed, and actual results may differ materially from those projected. The Company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise, except to the extent required by law.  We use words such as “anticipates,” “believes,” “plans,” “expects,” “projects,” “intends,” “may,” “will,” “should,” “could,” “estimates,” “predicts,” “potential,” “continue,” “guidance,” and similar expressions to identify these forward-looking statements that are intended to be covered by the safe-harbor provisions of the PSLRA.

Such forward-looking statements are based on our expectations and involve risks and uncertainties; consequently, actual results may differ materially from those expressed or implied in the statements due to a number of factors, including, but not limited to, risks relating to the sufficiency of the Company’s cash balance to fund the Company’s activities, and the expectations with respect thereto; the business and prospects of the Company; Forte’s plans to develop and potentially commercialize its product candidates, including FB-401; the timing of initiation of Forte’s planned clinical trials; the timing of the availability of data from Forte’s clinical trials; the timing of any planned investigational new drug application or new drug application; Forte’s plans to research, develop and commercialize its current and future product candidates; Forte’s ability to successfully enter into collaborations, and to fulfill its obligations under any such collaboration agreements; the clinical utility, potential benefits and market acceptance of Forte’s product candidates; Forte’s commercialization, marketing and manufacturing capabilities and strategy; Forte’s ability to identify additional products or product candidates with significant commercial potential; developments and projections relating to Forte’s competitors and its industry; the impact of government laws and regulations; Forte’s ability to protect its intellectual property position; Forte’s estimates regarding future revenue, expenses, capital requirements and need for additional financing following the proposed transaction; and the impact of COVID-19 on the Company, the Company’s industry or the economy generally.

The known risks and uncertainties are described in detail under the caption “Risk Factors” and elsewhere in this Form 10-Q and our Registration Statement filed on Form S-4 (Registration No. 333-237371), initially filed on March 25, 2020, as amended, and declared effective by the SEC, on May 13, 2020. Forward-looking statements included in this Form 10-Q are based on information available to Forte as of the date of this Form 10-Q. Accordingly, our actual results may materially differ from our current expectations, estimates and projections. Forte undertakes no obligation to update such forward-looking statements to reflect events or circumstances after the date of this presentation.

Overview

Forte Biosciences Inc. (www.fortebiorx.com) (“Forte”, “we”, “our”) is a clinical-stage biopharmaceutical company focused on advancing through clinical trials our lead product candidate, FB-401, which is a live biotherapeutic for the treatment of inflammatory skin disease, including pediatric and adult patients with atopic dermatitis (“AD”). There is currently a significant unmet need for safe and effective therapies for pediatric atopic dermatitis patients. FB401 was developed in collaboration with the National Institutes of Health (“NIH”), and the National Institute of Allergy and Infectious Diseases (“NIAID”). 

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Forte entered into a business combination (“Merger”) between Forte Subsidiary, Inc. (“Forte Subsidiary”) and Tocagen, Inc. (“Tocagen”), a publicly traded biotechnology company. The merger closed on June 15, 2020, in which Telluride Merger Sub, Inc. a wholly-owned subsidiary of Tocagen, merged with and into Forte Subsidiary, with Forte Subsidiary surviving that Merger as a wholly-owned subsidiary of Tocagen. Immediately prior to the closing of the Merger, the then outstanding Tocagen common stocks were adjusted with a reverse split ratio of 1-for-15. At the closing of the Merger, each share of Forte Subsidiary’s common stock was converted into the right to receive approximately 3.1624 shares of Tocagen common stock (before giving effect to the reverse split). Immediately prior to closing of the Merger, Tocagen changed its name to Forte Biosciences, Inc. Our common stock is publicly traded on the Nasdaq Capital Market under the ticker symbol FBRX. Prior to the Merger, Forte Subsidiary was a privately held company incorporated in Delaware on May 3, 2017.

On September 4, 2020, we entered into an “at-the-market” equity offering program (“ATM Facility”), as amended on October 28, 2020, whereby we may from time to time offer and sell shares of our common stock up to an aggregate offering price of $10,000,000 during the term of the ATM Facility. We are not obligated to sell any Shares under the ATM Facility. The ATM Facility may be terminated at any time upon ten days’ prior notice, or at any time in certain circumstances, including the occurrence of a material adverse event.

On November 2, 2020, we closed an underwritten public offering of 1,614,035 shares of common stock, which included 210,526 shares sold upon the full exercise of the underwriters’ option to purchase additional shares, at a public offering price of $28.50 per share, less the underwriting discounts and commissions, pursuant to our existing shelf registration statement. Including the option exercise, the net proceeds of the offering, after deducting the underwriting discounts and commissions and before other offering expenses were approximately $43.0 million.

FB-401

We are developing a new approach to treating inflammatory skin disease using a topical live biotherapeutic, FB-401, which consists of three therapeutic strains of a commensal gram-negative bacteria, Roseomonas mucosa that were specifically selected for their impact on key parameters of inflammatory skin disease. Our extensive preclinical and mechanism of action data demonstrate that FB-401 improves atopic dermatitis disease parameters by driving tissue repair and anti-inflammation as well as suppressing potentially harmful bacteria like S. aureus. Specifically, Forte believes that FB-401:

To date, a Phase 1/2a study has been completed with pediatric and adult patients, demonstrating significant reduction in atopic dermatitis disease and pruritus, as well as control of S. aureus while tapering/eliminating steroid use.

In September 2020, Forte initiated a multi-center, placebo controlled clinical trial of FB-401 which is expected to enroll adolescent and adult AD subjects aged 2 years of age and older. For additional information about the trial, see ClinicalTrials.gov using the identifier NCT04504279.

In October 2020, the U.S. Food and Drug Administration (“FDA”) granted Fast Track Designation to FB-401 for the treatment of atopic dermatitis.

Intellectual Property

On June 18, 2020, we announced the issuance of our seventh U.S. patent (10,682,379), broadening protection to include methods for culturing Gram-negative bacteria from the skin. Together with the six U.S. patents previously issued, we now have extensive patent protection covering the composition and method of use of our technology focused on inflammatory skin conditions. We also have two pending foreign patent applications, both of which are international patent applications filed under the Patent Cooperation Treaty.

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In December 2017, Forte Subsidiary entered into an exclusive license agreement with DHHS, as amended in May 2020. Under the agreement, the DHHS granted Forte Subsidiary an exclusive, sublicensable, worldwide license to certain patent rights under which we may develop and commercialize pharmaceutical and biological compositions comprising Gram-negative bacteria for the topical treatment of dermatological diseases and conditions.

Revenue

We have no products approved for commercial sale and have not generated any revenue from product sales. In the future, we may generate revenue from product sales, royalties on product sales, license fees, milestones, or other upfront payments if we enter into any collaborations or license agreements. We expect that our future revenue will fluctuate from quarter to quarter for many reasons, including the uncertain timing and amount of any such payments and sales.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred to advance our product candidate, FB-401. Our research and development expenses include external research and development expenses incurred under arrangements with third parties, such as contract research and manufacturing organizations, consultants, and our scientific advisors.

We expense research and development costs as incurred. Nonrefundable advance payments for goods and services that will be used in future research and development activities are capitalized as an asset and expensed when the service has been performed or when the goods have been received.

We expect our research and development expenses to increase for the foreseeable future as we continue to conduct our ongoing regulatory and development activities, initiate new clinical trials and build our pipeline. The process of conducting clinical trials necessary to obtain regulatory approval is costly and time consuming. We may never succeed in achieving marketing approval for any of our product candidates.  Due to the numerous risks and uncertainties associated with product development, we cannot determine with certainty the duration, costs and timing of our clinical trials, and, as a result, the actual costs to complete our planned clinical trials may exceed the expected costs.

General and Administrative Expenses

General and administrative expenses consist primarily of professional fees for legal, auditing, tax and business consulting services, personnel expenses and travel costs. We expect that general and administrative expenses will increase in the future as we expand our operating activities. In addition, we expect to incur significant additional costs associated with being a SEC registrant. These increases will likely include legal fees, costs associated with Sarbanes-Oxley compliance, accounting fees, directors’ and officers’ liability insurance premiums, and other expenses.

Critical Accounting Policies and Estimates

Critical accounting policies are those that, in management’s view, are most important in the portrayal of our financial condition and results of operations. Aside from the changes disclosed in Note 2 to the Notes to Condensed Consolidated Financial Statements included in Item 1, Part I of this Quarterly Report on Form 10-Q, management believes there have been no material changes during the three months ended September 30, 2020 to the critical accounting policies discussed in the Company’s Management’s Discussion and Analysis of Financial Condition and Results of Operations section of Tocagen’s Registration Statement on Form S-4 as filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 25, 2020, as amended and declared effective by the SEC on May 13, 2020.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and judgments. We based our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. These estimates

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and assumptions form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Actual results may differ materially from these estimates.

COVID-19

The pandemic caused by an outbreak of a new strain of coronavirus, or COVID-19, has resulted, and is likely to continue to result, in significant national and global economic disruption and may adversely affect our operations. We are actively monitoring the impact of COVID-19 and the possible effects on its financial condition, liquidity, operations, suppliers, industry, and workforce. However, the full extent, consequences, and duration of the COVID-19 pandemic and the resulting impact on us cannot currently be predicted. We will continue to evaluate the impact that these events could have on our operations, financial position, and the results of operations and cash flows during fiscal year 2020 and beyond.

Results of Operations

Comparison of Three and Nine Months Ended September 30, 2020 and 2019

The following tables summarize our results of operations for the three and nine months ended September 30, 2020 and 2019 (in thousands):

Research and Development Expenses

Research and development expenses were $3.7 million for the three months ended September 30, 2020, compared to $0.4 million during the same period in 2019. The increase of $3.3 million was primarily due to an increase of approximately $2.8 million of manufacturing, clinical and regulatory expenses related to the advancement of our FB-401 program and an increase of approximately $0.5 million in payroll and related expenses due to additional research and development headcount in 2020.

Research and development expenses were $7.0 million for the nine months ended September 30, 2020, compared to $1.5 million during the same period in 2019. The increase of $5.5 million was primarily due to an increase of approximately $4.9 million of manufacturing, clinical and regulatory expenses related to advancement of our FB-401 program, and an increase of approximately $0.6 million in payroll and related expenses due to additional research and development headcount in 2020.

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General and Administrative Expenses

General and administrative expenses were $1.3 million for the three months ended September 30, 2020 compared to $0.3 million for the same period in 2019. This increase of $1.0 million was primarily due to an increase of approximately $0.5 million in compensation related expenses due to increased headcount during 2020, an increase of $0.4 million in professional fees, and an increase of $0.1 million in insurance and other expenses.

General and administrative expenses were $2.8 million for the nine months ended September 30, 2020 compared to $1.0 million for the same period of 2019. This increase of $1.8 million was primarily due to an increase of $0.9 million in legal and professional expenses, an increase of $0.6 million in compensation expense due to increased headcount during 2020, and an increase of $0.3 million in insurance and other expenses as a result of being a public company.  

In-process research and development assets acquired

In connection with the Merger, we recognized a charge of $32.1 million of acquired in-process research and development expenses for assets with no alternative use for the nine months ended September 30, 2020.

Liquidity and Capital Resources

We have no products approved for commercial sale and have not generated any revenue from product sales. We have never been profitable and have incurred operating losses in each year since inception. Our net losses were approximately $41.9 million for the nine months ended September 30, 2020, which includes a $32.1 million charge for in-process research and development expenses. As of September 30, 2020, we had an accumulated deficit of approximately $46.9 million. Substantially all of our operating losses, excluding the charge of in-process research and development expenses, resulted from expenses incurred in connection with our research and development programs and from general and administrative costs associated with our operations.

We expect to incur significant expenses and increasing operating losses for the foreseeable future as we continue the clinical development of FB-401. In addition, operating as a SEC registrant may involve the hiring of additional financial and other personnel, upgrading financial information systems, and incurring costs associated with operating as a public company. We expect that our operating losses will fluctuate significantly from quarter-to-quarter and year-to-year due to the timing of clinical development programs.

Prior to the closing of the Merger, we had raised net cash proceeds of approximately $9.9 million in a Series A financing round from private placements of preferred stock. In connection with the Merger, we issued 3,804,817 shares of our common stock (after giving effect to the exchange ratio and reverse split), and warrants to purchase 2,752,546 shares of our common stock (after giving effect to the exchange ratio and reverse split) for gross proceeds of $19.4 million. In addition, on June 16, 2020, we issued an additional 411,112 shares of common stock for gross proceeds of $4.6 million.  

On September 4, 2020, as amended on October 28, 2020, we entered into an “at-the-market” equity offering program (“ATM Facility”) whereby we may from time to time offer and sell shares of our common stock up to an aggregate offering price of $10.0 million during the term of the ATM Facility. We are not obligated to sell any shares under the ATM Facility. The ATM Facility may be terminated at any time upon ten days’ prior notice, or at any time in certain circumstances, including the occurrence of a material adverse event. The Company has not issued any common stock under the ATM Facility as of the filing date of this Form 10-Q.

On November 2, 2020, we closed an underwritten public offering of 1,614,035 shares of common stock, which included 210,526 shares sold upon the full exercise of the underwriters’ option to purchase additional shares, at a public offering price of $28.50 per share, less the underwriting discounts and commissions, pursuant to our existing shelf registration statement. Including the option exercise, the net proceeds of the offering, after deducting the underwriting discounts and commissions and before other offering expenses were approximately $43 million.

The Company had cash of approximately $20.2 million as of September 30, 2020.  The Company believes that its existing cash, additional capital from the ATM Facility and the recent underwritten public offering on November 2, 2020 which raised net proceeds of approximately $43.0 million after deducting underwriting discounts and commissions, and before other offering expenses, will be sufficient to allow the Company to fund its operations for

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at least 12 months from the filing date of this Form 10-Q. However, we may not have sufficient funds to reach commercialization and we expect to require substantial additional capital to continue and complete our clinical development activities and fund our operations. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our development, regulatory and commercialization efforts. Failure to raise capital as and when needed, on favorable terms, if at all, would have a negative impact on our financial condition and our ability to develop and commercialize our product candidates.

The following table shows a summary of our cash flows for the nine months ended September 30, 2020 and 2019 (in thousands):

Operating Activities

Cash used in operating activities was $14.6 million for the nine months ended September 30, 2020 compared to $2.1 million for the same period of 2019. The increase of $12.5 million was principally due to increases of $7.8 million in manufacturing and clinical activity related to the development of FB-401, our product candidate, additional headcount, professional, legal and other administrative costs, and approximately $4.7 million of legal and professional expenses related to the Merger and Tocagen wind down costs.

Investing activities

Cash provided from investing activities of $3.6 million for the nine months ended September 30, 2020 consisted primarily of cash acquired from the reverse merger with Tocagen, Inc. that closed on June 15, 2020. The cash used in investing activates for the nine months ended September 30, 2019 consists of cash paid for the acquisition of property and equipment.

Financing Activities

Net cash provided by financing activities was $24.3 million for the nine months ended September 30, 2020, which was primarily from net proceeds of $24.0 million received from the sale of shares of the company’s common stock and $0.3 million of proceeds received from the exercise of employee stock options. Net cash provided by financing activities for the nine months ended September 30, 2019 of $4.9 million was from net proceeds received from the sale of our preferred stock.  

Future Capital Requirements

We have not generated any revenue from product sales. We do not know when, or if, we will generate any revenue from product sales. We do not expect to generate any revenue from product sales unless and until we obtain regulatory approval and commercialize our product candidates. At the same time, we expect our expenses to increase in connection with our ongoing development and manufacturing activities, particularly as we continue the research, development, manufacture and clinical trials of, and seek regulatory approval for FB-401. Immediately prior to the closing of the Merger, we received gross proceeds of $19.4 million from the issuance of our common stock. Immediately after the closing the Merger, we raised gross proceeds of $4.6 million from the issuance of our common stock and in November 2020 we raised net proceeds after deducting underwriting discounts and commissions and before other offering expenses of approximately $43.0 million from the underwritten public

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offering referenced above. We expect to incur additional costs associated with operating as a SEC registrant. We anticipate that we will need substantial additional funding in connection with our continuing operations.

As of September 30, 2020, we had approximately $20.2 million in cash. On November 2, 2020, the Company issued 1,614,035 shares of its common stock at $28.50 per share pursuant to a public offering. Net proceeds to the Company from the offering were $43.0 million after deducting underwriting discounts and commissions of approximately $3.0 million, and before offering expenses payable by the Company. We expect our research and development expenses to substantially increase in connection with our ongoing activities, particularly as we continue to advance FB-401 in the clinic.

Our future capital requirements are difficult to forecast and will depend on many factors, including but not limited to:

If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Any future debt financing may impose upon us covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. Any equity or debt financing may contain terms that are not favorable to us or our stockholders. If we are unable to raise additional funds when needed, we may be required to delay, reduce or terminate some or all of our development programs and clinical trials. We may also be required to sell or license to other parties rights to develop or commercialize our drug candidates that we would prefer to retain.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.

Contractual Obligations

See Note 5 to the Condensed Consolidated Financial Statements included elsewhere in this Form 10-Q.

Recent Accounting Standards

See Note 2 to the Condensed Consolidated Financial Statements included elsewhere in this Form 10-Q.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Qualitative and Quantitative Disclosures About Market Risk

We are a smaller reporting company as defined by Rule 12b‑2 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are not required to provide the information required under this item.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a‑15(e) and 15d‑15(e) under the Exchange Act, as of the end of the period covered by this quarterly report on Form 10-Q. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2020.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the quarter ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that some of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.

Part II. OTHER INFORMATION

Item 1: Legal Proceedings

From time to time, we may become involved in various claims and legal proceedings. Regardless of outcome, litigation and other legal and administrative proceedings can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. We are not currently a party to any material pending litigation or other material legal proceeding.

Item 1A:  Risk Factors

You should consider carefully the following information about the risks described below, together with the other information contained in this Quarterly Report on Form 10-Q and in our other public filings, in evaluating our business. If any of the following risks actually occurs, our business, financial condition, results of operations, and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock would likely decline.

Our ability to execute on our business strategy is subject to a number of risks, which are discussed more fully below in this section. You should carefully consider these risks before making an investment in our common stock. These risks include, among others, the following:

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