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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

______________________

FORM 10-Q

_____________________

(Mark One)

x			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

OR

¨			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to __________________

Commission File Number: 001-39634

______________________

Foghorn Therapeutics Inc.

(Exact Name of Registrant as Specified in its Charter)

______________________

Delaware (State or other jurisdiction of incorporation or organization)			47-5271393 (I.R.S. Employer Identification No.)
500 Technology Square, Ste 700 Cambridge MA (Address of principal executive offices)			02139 (Zip Code)

Registrant’s telephone number, including area code: 617-586-3100

______________________

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.0001 par value per share

FHTX

The Nasdaq Global Market

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

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

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

Large accelerated filer			¨			Accelerated filer			¨
Non-accelerated filer			x			Smaller reporting company			x
						Emerging growth company			x

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

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

As of April 28, 2023, the registrant had 41,824,758 shares of common stock, $0.0001 par value per share, outstanding.

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Table of Contents

Table of Contents

						Page
PART I.			FINANCIAL INFORMATION			1
Item 1.			Financial Statements (Unaudited)			1
			Condensed Consolidated Balance Sheets			1
			Condensed Consolidated Statements of Operations and Comprehensive Loss			2
			Condensed Consolidated Statements of Stockholders’ Equity			3
			Condensed Consolidated Statements of Cash Flows			4
			Notes to Unaudited Condensed Consolidated Financial Statements			5
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3.			Quantitative and Qualitative Disclosures About Market Risk			20
Item 4.			Controls and Procedures			20
PART II.			OTHER INFORMATION			22
Item 1.			Legal Proceedings			22
Item 1A.			Risk Factors			22
Item 6.			Exhibits			23
Signatures						24

i

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that are based on management’s beliefs and assumptions and on information currently available to management. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words. Forward-looking statements include, but are not limited to, statements concerning:

•the initiation, timing, progress and results of our research and development programs, preclinical and clinical studies, including the potential resolution of the full clinical hold and anticipated timing of release of clinical data;

•our ability to advance any product candidates that we may develop and to successfully complete preclinical and clinical studies;

•our ability to leverage our initial programs to develop additional product candidates using our Gene Traffic Control® platform;

•developments related to our competitors and our industry;

•our ability to expand the target populations of our programs and the availability of patients for clinical testing;

•our ability to obtain regulatory approval for FHD-286 and any future product candidates from the U.S. Food and Drug Administration (the “FDA”) and other regulatory authorities;

•our ability to identify and enter into future license agreements and collaborations;

•our ability to continue to rely on our contract development and manufacturing organizations (“CDMOs”) or contract research organizations (“CROs”) for our manufacturing and research needs;

•regulatory developments in the United States and foreign countries;

•general economic conditions, including recessionary conditions, interest rates, monetary fluctuations and supply chain constraints;

•our ability to attract and retain key scientific and management personnel;

•the scope of protection we are able to establish, maintain and enforce for intellectual property rights covering FHD-286, our future products and our Gene Traffic Control platform;

•the possibility of a prolonged government shutdown and the subsequent impact on the ability of the FDA or other regulatory authorities to timely review and process our regulatory submissions; and

•the impact of the COVID-19 pandemic on our and our collaborators’ business operations, including our research and development programs and preclinical and clinical studies, as well as recent geopolitical instability and other developments that may negatively impact the ability to utilize CDMOs, and CROs, that are located outside of the United States.

The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of known and unknown risks, uncertainties and assumptions, including those described under the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. Moreover, we operate in an evolving environment. New risks and uncertainties may emerge from time to time, and it is not possible for management to predict all risks and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

1

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Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

Foghorn Therapeutics Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)

			March 31, 2023						December 31, 2022
Assets
Current assets:
Cash and cash equivalents			$	50,641					$	52,214
Marketable securities			265,329						293,584
Prepaid expenses and other current assets			4,729						5,601
Total current assets			320,699						351,399
Property and equipment, net			15,225						15,311
Restricted cash			1,708						1,708
Other assets			2,364						2,379
Operating lease right-of-use assets			32,887						34,086
Total assets			$	372,883					$	404,883
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable			$	7,288					$	5,414
Accrued expenses and other current liabilities			8,831						11,001
Operating lease liabilities			6,346						5,970
Deferred revenue			33,331						32,820
Total current liabilities			55,796						55,205
Operating lease liabilities, net of current portion			43,493						45,537
Deferred revenue, net of current portion			298,180						304,000
Other liabilities			—						29
Total liabilities			397,469						404,771
Commitments and contingencies (Note 10)
Stockholders’ equity (deficit):
Preferred stock, $0.0001 par value; 25,000,000 shares authorized at March 31, 2023    and December 31, 2022; no shares issued and outstanding at March 31, 2023 and    December 31, 2022			—						—
Common stock, $0.0001 par value; 175,000,000 shares authorized at March 31, 2023 and December 31, 2022; 41,824,758 shares issued and outstanding at March 31, 2023 and 41,803,436 shares issued and outstanding at December 31, 2022			4						4
Additional paid-in capital			381,906						377,232
Accumulated other comprehensive loss			(2,870)						(3,986)
Accumulated deficit			(403,626)						(373,138)
Total stockholders’ equity (deficit)			$	(24,586)					$	112
Total liabilities and stockholders’ equity (deficit)			$	372,883					$	404,883

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

1

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Foghorn Therapeutics Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share amounts)

(Unaudited)

									Three Months Ended March 31,
															2023						2022
Collaboration revenue															$	5,309					$	3,920
Operating expenses:
Research and development															29,985						24,508
General and administrative															8,641						7,216
Total operating expenses															38,626						31,724
Loss from operations															(33,317)						(27,804)
Other income (expense):
Interest income															2,669						235
Other income, net															720						655
Total other income, net															3,389						890
Loss before income taxes															(29,928)						(26,914)
Provision for income taxes															(560)						—
Net loss															$	(30,488)					$	(26,914)
Net loss per share attributable to common stockholders—basic and diluted															$	(0.73)					$	(0.65)
Weighted average common shares outstanding—basic and diluted															41,811,087						41,370,186
Comprehensive loss:
Net loss															$	(30,488)					$	(26,914)
Other comprehensive loss:
Unrealized gains (losses) on marketable securities															1,116						(1,184)
Total other comprehensive gain (loss)															1,116						(1,184)
Total comprehensive loss															$	(29,372)					$	(28,098)

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

2

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Foghorn Therapeutics Inc.

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

(In thousands, except share amounts)

(Unaudited)

			Common Stock												Additional Paid-in Capital						Accumulated Other Comprehensive Loss						Accumulated Deficit						Total Stockholders’ Equity (Deficit)
			Shares						Amount
Balances at December 31, 2022			41,803,436						$	4					$	377,232					$	(3,986)					$	(373,138)					$	112
Issuance of common stock upon exercise of stock    options and employee stock purchase plan			21,322						—						102						—						—						102
Stock-based compensation expense			—						—						4,572						—						—						4,572
Unrealized Gains on marketable securities			—						—						—						1,116						—						1,116
Net loss			—						—						—						—						(30,488)						(30,488)
Balances at March 31, 2023			41,824,758						$	4					$	381,906					$	(2,870)					$	(403,626)					$	(24,586)

			Common Stock												Additional Paid-in Capital						Accumulated Other Comprehensive Gain (Loss)						Accumulated Deficit						Total Stockholders’ Equity
			Shares						Amount
Balances at December 31, 2021			41,299,720						$	4					$	361,133					$	(10)					$	(264,256)					$	96,871
Issuance of common stock upon exercise of stock    options			129,895						—						384						—						—						384
Stock-based compensation expense			—						—						3,244						—						—						3,244
Unrealized losses on marketable securities			—						—						—						(1,184)						—						(1,184)
Net loss			—						—						—						—						(26,914)						(26,914)
Balances at March 31, 2022			41,429,615						$	4					$	364,761					$	(1,194)					$	(291,170)					$	72,401

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

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Foghorn Therapeutics Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

			Three Months Ended March 31,
			2023						2022
Cash flows from operating activities:
Net loss			$	(30,488)					$	(26,914)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Stock-based compensation expense			4,572						3,244
Depreciation and amortization expense			859						811
Noncash lease expense			1,200						1,114
Amortization (accretion) of discount on marketable securities			(770)						38
Changes in operating assets and liabilities:
Prepaid expenses and other current assets			887						184
Collaboration receivable			—						300,000
Accounts payable			1,691						1,271
Accrued expenses and other liabilities			(2,154)						(2,542)
Operating lease liabilities			(1,668)						(1,752)
Deferred revenue			(5,309)						(3,920)
Net cash provided by (used in) operating activities			(31,180)						271,534
Cash flows from investing activities:
Purchases of property and equipment			(636)						(247)
Purchases of marketable securities			(26,232)						(212,294)
Proceeds from maturities of marketable securities			56,373						53,132
Net cash provided by (used in) investing activities			29,505						(159,409)
Cash flows from financing activities:
Proceeds from issuance of common stock upon exercise of stock options and    employee stock purchase plan			102						384
Net cash provided by financing activities			102						384
Net decrease in cash, cash equivalents and restricted cash			(1,573)						112,509
Cash, cash equivalents and restricted cash at beginning of period			53,922						102,869
Cash, cash equivalents and restricted cash at end of period			$	52,349					$	215,378
Supplemental disclosure of noncash investing and financing information:
Purchases of property and equipment included in accounts payable and accrued expenses			$	298					$	239
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents			$	50,641					$	213,645
Restricted cash (current and non-current)			1,708						1,733
Total cash, cash equivalents and restricted cash shown in the statement of cash flows			$	52,349					$	215,378

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

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Foghorn Therapeutics Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Nature of Business, Going Concern and Basis of Presentation

Foghorn Therapeutics Inc. (the “Company”) is a clinical-stage biopharmaceutical company discovering and developing a new class of medicines targeting genetically determined dependencies within the chromatin regulatory system. The Company uses its proprietary Gene Traffic Control platform to identify, validate and potentially drug targets within the system. The Company was founded in October 2015 as a Delaware corporation. The Company is headquartered in Cambridge, Massachusetts.

The Company is subject to risks similar to those of other early-stage companies in the biopharmaceutical industry, including dependence on key individuals, the need to develop commercially viable products, competition from other companies, many of whom are larger and better capitalized, and the need to obtain adequate additional financing to fund the development of its products. There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s intellectual property will be maintained, that any products developed will obtain required regulatory approval or that any approved products will be commercially viable. Even if the Company’s development efforts are successful, it is uncertain when, if ever, the Company will generate significant revenue from the sale of its products.

Going concern

The accompanying condensed consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the ordinary course of business. Since inception, the Company has funded its operations primarily with proceeds from sales of preferred stock, debt financing, an upfront payment from a collaboration agreement, a public offering and a stock purchase agreement all prior to 2022. In January 2022, the Company received an upfront payment of $300.0 million pursuant to a collaboration agreement completed with Lilly (the “Lilly Collaboration Agreement”) (see Note 8). In the third quarter of 2022, the Company achieved a research milestone related to the Merck Collaboration Agreement and received a $5.0 million milestone payment from Merck. The Company has incurred recurring losses, including net losses of $30.5 million and $26.9 million for the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, the Company had an accumulated deficit of $403.6 million. The Company expects to continue to generate operating losses in the foreseeable future. As of the issuance date of these interim condensed consolidated financial statements the Company expects that its cash, cash equivalents and marketable securities will be sufficient to fund its operating expenses and capital expenditure requirements for at least 12 months.

The Company will need to obtain additional funding through public or private equity offerings, debt financings, collaborations, strategic alliances and/or licensing arrangements to continue to fund its operations. The Company may not be able to obtain financing on acceptable terms, or at all, and the Company may not be able to enter into collaborative or strategic alliances or licensing arrangements. The terms of any financing may adversely affect the holdings or the rights of the Company’s stockholders. Arrangements with collaborators or others may require the Company to relinquish rights to certain of its technologies or programs. If the Company is unable to obtain funding, the Company could be forced to delay, reduce or eliminate some or all of its research and development programs, pipeline expansion or commercialization efforts, which could adversely affect its business prospects. Although management will continue to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient funding in the future on terms acceptable to the Company to fund continuing operations when needed or at all.

Basis of presentation

The Company’s condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All intercompany accounts and transactions have been eliminated in consolidation. Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”).

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2. Summary of Significant Accounting Policies

The accounting policies of the Company are set forth in Note 2 to the consolidated financial statements contained in the Company’s 2022 Annual Report on Form 10-K. The Company includes herein certain updates to those policies.

Marketable Securities

The Company’s marketable securities are classified as available-for-sale and are carried at fair value with the unrealized gains and losses reported as a component of accumulated other comprehensive loss in stockholders’ equity. The Company classifies its marketable securities with maturities beyond one year as short-term, based on their highly liquid nature and because such marketable securities are available for current operations.

The Company reviews marketable securities whenever the fair value of an investment is less than the amortized cost and evidence indicates that an investment’s carrying value is not recoverable. For available-for-sale debt securities, the credit allowance is limited to the amount that fair value is less than amortized cost. Unrealized losses are evaluated for impairment under ASC 326, Financial Instruments - Credit Losses, to determine if the impairment is credit-related or noncredit-related. Credit-related impairment is recognized as an allowance on the condensed consolidated balance sheets with a corresponding adjustment to earnings, and noncredit-related impairment is recognized in other comprehensive loss. Evidence considered in this assessment includes reasons for the impairment, compliance with our investment policy, the severity of the impairment, collectability of the security, and any adverse conditions specifically related to the security, an industry, or geographic area.

Unrealized gains and losses are included as a component of accumulated other comprehensive loss in the consolidated balance sheets and condensed consolidated statements of stockholders’ equity and a component of total comprehensive loss. Realized gains and losses are included as a component of other income (expense), net based on the specific identification method.

Recently issued accounting pronouncements

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that the Company adopts as of the specified effective date. The Company qualifies as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 and has elected not to “opt out” of the extended transition related to complying with new or revised accounting standards, which means that when a standard is issued or revised and it has different application dates for public and nonpublic companies, the Company can adopt the new or revised standard at the time nonpublic companies adopt the new or revised standard and can do so until such time that the Company either (i) irrevocably elects to opt out of such extended transition period or (ii) no longer qualifies as an emerging growth company.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326). The new standard adjusts the accounting for assets held at amortized costs basis by eliminating the probable initial recognition threshold and requires an entity to reflect its current estimate of all expected credit losses as an allowance for credit losses. For nonpublic entities and emerging growth companies that choose to take advantage of the extended transition period, the guidance was initially effective for annual reporting periods beginning after December 15, 2020. However, in November 2019, the FASB issued ASU No. 2019-10, which deferred the effective date for nonpublic entities to annual reporting periods beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted this s as of January 1, 2023 and the adoption had no material impact to the Company’s consolidated financial position, results of operation, or cash flows.

3. Marketable Securities and Fair Value Measurements

As of March 31, 2023, available for sale marketable securities by security type consisted of (in thousands):

			Amortized Cost						Gross Unrealized Gains						Gross Unrealized Losses						Estimated Fair Value
U.S. treasury notes (due within one year)			$	2,992					$	—					$	(80)					$	2,912
U.S. government agencies (due within one year)			7,998						1						(4)						7,995
Commercial paper (due within one year)			38,436						—						(102)						38,334
Corporate notes and bonds (due within one year)			165,157						7						(1,565)						163,599
U.S. government agencies (due after one year through two years)			2,862						3						—						2,865
Corporate notes and bonds (due after one year through three    years)			50,754						2						(1,132)						49,624
Total			$	268,199					$	13					$	(2,883)					$	265,329

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As of December 31, 2022, available for sale marketable securities by security type consisted of (in thousands):

			Amortized Cost						Gross Unrealized Gains						Gross Unrealized Losses						Estimated Fair Value
U.S. treasury notes (due within one year)			$	7,987					$	—					$	(115)					$	7,872
Commercial paper (due within one year)			56,697						2						(301)						56,398
Corporate notes and bonds (due within one year)			139,764						—						(1,342)						138,422
Corporate notes and bonds (due after one year through three    years)			93,122						4						(2,234)						90,892
Total			$	297,570					$	6					$	(3,992)					$	293,584

The following tables present the Company’s fair value hierarchy for its assets and liabilities, which are measured at fair value on a recurring basis (in thousands):

			Fair Value Measurements at March 31, 2023 Using:
			Level 1						Level 2						Level 3						Total
Assets:
Cash equivalents:
Money market funds			$	33,219					$	—					$	—					$	33,219
U.S. treasury notes			—						16,998						—						16,998
Marketable securities:
U.S. treasury notes			—						2,912						—						2,912
U.S. government agencies			—						10,860						—						10,860
Commercial paper			—						38,334						—						38,334
Corporate notes and bonds			—						213,223						—						213,223
Total			$	33,219					$	282,327					$	—					$	315,546
			Fair Value Measurements at December 31, 2022 Using:
			Level 1						Level 2						Level 3						Total
Assets:
Cash equivalents:
Money market funds			$	28,077					$	—					$	—					$	28,077
U.S. treasury notes			—						1,998						—						1,998
Commercial paper			—						22,139						—						22,139
Marketable securities:
U.S. treasury notes			—						7,872						—						7,872
Commercial paper			—						56,398						—						56,398
Corporate notes and bonds			—						229,314						—						229,314
Total			$	28,077					$	317,721					$	—					$	345,798

For the three months ended March 31, 2023 and 2022, there were no transfers between Level 1, Level 2 and Level 3.

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4. Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):

			March 31, 2023						December 31, 2022
Laboratory equipment			$	6,337					$	5,884
Furniture and fixtures			815						815
Computer equipment and software			115						100
Leasehold improvements			17,235						17,123
Assets not yet placed in service			193						—
			24,695						23,922
Less: Accumulated depreciation and amortization			(9,470)						(8,611)
			$	15,225					$	15,311

Depreciation and amortization expense was $0.9 million and $0.8 million for the three months ended March 31, 2023 and 2022, respectively.

5. Accrued Expenses and Other Current Liabilities

Accrued expenses consisted of the following (in thousands):

			March 31, 2023						December 31, 2022
Accrued external research and development expenses			$	5,891					$	5,262
Accrued income taxes			560						—
Accrued employee compensation and benefits			1,671						4,743
Accrued professional fees			574						678
Other			135						318
			$	8,831					$	11,001

6. Common Stock and Net Loss Per Share

Common Stock

Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are not entitled to receive dividends, unless declared by the board of directors.

Net Loss Per Share

The following common stock equivalents presented based on amounts outstanding at each period end have been excluded from the calculation of diluted net loss per share because including them would have had an anti-dilutive impact:

			March 31,
			2023						2022
Stock options to purchase common stock			9,666,311						7,772,058
Warrants to purchase common stock			18,445						18,445
			9,684,756						7,790,503

7. Stock-Based Compensation

2020 Equity Incentive Plan

The Company’s 2020 Equity Incentive Plan ( the “2020 Plan”) provides for the grant of incentive stock options, non-qualified options, stock appreciation rights, restricted stock awards, restricted stock units and other stock-based awards. The number of shares initially reserved for issuance under the 2020 Plan was (i) 2,200,000 shares (the “share pool”), plus (ii) the number of shares of common stock available for issuance under the Company’s 2016 Stock Incentive Plan (the “2016 Plan”) as of the effective date of the 2020 Plan, plus the number of shares of common stock underlying awards under the 2016 Plan that on or

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after the date of adoption expire or become unexercisable without delivery of shares, are forfeited to, or repurchased for cash, are settled in cash, or otherwise become available again for grant under the 2016 Plan, in each case, in accordance with its terms (up to an aggregate of 5,078,295 shares). As of March 31, 2023, 1,359,407 shares remained available for future grant under the 2020 Plan.

The share pool will automatically increase on January 1 of each year from 2021 to 2030 by the lesser of (i) four percent of the number of shares of our common stock outstanding as of the close of business on the immediately preceding December 31 and (ii) the number of shares determined by the board of directors on or prior to such date for such year. The number of shares reserved for issuance under the 2020 Plan was increased by 1,672,137 shares effective January 1, 2023.

The 2020 Plan is administered by the board of directors or, at the discretion of the board of directors, by a committee of the board of directors. The exercise prices, vesting and other restrictions are determined at the discretion of the board of directors, or its committee if so delegated. Stock options granted with service-based vesting conditions generally vest over four years and expire after ten years. The exercise price for stock options granted is not less than the fair value of common stock on the date of grant. The Company bases fair value of common stock on the quoted market price.

2020 Employee Stock Purchase Plan

On October 21, 2020, the Company’s board of directors adopted and its stockholders approved the 2020 Employee Stock Purchase Plan (the “ESPP”), which became effective on October 21, 2020. The aggregate number of shares of common stock available for purchase pursuant to the exercise of options under the ESPP is 360,000 shares, plus an automatic annual increase, as of January 1 of each year from 2021 to 2030, equal to the lesser of one percent of the number of shares of common stock outstanding as of the close of business on the immediately preceding December 31 and (ii) the number of shares determined by the board of directors on or prior to such date for such year (up to a maximum of 3,220,520 shares). The number of shares reserved for issuance under the ESPP was increased by 418,034 shares to 1,184,497 shares effective January 1, 2023.

Eligible employees may authorize payroll deductions of up to 15% of their eligible compensation during an offering period. The purchase of shares is done at a 15% discount on the lesser of (i) the Fair Market Value of a share of Stock on the first day of the offering period and (ii) the Fair Market Value of a share of Stock on the last day of the offering period. The Company currently holds two offering periods, September 1 and March 1, respectively. The first offering period commenced under the ESPP on September 1, 2021. The Company recognized a de minimis amount of expense related to the ESPP for the three months ended March 31, 2023 and 2022, respectively.

Stock-Based Compensation

Stock-based compensation expense was classified in the condensed consolidated statements of operations and comprehensive loss as follows (in thousands):

									Three Months Ended March 31,
															2023						2022
Research and development expenses															$	2,039					$	1,509
General and administrative expenses															2,533						1,735
															$	4,572					$	3,244

As of March 31, 2023, total unrecognized compensation cost related to unvested options was $40.6 million, which is expected to be recognized over a weighted average period of 2.7 years.

8. Collaboration Agreements

Lilly Collaboration Agreement and Stock Purchase Agreement

In December 2021, the Company entered into the Lilly Collaboration Agreement with Lilly to create novel oncology medicines by applying Foghorn’s proprietary Gene Traffic Control platform. The collaboration includes a co-development and co-commercialization agreement for the Company’s selective BRM oncology target, consisting of two programs, and one additional undisclosed oncology target (collectively, the “Joint Programs”). The collaboration also includes three additional discovery targets or programs (collectively, the “Discovery Programs”) for a total of six programs directed at five targets.

With respect to the Joint Programs, the Company will lead discovery and early research activities through the successful completion of dose finding toxicity studies for the identified compound, while Lilly will lead development and commercialization activities of the identified compound with participation from the Company in development activities and 50% cost sharing until registrational clinical trials. The Company and Lilly may jointly develop and commercialize the Joint Program compound though the Company may, in its sole discretion, opt-out on a program-by-program basis of further

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participation in the development and commercialization efforts prior to the first registrational clinical trial. If the Company does not opt-out, Lilly and the Company will continue to share in the costs to further develop and commercialize the Joint Program compound on a worldwide basis, equally share in the U.S. profits on product sales, subject to certain adjustments and receive royalties on sales outside of the United States (“Ex-U.S.”) at royalty rates ranging from low double digits to high twenties. If the Company opts-out of further development and commercialization efforts, it will have no further obligations to share in the development and commercialization costs, will receive royalties rather than profit share on U.S. sales and will receive royalties at a lower rate on Ex-U.S. sales.

With respect to the Discovery Programs, the Company will lead discovery and early research activities through the successful completion of dose finding toxicity studies for the identified compounds. The Company may, in its sole discretion, opt-in on a program-by-program basis after the successful completion of dose finding toxicity to participate in the further development and commercialization efforts of the Discovery Program compounds. If the Company opts-in to the development and commercialization of the Discovery Program compounds, it will be eligible to receive milestone payments of up to $10.0 million per program upon specified research and development milestones and up to $180.0 million per program upon achievement of specified regulatory and commercial milestones and will also be eligible to share in the U.S. profits at pre-determined percentages on product sales. The Company would also be eligible to receive tiered Ex-U.S. royalty rates, calculated on a product-by-product and country-by-country basis, on net sales outside of the United States, if any, ranging from low single digits to low double digits, but less then teens. If the Company does not opt-in to further development and commercialization efforts for the Discovery Programs, it will be eligible to receive milestone payments of up to $70.0 million per program upon specified research and development milestones and up to $360.0 million per program upon achievement of specified regulatory and commercial milestones per approved product, if any. The Company would also be eligible to receive tiered royalties on net sales of products worldwide at royalty rates ranging from low single digits to low double digits, but less then teens.

Lilly has the right to make substitutions for each of the five targets during the research term of each program, subject to certain limitations. Pursuant to the Lilly Collaboration Agreement, the Company will also participate in joint decision-making through the joint steering committee and subcommittees. Unless terminated earlier, the Lilly Collaboration Agreement will continue on a product-by-product basis until the expiration of all royalty obligations under the Lilly Collaboration Agreement and when neither the Company nor Lilly is developing, commercializing or manufacturing any product under the Lilly Collaboration Agreement. The Company or Lilly may terminate the Lilly Collaboration Agreement upon an uncured material breach by the other party. Lilly may also terminate the Lilly Collaboration Agreement in its entirety or on a target-by-target, program-by-program or product-by-product basis for any reason upon certain notice to the Company.

The Company determined that (1) the research activities performed by the Company for both the Joint Programs and the Discovery Programs (2) the development activities and cost sharing for the Joint Program development efforts after dose finding toxicity until registrational clinical trials (3) the research, development, manufacture and commercialization licenses and (4) service on the joint steering committee and subcommittees represent a single performance obligation under the Lilly Collaboration Agreement. The Company determined that Lilly cannot benefit from the licenses separately from the research activities, the development activities until registrational clinical trials and participation on the joint steering committee and subcommittees because these services are specialized and rely on the Company’s expertise such that these activities are highly interrelated and therefore not distinct. Accordingly, the promised goods and services represent one combined performance obligation, and the entire transaction price was allocated to that single combined performance obligation. The performance obligation will be satisfied over time as the Company performs the research activities, participates and shares in the cost of the development activities for the Joint Programs and participates in a joint steering committee and subcommittees to oversee these activities.

The Company’s options to share in further development and commercialization efforts via its opt-in/opt-out rights will be assessed and accounted for as separate units of accounting under the relevant guidance if, and when, such options are exercised by the Company.

As of March 31, 2023, the aggregate amount of the transaction price related to the unsatisfied portion of the performance obligation was $315.1 million, which is expected to be recognized as revenue through 2029 or beyond depending on the timing of certain clinical development activities. As of December 31, 2022, the aggregate amount of the transaction price related to the unsatisfied portion of the performance obligation was $319.8 million.

For the three months ended March 31, 2023 and 2022, the Company had recorded $4.7 million and $3.8 million, respectively, of revenue under the Lilly Collaboration Agreement, which was included in deferred revenue at the beginning of the respective periods.

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Merck Collaboration Agreement

In July 2020, the Company entered into a collaboration agreement (the “Merck Collaboration Agreement”) with Merck Sharp & Dohme Corp. (or “Merck”). The Company and Merck will apply Foghorn’s proprietary Gene Traffic Control platform to discover and develop novel therapeutics. Under the Merck Collaboration Agreement, the Company granted Merck exclusive global rights to develop, manufacture and commercialize drugs that target dysregulation of a single transcription factor. Under the terms of the Merck Collaboration Agreement, the Company and Merck are each responsible to perform certain research activities in accordance with a mutually-agreed upon research plan. Merck may substitute the selected transcription factor during certain stages of the research program, subject to certain limitations. Following completion of the research program, Merck is responsible for the development and commercialization of the compounds developed pursuant to the research program and any product containing such compounds. Pursuant to the Merck Collaboration Agreement, the Company will also participate on a joint steering committee.

Under the terms of the agreement, Foghorn received a nonrefundable upfront payment of $15.0 million from Merck, and is eligible to receive up to $245.0 million upon achievement of specified research, development and regulatory milestones by any product candidate generated by the collaboration, and up to $165.0 million upon achievement of specified sales-based milestones per approved product from the collaboration, if any. The Company will be eligible to receive tiered royalties, calculated on a product-by-product and country-by-country basis, on net sales of approved products from the collaboration, if any, at royalty rates ranging from the mid-single digits to low tens, depending on whether the products are covered by patent rights it licenses to Merck.

Unless terminated earlier, the Merck Collaboration Agreement will continue in full force and effect until one or more products has received marketing authorization and, thereafter, until expiration of all royalty obligations under the Merck Collaboration Agreement. The Company or Merck may terminate the Merck Collaboration Agreement upon an uncured material breach by the other party or insolvency of the other party. Merck may also terminate the Merck Collaboration Agreement for any reason upon certain notice to the Company.

The Company determined that the (1) research, development, manufacture and commercialization licenses, (2) the research activities performed by the Company and (3) service on the joint committees represent a single performance obligation under the Merck Collaboration Agreement. The Company determined that Merck cannot benefit from the licenses separately from the research activities and participation on the joint steering committee because these services are specialized and rely on the Company’s expertise such that these activities are highly interrelated and therefore not distinct. Accordingly, the promised goods and services represent one combined performance obligation and the entire transaction price was allocated to that single combined performance obligation. The performance obligation will be satisfied over the research term as the Company performs the research activities and participates in a joint steering committee to oversee research activities.

As of March 31, 2023, the $240.0 million of potential research, development and regulatory milestone payments that the Company is eligible to receive and have not already been achieved were excluded from the transaction price as they were fully constrained by uncertain events.

In the third quarter of 2022, the Company achieved a research milestone related to the Merck Collaboration Agreement and received a $5.0 million milestone payment from Merck.

As of March 31, 2023, the aggregate amount of the transaction price related to the unsatisfied portion of the performance obligation is $16.4 million, which is expected to be recognized as revenue through approximately 2028. As of December 31, 2022, the aggregate amount of the transaction price related to the unsatisfied portion of the performance obligation is $17.0 million.

For the three months ended March 31, 2023 and 2022, the Company had recorded $0.6 million and $0.1 million, respectively, of the revenue under the Merck Collaboration Agreement, which was included in deferred revenue at the beginning of the respective periods and the classification of deferred revenue between short term and long term.

9. Income Taxes

For the three months ended March 31, 2023, the Company recorded a provision for income taxes of $0.6 million representing an effective tax rate of 1.86%. The income tax provision and the effective tax rate is primarily driven by the current federal and state taxes related to the $300.0 million upfront payment for Lilly Collaboration Agreement, which will be recognized as taxable income in the current year, and the required capitalization of research and development costs pursuant to Internal Revenue Code Section 174. As a result, the Company expects to have taxable income in the current year, which will be reduced by utilizing available net operating loss carryforwards and research and development tax credit carryforwards.The Company accrued the provision for income taxes in accrued expenses and other current liabilities on the condensed consolidated balance sheets.

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The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets. Management has considered the Company’s history of cumulative net losses incurred since inception and its lack of commercialization of any products that would generate revenue from product sales and has concluded that it is more likely than not that the Company will not realize the benefits of the deferred tax assets. Accordingly, a full valuation allowance has been established against the net deferred tax assets.

10. Commitments and Contingencies

Leases

The Company leases office space under a non-cancelable operating lease. There have been no material changes to the Company's lease during the three months ended March 31, 2023. For additional information, see Note 10, Leases, to the consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.

License agreements

The Company has entered into various exclusive and non-exclusive license agreements for certain technologies. Under the terms of these license agreements, the Company could be required to reimburse the licensors for patent expenses and remit amounts in the low single-digit as sales-based royalties upon the occurrence of specific events as outlined in the corresponding license agreements. The Company is also required to make annual license maintenance fees of less than $0.3 million and pay up to $1.1 million in regulatory milestones on each licensed product upon the occurrence of specific events as outlined in one of the license agreements. None of our product candidates utilize technologies covered by these licenses.

Indemnification agreements

In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, contract research organizations, business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its board of directors and its executive officers that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. The Company has not incurred any material costs as a result of such indemnifications and is not currently aware of any indemnification claims.

Legal Proceedings

From time to time, the Company may become involved in litigation or other legal proceedings. The Company is not currently a party to any material litigation or legal proceedings.

11. Defined Contribution Plan

The Company has a 401(k) defined contribution plan (the “401(k) Plan”) for its employees. Eligible employees may make pretax contributions to the 401(k) Plan up to statutory limits. During the three months ended March 31, 2023, the Company recognized $0.2 million of expense related to 401(k) discretionary match. For the three months ended March 31, 2022, there was no discretionary match made under the 401(k).

12. Related Parties

In October 2015, the Company entered into a five-year consulting agreement with a scientific founder of the Company who is also a shareholder. This agreement was amended and extended to January 1, 2024 and is subject to automatic one-year renewal terms until terminated. During the three months ended March 31, 2023 and 2022, the Company paid the scientific founder a de minimis amount. As of March 31, 2023 and December 31, 2022, the Company had less than $0.1 million accounts payable to the scientific founder.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Some of the numbers included herein have been rounded for the convenience of presentation. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and in this Quarterly Report on Form 10-Q.

Overview

Foghorn is a clinical stage, precision therapeutics biotechnology company pioneering a new class of medicines that treat serious diseases by correcting abnormal gene expression through selectively targeting the chromatin regulatory system, an untapped opportunity for therapeutic intervention in oncology and in a wide spectrum of other diseases including virology, autoimmune diseases and neurology.

The chromatin regulatory system orchestrates gene expression—the turning on and off of genes—which is fundamental to how all our cells function. The chromatin regulatory system is implicated in approximately 50% of all cancers, and understanding how this system works could lead to an entirely new class of precision medicines. To our knowledge, we are the only company with the ability to study and target the chromatin regulatory system at scale, in context, and in an integrated way.

Our proprietary Gene Traffic Control® platform provides an integrated and mechanistic understanding of how the various components of the chromatin regulatory system interact, allowing us to identify, validate and potentially drug targets within this system. We have developed unique capabilities that have yielded new insights and scalability in drugging this new, previously untapped and promising area.

Since our inception in 2015, our platform has generated a broad pipeline of more than a dozen programs with two clinical-stage drug candidates currently in phase 1 development across multiple indications. We have discovered highly selective chemical matter for some of the most challenging targets in oncology including BRM, CBP, EP300 and ARID1B as well as other undisclosed targets. We believe our current pipeline has the potential to help more than 500,000 cancer patients. We take a small molecule modality agnostic approach to drugging targets which includes protein degraders, allosteric enzymatic inhibitors, and transcription factor disruptors. We are a biology first company which means we focus first on the underlying genetics and biology of a disease relevant target and then leverage the most appropriate drugging approach to impact the disease biology.

Our lead clinical-stage candidate, FHD-286, a selective, allosteric ATPase inhibitor is being developed in separate Phase 1 studies in (i) metastatic uveal melanoma and (ii) relapsed and/or refractory acute myeloid leukemia (“AML”), and myelodysplastic syndrome (“MDS”). We expect initial clinical data for metastatic uveal melanoma in the second quarter of 2023. The relapsed and/or refractory AML and MDS study has been placed on full clinical hold by the FDA due to potential differentiation syndrome and we plan to provide a regulatory update in the second quarter of 2023.

On April 24th, 2023, we provided an update on the FHD-609 Phase 1 program in synovial sarcoma and SMARCB1-deleted tumors. We have paused enrollment in the FHD-609 study due to a grade 4 QTc prolongation event in a synovial sarcoma patient at the second highest dose being evaluated. Enrollment of the dose escalation portion of the study has been completed and a maximum tolerated dose has been identified. Consequently, the FDA placed the study on partial clinical hold, while allowing patients currently enrolled and benefiting from therapy to continue dosing and to remain on FHD-609. The Company is not, at this time, planning to pursue a dose expansion study independently.

We believe Foghorn has the potential to be a major biopharmaceutical company with our current pipeline addressing more than 20 tumor types impacting more than 500,000 new patients annually. We believe we have the potential to file at least six new INDs over the next four years.

Since our inception, we have focused substantially all of our resources on building our Gene Traffic Control platform, organizing and staffing our company, business planning, raising capital, conducting discovery and research activities, protecting our trade secrets, filing patent applications, identifying potential product candidates, undertaking preclinical studies and clinical trial activities, establishing arrangements with third parties for the manufacture of initial quantities of our product candidates and component materials and initiating two strategic collaborations. We do not have any products approved for sale and have not generated any revenue from product sales.

On December 10, 2021, we entered into a collaboration agreement (the “Lilly Collaboration Agreement”) with Eli Lilly and Company (“Lilly”), for which we received an upfront payment of $300.0 million in January 2022 (see Note 8 to our notes to unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q). Concurrent with the Lilly Collaboration Agreement, we also entered into a stock purchase agreement (the “Lilly SPA”) and issued and sold

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Lilly 4,000,000 shares of our common stock at a price of $20.00 per share, resulting in net proceeds of $80.0 million, of which $42.2 million was allocated to equity upon the issuance of the Company’s common stock.

In the third quarter of 2022, the Company achieved a research milestone related to a Research Collaboration and Exclusive License Agreement (the “Merck Collaboration Agreement”) with Merck Sharp & Dohme Corp. (“Merck”) and received a $5.0 million milestone payment from Merck.

We have incurred significant operating losses since our inception. For the three months ended March 31, 2023 and the year ended December 31, 2022, we reported net losses of $30.5 million and $108.9 million, respectively. As of March 31, 2023, we had an accumulated deficit of $403.6 million. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. Our ability to generate any product revenue or product revenue sufficient to achieve profitability will depend on the successful development and eventual commercialization of one or more product candidates we are developing and may develop.

We expect that our expenses and capital requirements will increase substantially in connection with our ongoing activities, particularly if and as we:

•    advance our FHD-286 product candidate and continue our preclinical development of product candidates from our current research programs;

•    identify and advance additional research programs and additional product candidates;

•    initiate preclinical testing for any new product candidates we identify and develop;

•    obtain, maintain, expand, enforce, defend and protect our trade secrets and intellectual property portfolio and provide reimbursement of third-party expenses related to our patent portfolio;

•    hire additional research and development personnel;

•    add operational, legal, compliance, financial and management information systems and personnel to support our research, product development and operations;

•    expand the capabilities of our platform;

•    acquire or in-license product candidates, intellectual property and technologies;

•    operate as a public company;

•    seek marketing approvals for any product candidates that successfully complete clinical trials; and

•    ultimately establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval.

We will not generate revenue from product sales unless and until we successfully commercialize one of our product candidates, after completing clinical development and obtaining regulatory approval. If we obtain regulatory approval for any of our product candidates, we expect to incur significant expenses related to developing our commercialization capability to support product sales, marketing, manufacturing and distribution. Further, we expect to incur additional costs associated with operating as a public company.

As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of equity offerings, debt financings and collaborations or licensing arrangements and our collaboration agreements with Merck and Lilly. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back our development or commercialization plans for one or more of our product candidates.

Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

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Components of Our Results of Operations

Collaboration Revenue

To date, we have not generated any revenue from product sales and do not expect to do so in the near future. If our development efforts for our product candidates are successful and result in regulatory approval or licenses with third parties, we may generate revenue in the future from product sales, milestone payments under our existing collaboration agreements or payments from other license agreements that we may enter into with third parties.

In December of 2021, we entered into a strategic collaboration with Lilly to create novel oncology medicines by applying Foghorn’s proprietary Gene Traffic Control platform. The collaboration includes a co-development and co-commercialization agreement for the aforementioned selective BRM oncology program and an additional undisclosed oncology target. In addition, the collaboration includes three additional discovery programs using Foghorn’s proprietary Gene Traffic Control platform. Under the terms of the collaboration, Foghorn received upfront consideration of $300.0 million in cash pursuant to the Lilly Collaboration Agreement, together with an equity investment by Lilly of $80.0 million in shares of Foghorn common stock pursuant to the Lilly SPA.

For the BRM-selective program and the additional undisclosed target program, Foghorn will lead discovery and early research activities, while Lilly will lead development and commercialization activities with participation from Foghorn in operational activities and cost sharing. Foghorn and Lilly will share 50/50 in the U.S. economics, and Foghorn is eligible to receive royalties on ex-U.S. sales starting in the low double-digit range and escalating into the twenties based on revenue levels.

For the additional discovery programs, Foghorn will lead discovery and early research activities. Foghorn may receive up to a total of $1.3 billion in potential development and commercialization milestones. Additionally, Foghorn will have an option to participate in a percentage of the U.S. economics and is eligible to receive tiered royalties from the mid-single digit to low-double digit range on sales outside the U.S. that may be exercised after the successful completion of the dose-finding toxicity studies.

We cannot provide assurances as to the timing of future milestones, royalty payments and economics associated with the strategic collaboration with Lilly.

We recognized total deferred revenue of $337.8 million related to the Lilly Collaboration Agreement and the Lilly SPA, which included the $300.0 million upfront payment under the Lilly Collaboration Agreement as well as $37.8 million allocated to deferred revenue from the gross proceeds of the Lilly SPA to be recognized over the performance period. During the three months ended March 31, 2023, we recognized $4.7 million and $3.8 million, respectively, of revenue under the Lilly Collaboration Agreement and, as of March 31, 2023, we had $315.1 million of deferred revenue related to the above mentioned upfront payment and revenue allocation remaining on our condensed consolidated balance sheets.

In July 2020, we entered into the Merck Collaboration Agreement, pursuant to which we will apply our proprietary Gene Traffic Control platform to discover and develop novel therapeutics. Under the Merck Collaboration Agreement, we granted Merck exclusive global rights to develop and commercialize drugs that target dysregulation of a single transcription factor. Under the terms of the Merck Collaboration Agreement, we received a nonrefundable upfront payment of $15.0 million from Merck, and are eligible to receive up to $245.0 million upon achievement of specified research, development and regulatory milestones by any product candidate generated by the collaboration, and up to $165.0 million upon achievement of specified sales-based milestones per approved product from the collaboration, if any, as well as royalties on sales of any approved product from the collaboration. We cannot provide assurance as to the timing of future milestone or royalty payments or that we will receive any of these payments at all.

For the three months ended March 31, 2023 and 2022, we recognized $0.6 million and $0.1 million of revenue under the Merck Collaboration Agreement. In the third quarter of 2022, the Company achieved a research milestone related to the Merck Collaboration Agreement and received a $5.0 million milestone payment from Merck. As of March 31, 2023, we had $16.4 million of deferred revenue related to the upfront payment and milestone achievement remaining on our condensed consolidated balance sheets.

Operating Expenses

Our operating expenses are comprised of research and development expenses and general and administrative expenses.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for our research activities, including our discovery efforts, and progressing our programs, which include:

•personnel-related costs, including salaries, benefits and stock-based compensation expense, for employees engaged in research and development functions;

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•expenses incurred in connection with our research programs and preclinical and clinical development of our product candidates, including under agreements with third parties, such as consultants and contractors and contract research organizations (“CROs’);

•the cost of manufacturing drug substance and drug product for use in our research and preclinical studies and clinical trials under agreements with third parties, such as consultants and contractors and contract development and manufacturing organizations (“CDMOs)”;

•laboratory supplies and research materials;

•facilities, depreciation and amortization and other expenses, which include direct and allocated expenses for rent and maintenance of facilities and insurance; and

•payments made under third-party licensing agreements.

We track our direct external research and development expenses on a program-by-program basis. These consist of costs that include fees, reimbursed materials, and other costs paid to consultants, contractors, CDMOs, and CROs in connection with our preclinical, clinical and manufacturing activities. We do not allocate employee costs, costs associated with our discovery efforts, laboratory supplies, and facilities expenses, including depreciation or other indirect costs, to specific product development programs because these costs are deployed across multiple programs and our platform and, as such, are not separately classified.

We expect that our research and development expenses will increase substantially as we advance our programs into clinical development and expand our discovery, research and preclinical activities in the near term and in the future. At this time, we cannot accurately estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical and clinical development of any product candidates we may develop. A change in the outcome of any number of variables with respect to product candidates we may develop could significantly change the costs and timing associated with the development of that product candidate. We may never succeed in obtaining regulatory approval for any product candidates we may develop.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel-related costs, including salaries, benefits and stock-based compensation, for employees engaged in executive, legal, finance and accounting and other administrative functions. General and administrative expenses also include professional fees for legal, patent, consulting, investor and public relations, human resources, and accounting and audit services as well as direct and allocated facility-related costs.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research activities and development of our programs and platform. We also anticipate that we will continue to incur increased accounting, audit, legal, regulatory, compliance, director and officer insurance costs and investor and public relations expenses associated with operating as a public company.

Other Income (Expense)

Interest Income

Interest income consists of interest earned on our invested cash balances.

Other Income (Expense), Net

Other income (expense) ,net consists of sublease income and miscellaneous expense unrelated to our core operations.

Income Taxes

As of December 31, 2022, we had federal and state net operating loss carryforwards of $221.7 million and $203.3 million, respectively, which may be available to offset future taxable income. The federal net operating loss carryforwards include $5.3 million which expire in 2037 and $216.4 million which carryforward indefinitely but in some circumstances may be limited to offset 80% of annual taxable income. The state net operating loss carryforwards expire at various dates beginning in 2036. As of December 31, 2022, we also had federal and state research and development tax credit carryforwards of $9.6 million and $5.7 million, respectively, which may be available to reduce future tax liabilities and expire at various dates beginning in 2036 and 2031, respectively. Due to our history of cumulative net losses since inception and uncertainties surrounding our ability to generate future taxable income, we have recorded a full valuation allowance against our net deferred tax assets at each balance sheet date. We expect to have taxable income in the current year, which will be reduced by utilizing available net operating loss carryforwards and research and development tax credit carryforwards.

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Critical Accounting Estimates

Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of our condensed consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses and the disclosure of contingent assets and liabilities in our condensed consolidated financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 as well as elsewhere in this Quarterly Report on Form 10-Q, we believe that revenue recognition and accrued research and development expenses are those most critical to the judgments and estimates used in the preparation of our condensed consolidated financial statements. There have been no material changes to our critical accounting policies and estimates detailed in the Critical Accounting Policies and Significant Judgements section of Item 7. Managements Discussion and Analysis of financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Results of Operations

Comparison of the Three Months Ended March 31, 2023 and 2022

The following table summarizes our results of operations for three months ended March 31, 2023 and 2022:

															Three Months Ended March 31,
																					2023						2022						Change
									(in thousands)
Collaboration revenue																					$	5,309					$	3,920					$	1,389
Operating expenses:
Research and development																					29,985						24,508						5,477
General and administrative																					8,641						7,216						1,425
Total operating expenses																					38,626						31,724						6,902
Loss from operations																					(33,317)						(27,804)						(5,513)
Other income (expense):
Interest income																					2,669						235						2,434
Other income, net																					720						655						65
Total other income, net																					3,389						890						2,499
Loss before income taxes																					(29,928)						(26,914)						(3,014)
Provision for income taxes																					(560)						—						(560)
Net loss																					$	(30,488)					$	(26,914)					$	(3,574)

Collaboration Revenue

Collaboration revenue was $5.3 million for the three months ended March 31, 2023, compared to $3.9 million for the three months ended March 31, 2022. The increase in collaboration revenue is attributed to the following:

•an increase in Lilly collaboration revenue recognition of $0.9 million primarily due to work performed on the BRM Selective program pursuant to the Lilly Collaboration Agreement; and

•an increase in Merck collaboration revenue recognition of $0.5 million due to continued advancement of the single specified transcription factor target under the Merck collaboration agreement.

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Research and Development Expenses

The following table summarizes our research and development expenses for the three months ended March 31, 2023 and 2022:

															Three Months Ended March 31,
																					2023						2022						Change
									(in thousands)
Research and development program expenses:
FHD-286																					$	4,031					$	4,475					$	(444)
FHD-609																					2,686						2,319						367
Platform, research and discovery, and unallocated expenses:
Platform and other early stage research external costs																					7,104						5,164						1,940
Personnel related (including stock-based compensation)																					10,373						7,911						2,462
Facility related and other																					5,791						4,639						1,152
Total research and development expenses																					$	29,985					$	24,508					$	5,477

Research and development expenses were $30.0 million for the three months ended March 31, 2023, compared to $24.5 million for the three months ended March 31, 2022. The increase is attributed to the following:

•an increase in personnel-related costs of $2.5 million, including a $0.5 million increase in stock-based compensation expense, due primarily to increased headcount in our research and development function;

•an increase in platform and other early stage research investments of $1.9 million;

•an increase in facility-related and other expenses of $1.2 million, due to increased investments to support the growing research and development organization and research efforts;

•an increase in our FHD-609 program costs of $0.4 million associated with the Phase 1 clinical trial in Synovial Sarcoma and SMARCB1-loss tumors.

•This was slightly offset by a decrease in our FHD-286 program costs of $0.4 million primarily driven by a decline in clinical trail spend due to the FDA’s full clinical hold on the Phase 1 study in AML/MDS in August 2022.

General and Administrative Expenses

The following table summarizes our general and administrative expenses for the three months ended March 31, 2023 and 2022:

															Three Months Ended March 31,
																					2023						2022						Change
									(in thousands)
Personnel related (including stock-based compensation)																					$	5,769					$	4,070					$	1,699
Professional and consulting																					1,624						1,712						(88)
Facility related and other																					1,248						1,434						(186)
Total general and administrative expenses																					$	8,641					$	7,216					$	1,425

General and administrative expenses were $8.6 million for the three months ended March 31, 2023, compared to $7.2 million for the three months ended March 31, 2022. The increase is primarily attributed to the following:

•an increase in personnel-related costs of $1.7 million, including a $0.8 million increase in stock-based compensation expense, which was the result of increased headcount in our general and administrative function to support our growing business.

Other Income (Expense)

Interest income was $2.7 million for the three months ended March 31, 2023, compared to $0.2 million for the three months ended March 31, 2022. The increase in interest and other income (expense), net for the three months ended March 31, 2023 was due to an increase in the average interest rate compared to three months ended March 31, 2022.

Other income, net was $0.7 million for the three months ended March 31, 2023 and 2022.

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Provision for income taxes

We recorded an income tax provision of $0.6 million for the three months ended March 31, 2023. The income tax provision is primarily driven by the current federal and state taxes related to the $300.0 million upfront payment for Lilly Collaboration Agreement, which will be recognized as taxable income in the current year, and the required capitalization of research and development costs pursuant to Internal Revenue Code Section 174. The Company did not record a provision for income taxes for the three months ended March 31, 2022.

Liquidity and Capital Resources

Since our inception in October 2015, we have incurred significant operating losses. We expect to incur significant expenses and operating losses for the foreseeable future as we support our continued research activities and development of our programs and platform. Through March 31, 2023, we have funded our operations with proceeds from our IPO in October 2020, sales of preferred stock, term loans, an upfront payment of $15.0 million we received in July 2020 under the Merck Collaboration Agreement and proceeds we received in December 2021 under the Lilly SPA of $80.0 million; an upfront payment of $300.0 million received in January 2022 under the Lilly Collaboration Agreement and a payment of $5.0 million received from Merck under the Merck Collaboration Agreement for the achievement of a research milestone. As of March 31, 2023, we had cash, cash equivalents and marketable securities of $316.0 million.

Cash Flows

The following table summarizes our sources and uses of cash for each of the periods presented:

			Three Months Ended March 31,
			2023						2022
			(in thousands)
Net cash provided by (used in) operating activities			$	(31,180)					$	271,534
Net cash provided by (used in) investing activities			29,505						(159,409)
Net cash provided by financing activities			102						384
Net decrease in cash, cash equivalents and restricted cash			$	(1,573)					$	112,509

Operating Activities

During the three months ended March 31, 2023, operating activities used $31.2 million of cash, resulting from the net cash used to fund our net loss of $30.5 million and changes in our operating assets and liabilities of $6.6 million partially offset by net non-cash charges of $5.9 million. Net cash provided by changes in our operating assets and liabilities for the three months ended March 31, 2023 was primarily driven by a $5.3 million decrease in deferred revenue resulting from the recognition of revenue on the upfront payments received in connection with our collaboration agreements and a $1.7 million decrease in operating lease liabilities.

During the three months ended March 31, 2022, operating activities provided $271.5 million of cash, resulting from our changes in our operating assets and liabilities of $293.2 million and net non-cash charges of $5.2 million partially offset by a net loss of $26.9 million. Net cash provided by changes in our operating assets and liabilities for the three months ended March 31, 2022 consisted primarily of the $300.0 million of cash received related to our collaboration receivable, an increase of $1.3 million in accounts payable and a decrease of $0.2 million of prepaid expenses and other current assets partially offset by a $3.9 million decrease in deferred revenue resulting from the recognition of revenue on the upfront payments received in connection

with our collaboration agreements, a $2.5 million decrease in accrued expenses and other liabilities and a $1.8 million decrease in operating lease liabilities.

Investing Activities

During the three months ended March 31, 2023 net cash used in investing activities was $29.5 million due to $26.2 million of purchases of marketable securities and $0.6 million in purchases of property and equipment partially offset by $56.4 million of maturities of marketable securities.

During the three months ended March 31, 2022 net cash provided by investing activities was $159.4 million due to $212.3 million of purchases of marketable securities and $0.2 million in purchases of property and equipment partially offset by $53.1 million of maturities of marketable securities.

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Financing Activities

During the three months ended March 31, 2023, net cash provided by financing activities was $0.1 million consisting of net proceeds from the exercise of common stock options and the employee stock purchase plan.

During the three months ended March 31, 2022, net cash provided by financing activities was $0.4 million consisting of net proceeds from the exercise of common stock options.

Funding Requirements

We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the preclinical activities, initiate clinical trials for our product candidates in development and continue to fund on-going clinical efforts. As of the issuance date of these interim condensed consolidated financial statements, we expect that our cash, cash equivalents and marketable securities will be sufficient to fund our operating expenses and capital expenditure requirements for at least twelve months. We have based these estimates as to how long we expect we will be able to fund our operations on assumptions that may prove to be inaccurate. We could use our available capital resources sooner than we currently expect, in which case we would be required to obtain additional financing sooner than planned, which may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We will be required to obtain further funding through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources.

If we are unable to raise sufficient capital as and when needed, we may be required to significantly curtail, delay or discontinue one or more of our research or development programs or the commercialization of any product candidate we may develop, or be unable to expand our operations or otherwise capitalize on our business opportunities. If we raise additional funds through collaborations or licensing arrangements with third parties, we may have to relinquish valuable rights to future revenue streams or product candidates or grant licenses on terms that may not be favorable to us.

See “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 for additional risks associated with our substantial capital requirements.

Off-balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the Securities and Exchange Commission.

Recently Issued Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our Principal Executive Officer (our Chief Executive Officer) and Principal Accounting and Financial Officer (our Chief Financial Officer), has evaluated the effectiveness of our disclosure controls and procedures as of period end. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are 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 recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. 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. Management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2023, our

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Principal Executive Officer and Principal Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended March 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we may become involved in litigation or other legal proceedings. We are not currently a party to any litigation or legal proceedings that, in the opinion of our management, are probable to have a material adverse effect on our business. Regardless of outcome, litigation can have an adverse impact on our business, financial condition, results of operations and prospects because of defense and settlement costs, diversion of management resources and other factors.

Item 1A. Risk Factors.

For a discussion of potential risks or uncertainties, please see “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

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Item 6. Exhibits.

Exhibit Number						Description
31.1*						Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*						Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**						Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**						Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*						XBRL Instance Document
101.SCH*						XBRL Taxonomy Extension Schema Document
101.CAL*						XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*						XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*						XBRL Taxonomy Extension Label Linkbase Document
101.PRE*						XBRL Taxonomy Extension Presentation Linkbase Document

______________

*Filed herewith.

**    Furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

			FOGHORN THERAPEUTICS, INC.
Date: May 8, 2023			By:			/s/ Allan Reine
						Allan Reine, M.D. Chief Financial Officer (Principal Accounting and Financial Officer)

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