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Nov. 8, 2021, 9:04 a.m. EST

10-Q: FORTE BIOSCIENCES, INC.

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(EDGAR Online via COMTEX) -- 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 elsewhere in the Form 10-Q and in our Form 10-K as filed with the Securities and Exchange Commission, or SEC, on March 16, 2021. 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

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; 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 Form 10-K filed with the SEC on March 16, 2021. 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. and its subsidiaries ( www.fortebiorx.com ) ("Forte", "we", "our") is a biopharmaceutical company that had been advancing through clinical trials its product candidate, FB-401, which is a topical live biotherapeutic for the treatment of inflammatory skin diseases, including pediatric and adult patients with atopic dermatitis ("AD"). FB401 was developed in collaboration with the National Institutes of Health ("NIH"), and the National Institute of Allergy and Infectious Diseases ("NIAID"). On September 2, 2021, Forte announced that the clinical trial of FB-401 for the treatment of AD failed to achieve statistical significance for its primary endpoint of EASI-50 (the proportion of patients with at least a 50% improvement in atopic dermatitis disease severity as measured by EASI). Following the announcement of the FB-401 trial results, our board of directors continues to evaluate plans for FB-401 and also commenced a process of evaluating strategic alternatives to maximize stockholder value. We have engaged a financial advisory firm to help explore our available strategic alternatives, including a possible merger, business combination, asset acquisitions or sales, collaboration or licensing arrangements.

On June 15, 2020, Forte completed a business combination ("Merger") with Tocagen, Inc. ("Tocagen"), a publicly traded biotechnology company, with Forte being the surviving business. As part of the Merger, the then outstanding Tocagen common stock was adjusted with a reverse split ratio of 1-for-15 and each share of Forte's common stock was converted into the right to receive approximately 3.1624 shares of Tocagen common stock (prior to giving effect to the reverse split). Immediately prior to the closing of the Merger, the Tocagen legal entity that survived the Merger 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 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 did not issue any shares of common stock under the ATM Facility which expired in May 2021. We subsequently filed a new "shelf" registration statement on Form S-3 that went effective in June 2021 which will allow us to raise up to $300 million in additional capital. We incurred $106.4 thousand in offering costs related to this shelf registration statement which is recorded in the condensed consolidated balance sheet as of September 30, 2021. We have not issued any securities under the new shelf registration statement 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 at $28.50 per share, which included the over-allotment option exercised by the underwriters to purchase an additional 210,526 shares. Total net proceeds were $42.7 million after deducting underwriting discounts and other offering expenses of approximately $3.3 million.

We issued 673,463, 560,402 and 655,409 shares of our common stock pursuant to cashless exercises by certain warrant holders in February, June and September of 2021, respectively.

Intellectual Property

We own or exclusively license eleven U.S. patents which provide extensive protection covering the composition, manufacture, and method of use of our Gram-negative bacteria technology which is focused on inflammatory skin conditions.

In December 2017, Forte entered into an exclusive license agreement with the Department of Health and Human Services ("DHHS"), as amended in May 2020. Under the agreement, the DHHS granted Forte an exclusive, sublicensable and 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.

Components of Operating Results

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 costs are expensed as incurred. Research and development costs consist primarily of salaries and benefits of research and development personnel and costs related to research activities, preclinical studies, clinical trials, drug manufacturing, wind down costs incurred following the announcement of our unfavorable clinical trial results and the write-off of manufacturing property and equipment. Non-refundable advance payments for goods or services that will be used in future research and development activities are deferred

and capitalized and are only expensed when the goods have been received or when the service has been performed rather than when the payment is made.

Drug manufacturing and clinical trial costs are a component of research and development expenses. The Company expenses costs for its drug manufacturing activities performed by Contract Manufacturing Organizations ("CMOs"), costs for its preclinical and clinical trial activities performed by Contract Research Organizations ("CROs") and other service providers, as they are incurred, based upon estimates of the work completed over the life of the individual study in accordance with associated agreements. The Company uses information it receives from internal personnel and outside service providers to estimate the percentage of completion and therefore the expense to be incurred.

The Company intends to significantly reduce its research and development expenses as it considers its future plans regarding FB-401 and strategic alternatives.

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 to incur significant costs associated with being a SEC registrant such as legal fees, costs associated with Sarbanes-Oxley compliance, accounting fees, directors' and officers' liability insurance premiums, and other expenses. Our general and administrative expenses may increase due to increases in professional and advisory fees as we evaluate our strategic alternatives.

Acquired In-Process Research and Development Expense

The Company acquired in-process research and development assets in connection with its Merger with Tocagen. As the acquired in-process research and development assets were deemed to have no current or alternative future use, an expense of $32.1 million was recognized in the condensed consolidated statements of operations on the Merger date of June 15, 2020.

Other Income (Expense), Net

Other income (expense), net, consists of foreign exchange gains or losses and franchise taxes, partially offset by interest earned on our cash and cash equivalents balances.

Critical Accounting Policies and Estimates

There have been no significant changes during the nine months ended September 30, 2021 to our critical accounting policies, significant judgments and estimates as disclosed in our management's discussion and analysis of financial condition and results of operations included in our Annual Report on our Form 10-K for the year ended December 31, 2020 as filed with the SEC on March 16, 2021.

COVID-19

The pandemic caused by an outbreak of a new strain of coronavirus, or COVID-19 and its variants, 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 our 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, results of operations and cash flows during the remainder of fiscal year 2021.







        Results of Operations
        Comparison of Three and Nine months ended September 30, 2021 and 2020
        The following tables summarize our results of operations for the three and nine
        months ended September 30, 2021 and 2020 (in thousands):
                                                       Three Months Ended
                                                          September 30,
                                                      2021             2020         Change in $     Change in %
        Operating expenses:
        Research and development                   $    5,656       $    3,688     $       1,968              53 %
        General and administrative                      2,043            1,320               723              55 %
        Total operating expenses                        7,699            5,008             2,691              54 %
        Other income (expense), net                       (52 )            (92 )              40             -43 %
        Net loss                                   $   (7,751 )     $   (5,100 )   $      (2,651 )            52 %
                                                   Nine Months Ended September
                                                               30,
                                                      2021             2020         Change in $     Change in %
        Operating expenses:
        Research and development                   $   12,501       $    6,979     $       5,522              79 %
        General and administrative                      5,686            2,753             2,933             107 %
        In-process research and development
        assets acquired                                     -           32,057           (32,057 )          -100 %
        Total operating expenses                       18,187           41,789           (23,602 )           -56 %
        Other income (expense), net                      (180 )           (122 )             (58 )            48 %
        Net loss                                   $  (18,367 )     $  (41,911 )   $      23,544             -56 %
        


Research and Development Expenses

Research and development expenses were $5.7 million for the three months ended September 30, 2021, compared to $3.7 million for the same period in 2020. The increase of $2.0 million was primarily due to a net increase of approximately $1.5 million in manufacturing, clinical, regulatory and other expenses as we advanced our FB-401 program through US FDA clinical trials, the subsequent wind down costs incurred following the announcement of our unfavorable clinical trial results, and an increase of approximately $0.5 million in payroll and related expenses including stock-based compensation expense as a result of increased headcount

Research and development expenses were $12.5 million for the nine months ended September 30, 2021, compared to $7.0 million for the same period in 2020. The increase of $5.5 million was primarily due to a net increase of approximately $3.2 million in manufacturing, clinical, regulatory and other expenses as we advanced our FB-401 program through US FDA clinical trials, the subsequent wind down costs incurred following the announcement of our unfavorable clinical trial results, and an increase of approximately $2.3 million in payroll and related expenses including stock-based compensation expense as a result of increased headcount.

The Company intends to significantly reduce its research and development expenses as it considers its future plans regarding FB-401 and strategic alternatives.

General and Administrative Expenses

General and administrative expenses were $2.0 million for the three months ended September 30, 2021, compared to $1.3 million for the same period in 2020. The increase of $0.7 million was primarily due to an increase

of approximately $0.9 million in payroll expenses including stock-based compensation expense, partially offset by a $0.2 million reduction in legal, professional, insurance and other expenses.

General and administrative expenses were $5.7 million for the nine months ended September 30, 2021, compared to $2.8 million for the same period in 2020. The increase of $2.9 million was primarily due to an increase of approximately $2.1 million in payroll and related expenses including stock-based compensation expense as we increased our headcount and an increase of approximately $0.8 million in legal, professional, insurance and other expenses as a result of being a public company.

Our general and administrative expenses may increase due to increases in professional and advisory fees as we evaluate our strategic alternatives.

In-process research and development assets acquired

In connection with the Merger, we recognized a charge of $0 and $32.1 million of acquired in-process research and development expenses for assets with no alternative use for the three and nine months ended September 30, 2020, respectively. There was no corresponding expense in the three or nine months ended September 30, 2021.

Other Income (Expense), net

The net decrease in other expense of approximately $40 thousand for the three months ended September 30, 2021, compared with the same period in the prior year were primarily due to reduced foreign currency transaction losses related to contracts denominated in currencies other than the U.S. dollar due to differences between the exchange rates on the billing and payment dates, partially offset by higher franchise taxes.

The net increase in other expense of approximately $58 thousand for the nine months ended September 30, 2021, compared with the same period in the prior year were primarily due to an increase in franchise taxes partially offset by reduced foreign currency transaction losses.

Liquidity and Capital Resources

We have no products approved for commercial sale and have not generated any revenue from product sales or out-licenses. We have never been profitable and have incurred operating losses each year since inception. Our net loss was approximately $18.4 million for the nine months ended September 30, 2021. As of September 30, 2021, we had an accumulated deficit of approximately $69.8 million. On September 2, 2021, we announced that the clinical trial of FB-401 for the treatment of AD failed to meet statistical significance for its primary endpoint. Following the announcement of the FB-401 trial results, our board of directors continues to evaluate plans for FB-401 and also commenced a process of evaluating strategic alternatives to maximize stockholder value.

We expect to incur expenses and operating losses for the foreseeable future as we evaluate future plans for FB-401 and our strategic alternatives.

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 and warrants ("Concurrent Financing Warrants") to purchase 2,752,546 shares of our common stock (in each case, after giving effect to the exchange ratio and reverse split contemplated by the Merger) for net proceeds of $19.4 million. In addition, on June 16, 2020, we issued an additional 411,112 shares of common stock for net proceeds of $4.6 million.

On September 4, 2020, we entered into an "at-the-market" equity offering program ("ATM Facility"), as amended on October 28, 2020, whereby we could 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 did not issue any shares of common stock under the ATM Facility which expired in May 2021. We subsequently filed a new "shelf" registration statement on Form S-3 that went effective in June 2021 which will allow us to raise up to $300 million in additional capital. We incurred $106.4 thousand in offering costs related to this shelf registration statement which

is recorded in Other Assets in the condensed consolidated balance sheet for the period ended September 30, 2021. We have not issued any securities under the new shelf registration statement 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 at $28.50 per share, which includes the over-allotment option exercised by the underwriters to purchase an additional 210,526 shares. Total net proceeds were $42.7 million after deducting underwriting discounts and other offering expenses of approximately $3.3 million.

We issued 673,463, 560,402 and 655,409 shares of our common stock pursuant to cashless exercises by certain warrant holders in February, June and September of 2021, respectively. As of September 30, 2021, no Concurrent Financing Warrants were outstanding.

We had cash and cash equivalents of approximately $45.7 million as of September 30, 2021. We believe that our existing cash and cash equivalents will be sufficient to allow us to fund our operations for at least 12 months from the filing date of this Form 10-Q.

Future Capital Requirements

We have not generated any revenue from product sales or from out-licensing. We do not know when, or if, we will generate any revenue. We expect to incur ongoing expenses as we evaluate our plans for FB-401 and strategic alternatives after we announced on September 2, 2021 that the clinical trial of FB-401 for the treatment of atopic dermatitis failed to meet statistical significance for its primary endpoint. We have paused further advancement of the development of FB-401 and have no other product candidate undergoing clinical trials. Our future capital requirements are difficult to forecast and will depend on many factors, including but not limited to the terms and timing of any strategic alternatives including a merger or business combination, asset acquisitions or sales, collaborations or licensing arrangements.

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.

See the "Risk Factors" section on this Form 10-Q for additional risks associated with our substantial capital requirements.

The following table shows a summary of our cash flows for the nine months ended September 30, 2021 and 2020 (in thousands):







                                                                    Nine Months Ended September 30,
                                                                      2021                   2020
        Net cash (used in) provided by:
        Operating activities                                    $        (13,095 )     $        (14,620 )
        Investing activities                                                   -                  3,582
        Financing activities                                                  (5 )               24,274
        Net (decrease) increase in cash and cash equivalents    $        (13,100 )     $         13,236
        


Operating Activities

Net cash used in operating activities for the nine months ended September 30, 2021 was $13.1 million and consisted primarily of a net loss of $18.4 million adjusted for non-cash items of $3.1 million which were primarily related to stock-based compensation and decreases in net operating assets of $2.2 million.

Net cash used in operating activities for the nine months ended September 30, 2020 was $14.6 million and consisted primarily of a net loss of $41.9 million adjusted for non-cash items primarily related to $30.9 million of IPR&D write off in connection with the Merger and $0.4 million for stock-based compensation, and increases in net operating assets of $4.0 million.

Investing activities

Cash provided from investing activities for the nine months ended September 30, 2020 was $3.6 million, which primarily consisted of cash acquired from the reverse merger with Tocagen, Inc. that closed on June 15, 2020.

Financing Activities

Net cash used by financing activities of $5 thousand for the nine months ended September 30, 2021 was primarily from $66 thousand in additional fees paid for our shelf registration statement partially offset by net proceeds of $61 thousand received from the exercise of stock options.

Net cash provided by financing activities of $24.3 million for the nine months ended September 30, 2020 was primarily from net proceeds of $24.0 million received from the sale of the company's common stock and $0.3 million of proceeds received from the exercise of stock options

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.

Nov 08, 2021

COMTEX_396513934/2041/2021-11-08T09:03:38

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