FBRX Forte Biosciences Inc

1. Organization and Description of Business

Forte Biosciences, Inc. (www.fortebiorx.com) and its subsidiaries, referred to herein as the “Company” or "Forte", is a clinical-stage biopharmaceutical company focused on developing its FB102 program which the Company believes has potentially broad applications for autoimmune and autoimmune-related diseases, including graft-versus-host disease ("GvHD"). FB102 is currently in a Phase 1 clinical trial.

The Company merged with Tocagen, Inc. ("Merger"), a publicly traded biotechnology company, on June 15, 2020. Prior to the Merger, Forte was a privately held company incorporated in Delaware on May 3, 2017. The Company's headquarters is in Dallas, Texas. The Company’s common stock is traded on the Nasdaq stock exchange under the ticker symbol “FBRX”‌.

Liquidity and Risks

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The condensed consolidated financial statements do not reflect any adjustments relating to the recoverability and reclassification of assets and liabilities that might be necessary if the Company is unable to continue as a going concern. Since inception, the Company has incurred losses and negative cash flows from operations. As of March 31, 2024, the Company had an accumulated deficit of $125.9 million. The Company used $6.7 million of cash in operating activities during the three months ended March 31, 2024. Management expects to continue to incur additional losses in the foreseeable future as the Company focuses its development efforts on advancing FB102 through clinical trials.

The Company had cash and cash equivalents of approximately $30.4 million as of March 31, 2024. The Company’s cash and cash equivalents are held at financial institutions and exceed federally insured limits. The Company believes that its existing cash and cash equivalents will be sufficient to allow the Company to fund its operations for at least 12 months from the filing date of this Form 10-Q.

The Company will continue to need to raise additional capital or obtain financing from other sources. Management may fund future operations through the sale of equity and debt financings and may also seek additional capital through arrangements with strategic partners or other sources. There can be no assurance that additional funding will be available on terms acceptable to the Company, if at all. If the Company is unable to raise additional funding to meet its working capital needs in the future, it may be forced to delay or reduce the scope of its research and development programs and/or limit or cease its operations. The Company's ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the military conflicts in Eastern Europe, the Middle East, and otherwise.

There are numerous risks and uncertainties associated with pharmaceutical development and the Company is unable to predict the timing or amount of increased expenses on the development of future product candidates or when or if it will start to generate revenues. Even if the Company does generate revenues, it may not be able to achieve or maintain profitability. If the Company fails to become profitable or is unable to sustain profitability on a continuing basis, then it may be unable to continue its operations at planned levels and may be forced to reduce its operations.

Businesses throughout our industry have been and will continue to be impacted by a number of challenging and unexpected global and national events and circumstances that continue to evolve, including without limitation the COVID-19 pandemic, the military conflicts in Ukraine and the Middle East, increased economic uncertainty, inflation, rising interest rates, recent and any potential future financial institution failures, and other geopolitical tensions. The extent of the impact of these events and circumstances on our business, operations, development

timelines and plans remains uncertain, and will depend on certain developments, including the duration and scope of the events and their impact on the Company's development activities, third parties with whom it does business, as well as its impact on regulatory authorities and its key scientific and management personnel. The Company has been and continues to actively monitor the potential impacts that these various events and circumstances may have on its business and the Company takes steps, where warranted, to minimize any potential negative impacts on its business resulting from these events and circumstances.

2. Summary of Significant Accounting Policies

The preparation of the Company’s condensed consolidated financial statements requires management to make estimates and assumptions that impact the reported amounts of assets, liabilities, expenses and the disclosure of contingent assets and liabilities in the Company’s condensed consolidated financial statements and accompanying notes. Significant management estimates that affect the reported amounts of assets, liabilities and expenses include stock-based compensation expense and accruals for clinical trials and drug manufacturing. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may ultimately materially differ from these estimates and assumptions.

3. Balance Sheet Components

Prepaid Expenses and Other Current Assets

Property and Equipment, Net

Other Assets

Accrued Liabilities

4. Fair Value

The Company measures its financial assets and liabilities at fair value, which is defined as the exit price, or the amount that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The Company uses the following three-level valuation hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs to value its financial assets and liabilities:

Money market funds are valued at the closing price reported by the fund sponsor from an actively traded exchange. Money market funds and U.S. Treasury bills were included as cash and cash equivalents in the condensed consolidated balance sheets for the periods presented. The Company obtains the fair value of its Level 2 cash equivalents from third-party pricing services. The pricing services utilize industry standard valuation models whereby all significant inputs, including benchmark yields, reported trades, broker/dealer quotes, issuer spreads, bids, offers, or other market-related data, are observable.

The following tables provides a summary of the assets that are measured at fair value on a recurring basis as of March 31, 2024 and December 31, 2023 (in thousands):

5. Available-for-sale Securities

As of March 31, 2024 and December 31, 2023, the Company classified available-for-sale securities as cash equivalents in the condensed consolidated balance sheets because the original maturity dates were less than three months as of the date of the purchases. As of March 31, 2024 the Company has one U.S. treasury bill security in an unrealized loss position.

6. Commitments and Contingencies

Concentrations of Credit Risk

Bank accounts in the United States are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. The Company’s cash accounts significantly exceed FDIC limits.

Indemnifications

As permitted under Delaware law, the Company indemnifies its officers, directors, and employees for certain events and occurrences while the officer, or director is, or was, serving at the Company’s request in such capacity.

Lease Agreements

The Company has entered into month-to-month lease agreements for certain office and laboratory space. The lease agreements are cancellable by the Company at any time with a 30-day notice. Total rent expense for all locations for the three months ended March 31, 2024 was $70 thousand. Total rent expense for all locations for the three months ended March 31, 2023 was $7 thousand.

Clinical and Preclinical Services

The Company has entered into various agreements with third-party vendors for preclinical and clinical services. The estimated remaining commitments as of March 31, 2024 under these agreements were approximately $357 thousand. The Company entered into agreements with a clinical research organization ("CRO") in 2023 for

Phase 1 clinical trials of FB102, its product candidate. The Company has agreed to pay third-party costs associated with those agreements. The CRO agreements are subject to termination at any time, with or without cause, by the Company, in which case only costs earned or non-cancellable to date of termination would remain subject to reimbursement.

Legal Proceedings

Camac Fund L.P. v. Forte Biosciences Inc., C.A. No. 2022-1075-NAC (Del. Ch.)

In November 2022, a stockholder of the Company, Camac Fund LP, filed a complaint in the Delaware Court of Chancery seeking to access certain books and records of the Company pursuant to Section 220 of the Delaware General Corporation Law, as well as to seek attorney fees (the “Books and Records Action”). The Books and Records Action, which is captioned Camac Fund L.P. v. Forte Biosciences Inc., C.A. No. 2022-1075-NAC, remains pending. The Company believes that it has meritorious defenses to the claims asserted in the Books and Records Action and intends to vigorously defend against it.

Camac Fund, LP v. Paul A. Wagner, et al., C.A. No. 2023-0817-MTZ (Del. Ch.)

On August 10, 2023, Camac Fund LP filed a complaint (the “Complaint”), captioned Camac Fund, LP v. Paul A. Wagner, et al., C.A. No. 2023-0817-MTZ, in the Delaware Court of Chancery, against the members of the Company’s Board of Directors (the “Directors”) and entities affiliated with certain of the Company’s investors (the “Investors”) and naming the Company as nominal defendant. The Complaint alleged that the Directors breached their fiduciary duties by causing the Company to enter into a July 31, 2023 private placement (the “Private Placement”), which raised approximately $25 million for the Company from the Investors and certain of the Company’s executives and directors, and by scheduling the Company’s 2023 annual meeting of stockholders (the “Annual Meeting”) for more than thirteen months after its 2022 annual meeting. The Complaint also alleged the Investors aided and abetted the alleged breaches of fiduciary duty by the Directors. Plaintiff also filed a motion for preliminary injunction and motion to expedite seeking a hearing on its preliminary injunction motion on an expedited basis. The Complaint and motions sought declarations that the Directors breached their fiduciary duties and that the Investors aided and abetted them, to enjoin defendants from counting votes cast by the Investors’ shares obtained through the private placement at the Annual Meeting or any subsequent director election, and money damages in an unspecified amount.

On August 15, 2023, the Company, the Directors, and certain Investors filed oppositions to Plaintiff’s motion to expedite. On August 16, 2023, the Company, the Directors, and certain Investors filed motions to dismiss the Complaint. On August 17, 2023, the Court held a hearing at which it granted the motion to expedite in part but declined to schedule a preliminary injunction hearing prior to the Annual Meeting and determined that Defendants could brief their motions to dismiss and be heard on an expedited schedule. The Court determined that discovery could proceed while the motions to dismiss are pending and directed the parties to confer regarding a schedule for further proceedings.

On September 1, 2023, Plaintiff voluntarily dismissed its claims against the Investors. On September 7, 2023, the parties agreed to a schedule for briefing the motion to dismiss filed by the Directors and the Company (together, hereinafter, “Defendants”), with the understanding that the schedule would change if Plaintiff amended its Complaint rather than file a brief in opposition to Defendants’ motion to dismiss, and the parties also agreed to stay discovery pending resolution of the motion to dismiss. On September 19, 2023, the Company held its Annual Meeting at which, among other things, the Company’s two director nominees were re-elected and Plaintiff’s two director nominees were not elected. On September 21, 2023, Defendants filed their opening brief in support of their motion to dismiss.

On October 20, 2023, Plaintiff filed an amended class action and derivative complaint (the “Amended Complaint”) against the Directors and naming the Company as a nominal defendant. The Amended Complaint makes many of the same allegations as the original Complaint. The Amended Complaint also purports to bring a claim on behalf of a class of holders of the Company’s common stock as of August 10, 2023, the record date for the Annual Meeting. The class claim alleges the Directors breached their fiduciary duties by causing the Company to

enter into the Private Placement, setting the Annual Meeting record date for a date after the Private Placement closed, and holding the Annual Meeting more than thirteen months after the 2022 annual meeting. The Amended Complaint purports to bring a second claim for “wrongful dilution” derivatively on behalf of the Company. The derivative claim alleges the Directors “wrongfully diluted” Plaintiff and other stockholders by causing the Company to enter into the Private Placement in bad faith and for the purpose of entrenchment and not permitting Plaintiff and other stockholders to participate. The Amended Complaint seeks declarations that the Directors breached their fiduciary duties, that the votes cast at the Annual Meeting by the shares acquired in the Private Placement should be excluded from the final voting results, that Plaintiff’s two director nominees at the Annual Meeting were elected and that the Company’s nominees were not elected, as well as an order requiring the Company’s board of directors to recognize Plaintiff’s nominees as validly elected and remove the Company’s nominees from their positions on the board of directors. The Amended Complaint also seeks an order that the Company hold an annual meeting of stockholders in 2024 within thirteen months of the 2023 Annual Meeting, that the shares acquired in the Private Placement are enjoined from voting at the 2024 annual meeting, and awarding money damages in an unspecified amount.

On November 3, 2023, Defendants filed a motion to dismiss the Amended Complaint, which was fully briefed in advance of a hearing before the Court on the motion on February 14, 2024. On April 15, 2024, the Court issued an oral ruling denying Defendants’ motion to dismiss. Discovery is currently ongoing, and trial is scheduled for July 29-31, 2024, in Wilmington, Delaware. The Company believes the Plaintiff’s claims are baseless and intends to vigorously defend against them.

Forte Biosciences, Inc. v. Camac Fund, LP, et al., Case No. 3:23-cv-02399-N (N.D. Tex.)

On October 28, 2023, the Company filed a complaint (the “Complaint”), captioned Forte Biosciences, Inc. v. Camac Fund, LP, et al., Case No. 3:23-cv-02399-N, against Camac Fund, LP, Camac Partners, LLC, Camac Capital, LLC, and Eric Shahinian (collectively, “Camac”), as well as against Michael G. Hacke, Chris McIntyre, McIntyre Partnerships, LP, McIntyre Capital GP, LLC, McIntyre Capital Management, LP, McIntyre Capital Management GP, LLC, ATG Fund II LLC, ATG Capital Management, LLC, Gabriel Gliksberg, Funicular Funds, LP, The Funicular Fund, LP, Cable Car Capital LLC, Jacob Ma-Weaver, BML Investment Partners, L.P., BML Capital Management, LLC, and Braden M. Leonard (collectively with Camac, “Defendants”). The Complaint alleges that Defendants have been and are engaged in a campaign of deceit and misinformation in an attempt to force the Company to liquidate for Defendants’ benefit and to the detriment of the Company and other stockholders.

The Company brings claims against Camac and certain other Defendants for issuing false and misleading proxy statements in connection with their attempts to elect two members of Forte’s board at the Company’s 2023 annual meeting in violation of Section 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”). The Company also brings claims against Defendants under Exchange Act Section 13(d) for failure to file and for filing misleading Schedule 13Ds, including because Defendants failed to disclose that they were coordinating as a group. The Company further alleges that Defendants tortiously interfered with Forte’s prospective business relationships, including by smearing the Company and manipulating the market for its stock to dissuade prospective investors from investing in the Company. The Complaint seeks declarations that Defendants violated Sections 14(a) and 13(d) of the Exchange Act, an order directing Defendants to file true and correct proxy statements and Schedule 13Ds, an injunction prohibiting Defendants from issuing future materially misleading and false public filings, and money damages to compensate the Company for Defendants’ violations of law.

Defendants filed a Motion to Dismiss the Complaint on January 16, 2024. On February 6, 2024, the Company filed an Amended Complaint. The Amended Complaint makes many of the same allegations as the original Complaint and alleges two additional federal claims, one brought under Section 16(b) of the Exchange Act for recovery of short swing profits of the Defendants, and the other for declaratory relief under 28 U.S.C. § 2201. On February 15, 2024, the Company also filed a Motion for Relief from the PSLRA Discovery Stay and Speedy Hearing on Declaratory Judgment Act Claim, asking the Court to allow the Company to conduct limited, targeted discovery of documents and communications that demonstrate the full scope of the relationship between all Defendants and for an accounting of all short swing profits and trading records for all shares purchased or sold during the relevant time frame so the Company can fully account for short swing profits. Defendants filed a Motion to Dismiss the Amended Complaint on March 5, 2024, and on March 7, 2024, Defendants also filed a response in opposition to the Company’s Motion for Relief from the PSLRA Discovery Stay and Speedy Hearing on Declaratory Judgment Act. On March 21, 2024, the Company filed a Reply in support of the Motion for Relief from

the PSLRA Discovery Stay and Speedy Hearing. Therefore, this motion has now been fully briefed and is awaiting a ruling from the Court.

On March 26, 2024 the Company filed a Response in opposition to Defendants’ Motion to Dismiss the Amended Complaint and Defendants filed their Reply in support of the Motion to Dismiss the Amended Complaint on April 9, 2024. Therefore, this motion has now been fully briefed and is awaiting a ruling from the Court.

The Company believes its claims are meritorious and intends to pursue them vigorously to remedy Defendants’ violations of the law.

7. Equity

Preferred Stock

The Company has 10 million authorized shares of Series A Preferred Stock, par value $0.001, with no shares outstanding as of March 31, 2024 and December 31, 2023.

Common Stock

On July 31, 2023, the Company issued 15,166,957 shares of the Company’s common stock at a purchase price of $1.006 per Share and 9,689,293 pre-funded warrants to purchase shares of common stock at a purchase price of $1.005 per pre-funded warrant ("Private Placement") in connection with a Securities Purchase Agreement (the “Purchase Agreement”). The pre-funded warrants have an exercise price of $0.001 per share of common stock, are immediately exercisable and remain exercisable until exercised in full. The holders of pre-funded warrants may not exercise a pre-funded warrant if the holder, together with its affiliates, would beneficially own more than 9.99% of the number of shares of common stock outstanding immediately after giving effect to such exercise. The holders of pre-funded warrants may increase or decrease such percentages not in excess of 19.99% by providing at least 61 days’ prior notice to the Company. The Purchase Agreement also provides certain investors a participation right in future offerings of the Company’s equity securities. In connection with the Private Placement, the Company filed a registration statement on Form S-3 that was declared effective on September 8, 2023. The gross proceeds of the Private Placement were approximately $25 million and the Company incurred $272,000 in issuance costs. Certain executive officers, senior management, and board members of the Company participated in this Private Placement, purchasing approximately $1.16 million of shares of common stock at a purchase price of $1.01 per share.

As of March 31, 2024, no pre-funded warrants were exercised and pre-funded warrants to purchase an aggregate of 9,689,293 shares of common stock outstanding. The 9,689,293 shares of common stock issuable upon the exercise of the pre-funded warrants is not included in the number of issued and outstanding shares of common stock as of March 31, 2024 and December 31, 2023.

In June 2021, the Company filed a shelf registration statement on Form S-3 that went effective in June 2021 which will allow the Company to raise up to $300 million in additional capital. On March 31, 2022, the Company entered into an “at-the-market” equity offering program (“ATM Facility”) whereby the Company may from time to time offer and sell shares of its common stock up to an aggregate offering price of $25.0 million during the term of the ATM Facility. On April 1, 2022, the Company filed a prospectus supplement to the June 2021 Form S-3 relating to the offer and sale of the shares pursuant to the ATM Facility covering sales of up to $7.0 million of shares of common stock. On August 12, 2022, the Company filed an additional prospectus supplement relating to the offer and sale of shares pursuant to the ATM Facility covering sales of up to an additional $2.7 million of shares of common stock. The Company is 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 effect on the Company. The Company has agreed to pay the sales agent a commission equal to 3.0% of the gross proceeds from the sales of shares under the ATM Facility and has agreed to provide the sales agent with customary indemnification and contribution rights. The Company issued 6.1 million shares of common stock for gross proceeds of approximately $7.7 million under the ATM Facility from July 1, 2022 through December 31, 2022 and incurred $595 thousand in issuance costs related to the ATM Facility and shelf registration statement. While the ATM Facility remains in place, it remains restricted in its ability to access additional funding from the sale of securities under Form S-3.

Warrants to purchase 4,434 shares of the Company’s common stock at an exercise price of $140.25 per share which were previously issued by Tocagen, survived the Merger and remained outstanding as of March 31, 2024 and December 31, 2023. These warrants have an expiration date of October 30, 2025. These warrants meet the criteria for equity classification and were therefore recorded at fair value as of the grant date as a component of stockholders’ equity within additional paid-in capital.

Rights Plan

On July 11, 2022, the Company authorized and declared a dividend distribution of one right (each, a “Right” and part of the "Rights Agreement") for each outstanding share of common stock of the Company to stockholders of record as of the close of business on July 21, 2022. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Participating Preferred Stock, par value $0.001 per share (the “Preferred Stock”), of the Company at an exercise price of $16.00 per one one-thousandth of a share of Preferred Stock, subject to adjustment. The Rights are not exercisable until the Distribution Date. The Distribution Date is the 10th business day after the public announcement that a person or group of affiliated or associated persons has acquired beneficial ownership of 10 percent or more of our common stock or the 10th business day after a person or group announces a tender or exchange offer that would result in ownership by a person or group of 10 percent or more of our common stock.

The Rights will be redeemable at the Company’s option for $0.001 per Right at any time on or prior to the 10th business day after the public announcement that an Acquiring Person has acquired beneficial ownership of 10 percent or more of the Common Stock.

On June 26, 2023, the Company entered into Amendment No. 1 to the Rights Agreement which extends the expiration of the Rights to July 12, 2024, unless the Rights are earlier redeemed or exchanged in accordance with the terms of the Rights Agreement. There were no other changes to the terms and conditions of the Rights Agreement in connection with such amendment.