Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and the related notes contained elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. The known risks and uncertainties include, but are not limited to, those identified and described in detail under the caption “Risk Factors” and elsewhere in this Form 10-K.

Overview

Forte Biosciences, Inc. and its subsidiaries (www.fortebiorx.com) (“Forte”, “we”, “our”) is a biopharmaceutical company that is advancing through preclinical trials its product candidate, FB-102, which is a proprietary molecule with potentially broad autoimmune applications in such indications as graft-versus-host disease (“GvHD”), vitiligo and alopecia areata (“AA”). The Company’s FB-102 program aims to address key pathways implicated in these indications.

GvHD is a complication that may occur after an allogeneic transplant and is where donor's T-cells attack the patient's healthy cells. There are 2 main types of GvHD – acute GvHD and chronic GvHD. The severity of symptoms range from mild to fatal. Acute GvHD usually occurs within 100 days of a transplant. Symptoms of the acute GvHD affect the skin, GI tract or liver. Chronic GvHD symptoms can occur any time after a transplant, but usually start within 2 years. Symptoms of chronic GvHD affect the skin, mouth, liver, lungs, GI tract, muscles or joints.There remains a significant unmet need for safe and effective therapies for GvHD.

Vitiligo is characterized by the loss of melanocytes which are cells that produce skin pigmentation and results in discolored patches appearing in the skin, hair and mucous membrane. Vitiligo is mediated primarily by natural killer cells (“NK cells”) and cytotoxic T lymphocytes (“CD8+”). Current treatments include black box warnings. There remains a significant unmet need for safe and effective therapies for vitiligo.

AA is characterized by nonscaring, unpredictable and patchy hair loss generally on the scalp but also in other areas of the body as a result of immune cells attacking and damaging hair follicles. There remains a significant unmet need for safe and effective therapies for AA.

We had $41.1 million in cash and cash equivalents as of December 31, 2022. Our common stock is publicly traded on the Nasdaq Capital Market under the ticker symbol FBRX. Prior to our merger with Tocagen, Inc., a publicly traded biotechnology company, Forte was a privately held company incorporated in Delaware on May 3, 2017.

In June 2021, we filed a 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. On March 31, 2022, 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 $25.0 million during the term of the ATM Facility. On April 1, 2022, we filed a prospectus supplement to the June 2021 Form S-3 relating to the offer and sale of shares under the ATM Facility covering sales of up to $7.0 million of shares of common stock. On August 12, 2022, we filed an additional prospectus supplement relating to the offer and sale of shares for an additional $2.7 million of shares of common stock. As discussed above, we are currently eligible to sell securities under Form S-3 only if and to the extent the aggregate market value of securities sold by us pursuant to General Instruction I.B.6 of Form S-3 during the twelve-month period immediately prior to, and including, the date of any such sale, does not exceed one-third of the aggregate market value of our common stock held by non-affiliates (as determined by General Instruction I.B.6 of Form S-3), and we will remain subject to such limitation for so long as the aggregate market value of our common stock held by non-affiliates is less than $75 million (as determined by General Instruction I.B.6 of Form S-3). As of the date of filing of this Annual Report on Form 10-K, we have reached this limit and, as such, may not sell any additional securities under the ATM Facility (or otherwise under Form S-3) until such time as (i) during the preceding twelve-month period, we have not sold securities in excess of the limitation set forth in General Instruction I.B.6 of Form S-3, or (ii) the aggregate market value of our common stock held by non-affiliates is less than $75 million (as determined by General Instruction I.B.6 of Form S-3).

Intellectual Property

In December 2017, Forte entered into an exclusive license agreement with the DHHS, as amended in May 2020. Under the agreement, the DHHS granted Forte an exclusive, sublicensable and worldwide license to certain rights in 12 patents under which we may develop and commercialize pharmaceutical and biological compositions comprising Gram-negative bacteria for the topical

treatment of dermatological diseases and conditions. The Company terminated its license agreement with DHHS effective April 2, 2022.

We own one US patent for administering a combination of Gram-positive and Gram-negative bacteria along with metabolites for treatment of a wide variety of skin conditions. The patent’s estimated expiration date is 2039. This patent is not material to Forte’s FB-102 program. We also own four pending US patent applications related to FB-102 program. The estimated expiration dates of these patents are 2043-2044.

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.

Components of Operating Results

Revenue

We have no products approved for commercial sale or in active development 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, and, in 2021, 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.

We anticipate research and development expenses to continue to increase in the future as we develop our current lead product candidate, FB-102.

General and Administrative Expenses

General and administrative expenses consist primarily of professional fees such as legal, auditing, tax and business consulting services, personnel expenses and travel costs, costs associated with being a publicly traded company such as Sarbanes-Oxley compliance, accounting fees, and directors’ and officers’ liability insurance premiums. Our general and administrative expenses may increase due to increases in professional and advisory fees and as we build out our infrastructure to develop FB-102.

Other Expenses, net

Other expense, net, consists of net foreign exchange losses and franchise taxes, partially offset by interest earned on our cash and cash equivalents.

Critical Accounting Policies, Significant Judgments and Use of Estimates

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that may be readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

While our significant accounting policies are described in Note 2 of our consolidated financial statements included elsewhere in this Form 10-K, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results.

Research and Development Expenses

As part of the process of preparing our consolidated financial statements, we are required to estimate our research and development expenses. This process involves reviewing open contracts and commitments, communicating with our personnel to identify services that have been performed for us and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. We make estimates of our research and development expenses in our consolidated financial statements based on facts and circumstances known to us at that time. If our estimates of the status and timing of services performed differs from the actual status and timing of services performed, we may report amounts that are too high or too low in any particular period. To date, there have been no material differences from our estimates to the amounts actually incurred.

Stock-Based Compensation

We account for stock-based compensation arrangements with employees, directors and non-employees in accordance with Accounting Standards Codification (“ASC”) 718, Stock Compensation. Stock-based awards issued by us have been primarily stock options and restricted stock units with time-based or performance-based vesting. ASC 718 requires the recognition of compensation expense, using a fair value-based method, for costs related to all stock-based awards. To determine the grant-date fair value of stock options, we utilize the Black-Scholes option pricing model, which is impacted by the fair value of our common stock as well as other variables including, but not limited to, the expected term that stock-based awards will remain outstanding, expected common stock price volatility over the expected term of the stock-based awards, risk-free interest rates and expected dividends.

For stock-based awards with time-based vesting which includes stock options and restricted stock units, stock-based compensation is recognized over the period during which an awardee is required to provide services in exchange for the stock-based award, known as the requisite service period (usually the vesting period), on a straight-line basis. For time-based stock awards, stock-based compensation expense is recognized based on the fair value determined on the date of grant. For stock-based awards with performance-based vesting, the fair value of the award is recognized as expense when the achievement of the associated performance criteria becomes probable.

The Company has an employee stock purchase plan (“ESPP”). The fair value of each purchase under the ESPP is estimated at the beginning of the offering period using the Black-Scholes option pricing model.

Estimates of the fair value of stock-based awards as of the grant date using the Black-Scholes option pricing model are affected by assumptions regarding a number of variables. Changes in the assumptions can materially affect the fair value and ultimately how much stock-based compensation expense is recognized. The volatility input is subjective and generally requires significant analysis and judgment to develop and involves inherent uncertainties and the application of significant judgment. If we use significantly different assumptions or estimates, our equity-based compensation could be materially different.

These inputs are:

Expected term – The expected term represents the period that our stock-based awards are expected to be outstanding and is determined using the simplified method which is based on the mid-point between the vesting period and the end of the contractual term. We have very limited historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior for our stock-based awards.

Expected volatility – Due to the Company’s limited trading of its common stock and lack of company-specific historical or implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies in the life sciences industry whose shares are publicly traded. The Company selects the peer group based on comparable characteristics, including development stage, product pipeline, and market capitalization. The Company computes historical volatility data using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards. The Company will continue to apply this process until sufficient amount of historical information regarding the volatility of its own stock price becomes available.

Risk-Free Interest Rate– The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of the stock-based awards.

Expected Dividend – We have never paid dividends on our common stock and have no plans to pay dividends on our common stock. Therefore, we use an expected dividend yield of zero.

We will continue to use judgment in evaluating the expected volatility, expected terms and interest rates utilized for our stock-based compensation expense calculations on a prospective basis.

Results of Operations

Comparison of the Years Ended December 31, 2022 and 2021

The following tables summarize our results of operations for the years ended December 31, 2022 and 2021 (in thousands):

Year Ended December 31,

Operating expenses:

Other income (expenses), net 17 (222 ) 239

Research and Development Expenses

Research and development expenses were $5.6 million for the year ended December 31, 2022, compared to $13.9 million during the same period in 2021. The decrease of $8.3 million was primarily due to a net decrease of approximately $3.7 million in manufacturing expenses, a net decrease of approximately $3.1 million in preclinical and clinical expenses as we terminated our FB-401 program following the announcement of our unfavorable clinical trial results, a net decrease in payroll and related expenses of approximately $0.9 million as a result of reduced average headcount and a net decrease of $0.6 million in other expenses.

While research and development expenses decreased for the year ended December 31, 2022 compared to the same period last year, we anticipate research and development expenses to increase in the future as we continue to develop our current lead product candidate, FB-102.

General and Administrative Expenses

General and administrative expenses were $8.3 million for the year ended December 31, 2022 compared to $7.6 million for the same period of 2021. The increase of $0.7 million was primarily due to an increase in legal expenses.

Our general and administrative expenses may increase in the future due to increases in professional and advisory fees as we build out our infrastructure to develop FB-102.

Other Income (Expenses), net

The change in other income (expenses), net for the year ended December 31, 2022, compared with the same period in the prior year was primarily driven by an increase in interest income of $150 thousand as a result of higher interest rates, reductions in foreign currency transaction and remeasurement losses of $52 thousand 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, and reduced franchise taxes of $37 thousand.

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 in each year since inception. Our net loss was approximately $13.9 million for the year ended December 31, 2022. As of December 31, 2022, we had an accumulated deficit of approximately $87.0 million. We expect to incur operating losses in the future as we develop our current lead product candidate, FB-102.

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 effect on us. We 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. We 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 $595,000 in issuance costs related to the ATM Facility and shelf registration statement.

We had cash and cash equivalents of approximately $41.1 million as of December 31, 2022. We believe that our existing cash and cash equivalents will be sufficient to fund our operations for at least 12 months from the filing date of this Form 10-K.

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 losses as we develop our current lead product candidate, FB-102, which has potentially broad application for autoimmune indications such as graft-vs-host disease, vitiligo and alopecia areata. FB-102 is in preclinical development. Our future capital requirements are difficult to forecast and will depend on many factors, including but not limited to:

•the initiation and progress of preclinical studies and any clinical trials for our product candidates;

•the terms and timing of any strategic alliance, licensing and other arrangements that we may establish;

•the number of programs we pursue;

•the outcome, timing and cost of regulatory approvals;

•the cost and timing of hiring new employees to support our continued growth;

•the costs involved in patent filing, prosecution, and enforcement; and

•the costs and timing of having clinical supplies of our product candidates manufactured.

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. In addition, our 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 ongoing COVID‐19 pandemic, the conflicts in Eastern Europe, and otherwise. 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 “Risk Factors” for additional risks associated with our substantial capital requirements.

Summary Consolidated Statements of Cash Flows

The following table sets forth the primary sources and uses of cash for the years ended December 31, 2022 and 2021 (in thousands):

Year Ended December 31,

Net cash (used in) provided by:

Financing activities 7,241 (44 )

Net decrease in cash $ (944 ) $ (16,721 )

Operating Activities

Net cash used in operating activities for the year ended December 31, 2022 was $8.2 million and consisted primarily of a net loss of $13.9 million adjusted for non-cash stock-based compensation of $4.0 million and a decrease in net operating assets of $1.7 million.

Net cash used in operating activities for the year ended December 31, 2021 was $16.7 million and consisted primarily of a net loss of $21.7 million adjusted for non-cash stock-based compensation of $4.2 million, depreciation and impairment charges on property and equipment of $0.1 million and a decrease in net operating assets of $0.7 million.

Financing Activities

Net cash provided by financing activities for the year ended December 31, 2022 consisted of $7.2 million in net proceeds from the sale of shares of our common stock under our ATM Facility and $12 thousand received from proceeds from stock option exercises and the issuance of shares of our common stock under the ESPP.

Net cash used in financing activities was $44 thousand for the year ended December 31, 2021 consisted of $106 thousand in payments related to our shelf registration, partially offset by $62 thousand of proceeds received for the exercise of stock options.

Indemnification

As permitted under Delaware law and in accordance with our bylaws, we indemnify our officers and directors for certain events or occurrences while the officer or director is or was serving in such capacity pursuant to indemnification agreements. We believe the fair value of the indemnification rights and agreements is minimal. Accordingly, we have not recorded any liabilities for these indemnification rights and agreements as of December 31, 2022 and 2021.

Contractual Obligations

See Note 4 to the Consolidated Financial Statements included elsewhere in this Form 10-K.

Item 7A. Quantitative and Qualitative 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, and are not required to provide the information required under this item.

Item 8. Financial Statements and Supplementary Data

The financial statements and supplementary data required by this item are included after the Signatures page of this Annual Report on Form 10-K beginning on page F-1.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) under the Exchange Act, that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2022. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2022, our disclosure controls and procedures were not effective at the reasonable assurance level due to a material weakness in our internal control over the review of our annual income tax provision, as discussed in more detail below.

Notwithstanding the identified a material weakness described below, our Chief Executive Officer and our Chief Financial Officer believe the consolidated financial statements included in this Annual Report on Form 10-K fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.

Material Weakness in Internal Control over Financial Reporting

A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

During the audit process related to our fiscal year ended December 31, 2022, management identified a material weakness in our controls related to the review of the annual income tax provision which had been prepared by a third-party accounting firm. Specifically, there was ineffective controls to sufficiently review the completeness and accuracy of the annual tax provision. Management concluded that the review was not sufficiently detailed enough to make it remote that a material misstatement in deferred income taxes would be prevented or detected. Accordingly, management determined that a material weakness existed in the Company’s internal control over financial reporting as of December 31, 2022, related to the internal control over the review of our annual income tax provision.

Material Weakness Remediation

We will be taking steps to remediate the material weakness described above, including, augmenting existing staff and third party resources tasked with tax accounting review, strengthening our review process related to our tax provisions and implementing additional procedures to ensure appropriate review of such matters. However, we cannot assure investors that these measures will significantly improve or remediate the material weakness described above.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2022 based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on the results of its evaluation, management concluded that our internal control over financial reporting was not effective as of December 31, 2022, due to the material weakness identified above.

Changes in Internal Control over Financial Reporting

Except for the material weakness described above, there were no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Attestation Report of the Registered Public Accounting Firm

As a smaller reporting company and non-accelerated filer, we are not required to provide an attestation report on our internal control over financial reporting issued by the Company’s independent registered public accounting firm.

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and our Chief Financial Officer, believes that our disclosure controls, procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by the collusion of two or more people or by management override of controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Item 9B. Other Information.

None.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Not Applicable

PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information called for by this item will be set forth in our Proxy Statement for the Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2022 (the “Definitive Proxy Statement”) and is incorporated herein by reference. Our board of directors has adopted a Business and Ethics Code of Conduct (the “Code of Conduct”) that applies to our officers, directors and employees which is available on our website at www.fortebiorx.com. The Code of Conduct contains general guidelines for conducting the business of our company consistent with the highest standards of business ethics, and is intended to qualify as a “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and Item 406 of Regulation S-K.

Item 11. Executive Compensation

The information required by this Item is hereby incorporated by reference to our Definitive Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item is hereby incorporated by reference to our Definitive Proxy Statement.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this Item is hereby incorporated by reference to our Definitive Proxy Statement.

Item 14. Principal Accounting Fees and Services

The information required by this Item is hereby incorporated by reference to our Definitive Proxy Statement.

PART IV

Item 15. Exhibits, Financial Statement Schedules

(a)

The following documents are filed as part of this Annual Report

(1)

The Financial Statements of Forte Biosciences Inc. and Report of Independent Registered Public Accounting Firm are included after the Signatures page of this Annual Report on Form 10-K beginning on page F-1.

(2)

Financial Statement Schedules have been omitted because the required information is included in the financial statements or notes thereto or because they are not applicable or not required.

(b)

Exhibits

Exhibits are filed as part of this Annual Report and are hereby incorporated by reference. Refer to Exhibit Index included herein.

Exhibit Index

ExhibitNumber Description

10.16*† Forte Biosciences, Inc. 2021 Equity Incentive Plan.

21.1* List of Subsidiaries.

23.1* Consent of Independent Registered Public Accounting Firm.

101.SCH Inline XBRL Taxonomy Extension Schema Document

101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document

104 Cover Page Interactive Data File (embedded within the Inline XBRL document)

* Filed herewith.

+ Indicates management contract or compensatory plan.

† Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

^ Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished to the Securities and Exchange Commission upon request.

Item 16. Form 10-K Summary

The Company has elected to not include a summary.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

Forte Biosciences, Inc.

Date: March 31, 2023 By: /s/ Paul Wagner

Paul Wagner, Ph.D. Chief Executive Officer (Principal Executive Officer)

Date: March 31, 2023 By: /s/ Antony Riley

Antony Riley Chief Financial Officer (Principal Financial Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

Name Title Date

/s/ Paul A. Wagner, Ph.D. Chairman and Chief Executive Officer March 31, 2023

Paul A. Wagner, Ph.D.

/s/ Antony Riley Chief Financial Officer March 31, 2023

Antony Riley

/s/ Scott Brun, M.D. Director March 31, 2023

Scott Brun, M.D.

Stephen Doberstein, Ph. D. Director March 31, 2023

Stephen Doberstein, Ph. D.

/s/ Lawrence Eichenfield, M.D. Director March 31, 2023

Lawrence Eichenfield, M.D.

/s/ Barbara K. Finck, M.D. Director March 31, 2023

Barbara K. Finck, M.D.

/s/ David Gryska Director March 31, 2023

David Gryska

/s/ Steven Kornfeld Director March 31, 2023

Steven Kornfeld

/s/ Donald A. Williams Director March 31, 2023

Donald A. Williams

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm F-2

Consolidated Balance Sheets as of December 31, 2022 and 2021 F-3

Notes to Consolidated Financial Statements F-7

F-1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

Forte Biosciences, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Forte Biosciences, Inc. (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there were no critical audit matters.

We have served as the Company’s auditor since 2018.

/s/ Mayer Hoffman McCann P.C.

San Diego, California

March 31, 2023

F-2

Forte Biosciences, Inc.

Consolidated Balance Sheets

(in thousands, except share and par value data)

Assets

Current assets:

Prepaid expenses and other current assets 411 476

Liabilities and stockholders' equity

Current liabilities:

Commitments and contingencies (Note 4)

Stockholders’ equity:

Total liabilities and stockholders’ equity $ 41,997 $ 43,306

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

F-3

Forte Biosciences, Inc.

Consolidated Statements of Operations

(in thousands, except share and per share data)

Year Ended December 31,

Operating expenses:

Other income (expenses), net 17 (222 )

Per share information:

Net loss per share - basic and diluted $ (0.80 ) $ (1.55 )

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

F-4

Forte Biosciences, Inc.

Consolidated Statements of Stockholders’ Equity

(in thousands, except share data)

Additional Total

Common Stock Paid-in Accumulated Stockholders’

Shares Amount Capital Deficit Equity

Exercise of employee stock options 29,575 - 62 - 62

Cashless exercise of warrants 1,889,274 2 (2 ) - -

Issuance of common stock upon vesting of restricted stock units 5,000 - - - -

Stock based compensation - - 4,214 - 4,214

Exercise of employee stock options 1,098 - 1 - 1

Issuance of common stock under ESPP 5,716 - 11 - 11

Issuance of common stock upon vesting of restricted stock units 96,650 - - - -

Stock based compensation - - 4,015 - 4,015

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

F-5

Forte Biosciences, Inc.

Consolidated Statements of Cash Flows

(in thousands)

Year Ended December 31,

Cash flows from operating activities:

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation expense — 36

Impairment of property and equipment — 61

Stock based compensation expense 4,015 4,214

Changes in operating assets and liabilities:

Prepaid expenses and other assets 258 1,221

Net cash used in operating activities (8,185 ) (16,677 )

Cash flows from financing activities:

Proceeds from issuance of common stock, net of issuance costs 7,229 —

Proceeds from exercise of employee stock options and ESPP 12 62

Prepaid financing costs — (106 )

Net cash provided by financing activities 7,241 (44 )

Cash and cash equivalents — beginning of period 42,044 58,765

Cash and cash equivalents — end of period $ 41,100 $ 42,044

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

F-6

Forte Biosciences Inc.

Notes to Consolidated Financial Statements

1. Organization and Description of Business

Forte Biosciences, Inc. (www.fortebiorx.com) and its subsidiaries, referred to herein as the “Company”, is a biopharmaceutical company focused on developing its FB-102 program which the Company believes has potentially broad applications for autoimmune diseases. FB-102 is currently in preclinical development.‌

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 common stock is traded on the Nasdaq stock exchange under the ticker symbol “FBRX”‌. On February 12, 2021, the Company incorporated Forte Biosciences Emerald Limited in Dublin, Ireland. This subsidiary was dissolved on April 1, 2022.

Liquidity and Risks

The accompanying 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 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 December 31, 2022, the Company had an accumulated deficit of $87.0 million. The Company used $8.2 million of cash in operating activities during the year ended December 31, 2022. Management expects to continue to incur additional losses in the foreseeable future as the Company focuses its development efforts on advancing FB-102 through preclinical trials.

The Company had cash and cash equivalents of approximately $41.1 million as of December 31, 2022. 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-K.

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. Our 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 conflicts in Eastern Europe, 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.

The pandemic caused by outbreaks of new strains of coronaviruses, or COVID-19 and its variants, has resulted, and may continue to result, in significant national and global economic disruption and may adversely affect the Company’s operations. The Company is 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 the Company cannot currently be predicted. The Company will continue to evaluate the impact that these events could have on its operations, financial position, results of operations and cash flows for the foreseeable future.

2. Summary of Significant Accounting Policies

Basis of Presentation

The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”), as found in the Accounting Standards Codification (“ASC”), the Accounting Standards Update

F-7

(“ASU”), of the Financial Accounting Standards Board (“FASB”), and the rules and regulations of the US Securities and Exchange Commission (“SEC”).

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Forte Subsidiary, Inc. and Forte Biosciences Emerald Limited. All intercompany accounts and transactions have been eliminated in the preparation of the consolidated financial statements.

Use of Estimates

The preparation of the Company’s 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 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.

Segment Information

The Company operates as a single operating segment. The Company’s chief operating decision maker, its Chief Executive Officer, manages the Company’s operations on a consolidated basis for the purposes of allocating resources, making operating decisions and evaluating financial performance.

Cash and cash equivalents

Cash and cash equivalents include money market funds and deposits with commercial banks. Cash equivalents are defined as short-term, highly liquid investments with original maturities of 90 days or less at the date of purchase.

Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a three-level hierarchy that prioritizes the inputs used in determining fair value by their reliability and preferred use as follows:

•

Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities.

•

Level 2 – Valuations based on quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data.

•

Level 3 – Valuations based on inputs that are both significant to the fair value measurements and are unobservable.

To the extent that a valuation is based on models or inputs that are less observable, or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized within Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

There have been no significant changes to the valuation methods utilized by the Company during the periods presented. There have been no transfers between Level 1, Level 2, and Level 3 in any periods presented.

The carrying amounts of financial instruments consisting of cash and cash equivalents, prepaid expenses and other current assets, accounts payable, accrued liabilities included in the Company’s financial statements are reasonable estimates of fair value, primarily due to their short maturities.

F-8

The Company had $5.0 million in money market funds as of December 31, 2022 and 2021, which are classified within Level 1. Money market funds are valued at the closing price reported by the fund sponsor from an actively traded exchange. Money market funds were included as cash and cash equivalents in the consolidated balance sheets at December 31, 2022 and 2021.

Research and Development Costs

Research and development costs are expensed as incurred. Research and development costs consist primarily of salaries and benefits of research and development personnel, costs related to research activities, preclinical studies, clinical trials and drug manufacturing. 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”), preclinical and clinical trial costs 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.

Patent Costs

Costs to secure, defend and maintain patents are expensed as incurred, and are classified as general and administrative expenses due to the uncertainty of future benefits.

Net Loss Per Share

Basic net loss per share is computed by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding during the period, without consideration for common stock equivalents.

Diluted net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock and common stock equivalents outstanding during the period in accordance with the treasury stock method. The following number of unexercised stock options, restricted stock units and warrants, which are common stock equivalents, have been excluded from the diluted net loss calculation as their effect would have been anti-dilutive for the periods presented:

Year Ended December 31,

Stock-Based Compensation

The Company issues stock-based awards to employees, directors and non-employees, generally in the form of stock options, restricted stock units or rights granted to employees under the Employee Stock Purchase Plan (“ESPP”). The Company accounts for stock-based compensation awards in accordance with ASC Topic 718, Compensation—Stock Compensation.

The Company measures compensation cost for all equity awards for employees, directors and non-employees at their grant-date fair value and recognizes compensation expense for service-based awards on a straight-line basis over the requisite service period, which is generally the vesting period. The grant-date fair value of stock options is estimated using the Black-Scholes option pricing model. The grant-date fair value of restricted stock units is determined using the Company’s closing stock price on the date of grant. Forfeitures are recognized as they occur.

F-9

Stock-based compensation expense for an award with a performance condition is recognized when the achievement of the performance condition has been determined to be probable. If the outcome of such performance condition has not been determined to be probable, or has not been met, no compensation expense is recognized and any previously recognized compensation expense is reversed. For rights granted under the ESPP, the fair value of each purchase is estimated at the beginning of the offering period using the Black-Scholes option pricing model.

The Company classifies stock-based compensation expense in its statement of operations in the same manner in which the award recipient’s salary and related costs are classified in the case of employees, or in which the award recipient’s service payments are classified in the case of directors and non-employees.

Foreign Currency Transactions

The Company is subject to foreign currency risk with respect to contracts denominated in currencies other than the U.S. dollar. Payments for contracts denominated in foreign currencies are made at the spot rate on the day of payment. Changes in the exchange rate between billing dates and payment dates are recorded to other expenses, net in the consolidated statements of operations.

Income Taxes

The Company uses an asset and liability approach to account for income taxes. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. These differences are measured using the enacted statutory tax rates that are expected to be in effect for the years in which differences are expected to reverse.

Valuation allowances are provided when the expected realization of deferred tax assets does not meet a “more likely than not” criterion. The Company makes estimates and judgments about its future taxable income that are based on assumptions that are consistent with its plans and estimates. Should the actual amounts differ from those estimates, the amount of the valuation allowance could be materially impacted. Changes in these estimates may result in significant increases or decreases to the Company’s tax provision in a period in which such estimates are changed, which in turn would affect net income or loss.

The Company recognizes tax benefits from uncertain tax positions if it believes the position is more likely than not to be sustained on examination by the taxing authorities based on the technical merits of the position. The Company makes adjustments to these reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. The provision for income taxes includes the effects of any reserves for tax positions that are not more likely than not to be sustained, as well as the related net interest and penalties.

Impairment of Property and Equipment

The Company reviews its property and equipment for impairment when events or changes in circumstances indicate the carrying value of the assets may not be recoverable. Recoverability is measured by comparing the book values of the assets to future net undiscounted cash flows that the assets or the asset groups are expected to generate. If such assets are considered impaired, the impairment to be recognized is measured by the amount the book value of the assets exceed their fair value, which is measured based on the estimated discounted future net cash flows arising from the assets or asset groups. No impairment losses on property and equipment have been recorded for the year ended December 31, 2022. Impairment losses on property and equipment of $61,000 have been recorded for the year ended December 31, 2021.

Comprehensive Loss

Comprehensive loss includes net loss and other comprehensive loss for the periods presented. The Company did not have other comprehensive loss items such as unrealized gains and losses and so for the years ended December 31, 2022 and 2021, comprehensive loss was equal to the net loss.

Recently Issued Accounting Standards Not Yet Adopted

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies and are adopted by the Company as of a specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s financial position or results of operations.

F-10

In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in an Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”). ASU 2020-06 eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, ASU 2020-06 modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted earnings per share computation. The amendments in ASU 2020-06 are effective for smaller reporting companies as defined by the SEC for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but not earlier than fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of ASU 2020-06 on its consolidated financial statements and does not expect the adoption of this amended guidance to have a material impact on the Company’s consolidated financial statements.

3. Balance Sheet Components

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets as of December 31, 2022 and 2021 consist of the following (in thousands):

Total Prepaid Expenses and Other Current Assets $ 411 $ 476

Other Assets

Other assets as of December 31, 2022 and 2021 consist of the following (in thousands).

Prepaid offering costs - 106

Accrued Liabilities

Accrued liabilities as of December 31, 2022 and 2021 consist of the following (in thousands):

Accrued legal and professional fees $ 643 $ 75

Accrued manufacturing and clinical expenses 485 40

Accrued other expenses 8 16

Total Accrued Liabilities $ 2,026 $ 812

4. 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, employee or director is, or was, serving at the Company’s request in such capacity.

F-11

License to Patented Technology

In December 2017, the Company entered into an exclusive license agreement with the Department of Health and Human Services (“DHHS”). Under the agreement, the DHHS granted the Company an exclusive, sublicensable, worldwide license to certain patent rights under which the Company may develop and commercialize pharmaceutical and biological compositions comprising Gram-negative bacteria for the topical treatment of dermatological diseases and conditions (the “DHHS License”). The Company terminated the license agreement with DHHS effective April 2, 2022 without meeting any milestones.

The Company incurred $25,000 and 100,000 in minimum royalty expenses for the years ended December 31, 2022 and 2021, respectively.

Lease Agreement

In April 2019, the Company entered into a lease agreement for certain office and laboratory space in Torrance, California. The lease in Torrance was terminated in December 2021 and replaced with a new lease for office and laboratory space in Dallas, Texas in December 2021. The lease in Dallas is cancellable by the Company at any time with a 30-day notice. In June 2021, the Company entered into a lease agreement for additional office space at a separate location for an initial lease of 6 months after which the lease term will be month-to-month. Total rent expense was $19,000 for the year ended December 31, 2022. Total rent expense for all locations for the year ended December 31, 2021 was $5,000, which included a credit of $9,000 from a refund for operating expenses from a previous Tocagen facility.

Preclinical Services‌

The Company has entered into various agreements with third party vendors for preclinical services. The estimated remaining commitments as of December 31, 2022 under these agreements were approximately $2.3 million.

Legal Proceedings

In November 2022, a stockholder of the Company filed a complaint in the Delaware Court of Chancery 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 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 and may be entitled to attorney fees should the stockholder not determine to dismiss the action.

5. Equity

Preferred Stock

The Company has 10 million authorized shares of Series A Preferred Stock, par value $0.001, with no shares oustanding as of December 31, 2022 and 2021.

Common Stock

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

F-12

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 $595,000 in issuance costs related to the ATM Facility and shelf registration statement.

In connection with the Merger in June 2020, the Company issued warrants to purchase 2,752,546 shares (“Concurrent Financing Warrants”) of the Company’s common stock at an exercise price of $10.56 per share. All Concurrent Financing Warrants were subsequently exercised on a cashless basis in 2021 resulting in 1,889,274 additional shares of common stock being issued. As of December 31, 2022, no Concurrent Financing Warrantswere outstanding.

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 December 31, 2022 and 2021. These warrants have an expiration date of October 30, 2025.

Rights Plan

On July 11, 2022, the Company authorized and declared a dividend distribution of one right (each, a “Right”) 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.

The Rights expire on the earliest of July 12, 2023 or on the redemption or exchange of the Rights. There is no financial statement impact until such time as the rights become exercisable.

6. Stock-Based Compensation

Equity Plans

The Company inherited the 2017 Equity Incentive Plan (the "2017 Plan") as part of its merger with Tocagen, Inc. in June 2020. The 2017 Plan was terminated in May 2021 and replaced by the 2021 Equity Incentive Plan (the “2021 Plan”). The 2017 Plan will continue to govern outstanding awards issued under the 2017 Plan. The 2021 Plan had an initial reserve of 1,000,000 shares available for grant. The 2021 Plan was amended in June 2022 to increase the shares available for grant by an additional 1,500,000 shares. The 2021 Plan provides for the grant of incentive stock options (“ISOs”), non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance-based stock awards, other forms of equity compensation and performance cash awards. ISOs may be granted only to employees. All other awards may be granted to employees, including officers, and to non-employee directors and consultants of the Company and its affiliates. Service-based awards generally vested over a four-year period, with the first 25% of such awards vesting following twelve months of continued employment or service with the remaining awards vesting monthly in equal installments over the following thirty-six months. For certain service-based awards to the board of directors, vesting occurs in thirty-six equal monthly installments over a three-year period for initial grants and in twelve equal monthly installments over a twelve-month period for subsequent grants. As of December 31, 2022, there were 1,337,277 shares available for issuance under the 2021 Plan.

On July 26, 2020, the Company adopted the 2020 Inducement Equity Incentive Plan (the “2020 Inducement Plan”) and reserved 500,000 shares for future grant under the 2020 Inducement Plan. As of December 31, 2022, there were 115,000 shares available for issuance under the 2020 Inducement Plan.

Stock Options

The risk-free interest rate assumption for stock options is based on the U.S. Treasury yield curve rate at the date of grant with a maturity approximating the expected term of the option.

F-13

The expected term assumption for options granted to employees is determined using the simplified method that represents the average of the contractual term of the option and the weighted average vesting period of the option. The Company uses the simplified method because it does not have sufficient historical option exercise data to provide a reasonable basis upon which to estimate expected term.

Due to the Company’s limited trading of its common stock and lack of company-specific historical or implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies in the life sciences industry whose shares are publicly traded. The Company selects the peer group based on comparable characteristics, including development stage, product pipeline, and market capitalization. The Company computes historical volatility data using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards. The Company will continue to apply this process until sufficient amount of historical information regarding the volatility of its own stock price become available.

The assumed dividend yield is based upon the Company’s expectation of not paying dividends in the foreseeable future. The fair value per share of common stock is the closing stock price on the option grant date.

The weighted average grant-date fair value of stock options granted to employees and non-employees for the years ended December 31, 2022 and 2021 was $0.91 and $21.89, respectively. The weighted-average assumptions used to value these stock options using the Black-Scholes option-pricing model were as follows.

Fair value of common stock and exercise price $ 1.47 $ 35.78

Risk-free interest rate 2.31 % 0.94 %

Expected term of options (years) 5.88 5.95

The table below summarizes the stock option activity during the year ended December 31, 2022:

The aggregate intrinsic value of stock options as of December 31, 2022 is based on the Company’s closing stock price of $1.00 per share.

Restricted Stock Unit Awards

The restricted stock units granted during the year ended December 31, 2021 have performance-based vesting. The Company concluded that as of December 31, 2021, it was probable the performance criteria would be met and $252,000 in expense was recorded in the Consolidated Statement of Operations for the year ended December 31, 2021.

There were no restricted stock units granted during the year ended December 31, 2022. The Company made a change in accounting estimate during the year ended December 31, 2022 related to the vesting of performance-based restricted stock units. As a result of this change in accounting estimate, $158,000 of expense that had been previously recognized in 2021 was reversed during the year ended December 31, 2022.

F-14

Restricted stock unit award transactions during the year ended December 31, 2022 were as follows:

Weighted Avg

Grant Date

Shares Fair Value

Granted — —

Forfeited/Cancelled — —

2017 Employee Stock Purchase Plan

In May 2021, the Company’s board of directors reactivated the Company’s 2017 Employee Stock Purchase Plan (“ESPP”) which had previously been suspended. The ESPP allows eligible employees to withhold up to 15% of their earnings to purchase shares of the Company’s common stock at a price per share equal to the lower of (i) 85% of the fair market value of a share of the Company’s common stock on the first date of an offering or (ii) 85% of the fair market value of a share of the Company’s common stock on the date of purchase. The Company had 318,522 shares available for future issuance under the ESPP as of December 31, 2022. The number of shares of common stock reserved for issuance will automatically increase on January 1 of each calendar year through January 1, 2027, by the lesser of (a) 1% of the total number of shares of the Company’s common stock outstanding on December 31 of the preceding calendar year, (b) 300,000 shares, or (c) a number determined by the Company’s board of directors that is less than (a) and (b). The Company issued 5,716 shares under the ESPP during the year ended December 31, 2022. The ESPP is considered a compensatory plan. The Company recorded stock-based compensation expense related to its ESPP of $3 thousand and $25 thousand for the years ended December 31, 2022 and 2021, respectively.

The fair value of the rights granted to employees under the ESPP was estimated using a Black-Scholes option-pricing model with the following weighted-average valuation assumptions:

Fair value of common stock and exercise price $ 1.32 $ 34.97

Risk-free interest rate 2.52 % 0.05 %

Expected term of options (years) 0.51 0.51

Stock-Based Compensation Expense

Stock-based compensation expenses included in the Company’s consolidated statements of operations for the years ended December 31, 2022 and 2021 are as follows (in thousands):

Year Ended December 31,

As of December 31, 2022, there was unrecognized stock-based compensation expense of $6.2 million related to stock options with service conditions, which is expected to be recognized over a weighted-average period of 2.15 years. Total unrecognized stock-based compensation as of December 31, 2022 was approximately $233 thousand related to stock options and restricted stock units with performance based vesting.

7. Income Taxes

For the years ended December 31, 2022 and 2021, the Company did not record a current or deferred income tax expense or benefit due to a valuation allowance position.

F-15

The benefit for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income as a result of the following differences (in thousands):

Year Ended December 31,

Increase/(decrease) in tax resulting from:

Transaction adjustments — 0.0 % 281 -1.3 %

Total $ — 0.0 % $ — 0.0 %

The primary components of temporary differences which give rise to the Company’s net deferred tax assets and liabilities as of December 31, 2022 and 2021 are as follows:

Year Ended December 31,

Deferred tax assets:

Accrual to cash adjustment $ 480 $ 268

Capitalized R&D 978 —

Other deferred taxes 10 10

Total noncurrent deferred tax assets 12,215 9,586

Net deferred tax assets after valuation allowance $ — $ —

Beginning January 1, 2022, the Tax Cuts and Jobs Act (the "Tax Act”) eliminated the option to deduct research and development expenditures in the current year and requires taxpayers to capitalize such expenses pursuant to Internal Revenue Code (“IRC”) Section 174. The capitalized expenses are amortized over a 5-year period for domestic expenses and a 15-year period for foreign expenses. As a result of this provision of the Tax Act, deferred tax assets related to capitalized research expenses increased by $978 thousand.

The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Based upon the Company’s history of operating losses, the Company has concluded that it is more likely than not that the benefit of its deferred tax assets will not be realized. Accordingly, the Company has provided a full valuation allowance for deferred tax assets as of December 31, 2022 and 2021. During 2022 and 2021, the valuation allowance increased by $2.6 million and $3.8 million, respectively.

The Company has federal and California net operating loss carryforwards which may be available to offset future income tax liabilities. As of December 31, 2022, the Company has federal net operating losses of $24.9 million some of which begin to expire in 2037 unless utilized. The Company has state net operating carryforwards of $11.6 million that begin to expire in 2037 unless previously utilized.

As of December 31, 2022, the Company has federal and California research and development tax credit carryforwards of approximately $268 thousand and $254 thousand, respectively. The federal research and development tax credits begin to expire in 2041 unless previously utilized. The California credits do not expire.

F-16

The Company is subject to taxation in the U.S. and California. As of December 31, 2022, Tocagen’s tax years beginning 2007 to date are subject to examination by federal and California taxing authorities due to the carry forward of unutilized net operating losses and research and development tax credits. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state tax authorities to the extent utilized in a future period.

Pursuant to Internal Revenue Code (IRC) Sections 382 and 383, annual use of a company’s net operating loss and tax credit carryforwards may be limited if there is a cumulative change in ownership of greater than 50% (by value) within a three-year period. The amount of the annual limitation is determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. The Company has completed several equity offerings since its inception which may have resulted in a change in control as defined by Sections 382 and 383 of the IRC, or could result in a change in control in the future. The Company has not completed an IRC Section 382 and 383 analysis regarding the limitation of net operating loss and research and development credit carryforwards. Until such an analysis has been completed, the Company has removed the deferred tax assets for net operating losses of $74.2 million and federal and California research and development credits of approximately $36.3 million from its deferred tax asset schedule and has recorded a corresponding decrease to its valuation allowance. When this analysis is finalized, the Company plans to update its unrecognized tax benefits accordingly. The Company does not expect this analysis to be completed within the next 12 months and, as a result, the Company does not expect that the unrecognized tax benefits will change within 12 months of this reporting date. Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact the Company’s effective tax rate.

The Company’s policy is to record interest and penalties relating to uncertain tax positions as a component of income tax expense should the Company believe there is an uncertain tax position liability. As of December 31, 2022, and 2021, there was no accrued interest or penalties for uncertain positions.

8. Related Party Transactions

Two members of the Company’s board of directors received cash payments of $9 thousand and $7 thousand for scientific consulting services during the year ended December 31, 2022. The Company had no outstanding accounts payable to either of these directors as of December 31, 2022.

One member of the Company’s board of directors received a cash payment of $1,000 for scientific consulting services during the year ended December 31, 2021. The Company had no outstanding accounts payable to this director as of December 31, 2021.

F-17

FBRX US Equity

FBRX · 10-K · period ended 2022-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

Item 9B. Other Information.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Item 10. Directors, Executive Officers and Corporate Governance

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence

Item 14. Principal Accounting Fees and Services

Item 15. Exhibits, Financial Statement Schedules

Item 16. Form 10-K Summary

FBRX US Equity☆

FBRX · 10-K · period ended 2022-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

Item 9B. Other Information.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Item 10. Directors, Executive Officers and Corporate Governance

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence

Item 14. Principal Accounting Fees and Services

Item 15. Exhibits, Financial Statement Schedules

Item 16. Form 10-K Summary

FBRX US Equity