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

On June 15, 2020, Forte completed a business combination (“Merger”) with Tocagen, Inc. (“Tocagen”), a publicly traded biotechnology company, with Forte being the surviving business. As part of the Merger, the then outstanding Tocagen common stock was adjusted with a reverse split ratio of 1-for-15 and each share of Forte’s common stock was converted into the right to receive approximately 3.1624 shares of Tocagen common stock (prior to giving effect to the Merger). Immediately prior to the closing of the Merger, the Tocagen legal entity that survived the Merger changed its name to Forte Biosciences, Inc. Our common stock is publicly traded on the Nasdaq Capital Market under the ticker symbol FBRX. Prior to the Merger, Forte was a privately held company incorporated in Delaware on May 3, 2017.

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

On November 2, 2020, we closed an underwritten public offering of 1,614,035 shares of common stock at $28.50 per share, which includes the over-allotment option exercised by the underwriters to purchase an additional 210,526 shares. Total net proceeds were $42.7 million after deducting underwriting discounts and other offering expenses of approximately $3.3 million.

FB-401

We are developing a new approach to treating inflammatory skin disease using a topical live biotherapeutic, FB-401, which consists of three therapeutic strains of a commensal Gram-negative bacteria, Roseomonas mucosa, that were specifically selected for their impact on key parameters of inflammatory skin disease. Genetic-based microbiome identification revealed significant differences in the Gram-negative skin biome between AD patients and healthy volunteers (“HV”). Over 50% of AD patients did not have any culturable Gram-negative flora. Our extensive preclinical and mechanism of action data demonstrate that FB-401 improves AD disease parameters by driving tissue repair and anti-inflammation as well as potentially suppressing harmful bacteria like S. aureus. Specifically, Forte believes that FB-401:

• drives immune pathways that are defective;

• potentially suppresses S. aureus growth; and

• improves skin barrier function.

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

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

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

Intellectual Property

On June 18, 2020, we announced the issuance of our seventh U.S. patent (10,682,379), broadening protection to include methods for culturing Gram-negative bacteria from the skin. Together with the six U.S. patents previously issued, we now have extensive patent protection covering the composition and method of use of our technology which is focused on inflammatory skin conditions.

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

Components of Operating Results

Revenue

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

Research and Development Expenses

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

General and Administrative Expenses

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

Acquired In-Process Research and Development Expense

The Company acquired in-process research and development assets in connection with its Merger with Tocagen. As the acquired in-process research and development assets were deemed to have no current or alternative future use, an expense of $32.1 million was recognized in the consolidated statements of operations for the year ended December 31, 2020.

Other Expenses, net

Other Expenses, net consists of foreign exchange gains or losses and franchise taxes, partially offset by interest earned on our cash balances.

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 are not 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 with time-based vesting or performance-based vesting and restricted stock units. 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-based awards with time-based vesting, 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. Prior to the Merger with Tocagen, there was no public market for Forte Biosciences’ common stock. As such, the estimated fair values of our common stock underlying our stock-based awards were determined at each grant date by our board of directors, with input from management, based on the information known to us on the grant date, including a review of any recent events and their potential impact on the estimated per share fair value of our common stock. Valuations of our common stock were prepared by a third-party valuation firm in accordance with the guidance outlined in the American Institute of Certified Public Accountants Technical Practice Aid, Valuation of Privately Held Company Equity Securities Issued as Compensation (the “Practice Aid”).

For stock-based awards with time-based vesting, 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 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. For both time-based and performance-based stock-based awards, stock-based compensation expense is recognized based on the fair value determined on the date of grant.

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 complex variables. Changes in the assumptions can materially affect the fair value and ultimately how much stock-based compensation expense is recognized. These inputs are subjective and generally require significant analysis and judgment to develop. These inputs are:

Expected term – The expected term represents the period that our stock-based awards granted is 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 – Prior to the Merger, we did not have any trading history for our common stock, so the expected volatility was estimated based on the average volatility for comparable publicly traded biopharmaceutical companies over a period, where available, equal to the expected term of the stock-based awards. The comparable companies were chosen based on their similar size, life cycle stage or area of specialty.

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.

Income Taxes

We provide for income taxes under the asset and liability method. Current income tax expense or benefit represents the amount of income taxes expected to be payable or refundable for the current year. Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities, net operating loss and credit carryforwards, and are measured using the enacted tax rates and laws that will be in effect when such items are expected to reverse. Deferred income tax assets are reduced, as necessary, by a valuation allowance when management determines it is more likely than not that some or all of the tax benefits will not be realized.

Due to our lack of earnings history and uncertainties surrounding our ability to generate future taxable income, the net deferred tax assets have been fully offset by a valuation allowance. The deferred tax assets were primarily comprised of federal and state tax net operating losses (“NOLs”). Utilization of NOLs may be limited by the “ownership change” rules, as defined in Section 382 of the Internal Revenue Code. Similar rules may apply under state tax laws.

We account for uncertain tax positions in accordance with ASC 740-10, Accounting for Uncertainty in Income Taxes. We assess all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and we will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available.

Results of Operations

Comparison of the Years Ended December 31, 2020 and 2019

The following tables summarize our results of operations for the years ended December 31, 2020 and 2019 (in thousands):

Year Ended December 31,

Operating expenses:

In-process research and development assets acquired 32,057 — 32,057

Research and Development Expenses

Research and development expenses were $10.0 million for the year ended December 31, 2020, compared to $2.7 million during the same period in 2019. The increase of $7.3 million was primarily due to an increase of approximately $5.4 million of manufacturing, clinical and regulatory expenses as we advanced our FB-401 program through FDA clinical trials, an increase of approximately $1.4 million in payroll and related expenses including stock-based compensation expense as we expanded our research and development headcount in 2020, and an increase of approximately $0.5 million in other research and development expenses. We expect our research and development expenses to increase substantially during the next few years as we advance FB-401 through US FDA clinical trials and possibly initiate additional trials.

General and Administrative Expenses

General and administrative expenses were $4.2 million for the year ended December 31, 2020 compared to $1.4 million for the same period of 2019. This increase of $2.8 million was primarily due to an increase of approximately $1.2 million in legal and professional expenses driven by the increased expense of being a public company, an increase of approximately $1.0 million in payroll and related expenses including stock-based compensation expense as we expanded our headcount, an increase of approximately $0.4 million in insurance expenses primarily for directors and officers, and an increase of approximately $0.2 million in other general and administrative expenses. We expect our general and administrative expenses to increase substantially during the next few years as a result of staff expansion, costs associated with being a public company, including higher insurance premiums, legal and accounting fees and other compliance costs associated with operating a public company.

In-process research and development assets acquired

In connection with the Merger, we recognized a charge of $32.1 million of acquired in-process research and development expenses for assets with no alternative use for the year ended December 31, 2020.

Other Expenses, net

The increase in other expenses, net of approximately $0.2 million was primarily due to foreign currency transaction losses related to contracts denominated in currencies other than the U.S. dollar as a result of differences between the exchange rates on the billing dates and the payment dates.

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 losses were approximately $46.5 million for the year ended December 31, 2020, which includes a $32.1 million charge for in-process research and development expenses. As of December 31, 2020, we had an accumulated deficit of approximately $51.5 million. We expect to incur significant expenses and increasing operating losses for the foreseeable future as we continue the clinical development of FB-401. In addition, operating as a SEC registrant may involve the hiring of additional financial and other personnel, upgrading financial information systems, and incurring costs associated with operating as a public company. We expect that our operating losses will fluctuate significantly from quarter-to-quarter and year-to-year due to the timing of clinical development programs.

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

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

On November 2, 2020, we completed a public offering of 1,614,035 shares of our common stock at $28.50 per share, which includes the over-allotment option exercised by the underwriters to purchase an additional 210,526 shares. Total net proceeds were $42.7 million after deducting underwriting discounts and other offering expenses of approximately $3.3 million.

In February 2021, we issued 673,463 shares of our common stock pursuant to cashless exercises by certain warrant holders.

We had cash and cash equivalents of approximately $58.8 million as of December 31, 2020. We believe that our existing cash and cash equivalents will be sufficient to allow us to fund our operations for at least 12 months from the filing date of this Form 10-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 from product sales or out-licensing. We do not expect to generate any revenue from product sales unless and until we obtain regulatory approval and commercialize our product candidates. At the same time, we expect our expenses to increase in connection with our ongoing development and manufacturing activities, particularly as we continue the research, development, manufacturing and clinical trials of, and seek regulatory approval for FB-401. We expect to incur additional costs associated with operating as a SEC registrant. We anticipate that we will need substantial additional funding in connection with our continuing operations.

We expect our research and development expenses to substantially increase in connection with our ongoing activities, particularly as we continue to advance FB-401 in the clinic.

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

• the number of programs Forte pursues;

• the outcome, timing and cost of regulatory approvals;

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

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

See “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, 2020 and 2019 (in thousands):

Year Ended December 31,

Net cash (used in) provided by:

Operating Activities

Net cash used in operating activities for the year end December 31, 2020 was $18.4 million and consisted primarily of a net loss of $46.5 million adjusted for non-cash items primarily related to acquired in-process research and development expense of $30.9

million, depreciation and stock-based compensation expense of $1.0 million, and cash used by increases in net operating assets of $3.8 million.

Net cash used in operating activities for the year ended December 31, 2019 was $2.8 million and consisted primarily of a net loss of $4.1 million adjusted for decreases in net operating assets of $1.3 million.

Investing activities

Cash provided by investing activities of $3.6 million for the year ended December 31, 2020 consisted of cash acquired from the reverse merger with Tocagen, Inc. that closed on June 15, 2020. Cash used in investing activities for the year ended December 31, 2019 consisted of cash paid for the acquisition of property and equipment.

Financing Activities

Net cash provided by financing activities was $66.7 million for the year ended December 31, 2020, which was primarily from net proceeds of $66.7 million received from the sale of shares of the Company’s common stock, $0.3 million of proceeds received from the exercise of employee stock options, and cash used for prepaid financing costs of $0.3 million. Net cash provided by financing activities for the year ended December 31, 2019 of $4.9 million was from net proceeds received from the sale of our preferred stock.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC.

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, 2020 and 2019.

Contractual Obligations

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

Recent Accounting Standards

See Note 2 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) and 15d-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, 2020. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2020, our disclosure controls and procedures were effective at the reasonable assurance level.

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) and 15d-15(f). Our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2020 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 effective as of December 31, 2020.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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.

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, 2020 (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 on Form 10-K

(b) Exhibits

Exhibits are filed as part of this Annual Report on Form 10-K and are hereby incorporated by reference. Refer to Exhibit Index included herein.

Exhibit Index

Exhibit Number Description

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.

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.

Company Name

Date: March 15, 2021 By: /s/ Paul Wagner

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

Date: March 15, 2021 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/ Thomas E. Darcy Director March 15, 2021

Thomas E. Darcy

/s/ Lawrence Eichenfield, M.D. Director March 15, 2021

Lawrence Eichenfield

/s/ Steven Kornfeld Director March 15, 2021

Steven Kornfeld

/s/ Antony Riley Chief Financial Officer March 15, 2021

Antony Riley

Paul A. Wagner

/s/ Patricia Walker, M.D, Ph.D. Director March 15, 2021

Patricia Walker

/s/ Donald A. Williams Director March 15, 2021

Donald A. Williams

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm F-2

Consolidated Balance Sheets as of December 31, 2020 and 2019 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, 2020 and 2019, and the related consolidated statements of operations, convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the two years in the period ended December 31, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, 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.

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

/s/ Mayer Hoffman McCann P.C.

San Diego, California

March 15, 2021

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 1,133 567

Property and equipment, net 97 152

Liabilities, convertible preferred stock and stockholders' equity (deficit)

Current liabilities:

Commitments and contingencies (Note 5)

Stockholders’ equity (deficit):

Total stockholders’ equity (deficit): 58,980 (4,769 )

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:

In-process research and development assets acquired 32,057 —

Other expenses, net (205 ) (5 )

Per share information:

Net loss per share - basic and diluted $ (6.32 ) $ (1.93 )

Weighted average shares outstanding, basic and diluted 7,358,931 2,108,266

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

F-4

Forte Biosciences Inc.

Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(in thousands, except share data)

Series A Additional Total

Convertible Preferred Stock Common Stock Paid-in Accumulated Stockholders’

Shares Amount Shares Amount Capital Deficit Equity (Deficit)

Stock based compensation — — — — 36 — 36

Exercise of employee stock options — — 74,842 — 257 — 257

Stock based compensation — — — — 956 — 956

Restricted stock awards withholdings for taxes — — (16,294 ) — — — —

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:

In process research and development acquired 30,885 —

Depreciation expense 54 11

Stock based compensation expense 956 36

Changes in operating assets and liabilities:

Prepaid expenses and other assets (263 ) 3

Net cash used in operating activities (18,423 ) (2,771 )

Cash flows from investing activities:

Cash and restricted cash acquired in reverse merger 3,582 —

Purchase of property and equipment — (162 )

Net cash provided by (used in) investing activities 3,582 (162 )

Cash flows from financing activities:

Proceeds from issuance of common stock, net of issuance costs 66,699 —

Proceeds from exercise of employee stock options 257 —

Prepaid financing costs (289 ) —

Net cash provided by financing activities 66,667 4,856

Cash and cash equivalents — beginning of period 6,939 5,016

Cash and cash equivalents — end of period $ 58,765 $ 6,939

Supplemental disclosure of non-cash investing and financing activities:

Conversion of preferred stock to common stock $ 10,515 $ —

Issuance of common stock to Tocagen shareholders $ 31,809 $ —

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), together with its subsidiary referred to herein as the “Company”, is a clinical-stage biopharmaceutical company focused on advancing its clinical program and developing a live biotherapeutic for the treatment of inflammatory skin diseases, particularly for pediatric atopic dermatitis patients for which there is currently a significant unmet need for safe and effective therapies. The Company entered into a business combination (“Merger”) between Forte Subsidiary, Inc. (“Forte Subsidiary”) a private entity, and Tocagen, Inc. (“Tocagen”), a publicly traded biotechnology company. The Merger closed on June 15, 2020, in which Telluride Merger Sub, Inc., a wholly-owned subsidiary of Tocagen, merged with and into Forte Subsidiary, with Forte Subsidiary surviving the Merger as a wholly-owned subsidiary of Tocagen. Immediately prior to the closing of the Merger, the shares of Tocagen common stock were adjusted with a reverse split ratio of 1‐for‐15. At the closing of the Merger, each share of Forte Subsidiary common stock outstanding immediately prior to the Merger was converted into the right to receive approximately 3.1624 shares of Tocagen common stock (before giving effect to the reverse split). All share and per share amounts have been retrospectively adjusted to give effect to the exchange of Forte Subsidiary common stock and the reverse split of Tocagen common stock. The par value per share of our capital stock was not adjusted as a result of the stock split. Immediately prior to the closing of the Merger, Tocagen changed its name to Forte Biosciences, Inc. The Company’s common stock is traded on the Nasdaq stock exchange under the ticker symbol “FBRX.” Immediately following the Merger, the former Forte Subsidiary and Tocagen security holders owned approximately 84.7% and 15.3% of the number of shares of the Company’s common stock, respectively.

Prior to the Merger, Forte Subsidiary was incorporated as Forte Biosciences, Inc. under the laws of the State of Delaware on May 3, 2017 as a privately-held company. Forte Biosciences, Inc. was renamed Forte Subsidiary, Inc. in anticipation of the Merger.

The Merger was accounted for as a reverse asset acquisition. Forte Subsidiary is deemed to be the acquirer for accounting purposes and Tocagen the accounting acquiree (Note 4). Accordingly, for accounting purposes: (i) the merger was treated as the equivalent of Forte Subsidiary issuing stock to acquire the net assets of Tocagen, (ii) the transaction price was allocated over the acquired net assets of Tocagen based upon their relative fair value at the time of closing, (iii) the reported historical operating results of the combined company prior to the merger will be those of Forte Subsidiary and not of Tocagen, and (iv) for periods prior to the transaction, shareholders’ authorized capital of the combined company is presented based on the historical authorized capital of Tocagen.

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, 2020, the Company had an accumulated deficit of $51.5 million, which includes a charge of $32.1 million for acquired in-process research and development assets in connection with the Merger. The Company used $18.4 million of cash in operating activities during the year ended December 31, 2020. Management expects to continue to incur additional substantial losses in the foreseeable future as a result of the Company’s research and development activities.

The Company had cash and cash equivalents of approximately $58.8 million as of December 31, 2020. 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 equivalentswill 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.

Because of the numerous risks and uncertainties associated with pharmaceutical development, the Company is unable to predict the timing or amount of increased expenses or when or if it will start to generate revenues. Even if the Company is able to 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.

F-7

The pandemic caused by outbreaks of new strains of coronaviruses, 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 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 during 2021.

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

The Merger was accounted for as a reverse asset acquisition, as more fully described in Notes 1 and 4. Forte Subsidiary is deemed to be the acquirer for accounting purposes and Tocagen is the accounting acquiree.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Forte Subsidiary, Inc. 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 useful lives of property and equipment, stock-based compensation expense, accruals for clinical trials and drug manufacturing, and deferred tax assets. 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 President and 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 includes money market funds and deposits with commercial banks.

Fair Value of Financial Instruments

The carrying amount of the Company’s financial instruments, including certain prepaid and accrued expenses, approximates fair value due to their short-term maturities.

Property and Equipment

Property and equipment are recorded at cost and depreciated over their estimated useful life using the straight-line method. Depreciation and amortization begin at the time the asset is placed in service. Maintenance and repairs that do not improve or extend the lives of the respective assets are expensed to operations as incurred. Upon disposal, retirement, or sale of an asset, the related cost and accumulated depreciation is removed from the accounts and any resulting gain or loss is included in the results of operations. Estimated useful life for property and equipment is as follows:

Estimated Useful Life

Manufacturing equipment 3 years

F-8

Acquired In-Process Research and Development Expense

Research and Development Costs

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, convertible preferred stock 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,

Convertible preferred stock — 3,177,744

Stock-Based Compensation

The Company issues stock-based awards to employees and non-employees, generally in the form of stock options and restricted stock units. 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 over the requisite service period, which is generally the vesting period, on a straight-line basis. 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.

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 director and non-employees.

Series A Convertible Preferred Stock

The Company records all convertible preferred stock at their respective transaction prices on the dates of issuance, less issuance costs. Series A convertible preferred stock, prior to its conversion into common stock (Note 6), was classified as temporary equity and excluded from stockholders’ equity as the potential redemption, in the event of a deemed liquidation event, was not solely within the Company’s control.

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 on 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 on 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 Long-Lived Assets

The Company reviews long-lived assets 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 to be impaired, the impairment to be recognized is measured by the amount by which 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 long-lived assets have been recorded through December 31, 2020.

Comprehensive Loss

Comprehensive loss includes net loss and other comprehensive income (loss) for the periods presented. The Company did not have other comprehensive income (loss) items such as unrealized gains and losses and so for the years ended December 31, 2020 and 2019, comprehensive loss was equal to the net loss.

F-10

Recently Adopted Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses, which changes the accounting for recognizing impairments of financial assets. Under the new guidance, credit losses for certain types of financial instruments will be estimated based on expected losses. The new guidance also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. The Company adopted this ASU on January 1, 2020. The adoption of this amended guidance did not have a material effect on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement. The new guidance removes, modifies and adds certain disclosure requirements on fair value measurements. The Company adopted this ASU on January 1, 2020. The adoption of this amended guidance did not have a material effect on the Company’s consolidated financial statements.

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 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.

In December 2019, the FASB issued ASU 2019-12, Income Taxes, which simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The guidance is effective for calendar-year public business entities in 2021 and interim periods within that year. Early adoption is permitted. The Company does not expect adoption of this amended guidance will have a material impact on its financial position or results of operations.

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, 2020 and 2019 consist of the following (in thousands):

Prepaid manufacturing and clinical expenses $ 488 $ 514

Prepaid taxes 74 —

Total Prepaid Expenses and Other Current Assets $ 1,133 $ 567

F-11

Other Assets

Other assets as of December 31, 2020 consist of the following (in thousands). There were no other assets as of December 31, 2019.

Prepaid insurance $ 861

Deposits for manufacturing components 82

Prepaid offering costs 289

Total Other Assets $ 1,244

Accrued Liabilities

Accrued liabilities as of December 31, 2020 and 2019 consist of the following (in thousands):

Accrued legal and professional fees $ 86 $ 140

Accrued manufacturing and clinical expenses 237 26

Accrued other expenses 50 2

Total Accrued Liabilities $ 1,019 $ 343

4. Merger

On June 15, 2020, the Company completed the Merger (see Note 1). The Merger was accounted for as a reverse asset acquisition as Tocagen did not meet the definition of a business pursuant to Topic 805, Business Combinations, as Tocagen did not have the ability to create output, and substantially all of its fair value was concentrated in cash and in-process research and development (“IPR&D”) assets. Forte Subsidiary is deemed to be the acquirer for accounting purposes as immediately following the merger: (i) Forte Subsidiary stockholders owned a substantial majority of the voting rights of the combined company; (ii) Forte Subsidiary designated a majority of the initial members of the board of directors of the combined company; and (iii) Forte Subsidiary’s senior management held all key positions of the combined company and no employees were retained from Tocagen. Accordingly, for accounting purposes: (i) the merger has been treated as the equivalent of Forte Subsidiary issuing stock to acquire the net assets of Tocagen, (ii) the transaction price has been allocated over the acquired net assets of Tocagen based upon their relative fair value at the time of closing, (iii) the reported historical operating results of the combined company prior to the merger are those of Forte Subsidiary, and (iv) for periods prior to the transaction, shareholders’ authorized capital of the combined company is presented based on the historical authorized capital of Tocagen.

The following summarizes the estimated fair value of the assets and liabilities acquired at June 15, 2020, the date of the Merger (in thousands):

Restricted cash 586

Prepaid and other assets 1,257

In-process research and development 32,057

Accounts payable and accrued expenses assumed (3,916 )

The estimated fair value of total consideration given was $33.0 million based on 1,594,670 shares of Tocagen common stock, 61,406 vested restricted stock awards and in-the-money options to purchase 26,968 shares of common stock of Tocagen outstanding immediately prior to the merger date, multiplied by the Tocagen closing stock price of $18.90 on the date of the merger, and transaction costs of approximately $1.2 million. The fair value of the IPR&D assets is expensed as a charge in the consolidated statements of operations for the year ended December 31, 2020 as there is no alternative use to these assets.

F-12

5. 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 primary operating 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 or employee is, or was, serving at the Company’s request in such capacity.

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”). Under the DHHS License, the Company is obligated to meet certain development benchmarks within certain time periods. If the Company is unable to meet any of these development benchmarks, the DHHS could terminate the license. In addition, the DHHS may terminate or modify the DHHS License in the event of a material breach or upon certain insolvency events that remain uncured following a 90 day written notice of such material breach or insolvency event. The DHHS also has the right to require the Company to grant mandatory sublicenses to patent rights licensed from the DHHS to product candidates covered by other DHHS licenses under certain specified circumstances, including if it is necessary to meet health and safety needs that the Company is not reasonably satisfying or if necessary to meet requirements for public use specified by federal regulations which the Company is not reasonably satisfying.

Under the DHHS License, as amended in May 2020, the Company is obligated to pay the DHHS a minimum annual payment of $20,000 for 2020, which increased to $100,000 beginning January 1, 2021. The Company is required to reimburse the DHHS for certain patent-related expenses and may also be obligated to make milestone payments to the DHHS based upon achieving specified development and regulatory milestones for the first licensed product. Such development milestone payments are the completion of patient enrollment in a phase 3 clinical trial and the completion of a phase 3 clinical trial demonstrating a statistically significant efficacy benefit. The regulatory milestones are the receipt of the first FDA approval and the first non-USA regulatory agency approval. In addition, to the extent licensed products are approved for commercial sale, the Company is also obligated to pay the DHHS royalties based on net sales of licensed products sold by the Company and if applicable, its sublicensees. No milestones have been met as of December 31, 2020.

The Company incurred $30,000 and $20,000 in minimum royalty expenses for the years ended December 31, 2020 and 2019, respectively.

Lease Agreement

In April 2019, the Company entered into a lease agreement for certain office and laboratory space in Torrance, California. The lease agreement is cancellable by the Company at any time with a 30-day notice. The Company recorded total rent expenses of $52,000 and $18,000 for the years ended December 31, 2020 and 2019, respectively.

Clinical Supply Agreements

The Company has entered into various agreements with Contract Manufacturing Organizations (“CMOs”) for the manufacture of clinical trial materials and Contract Research Organizations (“CROs”) for clinical trial services. These agreements provide the terms and conditions under which the CMOs and CROs will formulate, fill, inspect, package, label and test the Company’s drug product candidate, FB-401. The estimated remaining commitment as of December 31, 2020 under these agreements was approximately $82,000.

F-13

6. Equity

Series A Convertible Preferred Stock

On November 27, 2018, the Company entered into a preferred stock purchase agreement with certain investors and issued 1,738,759 shares of Series A convertible preferred stock for net proceeds of $5.7 million, including $0.7 million from the conversion of convertible notes and accrued interest. In addition, on January 2, 2019, the Company completed a second round of Series A preferred stock financing and issued 1,438,985 shares at $3.41 per share for net proceeds of $4.9 million. All outstanding shares of Series A convertible preferred stock were converted into shares of common stock on a one for one ratio in connection with the closing of the Merger on June 15, 2020.

Common Stock

In connection with the Merger, the Company issued 3,804,817 shares of its common stock, and warrants to purchase 2,752,546 shares of the Company’s common stock at an exercise price of $10.56 per share, for net proceeds of $19.4 million. In addition, on June 16, 2020, the Company issued an additional 411,112 shares of common stock for net proceeds of $4.6 million.

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, 2020.

On September 4, 2020, the Company entered into an “at-the-market” equity offering program (“ATM Facility”), as amended on October 28, 2020, whereby the Company may from time to time offer and sell shares of its common stock up to an aggregate offering price of $10.0 million during the term of the ATM Facility. 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 had not issued any common stock under the ATM Facility as of December 31, 2020.

On November 2, 2020, the Company completed a public offering of 1,614,035 shares of its common stock at $28.50 per share, which includes the over-allotment option exercised by the underwriters to purchase an additional 210,526 shares. Total net proceeds were $42.7 million after deducting underwriting discounts and other offering expenses of approximately $3.3 million.

7. Stock-Based Compensation

Equity Plans

In December 2018, Forte Subsidiary adopted the 2018 Equity Incentive Plan (the “2018 Incentive Plan”). The terms and conditions of stock-based awards were defined at the sole discretion of Forte Subsidiary’s Board of Directors. Service-based awards, vesting over a defined period of service, and performance-based awards that vest upon the achievement of defined conditions have been issued under the 2018 Incentive Plan. Service-based awards to employees generally vest over a four-year period, with the first 25% of such awards vesting following twelve months of continued employment or service with the remainder of the awards vesting monthly in equal installments over the following thirty-six months. Stock options granted under the 2018 Incentive Plan expire ten years from the date of grant and the exercise price must be at least equal to the fair market value of common stock on the grant date. In connection with the Merger, all outstanding options under the 2018 Incentive Plan were exchanged into options to purchase common stock of Tocagen, which changed its name to Forte Biosciences Inc. after the Merger. Subsequent to the Merger, the 2018 Incentive Plan was frozen and no more stock-based awards will be granted from that plan.

In connection with the Merger, the Company assumed Tocagen’s 2017 Equity Incentive Plan, which was effective on April 12, 2017 and was subsequently amended on September 30, 2018 and further amended on February 12, 2019 (the “2017 Plan”). The 2017 Plan provides for the grant of incentive stock options (“ISOs”), nonstatutory 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, non-employee directors and consultants of the Company and its affiliates. Subsequent to the Merger, service-based awards generally vest over a four-year period, with the first 25% of such awards vesting following twelve months of continued employment or service with the remainder of the awards generally 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. As of December 31, 2020, there were 28,862 shares available for issuance under the 2017 Plan.

F-14

Immediately upon closing of the Merger, 61,406 restricted stock awards and stock options to purchase 26,968 shares of common stock granted under the 2017 Plan prior to the Merger became fully vested in consideration for pre-merger services provided to Tocagen.

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, 2020, there were 180,000 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.

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 enterprise value. 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 historical volatility is generally calculated based on a period of time commensurate with the expected term assumption.

The assumed dividend yield is based upon the Company’s expectation of not paying dividends in the foreseeable future. Prior to the Merger, the fair value per share was determined by the Company’s Board of Directors, as of the date of each grant based on independent third-party valuations, taking into consideration various objective and subjective factors. Subsequent to the Merger, the fair value per share 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 year ended December 31, 2020 was $11.94. The weighted-average assumptions used to value these stock options using the Black-Scholes option-pricing were as follows.

Fair value of common stock and exercise price $ 19.43

Risk-free interest rate 0.49 %

Dividend yield 0.00 %

Expected term of options (years) 6.02

There were no stock options granted during 2019.

The table below summarizes the stock option activity during the year ended December 31, 2020:

Assumed from reverse merger 26,968 $ 9.59

Cancelled/Forfeited (166 ) $ 9.59

F-15

The aggregate intrinsic value of options at December 31, 2020 is based on the Company’s closing stock price of $36.41 per share.

Restricted Stock Unit Awards

Restricted stock unit award transactions during the year ended December 31, 2020 are as follows:

Weighted Avg

Grant Date

Shares Fair Value

Outstanding at December 31, 2019 — $ —

Forfeited/Cancelled — —

Issued as Common Stock — —

Stock-Based Compensation Expense

Stock-based compensation expenses included in the Company’s consolidated statements of operations for the years ended December 31, 2020 and 2019 are as follows (in thousands):

Year Ended December 31,

Research and development $ 585 $ 7

General and administrative 371 29

As of December 31, 2020, there was unrecognized stock-based compensation expense of $6.9 million related to stock options with service conditions, which is expected to be recognized over a weighted-average period of 3.37 years. Total unrecognized stock-based compensation was approximately $233,000 related to stock options with performance conditions, which is expected to be recognized if and when performance conditions become probable.

As of December 31, 2020, there was $375,000 of total unrecognized compensation expense related to unvested restricted stock unit awards, which the Company expects to fully recognize over a period of 3.45 years.

8. Income Taxes

For the years ended December 31, 2020 and 2019, we did not record a current or deferred income tax expense or benefit due to our valuation allowance position.

The (benefit) provision 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:

Deferred adjustments 38 -0.1 % —

Transaction adjustments (392 ) 0.9 % —

Permanent items 340 -0.7 % —

Nondeductible transaction costs 8,643 -18.6 % —

Total $ — 0.0 % $ — 0.0 %

F-16

The primary components of temporary differences which give rise to the Company’s net deferred tax assets and liabilities as of December 31, 2020 and 2019 are as follows:

Year Ended December 31,

Deferred tax assets:

Accrual to cash adjustment $ 256 $ 402

Patent costs 57 —

Stock option expense 275 —

Depreciation — 3

Tocagen acquisition 418 —

Total noncurrent deferred tax assets 6,165 1,481

Deferred tax liabilities:

Depreciation (3 ) —

Total noncurrent deferred tax liabilities (386 ) (92 )

Net deferred tax assets after valuation allowance $ — $ —

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, 2020 and 2019. During 2020 and 2019, the valuation allowance increased by $4.4 million and increased by $1.1 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, 2020, the Company has federal net operating losses of $256.5 million, of which, $136.5 million begin expiring in 2028 unless utilized and $120.0 million that do not expire but are limited to 80% of taxable income in a given year. The Company has state net operating carryforwards of $269.1 million that begin to expire in 2027 unless previously utilized.

As of December 31, 2020, the Company has federal and California research and development tax credit carryforwards of approximately $29.2 million and $7.1 million, respectively. The federal research and development tax credits begin to expire in 2028 unless previously utilized. The California credits do not expire.

The Company is subject to taxation in the U.S. and California. As of December 31, 2020, 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.

F-17

The Company’s policy is to record interest and penalties relating to uncertain tax positions as a component of income tax expense. As of December 31, 2020, and 2019, there was no accrued interest or penalties for uncertain positions.

9. Related Party Transactions

Two members of the Company’s board of directors received cash payments of $4,000 and $25,000 for scientific consulting services during the year ended December 31, 2020. As of December 31, 2020, the Company had no outstanding accounts payable to either of these directors.

10. Subsequent Event

In February 2021, the Company issued 673,463 shares of its common stock pursuant to cashless exercises by certain warrant holders.

F-18

FBRX US Equity

FBRX · 10-K · period ended 2020-12-31

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 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 2020-12-31

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 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