As filed with the Securities and Exchange Commission on March 24, 2020

Registration No. 333

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-4

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

Tocagen Inc.

(Exact name of Registrant as specified in its charter)

 

Delaware		2834		26-1243872
(State or Other Jurisdiction of Incorporation or Organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification Number)

4445 Eastgate Mall, Suite 200

San Diego, CA 92121

(858) 412-8400

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Martin J. Duvall

Chief Executive Officer

Tocagen Inc.

4445 Eastgate Mall, Suite 200

San Diego, CA 92121

(858) 412-8400

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Please send copies of all communications to:

 

Karen Deschaine, Esq. Rama Padmanabhan, Esq. Cooley LLP 4401 Eastgate Mall San Diego, CA 92121 (858) 550-6000		Paul A. Wagner, Ph.D. President and Chief Executive Officer Forte Biosciences, Inc. 1124 W Carson Street MRL Building 3-320 Torrance, CA 90502 (310) 618-6994		Dan Koeppen, Esq. Thomas E. Hornish, Esq. Wilson Sonsini Goodrich & Rosati 12235 El Camino Real San Diego, CA 92130 (858) 350-2300

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effectiveness of this registration statement and the satisfaction or waiver of all other conditions under the Merger Agreement described herein.

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, please check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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		☐		Smaller reporting company		☒
				Emerging growth company		☒

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 7(a)(2)(B) of the Securities Act.  ☒

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

Exchange Act Rule 13(e)-4(i) (Cross-Border Issuer Tender Offer)  ☐

Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer)  ☐

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Security Being Registered		Amount to be Registered (1)		Proposed Maximum Offering Price Per Share		Proposed Maximum Aggregate Offering Price		Amount of Registration Fee(3)
Common stock, $0.001 par value per share		82,953,064		N/A		$1,523.52 (2)		$0.20
Common stock issuable upon exercise of warrants		23,695,333		N/A		$26,279,478.45		$3,411.08
TOTAL		106,648,397		N/A		$26,281,001.97		$3,411.28

(1)

Relates to common stock, $0.001 par value per share, of Tocagen Inc., a Delaware corporation (“Tocagen”), issuable to holders of common stock (including the shares of common stock issuable upon conversion of all shares of preferred stock prior to the merger described herein) $0.0001 par value per share of Forte Biosciences, Inc., a Delaware corporation (“Forte”), and upon exercise of warrants to purchase common stock of Forte, in the proposed merger of Telluride Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Tocagen, with and into Forte (the “Merger”). The amount of Tocagen common stock to be registered is based on the estimated number of shares of Tocagen common stock that are expected to be issued pursuant to the Merger, without taking into account the effect of a reverse stock split of Tocagen common stock, assuming an exchange ratio of 1.8149 shares of Tocagen common stock for each outstanding share of Forte common stock and 1.8149 shares of common stock issuable upon exercise of each warrant to purchase one share of Forte common stock.

(2)

Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(f)(2) of the Securities Act of 1933, as amended. Forte is a private company, no market exists for its securities, and Forte has an accumulated capital deficit. Therefore, the proposed maximum aggregate offering price is one-third of the aggregate par value of the Forte securities expected to be exchanged in the proposed merger.

(3)	This fee has been calculated pursuant to Section 6(b) of the Securities Act of 1933, as amended.

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

The information in this proxy statement/prospectus/information statement is not complete and may be changed. Tocagen may not sell its securities pursuant to the proposed transactions until the registration statement filed with the Securities and Exchange Commission is effective. This proxy statement/prospectus/information statement is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

PRELIMINARY—SUBJECT TO COMPLETION—DATED MARCH 24, 2020

PROPOSED MERGER

YOUR VOTE IS VERY IMPORTANT

To the Stockholders of Tocagen Inc. and Forte Biosciences, Inc.:

Tocagen Inc. (“Tocagen”) and Forte Biosciences, Inc. (“Forte”) have entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”), pursuant to which a wholly owned subsidiary of Tocagen will merge with and into Forte, with Forte surviving as a wholly owned subsidiary of Tocagen (the “Merger”). The Merger will result in a clinical-stage biopharmaceutical company focused on advancing Forte’s 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.

At the effective time of the Merger (the “Effective Time”), each share of common stock of Forte (including the shares of common stock issuable upon conversion of all shares of preferred stock prior to the Merger), $0.0001 par value per share (“Forte Common Stock”), will be converted into the right to receive 1.8149 shares of common stock of Tocagen, $0.001 par value per share (“Tocagen Common Stock”), subject to adjustment for the reverse stock split of Tocagen Common Stock to be implemented prior to the consummation of the Merger as discussed in this proxy statement/prospectus/information statement, and further adjusted based on Tocagen’s net cash in connection with the closing of the Merger. Tocagen will assume outstanding and unexercised options to purchase shares of Forte capital stock, and in connection with the Merger they will be converted into options to purchase shares of Tocagen Common Stock. At the Effective Time, Tocagen’s stockholders will continue to own and hold their then existing shares of Tocagen Common Stock, subject to adjustment for the reverse stock split. Each warrant to purchase Forte Common Stock outstanding and unexercised immediately prior to the Effective Time of the Merger will be assumed by Tocagen and will become a warrant to purchase shares of Tocagen Common Stock, with the number of shares and exercise price being adjusted by an exchange ratio of 1.8149 shares of Tocagen Common Stock issuable upon exercise of each warrant to purchase one share of Forte Common Stock. As of immediately prior to the Effective Time, all outstanding and unexercised options to purchase shares of Tocagen Common Stock with an exercise price of greater than $0.64 will be cancelled and have no further force and effect. All outstanding and unexercised options to purchase shares of Tocagen Common Stock with an exercise price equal to or less than $0.64 will remain effective and outstanding.

In connection with the Merger, on February 19, 2020, Forte entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with certain investors pursuant to which, among other things, Forte agreed to issue to the investors (i) approximately $14.1 million of shares of Forte Common Stock and (ii) warrants to purchase an equal number of shares of Forte Common Stock purchased under the Securities Purchase Agreement, and on March 18, 2020 Forte entered into a Common Stock Purchase Agreement with certain investors pursuant to which, among other things, Forte agreed to issue to the investors approximately $5.2 million of shares of Forte Common Stock (collectively with the shares and warrants issued under the Securities Purchase Agreement, the “Pre-Closing Financing”). The warrants to be issued pursuant to the Securities Purchase Agreement shall have an exercise price equal to that price per share of Tocagen Common Stock wherein Tocagen’s market value, after the Merger, would be $120.0 million. Immediately after the Merger, after giving effect to the Pre-Closing Financing and assuming Tocagen holds $7.5 million of net cash at the closing of the Merger, the former equity holders of Forte are expected to hold approximately 76.7% of the Tocagen capital stock on a fully diluted treasury stock method basis and the equity holders of Tocagen (pre-Merger) are expected to hold approximately 23.3% of the Tocagen capital stock on a fully diluted treasury stock method basis.

Shares of Tocagen’s common stock are currently listed on The Nasdaq Global Select Market under the symbol “TOCA” although Tocagen plans to transfer its listing to The Nasdaq Capital Market prior to completion of the Merger and file an initial listing application with The Nasdaq Stock Market LLC (“Nasdaq”) pursuant to Nasdaq’s “reverse merger” rules. Substantially concurrent with the completion of the Merger, Tocagen will be renamed “Forte Biosciences, Inc.” and expects to trade on The Nasdaq Capital Market under the symbol “FBRX.” On                                         , 2020, the last trading day before the date of this proxy statement/prospectus/information statement, the closing sale price of Tocagen’s common stock was $                per share.

Tocagen is holding a special meeting of its stockholders (the “Tocagen special meeting”) in order to obtain the stockholder approvals necessary to complete the Merger and related matters. At the Tocagen special meeting, which will be held at                local time, on                            , 2020 at                , unless postponed or adjourned to a later date, Tocagen will ask its common stockholders to, among other things:

 

1.

approve an amendment to the amended and restated certificate of incorporation of Tocagen to effect a reverse stock split of Tocagen’s common stock at a ratio within the range between 1-for-8 and 1-for-12 (with such ratio to be mutually agreed upon by Tocagen and Forte prior to the effectiveness of the Merger);

 

2.

approve (i) the issuance of shares of Tocagen capital stock pursuant to the Merger, which will represent more than 20% of the shares of Tocagen Common Stock outstanding immediately prior to the Merger, and (ii) the change of control resulting from the Merger, pursuant to Nasdaq Listing Rules 5635(a) and 5635(b), respectively; and

 

3.

approve a postponement or adjournment of the Tocagen special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposal Nos. 1 or 2.

Please refer to the attached proxy statement/prospectus/information statement for further information with respect to the business to be transacted at the Tocagen special meeting. As described in the accompanying proxy statement/prospectus/information statement, certain of Forte’s stockholders who in the aggregate own approximately 95% of the shares of Forte Common Stock, and certain of Tocagen’s stockholders who in the aggregate own approximately 6% of the shares of Tocagen Common Stock, in each case, outstanding as of the date of the Merger Agreement, are parties to support agreements with Tocagen and Forte, whereby such stockholders have agreed to vote their shares in favor of the adoption or approval, among other things, of the Merger Agreement and the approval of the transactions contemplated therein, including the Merger, the issuance of shares of Tocagen Common Stock to Forte’s stockholders, and the change of control resulting from the Merger, subject to the terms of the support agreements.

In addition, following the effectiveness of the registration statement on Form S-4 (the “Registration Statement”), of which this proxy statement/prospectus/information statement is a part, and pursuant to the conditions of the Merger Agreement and the support agreements, Forte’s stockholders who are party to the support agreements will each execute an action by written consent of Forte’s stockholders, referred to as the written consent, adopting the Merger Agreement, thereby approving the transactions contemplated thereby, including the Merger. No meeting of Forte’s stockholders will be held; all of Forte’s stockholders will have the opportunity to elect to adopt the Merger Agreement, thereby approving the Merger and related transactions, by signing and returning to Forte a written consent once this Registration Statement is declared effective by the Securities and Exchange Commission.

After careful consideration, Tocagen’s board of directors has unanimously (i) determined that the Merger and all related transactions contemplated by the Merger Agreement are advisable and fair to, and in the best interests of, Tocagen and its stockholders (ii) approved and declared advisable the Merger Agreement and the transactions contemplated therein and (iii) determined to recommend, upon the terms and subject to the conditions set forth in the Merger Agreement, that its stockholders vote “FOR” Proposal Nos. 1, 2 and 3.

After careful consideration, Forte’s board of directors has unanimously (i) determined that the Merger and all related transactions contemplated by the Merger Agreement are advisable and fair to, and in the best interests

of, Forte and its stockholders, (ii) approved and declared advisable the Merger Agreement and the transactions contemplated therein and (iii) determined to recommend, upon the terms and subject to the conditions set forth in the Merger Agreement, that each Forte stockholder sign and return the written consent, indicating its (w) adoption of the Merger Agreement and approval of the transactions contemplated thereby, (x) acknowledgement that the approval given is irrevocable and that such stockholder is aware of its rights to demand appraisal for its shares pursuant to Section 262 of the General Corporation Law of the State of Delaware (“DGCL”), and that such stockholder has received and read a copy of Section 262 of the DGCL, (y) consent to conversion of Forte’s preferred stock to Forte Common Stock immediately prior to the closing of the Merger, for Forte’s preferred stockholders, and is aware of its dissenters’ rights in accordance with Chapter 13 of the California Corporations Code (the “CCC”), and that such stockholder has received and read a copy of Section 262 of the DGCL and Chapter 13 of the CCC, and (z) acknowledgement that by its approval of the Merger it is not entitled to appraisal rights or dissenters’ rights with respect to its shares in connection with the Merger and thereby waives any rights to receive payment of the fair value of its capital stock under the DGCL or the CCC.

More information about Tocagen, Forte and the proposed transaction is contained in this proxy statement/prospectus/information statement. Tocagen and Forte urge you to read the accompanying proxy statement/prospectus/information statement carefully and in its entirety. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER “RISK FACTORS” BEGINNING ON PAGE 10.

Tocagen and Forte are excited about the opportunities the Merger brings to Tocagen’s and Forte’s stockholders, and thank you for your consideration and continued support.

 

Marty J. Duvall Chief Executive Officer Tocagen Inc.		Paul A. Wagner, Ph.D. President and Chief Executive Officer Forte Biosciences, Inc.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this proxy statement/prospectus/information statement. Any representation to the contrary is a criminal offense.

The accompanying proxy statement/prospectus/information statement is dated                        , 2020, and is first being mailed to Tocagen’s and Forte’s stockholders on or about                        , 2020.

PRELIMINARY—SUBJECT TO COMPLETION—DATED MARCH 24, 2020

Tocagen Inc.

4445 Eastgate Mall, Suite 200

San Diego, CA 92121

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

To Be Held On                                    , 2020

Dear Stockholder of Tocagen:

On behalf of the board of directors of Tocagen Inc., a Delaware corporation (“Tocagen”), we are pleased to deliver this proxy statement/prospectus/information statement for a special meeting of stockholders of Tocagen (the “Tocagen special meeting”), (i) for the proposed merger between Tocagen and Forte Biosciences, Inc., a Delaware corporation (“Forte”), pursuant to which Telluride Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Tocagen, will merge with and into Forte, with Forte surviving as a wholly owned subsidiary of Tocagen (the “Merger”). The Tocagen special meeting will be held on                            , 2020, at                            local time at                             for the following purposes:

 

1.

approve an amendment to the amended and restated certificate of incorporation of Tocagen to effect a reverse stock split of Tocagen’s common stock at a ratio within the range between 1-for-8 and 1-for-12 (with such ratio to be mutually agreed upon by Tocagen and Forte prior to the effectiveness of the Merger);

 

2.

approve (i) the issuance of shares of Tocagen capital stock pursuant to the Merger, which will represent more than 20% of the shares of Tocagen Common Stock outstanding immediately prior to the Merger, and (ii) the change of control resulting from the Merger, pursuant to Nasdaq Listing Rules 5635(a) and 5635(b), respectively; and

 

3.

approve a postponement or adjournment of the Tocagen special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposal Nos. 1 or 2.

Please refer to the attached proxy statement/prospectus/information statement for further information with respect to the business to be transacted at the Tocagen special meeting. The board of directors of Tocagen (the “Tocagen Board”) has fixed                , 2020, as the record date for the determination of stockholders entitled to notice of, and to vote at, the Tocagen special meeting and any adjournment or postponement thereof. Only holders of record of shares of Tocagen Common Stock at the close of business on the record date are entitled to notice of, and to vote at, the Tocagen special meeting. At the close of business on the record date, Tocagen had                shares of common stock outstanding and entitled to vote. A complete list of such stockholders entitled to vote at the Tocagen special meeting will be available for examination at the Tocagen offices in San Diego, California during normal business hours for a period of ten days prior to the Tocagen special meeting.

Your vote is important. Approval of Proposal No. 1 requires the affirmative vote of holders of a majority of Tocagen Common Stock outstanding as of the record date for the Tocagen special meeting. Approval of Proposal Nos. 2 and 3 requires the affirmative vote of a majority of the votes cast in person or by proxy at the special meeting. Each of Proposal Nos. 1 and 2 is a condition to the consummation of the Merger. Therefore, the Merger cannot be consummated without the approval of Proposal Nos. 1 and 2.

Even if you plan to attend the Tocagen special meeting in person, Tocagen requests that you sign and return the enclosed proxy card to ensure that your shares will be represented at the Tocagen special meeting if you are unable to attend. If you sign, date and mail your proxy card without indicating how you wish to vote, your proxy will be counted as a vote in favor of adoption of each of the proposals.

THE TOCAGEN BOARD HAS UNANIMOUSLY DETERMINED AND BELIEVES THAT EACH OF THE PROPOSALS OUTLINED ABOVE IS ADVISABLE TO, AND IN THE BEST INTERESTS OF, TOCAGEN AND ITS STOCKHOLDERS AND HAS UNANIMOUSLY APPROVED EACH SUCH PROPOSAL. THE TOCAGEN BOARD UNANIMOUSLY RECOMMENDS THAT TOCAGEN’S COMMON STOCKHOLDERS VOTE “FOR” EACH SUCH PROPOSAL.

By Order of the Tocagen Board of Directors,

Marty J. Duvall

Chief Executive Officer

San Diego, California

                                     , 2020

Tocagen is closely monitoring developments related to COVID-19. It could become necessary to change the date, time, location and/or means of holding the Tocagen special meeting (including by means of remote communication). If such a change is made, Tocagen will announce the change in advance, and details on how to participate will be issued by press release, posted on Tocagen’s website and filed as additional proxy materials.

 

REFERENCES TO ADDITIONAL INFORMATION

This proxy statement/prospectus/information statement incorporates important business and financial information about Tocagen that is not included in or delivered with this document. You may obtain this information without charge through the SEC website (www.sec.gov) or upon your written or oral request by contacting Tocagen Inc., Attention: Mark Foletta, 4445 Eastgate Mall, Suite 200, San Diego, California 92121, or by email at mfoletta@tocagen.com or by calling (858) 412-8400.

You may also request additional copies from Tocagen’s proxy solicitor using the following contact information:

The Proxy Advisory Group, LLC

18 East 41st Street, Suite 2000

New York, New York 10017

1 (212) 616-2180

To ensure timely delivery of these documents, any request should be made no later than                     , 2020 to receive them before the special meeting.

For additional details about where you can find information about Tocagen, please see the section titled “Where You Can Find More Information” beginning on page 271 of this proxy statement/prospectus/information statement.

 

TABLE OF CONTENTS

 

		Page
QUESTIONS AND ANSWERS ABOUT THE MERGER			1
PROSPECTUS SUMMARY			10
SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA			22
MARKET PRICE AND DIVIDEND INFORMATION			23
RISK FACTORS			24
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS			98
THE SPECIAL MEETING OF TOCAGEN’S STOCKHOLDERS			99
THE MERGER			103
THE MERGER AGREEMENT			141
AGREEMENTS RELATED TO THE MERGER			162
MATTERS BEING SUBMITTED TO A VOTE OF TOCAGEN’S STOCKHOLDERS			163
PROPOSAL NO. 1: APPROVAL OF AN AMENDMENT TO THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF TOCAGEN EFFECTING THE REVERSE SPLIT			163
PROPOSAL NO. 2: APPROVAL OF (I)  THE ISSUANCE OF SHARES OF TOCAGEN COMMON STOCK PURSUANT TO THE MERGER, AND (II) THE CHANGE OF CONTROL RESULTING FROM THE MERGER			170
PROPOSAL NO. 3: APPROVAL OF POSSIBLE ADJOURNMENT OF THE TOCAGEN SPECIAL MEETING			171
DESCRIPTION OF TOCAGEN’S BUSINESS			172
DESCRIPTION OF FORTE’S BUSINESS			179
TOCAGEN MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			201
FORTE MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			212
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS			219
MANAGEMENT FOLLOWING THE MERGER			220
EXECUTIVE COMPENSATION OF TOCAGEN			226
EXECUTIVE COMPENSATION OF FORTE			241
RELATED PARTY TRANSACTIONS OF THE COMBINED COMPANY			248
DESCRIPTION OF TOCAGEN CAPITAL STOCK			251
COMPARISON OF RIGHTS OF HOLDERS OF FORTE STOCK AND TOCAGEN STOCK			255
PRINCIPAL STOCKHOLDERS OF TOCAGEN			263
PRINCIPAL STOCKHOLDERS OF FORTE			265
PRINCIPAL STOCKHOLDERS OF THE COMBINED COMPANY			268
LEGAL MATTERS			271
EXPERTS			271
WHERE YOU CAN FIND MORE INFORMATION			271
PRO FORMA COMBINED FINANCIAL STATEMENTS			PF-1
TOCAGEN INC. INDEX TO FINANCIAL STATEMENTS			FINTOC-1
FORTE BIOSCIENCES, INC. INDEX TO FINANCIAL STATEMENTS			FBRX-1
ANNEX A—AGREEMENT AND PLAN OF MERGER AND REORGANIZATION			A-1
ANNEX B—OPINION OF TOCAGEN’S FINANCIAL ADVISOR DATED FEBRUARY 19, 2020			B-1
ANNEX C—APPRAISAL RIGHTS (SECTION  262 OF THE DELAWARE GENERAL CORPORATION LAW)			C-1
ANNEX D—DISSENTERS’ RIGHTS (CHAPTER 13 OF THE CALIFORNIA CORPORATIONS CODE)			D-1
ANNEX E—AMENDMENT TO AMENDED AND RESTATED CERTIFICATE OF INCORPORATION			E-1

 

QUESTIONS AND ANSWERS ABOUT THE MERGER

Except where specifically noted, the following information and all other information contained in this proxy statement/prospectus/information statement does not give effect to the proposed reverse stock split (the “Reverse Split”) of common stock of Tocagen Inc. (“Tocagen”), as described in Proposal No. 1 beginning on page 163 of this proxy statement/prospectus/information statement.

The following section provides answers to frequently asked questions about the proposed merger transaction. This section, however, provides only summary information. For a more complete response to these questions and for additional information, please refer to the cross-referenced sections.

 

Q:	What is the Merger?

 

A:

Tocagen, Telluride Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Tocagen (“Merger Sub”), and Forte Biosciences, Inc. (“Forte”) entered into the Agreement and Plan of Merger and Reorganization on February 19, 2020 (the “Merger Agreement”). The Merger Agreement, as it may be amended from time to time, contains the terms and conditions of the proposed merger transaction among Tocagen, Merger Sub and Forte. Under the Merger Agreement, Merger Sub will merge with and into Forte, with Forte surviving as a wholly owned subsidiary of Tocagen. This transaction is referred to as the “Merger.”

At the effective time of the Merger (the “Effective Time”): (a) each share of Forte’s common stock (the “Forte Common Stock”) and each share of Forte’s preferred stock (the “Forte Preferred Stock” and, together with the Forte Common Stock, the “Forte Capital Stock”) outstanding immediately prior to the Effective Time (excluding certain shares to be canceled pursuant to the Merger Agreement and shares held by stockholders who have exercised and perfected appraisal rights as more fully described in the section titled “The Merger—Appraisal Rights and Dissenters’ Rights” beginning on page 135 of this proxy statement/prospectus/information statement but including any shares of Forte Capital Stock issued pursuant to the Pre-Closing Financing (as defined below)) will automatically be converted into the right to receive a number of shares of Tocagen’s common stock (“Tocagen Common Stock”) calculated using an exchange ratio formula described in the Merger Agreement (the “Exchange Ratio”).

In connection with the Merger, on February 19, 2020, Forte entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with certain investors pursuant to which, among other things, Forte agreed to issue to the investors (i) approximately $14.1 million of shares of Forte Common Stock and (ii) warrants to purchase an equal number of shares of Forte Common Stock purchased under the Securities Purchase Agreement, and on March 18, 2020 Forte entered into a Common Stock Purchase Agreement with certain investors pursuant to which, among other things, Forte agreed to issue to the investors approximately $5.2 million of shares of Forte Common Stock (collectively with the shares and warrants issued under the Securities Purchase Agreement, the “Pre-Closing Financing”). The warrants to be issued pursuant to the Securities Purchase Agreement shall have an exercise price equal to that price per share of Tocagen Common Stock wherein Tocagen’s market value, after the Merger, would be $120.0 million.

Under the Exchange Ratio formula described in the Merger Agreement and assuming Tocagen holds $7.5 million of net cash at the closing of the Merger, the former Forte equity holders immediately before the Merger are expected to hold approximately 76.7% of the capital stock of Tocagen outstanding immediately following the Merger on a fully diluted treasury stock method basis and the equity holders of Tocagen immediately before the Merger are expected to hold approximately 23.3% of the Tocagen capital stock outstanding immediately following the Merger on a fully diluted treasury stock method basis, in each case, after giving effect to the Pre-Closing Financing. The Exchange Ratio formula is based upon a Forte fixed valuation of $49.3 million (assuming a Pre-Closing Financing of $19.3 million) and a Tocagen base valuation of $15 million, which is subject to adjustment based upon the Tocagen Net Cash relative to a range between $7.5 million and $10.0 million, the lower end of which range is subject to further adjustment,

 

1

including in connection with the disposition of the Company Assets, and as more fully described in the section titled “Overview of the Merger Agreement and Agreements Related to the Merger Agreement—Merger Consideration and Exchange Ratio” beginning on page 14 of this proxy statement/prospectus/information statement.

Assuming a $19.3 million investment in the Pre-Closing Financing, prior to the consummation of the Merger, the outstanding equity of Tocagen on a fully diluted treasury stock method basis is expected to be held as follows: equity holders of former Forte Capital Stock (prior to the Pre-Closing Financing) will hold approximately 46.7%, the investors in the Pre-Closing Financing will hold approximately 30.0%; and pre-Merger Tocagen equity holders will hold approximately 23.3%.

At the Effective Time, Tocagen’s stockholders will continue to own and hold their existing shares of Tocagen Common Stock, subject to adjustment in connection with the Reverse Split. As of immediately prior to the Effective Time, all outstanding and unexercised options to purchase shares of Tocagen Common Stock with an exercise price of greater than $0.64 will be cancelled and have no further force and effect. All outstanding and unexercised options to purchase shares of Tocagen Common Stock with an exercise price equal to or less than $0.64 will remain effective and outstanding. Each option to purchase shares of Forte Common Stock that is outstanding and unexercised immediately prior to the Effective Time, whether or not vested, will be converted into an option to purchase shares of Tocagen Common Stock. Each warrant to purchase Forte Common Stock outstanding and unexercised immediately prior to the Effective Time will be assumed by Tocagen and will become a warrant to purchase shares of Tocagen Common Stock, with the number of shares and exercise price being adjusted by the Exchange Ratio. Substantially concurrent with the completion of the Merger, Tocagen will change its corporate name to “Forte Biosciences, Inc.” as required by the Merger Agreement.

 

Q:	What will happen to Tocagen if, for any reason, the Merger does not close?

 

A:

If, for any reason, the Merger does not close, the board of directors of Tocagen (the “Tocagen Board”) may elect to, among other things, attempt to continue to sell or otherwise dispose of the various assets of Tocagen, dissolve and liquidate its assets or commence bankruptcy proceedings. Under certain circumstances, Tocagen may be obligated to pay Forte a termination fee of $500,000 or $750,000 or reimburse certain expenses of Forte up to $250,000, as more fully described in the section titled “The Merger Agreement—Termination and Termination Fees” beginning on page 158 of this proxy statement/prospectus/information statement. If Tocagen decides to dissolve and liquidate its assets, Tocagen would be required to pay all of its debts and contractual obligations, and to set aside certain reserves for potential future claims. There can be no assurances as to the amount or timing of available cash left to distribute to stockholders after paying the debts and other obligations of Tocagen and setting aside funds for reserves.

 

Q:	Why are the two companies proposing to merge?

 

A:

The Merger will result in a clinical-stage biopharmaceutical company focused on advancing Forte’s 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. For a discussion of Tocagen’s and Forte’s reasons for the Merger, please see the section titled “The Merger—Tocagen Reasons for the Merger” beginning on page 110 of this proxy statement/prospectus/information statement and “The Merger—Forte Reasons for the Merger” beginning on page 114 of this proxy statement/prospectus/information statement.

 

Q:	Why am I receiving this proxy statement/prospectus/information statement?

 

A:	You are receiving this proxy statement/prospectus/information statement because you have been identified as a common stockholder of Tocagen as of the record date, or a stockholder of Forte eligible to execute the

 

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Forte written consent. If you are a common stockholder of Tocagen, you are entitled to vote at the special meeting of stockholders of Tocagen (the “Tocagen special meeting”), which has been called for the purpose of approving the following proposals:

 

1.

the amendment to the amended and restated certificate of incorporation of Tocagen to effect a reverse stock split of Tocagen’s common stock at a ratio within the range between 1-for-8 and 1-for-12 (with such ratio to be mutually agreed upon by Tocagen and Forte prior to the effectiveness of the Merger);

 

2.

(i) the issuance of shares of Tocagen capital stock pursuant to the Merger, which will represent more than 20% of the shares of Tocagen Common Stock outstanding immediately prior to the Merger, and (ii) the change of control resulting from the Merger, pursuant to Nasdaq Listing Rules 5635(a) and 5635(b), respectively; and

 

3.

the postponement or adjournment of the Tocagen special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposal Nos. 1 or 2.

Proposal Nos. 1 through 3 described above are collectively the “Tocagen Stockholder Matters,” and Proposal Nos. 1 and 2 above are collectively the “Closing Tocagen Stockholder Matters.” We do not expect that any matter other than Proposal Nos. 1 through 3 will be brought before the Tocagen special meeting.

If you are a stockholder of Forte, you are requested to sign and return the Forte written consent to (i) adopt the Merger Agreement and approve the transactions and actions contemplated by the Merger Agreement, including the conversion of the Series A preferred stock to common stock immediately prior to the closing of the Merger you hold shares of Forte’s Series A preferred stock, (ii) acknowledge that your approval is irrevocable and that you are aware of your rights to demand appraisal for your shares pursuant to Section 262 of the General Corporation Law of the State of Delaware (“DGCL”), and you are aware of your dissenters’ rights in accordance with Chapter 13 of the California Corporations Code (the “CCC”), and that you have received and read a copy of Section 262 of the DGCL and Chapter 13 of the CCC, and (iii) acknowledge that by your approval of the Merger you are not entitled to appraisal rights or dissenters’ rights with respect to your shares in connection with the Merger and thereby waive any rights to receive payment of the fair value of your capital stock under the DGCL or the CCC (items (i) through (iii), collectively, the “Forte Stockholder Matters”).

This document serves as: (x) a proxy statement of Tocagen used to solicit proxies for the Tocagen special meeting, (y) a prospectus of Tocagen used to offer shares of Tocagen Common Stock (i) in exchange for shares of Forte Capital Stock in the Merger and (ii) upon exercise of the warrants to purchase shares of Tocagen common stock assumed in the Merger in exchange for the warrants to purchase shares of Forte Common Stock and (z) an information statement of Forte used to solicit the written consent of its stockholders for the adoption of the Merger Agreement and the approval of the Merger and related transactions after the declaration of the effectiveness of the registration statement on Form S-4 (the “Registration Statement”), of which this proxy statement/prospectus/information statement is a part.

 

Q:	What is required to consummate the Merger?

 

A:	To consummate the Merger, Tocagen’s common stockholders must approve the Closing Tocagen Stockholder Matters (Proposal Nos. 1 and 2 above) and Forte’s common stockholders must approve the Forte Stockholder Matters (items (i), (ii), and (iii) above).

Certain of Forte’s stockholders who in the aggregate own approximately 95% of the shares of Forte Common Stock, and certain of Tocagen’s stockholders who in the aggregate own approximately 6% of the shares of Tocagen Common Stock, in each case, outstanding as of the date of the Merger Agreement, are parties to support agreements with Tocagen and Forte, whereby such stockholders have agreed, subject to the terms of the support agreements, to vote their shares (or execute a written consent) in favor of the Tocagen Stockholder Matters or the Forte Stockholder Matters, as applicable.

In addition to the requirement of obtaining stockholder approval of the Closing Tocagen Stockholder Matters and Forte Stockholder Matters, each of the other closing conditions set forth in the Merger Agreement must be

 

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satisfied or waived. For a complete description of the closing conditions under the Merger Agreement, we urge you to read the section titled “The Merger Agreement—Conditions to the Completion of the Merger” beginning on page 145 of this proxy statement/prospectus/information statement.

 

Q:	What proposals will be voted on at the Tocagen special meeting, other than the Closing Tocagen Stockholder Matters?

 

A:	At the Tocagen special meeting, the holders of Tocagen Common Stock will also be asked to consider the following proposals, along with any other business that may properly come before the Tocagen special meeting or any adjournment or postponement thereof.

 

•

Proposal No. 3 to approve a postponement or adjournment of the Tocagen special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposal Nos. 1 or 2.

Proposal Nos. 1 and 2 are not conditioned upon Proposal No. 3 being approved. Proposal Nos. 1 through 3 are referred to collectively in this proxy statement/prospectus/information statement as “the proposals.”

 

Q:	What will Forte’s stockholders, option holders and warrant holders receive in the Merger?

 

A:

Tocagen will assume outstanding and unexercised options to purchase shares of Forte Capital Stock, and in connection with the Merger such options will be converted into options to purchase shares of Tocagen Common Stock, with the number of Tocagen shares subject to such option, and the exercise price, being appropriately adjusted to reflect the Exchange Ratio, and any unvested Forte restricted stock awards, which will be exchanged for shares of Tocagen Common Stock to be unvested to the same extent as such Forte restricted stock awards and subject to the same restrictions as such Forte restricted stock awards. Each warrant to purchase Forte Common Stock outstanding and unexercised immediately prior to the Effective Time of the Merger will be assumed by Tocagen and will become a warrant to purchase shares of Tocagen Common Stock, with the number of shares and exercise price being adjusted by the Exchange Ratio. For a more complete description of what Forte’s stockholders and option holders will receive in the Merger, please see the section titled “Overview of the Merger Agreement and Agreements Related to the Merger Agreement—Merger Consideration and Exchange Ratio” beginning on page 14 of this proxy statement/prospectus/information statement.

 

Q:	What will Tocagen’s stockholders, option holders and restricted stock unit holders receive in the Merger?

 

A:

At the Effective Time, Tocagen’s stockholders will continue to own and hold their existing shares of Tocagen Common Stock. All outstanding and unexercised options to purchase shares of Tocagen Common Stock with an exercise price of greater than $0.64 will be cancelled for no consideration immediately prior to the Effective Time. All of Tocagen’s restricted stock units will vest at the Effective Time.

 

Q:	Who will be the directors of Tocagen following the Merger?

 

A:

At the Effective Time, the combined company is expected to initially have an eight-member board of directors, comprised of (a) Paul A. Wagner, Ph.D., Lawrence F. Eichenfield, M.D., Steven Kornfeld, Patricia Walker, M.D., Ph.D., Donald A. Williams and one additional member to be appointed prior to the time this Registration Statement is declared effective under the Securities Act, each as a Forte designee and (b) Martin J. Duvall and Thomas E. Darcy, each as a Tocagen designee, until their respective successors are duly elected or appointed and qualified or their earlier death, resignation or removal. The aforementioned board of directors will have an audit committee, a compensation committee and a nominating and corporate governance committee, in accordance with the rules of The Nasdaq Stock Market LLC (“Nasdaq”). All of Tocagen’s current directors other than Martin J. Duvall and Thomas E. Darcy are expected to resign from their positions as directors of Tocagen, effective upon the Effective Time.

 

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Q:	Who will be the executive officers of Tocagen following the Merger?

 

A:	Immediately following the Merger, the executive management team of the combined company is expected to be comprised of the following individuals with such additional officers as may be added by Forte or the combined company:

 

Name		Position with the Combined Company		Current Position
Paul A. Wagner, Ph.D.		President, Chief Executive Officer, and Director		President, Chief Executive Officer and Director of Forte
Antony Riley		Chief Financial Officer		Chief Financial Officer of Forte

 

Q:	As a stockholder of Tocagen, how does the Tocagen Board recommend that I vote?

 

A:	After careful consideration, the Tocagen Board unanimously recommends that the Tocagen Common Stockholders vote:

 

•

“FOR” Proposal No. 1 to approve an amendment to the amended and restated certificate of incorporation of Tocagen to effect the Reverse Split;

 

•

“FOR” Proposal No. 2 to approve (i) the issuance of shares of Tocagen capital stock pursuant to the Merger, which will represent more than 20% of the shares of Tocagen Common Stock outstanding immediately prior to the Merger, and (ii) the change of control resulting from the Merger, pursuant to Nasdaq Listing Rules 5635(a) and 5635(b), respectively; and

 

•

“FOR” Proposal No. 3 to adjourn the special meeting, if necessary to solicit additional proxies if there are not sufficient votes in favor of Proposal Nos. 1 or 2.

For more information on each proposal and the Tocagen Board’s recommendations, please see the section entitled “Matters Being Submitted to a Vote of Tocagen’s Stockholders” beginning on page 163 of this proxy statement/prospectus/information statement.

 

Q:	How many votes are needed to approve each proposal?

 

A:

Approval of Proposal No. 1 requires the affirmative vote of holders of a majority of Tocagen Common Stock outstanding as of the record date for the Tocagen special meeting. Approval of Proposal Nos. 2 and 3 requires the affirmative vote of a majority of the votes cast in person or by proxy at the special Meeting.

 

Q:	As a stockholder of Forte, how does the Forte Board recommend that I vote?

 

A:	After careful consideration, the board of directors of Forte (the “Forte Board”) unanimously recommends that the Forte stockholders execute the written consent indicating their vote in favor of the Forte Stockholder Matters.

 

Q:	What risks should I consider in deciding whether to vote in favor of the Tocagen Stockholder Matters or to execute and return the written consent, as applicable?

 

A:

You should carefully review the section of the proxy statement/prospectus/information statement titled “Risk Factors,” which sets forth certain risks and uncertainties related to the Merger, risks and uncertainties to which the combined company’s business will be subject, and risks and uncertainties to which each of Tocagen and Forte, as an independent company, is subject.

 

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Q:	When do you expect the Merger to be consummated?

 

A:

We anticipate that the Merger will be consummated during the second quarter of 2020, soon after the Tocagen special meeting to be held on                 , 2020 but we cannot predict the exact timing. For more information, please see the section titled “The Merger Agreement—Conditions to the Completion of the Merger” beginning on page 145 of this proxy statement/prospectus/information statement.

 

Q:	What are the material U.S. federal income tax consequences of the Merger to U.S. Holders of Forte shares?

 

A:

Tocagen and Forte intend the Merger to qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”), as described in the section titled “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 131 of this proxy statement/prospectus/information statement. Assuming the Merger constitutes a reorganization, subject to the limitations and qualifications described in the section titled “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 131 of this proxy statement/prospectus/information statement, Forte stockholders generally should not recognize gain or loss for U.S. federal income tax purposes on the receipt of shares of Tocagen Common Stock issued in connection with the Merger (other than in respect of cash received in lieu of fractional shares). Each Forte stockholder who receives cash in lieu of a fractional share of Tocagen Common Stock should generally recognize capital gain or loss in an amount equal to the difference between the amount of cash received in lieu of such fractional share and the stockholder’s tax basis allocable to such fractional share.

If the Merger is not treated as a reorganization under Section 368(a) of the Code, then, subject to the limitations and qualification described in the section titled “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 131 of this proxy statement/prospectus/information statement, each Forte stockholder will generally recognize capital gain or loss, for U.S. federal income tax purposes, on the receipt of Tocagen Common Stock issued to such Forte stockholder and on any cash received in lieu of fractional shares in connection with the Merger. The tax consequences to each Forte stockholder will depend on that stockholder’s particular circumstances. Each Forte stockholder should consult with his, her or its tax advisor for a full understanding of the tax consequences of the Merger to that stockholder.

 

Q:	What are the material U.S. federal income tax consequences of the Reverse Split to U.S. Holders of Tocagen shares?

 

A:

The Reverse Split should constitute a “recapitalization” for U.S. federal income tax purposes. As a result, a Tocagen stockholder who is a U.S. holder (as defined in the section titled “Matters Being Submitted to a Vote of Tocagen’s Stockholders—Proposal No. 1: Approval of an Amendment to the Amended and Restated Certificate of Incorporation of Tocagen Effecting the Reverse Split—Material U.S. Federal Income Tax Consequences of the Reverse Split” beginning on page 166 of this proxy statement/prospectus/information statement) generally should not recognize gain or loss upon the Reverse Split (other than in respect of cash received in lieu of fractional shares). A U.S. holder’s aggregate tax basis in the shares of Tocagen Common Stock received pursuant to the Reverse Split should equal the aggregate tax basis of the shares of Tocagen Common Stock surrendered (excluding any portion of such basis that is allocated to any fractional share of Tocagen Common Stock), and such U.S. holder’s holding period in the shares of Tocagen Common Stock received should include the holding period in the shares of Tocagen Common Stock surrendered. Treasury Regulations provide detailed rules for allocating the tax basis and holding period of the shares of Tocagen Common Stock surrendered to the shares of Tocagen Common Stock received in a “recapitalization”. U.S. holders of shares of Tocagen Common Stock acquired on different dates and at different prices should consult their tax advisors regarding the allocation of the tax basis and holding period of such shares.

 

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Please review the information in the section titled “Matters Being Submitted to a Vote of Tocagen’s Stockholders—Proposal No. 1: Approval of an Amendment to the Amended and Restated Certificate of Incorporation of Tocagen Effecting the Reverse Split—Material U.S. Federal Income Tax Consequences of the Reverse Split” beginning on page 166 of this proxy statement/prospectus/information statement for a more complete description of the material U.S. federal income tax consequences of the Reverse Split to Tocagen U.S. holders.

 

Q:	What do I need to do now?

 

A:	Tocagen and Forte urge you to read this proxy statement/prospectus/information statement carefully, including its annexes and information incorporated herein, and to consider how the Merger affects you.

If you are a common stockholder of Tocagen, you may provide your proxy instructions in one of four different ways. First, you can mail your signed proxy card in the enclosed return envelope. Second, you may provide your proxy instructions via phone by following the instructions on your proxy card or voting instruction form. Third, you may provide your proxy instructions via the Internet by following the instructions on your proxy card or voting instruction form. Finally, you may vote in person at the Tocagen special meeting, as described below. Please provide your proxy instructions only once, unless you are revoking a previously delivered proxy instruction, and as soon as possible so that your shares can be voted at the Tocagen special meeting. If you sign, date and mail your proxy card without indicating how you wish to vote, your shares will be voted in favor of adoption of each of Proposals 1, 2 and 3.

If you are a stockholder of Forte, you may execute and return your written consent to Forte in accordance with the instructions provided by Forte once this Registration Statement is declared effective by the U.S. Securities and Exchange Commission (“SEC”).

 

Q:	What happens if I do not return a proxy card or otherwise provide proxy instructions, as applicable?

 

A:

If you are a common stockholder of Tocagen, the failure to return your proxy card or otherwise provide proxy instructions (a) will have the same effect as voting against Proposal No. 1, (b) will have no effect on Proposal No. 2 or No. 3 and (c) your shares will not be counted for purposes of determining whether a quorum is present at the Tocagen special meeting.

 

Q:	When and where is the special meeting of Tocagen’s stockholders?

 

A:

The Tocagen special meeting will be held at                 , local time, on                 , 2020 at                  located at                 , unless postponed or adjourned to a later date. Subject to space availability, all of Tocagen’s stockholders as of the record date, or their duly appointed proxies, may attend the Tocagen special meeting.

Tocagen is closely monitoring developments related to COVID-19. It could become necessary to change the date, time, location and/or means of holding the Tocagen special meeting (including by means of remote communication). If such a change is made, Tocagen will announce the change in advance, and details on how to participate will be issued by press release, posted on Tocagen’s website and filed as additional proxy materials.

 

Q:	May I vote in person at the special meeting of stockholders of Tocagen?

 

A:

If your shares of Tocagen Common Stock are registered directly in your name with Tocagen’s transfer agent as of the record date, you are considered to be the stockholder of record with respect to those shares, and the proxy materials and proxy card are being sent directly to you by Tocagen. If you are a stockholder of record of Tocagen, you may attend the Tocagen special meeting and vote your shares in person. Even if you plan to attend the Tocagen special meeting in person, Tocagen requests that you sign and return the enclosed proxy to ensure that your shares will be represented at the Tocagen special meeting if you become unable to

 

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attend. If your shares of Tocagen Common Stock are held in a brokerage account or by another nominee, you are considered the beneficial owner of shares held in “street name,” and the proxy materials are being forwarded to you by your broker or other nominee together with a voting instruction card. As the beneficial owner, you are also invited to attend the Tocagen special meeting. Because a beneficial owner is not the stockholder of record, you may not vote these shares in person at the Tocagen special meeting unless you obtain a proxy from the broker, trustee or nominee that holds your shares, giving you the right to vote the shares at the Tocagen special meeting.

 

Q:	How are votes counted?

 

A:	Votes will be counted by the inspector of elections appointed for the meeting, who will separately count votes “FOR” and “AGAINST,” abstentions and, if applicable, broker non-votes.

We do not expect that any matter other than Proposal Nos. 1 through 3 will be brought before the Tocagen special meeting.

 

Q:	What are “broker non-votes”?

 

A:

Brokers who hold shares in street name for customers have the authority to vote on “routine” proposals when they have not received instructions from beneficial owners. However, brokers are precluded from exercising their voting discretion with respect to approval of non-routine matters, such as Proposal No. 2, and, as a result, absent specific instructions from the beneficial owner of such shares, brokers are not empowered to vote those shares, referred to generally as “broker non-votes.” Broker non-votes, if any, will be treated as shares that are present at the special meeting for purposes of determining whether a quorum exists but will not be counted or deemed present in person or by proxy for the purpose of voting on Proposal No. 2.

It is anticipated that Proposal Nos. 1 and 3 will be discretionary proposals considered routine under the rules of the New York Stock Exchange (the “NYSE”), which generally controls the ability of brokers to vote or not vote shares held in street name on certain matters, and thus will not result in broker non-votes.

 

Q:	May I change my vote after I have submitted a proxy or provided proxy instructions?

 

A:

Tocagen’s common stockholders of record, other than those Tocagen stockholders who are parties to voting agreements, may change their vote at any time before their proxy is voted at the Tocagen special meeting in one of three ways. First, a stockholder of record of Tocagen can send a written notice to the Secretary of Tocagen stating that it would like to revoke its proxy. Second, a stockholder of record of Tocagen can submit new proxy instructions either on a new proxy card or via telephone or the Internet. Third, a stockholder of record of Tocagen can attend the Tocagen special meeting and vote in person. Attendance alone will not revoke a proxy. If a stockholder who owns Tocagen shares in “street name” has instructed a broker to vote its shares of Tocagen Common Stock, the stockholder must follow directions received from its broker to change those instructions.

 

Q:	Who is paying for this proxy solicitation?

 

A:

Forte will bear the cost of printing and filing of this proxy statement/prospectus/information statement and the proxy card. Arrangements will also be made with brokerage firms and other custodians, nominees and fiduciaries who are record holders of Tocagen Common Stock for the forwarding of solicitation materials to the beneficial owners of Tocagen Common Stock. In addition, Tocagen has engaged The Proxy Advisory Group, LLC, a proxy solicitation firm, to solicit proxies from Tocagen’s stockholders for a fee of up to $22,500 plus certain additional costs associated with solicitation campaigns. Tocagen will reimburse these brokers, custodians, nominees and fiduciaries for the reasonable out-of-pocket expenses they incur in

 

8

connection with the forwarding of solicitation materials. Fees paid to the SEC in connection with filing the statement/prospectus/information statement, and any amendments and supplements thereto, with the SEC will be paid by Forte.

 

Q:	What is the quorum requirement?

 

A:

A quorum of stockholders is necessary to hold a valid meeting. A quorum will be present if stockholders holding a majority of the issued and outstanding shares entitled to vote at a meeting are present at such meeting in person or represented by proxy. On the record date, there were                  shares of Tocagen Common Stock outstanding and entitled to vote. Thus, the holders of                  shares of Tocagen Common Stock must be present in person or represented by proxy at the Tocagen special meeting to have a quorum.

Your shares will be counted towards the quorum if you submit a valid proxy (or one is submitted on your behalf by your broker, bank or other nominee) or if you vote in person at the Tocagen special meeting. Abstentions and broker non-votes, if applicable, will also be counted towards the quorum requirement. If there is no quorum, the holders of a majority of shares at the meeting in person or represented by proxy may postpone or adjourn the meeting to another date.

 

Q:	Should Tocagen’s and Forte’s stockholders send in their stock certificates now?

 

A:

No. After the Merger is consummated, Forte’s stockholders will receive written instructions from the exchange agent for exchanging their certificates representing shares of Forte Capital Stock for certificates representing shares of Tocagen’s Common Stock. Each Forte stockholder who otherwise would be entitled to receive a fractional share of Tocagen Common Stock will be entitled to receive an amount in cash, without interest, determined by multiplying such fraction by the volume-weighted average closing trading price of a share of Tocagen Common Stock on Nasdaq for the five consecutive trading days ending five trading days immediately prior to the date upon which the Merger becomes effective.

In addition, Tocagen’s stockholders will receive written instructions, as applicable, from Tocagen’s transfer agent, Computershare Trust Company, N.A., for exchanging their certificates representing shares Tocagen Common Stock for new certificates giving effect to the Reverse Split, if effected. Tocagen’s stockholders will also receive a cash payment in lieu of any fractional shares, determined by multiplying such fraction by the fair market value per share of Tocagen’s Common Stock immediately prior to the effective time of the Reverse Split as determined by the Tocagen Board.

 

Q:	Who can help answer my questions?

 

A:

If you are a stockholder of Tocagen and would like additional copies, without charge, of this proxy statement/prospectus/information statement or if you have questions about the Merger, including the procedures for voting your shares, you should contact The Proxy Advisory Group, LLC, Tocagen’s proxy solicitor, by telephone at 1 (212) 616-2180.

If you are a stockholder of Forte, and would like additional copies, without charge, of this proxy statement/prospectus/information statement or if you have questions about the Merger, including the procedures for voting your shares, you should contact:

Forte Biosciences, Inc.

1124 W. Carson Street

MRL Building 3-320

Torrance, CA 90502

Attn: Secretary

 

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PROSPECTUS SUMMARY

This summary highlights selected information from this proxy statement/prospectus/information statement and may not contain all of the information that is important to you. To better understand the Merger, the proposals being considered at the Tocagen special meeting and Forte’s stockholder actions that are the subject of the written consent, you should read this entire proxy statement/prospectus/information statement carefully, including the Merger Agreement attached as Annex A, the fairness opinion of Ladenburg Thalmann & Co. Inc. (“Ladenburg”) attached as Annex B and the other annexes to which you are referred herein. For more information, please see the section titled “Where You Can Find More Information” beginning on page 271 of this proxy statement/prospectus/information statement.

The Companies

Tocagen Inc.

4445 Eastgate Mall, Suite 200

San Diego, CA 92121

(858) 412 8400

Until recently, Tocagen was a clinical-stage, cancer-selective gene therapy company developing broadly applicable product candidates designed to activate a patient’s immune system against their own cancer. Tocagen had been developing its lead product candidate, Toca 511 (vocimagene amiretrorepvec) & Toca FC (extended-release flucytosine), for the treatment of recurrent high grade glioma (“HGG”), a brain cancer with limited treatment options, low survival rates and, therefore, a significant unmet medical need. Tocagen conducted a randomized, controlled Phase 3 clinical trial (“Toca 5”) of Toca 511 & Toca FC in patients with recurrent HGG, which was designed to serve as a registrational trial. At the final analysis, the trial missed the primary endpoint of overall survival compared to the standard of care treatment (11.1 months median compared to 12.2 months, HR=1.06, p=0.6154). In addition, all secondary endpoints showed no meaningful difference between the arms of the trial. Tocagen discontinued further development of Toca 511 & Toca FC. In October 2019, Tocagen started taking steps to conserve its cash resources reduce operating expenses by substantially reducing its workforce and winding down and suspending its research and development activities while evaluating its strategic alternatives with a goal to enhance stockholder value, including the possibility of a merger or sale of Tocagen. Tocagen is continuing to provide study drug for patients who remain on therapy via investigator sponsored trials (principal investigator assumes responsibility) through single patient investigational new drug applications and is continuing its day-to-day business operations including the limited remaining activities required to wrap up the Toca 5 trial.

Forte Biosciences, Inc.

1124 W. Carson Street

MRL Building 3-320

Torrance, CA 90502

(310) 618-6994

Forte Biosciences is a clinical-stage biopharmaceutical company focused on dermatology. Forte’s lead product candidate, FB-401, is a live biotherapeutic for the treatment of inflammatory skin disease developed in collaboration with the National Institute of Health (the “NIH”), and the National Institute of Allergy and Infectious Diseases (the “NIAID”). FB-401 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. Forte has extensive preclinical and mechanism of action data demonstrating that FB-401 improves atopic dermatitis disease parameters by driving tissue repair and anti-inflammation as well as suppressing potentially harmful bacteria like S. aureus. To date, Forte’s clinical data validates safety and activity of FB-401

 

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live biotherapeutic therapy in both adults and pediatric. Forte has completed a Phase 1/2a study, including pediatrics, demonstrating a clean safety profile and a significant reduction in atopic dermatitis disease and pruritus, as well as control of S. aureus while tapering/eliminating steroid use. Forte is currently planning to initiate a Phase 2 clinical trial in mid-2020.

The Merger (see page 103)

On February 19, 2020, Tocagen, Merger Sub, and Forte entered into the Merger Agreement, pursuant to which Merger Sub will merge with and into Forte, with Forte surviving as a wholly owned subsidiary of Tocagen. Tocagen Common Stock will be issued to the former Forte stockholders at the Effective Time. In connection with the closing of the Merger, Tocagen will change its name to “Forte Biosciences, Inc.,” and Forte is expected to change its name to “Forte Subsidiary, Inc.” References to the combined company in this proxy statement/prospectus/information statement are references to Tocagen following the Merger.

Concurrently with the execution of the Merger Agreement, Forte entered into the Securities Purchase Agreement with certain investors pursuant to which, among other things, Forte agreed to issue to the investors (i) approximately $14.1 million of shares of Forte Common Stock and (ii) warrants to purchase an equal number of shares of Forte Common Stock purchased under the Securities Purchase Agreement, and on March 18, 2020 Forte entered into a Common Stock Purchase Agreement with certain investors pursuant to which, among other things, Forte agreed to issue to the investors approximately $5.2 million of shares of Forte Common Stock. The warrants to be issued pursuant to the Securities Purchase Agreement shall have an exercise price equal to that price per share of Tocagen Common Stock wherein Tocagen’s market value, after the Merger, would be $120.0 million. The securities to be issued in the Pre-Closing Financing will be issued pursuant to an exemption from securities laws. The Tocagen Common Stock issuable upon exchange of the shares of Forte Common Stock pursuant to the Merger will be registered on this Registration Statement filed and declared effective by the SEC. The warrants to purchase Tocagen Common Stock issuable upon exchange of the warrants to purchase shares of Forte Common Stock will be issued pursuant to an exemption from securities laws. The Registration Statement will also register the issuance of the Tocagen Common Stock issuable upon exercise of the warrants, following Tocagen’s assumption of the warrants in the Merger.

Tocagen and Forte expect the Merger to be consummated during the second quarter of 2020, subject to satisfaction or waiver of certain conditions, including, among other things, receipt of the requisite approval of Tocagen’s and Forte’s stockholders, including approval by the Tocagen Common Stockholders of (a)(i) the issuance of shares of Tocagen capital stock pursuant to the Merger, which will represent more than 20% of the shares of Tocagen Common Stock outstanding immediately prior to the Merger, and (ii) the change of control resulting from the Merger, pursuant to Nasdaq Listing Rules 5635(a) and 5635(b), respectively, and (b) an amendment to Tocagen’s amended and restated certificate of incorporation to effect immediately prior to the closing of the Merger the Reverse Split at a ratio anywhere in the range between 1-for-8 and 1-for-12 (with the actual reverse stock split ratio to be mutually agreed upon by Tocagen and Forte prior to the effectiveness of the Merger).

Immediately following the consummation of the Merger, the equity holders of Forte (including the holders of any outstanding and unexercised options to purchase Forte Capital Stock) immediately prior to the Merger are expected to hold approximately 76.7% of the shares of Tocagen capital stock outstanding immediately following the Merger on a fully diluted treasury stock method basis, and the equity holders of Tocagen immediately prior to the Merger are expected to hold approximately 23.3% of the Tocagen capital stock outstanding immediately following the Merger on a fully diluted treasury stock basis, in each case, after giving effect to the Pre-Closing Financing using the treasury stock method. As currently anticipated and assuming a $19.3 million investment in the Pre-Closing Financing, after the closing of the Pre-Closing Financing and consummation of the Merger, and assuming Tocagen holds $7.5 million of net cash at the closing of the Merger, the outstanding equity of Tocagen on a fully diluted treasury stock method basis will be held as follows: equity holders of former Forte Capital Stock (prior to the Pre-Closing Financing) are expected to hold approximately 46.7%; the investors in the

 

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Pre-Closing Financing are expected to hold approximately 30.0%; and pre-Merger Tocagen equity holders are expected to hold approximately 23.3%.

Reasons for the Merger (see page 110 and 114)

The Tocagen Board considered various reasons to reach its determination (i) that the Merger, the Reverse Split and the other transactions and actions contemplated by the Merger Agreement (the “Contemplated Transactions”) are advisable and fair to, and in the best interests, of Tocagen and its stockholders, (ii) to approve and declare advisable the Merger Agreement and the Contemplated Transactions, including the authorization and issuance of shares of Tocagen Common Stock to the stockholders of Forte pursuant to the terms of the Merger Agreement, and (iii) to recommend that, upon the terms and subject to the conditions set forth in the Merger Agreement, that the stockholders of Tocagen vote to approve the Tocagen Closing Stockholder Matters.

The Forte Board also considered various reasons to reach its determination (i) that the Merger is advisable and fair to, and in the best interests of, Forte and its stockholders, (ii) to approve the Merger Agreement, the Merger and the Contemplated Transactions and deem the Merger Agreement advisable and (iii) to recommend that its stockholders vote to approve the Forte Stockholder Matters.

Following the Merger, the combined company will be a clinical-stage biopharmaceutical company focused on advancing Forte’s 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. Among other reasons, Tocagen and Forte believe that the combined organization will have the following potential advantages:

 

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Product Pipeline. The combined company is expected to build upon and implement Forte’s current plans for developing its lead asset, FB-401, a live biotherapeutic being developed as a topical therapy for the treatment of inflammatory skin diseases including atopic dermatitis.

 

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Management Team. It is expected that the combined organization will be led by the experienced senior management team from Forte and a board of directors of eight members with representation from each of Tocagen and Forte.

 

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Cash Resources. The combined company is expected to have the cash that Forte is expected to have in connection with the consummation of the Merger, which includes the cash that Forte currently holds, plus the gross proceeds from the Pre-Closing Financing of at least $19.3 million, in addition to the cash that Tocagen is expected to have in connection with the consummation of the Merger, assuming the disposition of the Company Assets, which Tocagen and Forte believe is sufficient to enable Forte to pursue its near term clinical trials and business plans.

The Tocagen Board considered other reasons for the Merger, including:

 

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The Tocagen Board and Ladenburg have undertaken a comprehensive and thorough process of reviewing and analyzing the potential merger transaction as well as reaching out to candidates for a variety of strategic transactions to identify the opportunity that would, in the Tocagen Board’s opinion, create the most value for its stockholders;

 

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The Tocagen Board believes that, as a result of arm’s length negotiations with Forte, Tocagen and its representatives negotiated the most favorable exchange ratio that Forte was willing to agree to, and that the terms of the Merger Agreement include the most favorable terms to Tocagen in the aggregate to which Forte was willing to agree;

 

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The Tocagen Board believes, after a thorough review of strategic alternatives and Tocagen’s discussions with its financial advisors and legal counsel, as well as Tocagen management’s discussions with Forte’s senior management, that, compared to the Merger, no alternatives or other strategic

 

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options that may have been available to Tocagen, including remaining a standalone public company, were reasonably likely to create greater value for Tocagen’s stockholders;

 

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the consequences of Tocagen’s Phase 3 clinical trial of Toca 511 & Toca FC failing to meet its primary or secondary endpoints and the likelihood that Tocagen’s prospects as a stand-alone company were unlikely to change for the benefit of Tocagen’s stockholders in the foreseeable future;

 

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the risks associated with the need to obtain substantial amounts of financing to continue its operations and to continue the development of its gene therapy programs if Tocagen were to remain an independent company;

 

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the risks and delays associated with, and uncertain value and costs to Tocagen’s stockholders of, liquidating Tocagen, including, without limitation, the uncertainties of continuing cash burn while contingent liabilities are resolved and uncertainty of timing of release of cash until contingent liabilities are resolved;

 

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the strength of the balance sheet of the combined company, which includes the cash that Forte currently holds, plus the gross proceeds from the Pre-Closing Financing of at least $14 million, in addition to the cash that Tocagen is expected to have in connection with the consummation of the Merger;

 

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the combined company will be led by an experienced industry chief executive and a board of directors with representation from the current boards of directors of Tocagen and Forte; and

 

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Forte’s product pipeline and the potential market opportunity for Forte’s products, that Forte’s product candidates represent a sizeable potential market opportunity, and may thereby create value for the stockholders of the combined organization and an opportunity for Tocagen’s stockholders to participate in the potential growth of the combined organization.

In addition, the Forte Board approved the Merger based on a number of reasons, including the following:

 

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the potential to provide the current Forte stockholders with greater liquidity by owning stock in a public company;

 

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Forte’s need for capital to support the clinical development of its product candidates and the potential to access public market capital, including sources of capital from a broader range of investors than it could otherwise obtain if it continued to operate as a privately-held company;

 

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the expectation that the Merger would be a more time- and cost-effective means to access capital than other options considered; and

 

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the expectation that the Merger will qualify as a transaction described under Section 368(a) of the Code for U.S. federal income tax purposes, with the result that Forte’s stockholders will generally not recognize taxable gain or loss for U.S. federal income tax purposes.

Tocagen’s Unaudited Financial Projections Regarding Forte (see page 115)

In connection with the Tocagen Board’s evaluation of the Merger, preliminary internal financial projections for Forte were prepared by the management of Forte and provided to the management of Tocagen, and then adjusted by the management of Tocagen (such adjusted projections, the “Tocagen-prepared Forte financial projections”). For a summary of the Tocagen-prepared Forte financial projections, please see the section titled “The Merger—Tocagen’s Unaudited Financial Projections Regarding Forte” beginning on page 115 of this proxy statement/prospectus/information statement.

Opinion of the Tocagen Financial Advisor (see page 117)

The Tocagen Board engaged Ladenburg on October 24, 2019 to act as the financial advisor to the Tocagen Board to assist it in identifying and analyzing potential targets for a potential transaction and, if requested by the

 

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Tocagen Board, to render an opinion as to the fairness, from a financial point of view, to the Tocagen stockholders of the Exchange Ratio. On February 19, 2020, at the request of the Tocagen Board, Ladenburg rendered the oral opinion, subsequently confirmed by delivery of the written opinion dated February 19, 2020 (the “Opinion”), to the Tocagen Board, that the Exchange Ratio was fair, from a financial point of view, to the stockholders of Tocagen as of the date of such Opinion and based upon the various assumptions, qualifications and limitations set forth therein

The full text of the written Opinion is attached as Annex B to this proxy statement/prospectus/information statement and is incorporated by reference. Tocagen encourages its stockholders to read the Opinion in its entirety for the assumptions made, procedures followed, other matters considered and limits of the review by Ladenburg. The summary of the written Opinion set forth herein is qualified by reference to the full text of the Opinion. Ladenburg provided its Opinion for the sole benefit and use by Tocagen’s Board in its consideration of the Merger. The Opinion is not a recommendation to the Tocagen Board or to any stockholder as to how to vote with respect to the proposed Merger or to take any other action in connection with the Merger or otherwise.

Overview of the Merger Agreement and Agreements Related to the Merger Agreement

Merger Consideration and Exchange Ratio (see page 141)

Pursuant to the Merger Agreement, at the Effective Time, each share of Forte Capital Stock outstanding immediately prior to the Effective Time (excluding shares to be canceled pursuant to the Merger Agreement and excluding dissenting shares but including any shares of Forte Capital Stock issued pursuant to the Pre-Closing Financing as per the Merger Agreement) will be automatically converted solely into the right to receive a number of shares of Tocagen Common Stock equal to the Exchange Ratio.

No fractional shares of Tocagen Common Stock will be issued in connection with the Merger, and no certificates or scrip for any such fractional shares shall be issued. Any holder of Forte Capital Stock who would otherwise be entitled to receive a fraction of a share of Tocagen Common Stock (after aggregating all fractional shares of Tocagen Common Stock issuable to such holder) will, in lieu of such fraction of a share and upon surrender by such holder of a letter of transmittal in accordance with the Merger Agreement and any accompanying documents as required therein, be paid in cash the dollar amount (rounded to the nearest whole cent), without interest, determined by multiplying such fraction by the Tocagen’s volume weighted average closing trading price of a share of Tocagen Common Stock on Nasdaq for the five consecutive trading days ending five trading days immediately prior to the Effective Time. For a more complete description of the Exchange Ratio, please see the section titled “Overview of the Merger Agreement and Agreements Related to the Merger Agreement—Merger Consideration and Exchange Ratio” beginning on page 141 of this proxy statement/prospectus/information statement.

The Exchange Ratio formula is derived based upon a Forte Equity Value (as defined below) of $49.3 million and a Tocagen Equity Value (as defined below) of $15.0 million and is subject to adjustment based upon (a) the proceeds from the Pre-Closing Financing that are greater than $19.3 million and (b) Tocagen Net Cash at the closing of the Merger being greater than $10.0 or less than $7.5 million. Based upon the current size of the Pre-Closing Financing, the Forte Equity Value is $49.3 million. Tocagen may be unable to monetize its assets by entering into agreements for their disposition prior to Closing which could result in Tocagen being unable to meet the $7.5 million Tocagen net cash threshold or to meet the $3.0 million Tocagen net cash threshold (the “Net Cash Condition”). For a more complete description of the Merger and the potential adjustments in the Exchange Ratio, please see the section titled “Overview of the Merger Agreement and Agreements Related to the Merger Agreement—Merger Consideration and Exchange Ratio” beginning on page 141 of this proxy statement/prospectus/information statement.

As currently anticipated and assuming an investment of approximately $19.3 million in the Pre-Closing Financing and assuming Tocagen holds $7.5 million of net cash at the closing of the Merger, the equity holders

 

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of Forte immediately before the Merger (inclusive of investors in the Pre-Closing Financing) are expected to own approximately 76.7% of the aggregate number of outstanding shares of Tocagen capital stock immediately after the closing of the Merger, and the equity holders of Tocagen immediately before the Merger are expected to own approximately 23.3% of the aggregate number of outstanding shares of Tocagen capital stock immediately after the closing of the Merger, in each case, on a fully-diluted treasury stock method basis, subject to the adjustments described above.

Treatment of Tocagen Stock Options and Restricted Stock Units

Prior to the closing of the Merger, the Tocagen Board will have adopted appropriate resolutions to provide that certain unexpired and unexercised Tocagen stock options, whether vested or unvested, will be cancelled effective as of immediately prior to the Effective Time in accordance with the Tocagen 2009 Equity Incentive Plan (the “2009 Plan”) and the Tocagen 2017 Equity Incentive Plan (the “2017 Plan”), as applicable. As of immediately prior to the Effective Time, all outstanding and unexercised options to purchase shares of Tocagen Common Stock with an exercise price of greater than $0.64 will be cancelled and have no further force and effect. All outstanding and unexercised options to purchase shares of Tocagen Common Stock with an exercise price equal to or less than $0.64 will remain effective and outstanding. All Tocagen restricted stock units will vest at the Effective Time.

Treatment of Forte Stock Options

Under the terms of the Merger Agreement, each option to purchase shares of Forte Common stock that is outstanding and unexercised immediately prior to the Effective Time, whether or not vested, will be converted into an option to purchase shares of Tocagen Common Stock. Tocagen will assume the Forte 2018 Equity Incentive Plan, as amended, and all rights with respect to each outstanding option to purchase Forte Common Stock in accordance with its terms and the terms of the stock option agreement by which such option is evidenced.

Accordingly, from and after the Effective Time: (i) each outstanding Forte stock option assumed by Tocagen may be exercised solely for shares of Tocagen Common Stock; (ii) the number of shares of Tocagen Common Stock subject to each outstanding option assumed by Tocagen will be determined by multiplying (A) the number of shares of Forte Common Stock that were subject to such Forte stock option, as in effect immediately prior to the Effective Time, by (B) the Exchange Ratio and the Reverse Split, and rounding the resulting number down to the nearest whole number of shares of Tocagen Common Stock; (iii) the per share exercise price for the Tocagen Common Stock issuable upon exercise of each Forte stock option assumed by Tocagen shall be determined by dividing (A) the per share exercise price of Forte Common Stock subject to such Forte stock option, as in effect immediately prior to the Effective Time, by (B) the Exchange Ratio and the Reverse Split and rounding the resulting exercise price up to the nearest whole cent; and (iv) any restriction on the exercise of any Forte stock option assumed by Tocagen shall continue in full force and effect and the term, exercisability, vesting schedule, accelerated vesting provisions, and any other provisions of such Forte stock option shall otherwise remain unchanged; provided, however, that the Tocagen Board or a committee thereof will succeed to the authority and responsibility of the Forte Board or any committee thereof with respect to each Forte stock option assumed by Tocagen. The number of shares of Tocagen Common Stock that is expected to be issued upon exercise of the Forte stock options, and the exercise price of such options, will also be adjusted for the Reverse Split.

Treatment of Forte Warrants

Under the terms of the Forte warrants issued pursuant to the Securities Purchase Agreement immediately prior to the Merger, upon consummation of the Merger, the surviving corporation will assume the Forte warrants and the obligation to deliver to each holder of the Forte warrants shares of Tocagen Common Stock upon exercise in accordance with the terms and conditions of the Forte warrants. The number of shares of Tocagen

 

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common stock that is expected to be issued upon exercise of Forte warrants will assume an exchange ratio of 1.8149 shares of Tocagen Common Stock for each outstanding share of Forte Common Stock, resulting in 1.8149 shares of Tocagen Common Stock issuable upon exercise of each warrant to purchase one share of Forte Common Stock. The exercise price of the Forte warrants will be equal to the amount obtained by dividing (i) $120.0 million by (ii) the total number of shares of the surviving corporation outstanding immediately following the consummation of the Merger on a fully-diluted basis (excluding any shares issuable pursuant to the Forte warrants). The number of shares of Tocagen Common Stock that is expected to be issued upon exercise of the Forte warrants, and the exercise price of such warrants, will also be adjusted for the Reverse Split.

Conditions to the Completion of the Merger (see page 145)

The obligations to consummate the Merger and otherwise consummate the Contemplated Transactions shall be subject to receipt of the Required Forte Stockholder Vote, the required vote from Tocagen stockholders on the Closing Tocagen Stockholder Matters, the Net Cash Condition, and the satisfaction or waiver, on or prior to the Effective Time, of the other conditions set forth in the section titled “The Merger Agreement—Conditions to the Completion of the Merger” beginning on page 145 of this proxy statement/prospectus/information statement.

Non-Solicitation (see page 151)

Other than as necessary to communicate, discuss, negotiate or consummate the Permitted Asset Dispositions (as defined below) by Tocagen, both Tocagen and Forte are prohibited by the terms of the Merger Agreement from, directly or indirectly:

 

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soliciting, initiating or knowingly encouraging, inducing or facilitating the communication, making, submission or announcement of any Acquisition Proposal (as defined below) or Acquisition Inquiry (as defined below) or taking any action that could reasonably be expected to lead to an Acquisition Proposal or Acquisition Inquiry;

 

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furnishing any non-public information to any person in connection with or in response to an Acquisition Proposal or Acquisition Inquiry;

 

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engaging in discussions or negotiations with any person with respect to any Acquisition Proposal or Acquisition Inquiry;

 

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approving, endorsing or recommending any Acquisition Proposal;

 

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executing or entering into any letter of intent or any contract contemplating or otherwise relating to any Acquisition Transaction (as defined below) (other than a permitted confidentiality agreement); or

 

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publicly proposing to do any of the foregoing.

Either of Tocagen or Forte, as applicable, may furnish non-public information to and enter into discussions or negotiations with, any person in response to a bona fide written Acquisition Proposal, which its board of directors determines in good faith, after consultation with its outside financial advisors and outside legal counsel, constitutes, or could be reasonably likely to result in, a Superior Offer (as defined below) (and is not withdrawn) if:

 

•

neither it nor any of its representatives will have breached the non-solicitation restrictions in the Merger Agreement in any material respect;

 

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its board of directors concludes in good faith based on the advice of outside legal counsel, that the failure to take such action is reasonably likely to be inconsistent with the fiduciary duties of its board of directors under applicable law;

 

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it receives from such person an executed confidentiality agreement containing provisions, in the aggregate, at least as favorable to it as those contained in the non-disclosure and confidentiality agreement, dated as of December 6, 2019 between Forte and Tocagen; and

 

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•

substantially contemporaneously with furnishing any such nonpublic information to such person, it furnishes such nonpublic information to the other party (to the extent such information has not been previously furnished to the other party).

If Tocagen or Forte, or any of their respective representatives, receives an Acquisition Proposal or Acquisition Inquiry prior to Closing, then such party will promptly (and in no event later than one business day after it becomes aware of such Acquisition Proposal or Acquisition Inquiry) advise the other party orally and in writing of such Acquisition Proposal or Acquisition Inquiry (including the identity of the person making or submitting such Acquisition Proposal or Acquisition Inquiry and the material terms of the Acquisition Proposal or Acquisition Inquiry) and provide a copy of all material written materials relating to such Acquisition Proposal or Acquisition Inquiry. Each party will keep the other party informed on a current basis with respect to the status and material terms of any such Acquisition Proposal or Acquisition Inquiry and any material modification thereto.

Termination and Termination Fees (see page 158)

Upon termination of the Merger Agreement by Tocagen or Forte in certain circumstances a termination fee of $500,000 may be payable by Tocagen to Forte, or $1.0 million may be payable by Forte to Tocagen. Additionally, (i) in the event of a termination in connection with a Forte Triggering Event (as defined below), then a termination fee of $3.0 million may be payable by Forte to Tocagen, (ii) in the event of a termination by Tocagen in connection with entering into a definitive agreement in connection with a Superior Offer, then a termination fee of $750,000 may be payable by Tocagen to Forte and (iii) in the event of a termination by Forte in connection with Tocagen Closing Stockholder Matters not being approved at Tocagen special meeting expense reimbursement of up to $250,000 may be payable by Tocagen to Forte. For a more complete description of the termination provisions, please see the section titled “The Merger Agreement—Termination and Termination Fees” beginning on page 158 of this proxy statement/prospectus/information statement.

Support Agreements Tocagen (see page 162)

Concurrently with the execution of the Merger Agreement, (a) officers, directors and certain stockholders of Forte (solely in their respective capacities as Forte stockholders) who collectively beneficially owned or controlled approximately 95% of the voting power of Forte’s outstanding capital stock as of February 19, 2020, entered into support agreements under which such stockholders agreed to, among other things, vote in favor of the adoption of the Merger Agreement and the approval of the Merger and the other transactions contemplated by the Merger Agreement; provided that in the event of a Forte Triggering Event, the obligation of such Forte stockholders to vote their shares of Forte Capital Stock will be modified and such stockholders will only be required to collectively vote an aggregate number of shares of Forte Capital Stock equal to 35% of the total voting power of the outstanding Forte Capital Stock, and (b) officers, directors and certain stockholders of Tocagen (solely in their respective capacities as Tocagen stockholders), who collectively beneficially owned or controlled approximately 6% of the voting power of Tocagen’s outstanding capital stock as of February 19, 2020, entered into support agreements under which such stockholders agreed to, among other things, vote in favor of the adoption of the Merger Agreement and the approval of the Merger and the other transactions contemplated by the Merger Agreement.

The support agreements will terminate at the earlier of the Effective Time or the termination of the Merger Agreement in accordance with its terms.

Lock-Up Agreements (see page 162)

Concurrently with the execution of the Merger Agreement, certain directors and officers of Tocagen and certain directors, officers and stockholders of Forte (but excluding the stockholders receiving shares of Forte in the Pre-Closing Financing as described below), entered into lock-up agreements, pursuant to which such individuals have agreed not to, except in limited circumstances, transfer or dispose of, any shares of Tocagen Common Stock or any securities convertible into, or exercisable or exchangeable for, shares of Tocagen

 

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Common Stock, including, as applicable, shares received in the Merger and issuable upon exercise of certain warrants and stock options, for a period of 180 days after the closing date of the Merger.

Pre-Closing Financing; Securities Purchase Agreement (see page 162)

Securities Purchase Agreement; Common Stock Purchase Agreement

Concurrent with the execution of the Merger Agreement, Forte entered into the Securities Purchase Agreement with certain investors pursuant to which, among other things, Forte agreed to issue to the investors (i) approximately $14.1 million of shares of Forte Common Stock and (ii) warrants to purchase an equal number of shares of Forte Common Stock purchased under the Securities Purchase Agreement, and on March 18, 2020 Forte entered into a Common Stock Purchase Agreement with certain investors pursuant to which, among other things, Forte agreed to issue to the investors approximately $5.2 million of shares of Forte Common Stock. The warrants to be issued pursuant to the Securities Purchase Agreement shall have an exercise price equal to that price per share of Tocagen Common Stock wherein Tocagen’s market value, after the Merger, would be $120.0 million.

Appraisal Rights (see page 135)

Tocagen stockholders are not entitled to appraisal rights in connection with the Merger. Holders of Forte Common Stock are entitled to (i) appraisal rights in connection with the Merger under Section 262 of the DGCL and (ii) dissenters’ rights in accordance with Chapter 13 of the California Corporations Code (the “CCC”). For more information about such rights, please see the provisions of Section 262 of the DGCL attached as Annex C, the provisions of Chapter 13 of the CCC attached as Annex D and the section titled “The Merger—Appraisal Rights and Dissenters’ Rights” beginning on page 135 of this proxy statement/prospectus/information statement.

Management Following the Merger (see page 220)

Immediately following the Merger, the executive management team of the combined company is expected to be comprised of the following individuals with such additional officers as may be added by Forte or the combined company:

 

Name		Position with the Combined Company		Current Position
Paul A. Wagner, Ph.D.		Chief Executive Officer, President and Director		Chief Executive Officer, President and Director of Forte
Antony Riley		Chief Financial Officer		Chief Financial Officer of Forte

Directors of the Combined Company Following the Merger

At the Effective Time, the combined company is expected to initially have an eight-member board of directors, comprised of (a) Paul A. Wagner, Ph.D., Dr. Lawrence Eichenfield, Steven Kornfeld, Patricia Walker, M.D., Ph.D., Donald A. Williams and one additional member to be appointed prior to the time this Registration Statement is declared effective under the Securities Act, each as a Forte designee, and (b) Martin J. Duvall and Thomas E. Darcy, each as a Tocagen designee, until their respective successors are duly elected or appointed and qualified or their earlier death, resignation or removal.

The aforementioned board of directors will have an audit committee, a compensation committee and a nominating and corporate governance committee, in accordance with the Nasdaq rules. All of Tocagen’s current directors, other than Martin J. Duvall and Thomas E. Darcy, are expected to resign from their positions as directors of Tocagen, effective as of the Effective Time.

Interests of Certain Directors, Officers and Affiliates of Tocagen and Forte (see pages 124 and 129)

In considering the recommendation of the Tocagen Board with respect to the issuance of Tocagen Common Stock pursuant to the Merger Agreement and the other matters to be acted upon by Tocagen’s stockholders at the

 

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Tocagen special meeting, Tocagen’s stockholders should be aware that certain members of the Tocagen Board and current and former executive officers of Tocagen have interests in the Merger that may be different from, or in addition to, interests they have as Tocagen’s stockholders.

As of December 31, 2019, Tocagen’s directors and executive officers (including affiliates) beneficially owned, in the aggregate approximately 6% of the outstanding shares of Tocagen Common Stock. As of December 31, 2019, Tocagen’s named executive officers and directors collectively owned unvested Tocagen stock options covering 892,323 shares of Tocagen Common Stock and vested Tocagen stock options covering 1,365,527 shares of Tocagen Common Stock. Prior to the closing of the Merger, all outstanding and unexercised options to purchase shares of Tocagen Common Stock with an exercise price of greater than $0.64 will be cancelled and have no further force and effect. All outstanding and unexercised options to purchase shares of Tocagen Common Stock with an exercise price equal to or less than $0.64 will remain effective and outstanding.

The compensation arrangements with Tocagen’s officers and directors are discussed in greater detail in the section titled “The Merger—Interests of the Tocagen Directors and Executive Officers in the Merger” beginning on page 124 of this proxy statement/prospectus/information statement. Additionally, as described elsewhere in this proxy statement/prospectus/information statement, including in the section captioned “The Merger—Management Following the Merger” beginning on page 129 of this proxy statement/prospectus/information statement, certain of Tocagen’s directors are expected to become the directors of the combined company upon the closing of the Merger.

In considering the recommendation of the Forte Board with respect to adopting the Merger Agreement, Forte’s stockholders should be aware that members of the Forte Board and the executive officers of Forte may have interests in the Merger that may be different from, or in addition to, the interests of Forte’s stockholders. The Forte Board was aware of these potential conflicts of interest and considered them, among other matters, in reaching its decision to approve the Merger Agreement, the Merger, and the Contemplated Transactions.

As of December 31, 2019, Forte’s directors and executive officers (including affiliates) beneficially owned, in the aggregate approximately 95% of the outstanding shares of Forte Capital Stock.

As described elsewhere in this proxy statement/prospectus/information statement, including in the section captioned “The Merger—Management Following the Merger,” certain of Forte’s directors and executive officers are expected to become the directors and executive officers of the combined company upon the closing of the Merger.

Tocagen’s and Forte’s executive officers and directors have also entered into support agreements, pursuant to which the directors, officers and certain stockholders of Tocagen and Forte, respectively, have agreed, solely in their capacity as stockholders of Tocagen and Forte, respectively, to vote all of their shares of Tocagen Common Stock or Forte Capital Stock in favor of, among other things, the adoption or approval, respectively, of the Merger Agreement and the transactions contemplated therein in connection with the Merger. The support agreements are discussed in greater detail in the section titled “Agreements Related to the Merger” beginning on page 162 of this proxy statement/prospectus/information statement.

Material U.S. Federal Income Tax Consequences of the Merger (see page 131)

Tocagen and Forte intend the Merger to qualify as a reorganization within the meaning of Section 368(a) of the Code, as described in the section titled “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 131 of this proxy statement/prospectus/information statement. Assuming the Merger constitutes a reorganization, subject to the limitations and qualifications described in the section titled “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 131 of this proxy statement/prospectus/information statement, Forte stockholders generally should not recognize gain or loss for U.S. federal income tax purposes on the receipt of shares of Tocagen Common Stock issued in connection with

 

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the Merger (other than in respect of cash received in lieu of fractional shares). Each Forte stockholder who receives cash in lieu of a fractional share of Tocagen Common Stock should generally recognize capital gain or loss in an amount equal to the difference between the amount of cash received in lieu of such fractional share and the stockholder’s tax basis allocable to such fractional share.

Risk Factors (see page 24)

Both Tocagen and Forte are subject to various risks associated with their businesses and their industries. In addition, the Merger, including the possibility that the Merger may not be completed, poses a number of risks to each company and its respective stockholders, including the following risks:

 

•

The Exchange Ratio is not adjustable based on the market price of Tocagen Common Stock so the consideration at the closing of the Merger may have a greater or lesser value than at the time the Merger Agreement was signed;

 

•

Failure to complete the Merger may result in Tocagen or Forte paying a termination fee to the other party and could harm the common stock price of Tocagen and future business and operations of each company;

 

•

If the conditions to the closing of the Merger are not met, the Merger may not occur;

 

•

The Merger may be completed even though material adverse changes may result from the announcement of the Merger, industry-wide changes and/or other causes;

 

•

Some executive officers and directors of Tocagen and Forte have interests in the Merger that are different from the respective stockholders of Tocagen and Forte and that may influence them to support or approve the Merger without regard to the interests of the respective stockholders of Tocagen and Forte;

 

•

The market price of Tocagen Common Stock following the Merger may decline as a result of the Merger;

 

•

Forte and Tocagen securityholders will have a reduced ownership and voting interest in, and will exercise less influence over the management of, the combined company following the closing of the Merger as compared to their current ownership and voting interest in the respective companies;

 

•

During the pendency of the Merger, Tocagen and Forte may not be able to enter into a business combination with another party at a favorable price because of restrictions in the Merger Agreement, which could adversely affect their respective businesses;

 

•

Certain provisions of the Merger Agreement may discourage third parties from submitting competing proposals, including proposals that may be superior to the arrangements contemplated by the Merger Agreement;

 

•

Because the lack of a public market for Forte Capital Stock makes it difficult to evaluate the fairness of the Merger, the shareholders of Forte may receive consideration in the Merger that is less than the fair market value of Forte Capital Stock and/or Tocagen may pay more than the fair market value of Forte’s Capital Stock; and

 

•

If any of the events described in under the sections titled “Risk Factors—Risks Related to the Merger” occur, those events could cause the potential benefits of the Merger not to be realized.

These risks and other risks are discussed in greater detail under the section titled “Risk Factors” beginning on page 24 of this proxy statement/prospectus/information statement. Tocagen and Forte encourage you to read and consider all of these risks carefully.

 

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Regulatory Approvals (see page 131)

In the United States, Tocagen must comply with applicable federal and state securities laws and the rules and regulations of Nasdaq in connection with the issuance of shares of Tocagen Common Stock to Forte’s stockholders in connection with the Contemplated Transactions by the Merger Agreement and the filing of this proxy statement/prospectus/information statement with the SEC. Tocagen does not intend to seek any regulatory approval from antitrust authorities to consummate the Contemplated Transactions.

Nasdaq Capital Market Listing (see page 163)

Shares of Tocagen’s common stock are currently listed on The Nasdaq Global Select Market under the symbol “TOCA” although Tocagen plans to transfer its listing to The Nasdaq Capital Market prior to completion of the Merger and file an initial listing application with Nasdaq pursuant to Nasdaq’s “reverse merger” rules. After completion of the Merger, Tocagen will be renamed Forte Biosciences, Inc. and expects to trade on The Nasdaq Capital Market under the symbol “FBRX.”

Anticipated Accounting Treatment (see page 135)

The Merger will be treated by Tocagen as a reverse merger under the acquisition method of accounting in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). For accounting purposes, Forte is considered to be acquiring Tocagen in this transaction. The Merger will be accounted for under the acquisition method of accounting under existing U.S. GAAP, which are subject to change and interpretation. Under the acquisition method of accounting, management of Tocagen and Forte have made a preliminary estimated purchase price calculated as described in Note 3 to the Notes to the Unaudited Pro Forma Condensed Combined Financial Information. The net tangible and intangible assets acquired and liabilities assumed in connection with the Merger are at their estimated acquisition date fair values. The acquisition method of accounting is dependent upon certain valuations and other studies that have yet to commence or progress to a stage where there is sufficient information for a definitive measurement. A final determination of these estimated fair values, which cannot be made prior to the completion of the Merger, will be based on the actual net tangible and intangible assets of Tocagen that exist as of the date of completion of the Merger.

Description of Tocagen and Forte Capital Stock (see page 251)

Both Tocagen and Forte are incorporated under the laws of the State of Delaware and, accordingly, the rights of the stockholders of each are currently, and will continue to be, governed by the DGCL. If the Merger is completed, Forte stockholders will become Tocagen stockholders, and their rights will be governed by the DGCL, the amended and restated bylaws of Tocagen and the amended and restated certificate of incorporation of Tocagen, as may be amended by Proposal No. 1 if approved by the Tocagen stockholders at the Tocagen special meeting. The rights of Tocagen stockholders contained in Tocagen’s amended and restated certificate of incorporation, and amended and restated bylaws differ from the rights of Forte stockholders under Forte’s current amended and restated certificate of incorporation and amended and restated bylaws, as more fully described under the section titled “Comparison of Rights of Holders of Forte Stock and Tocagen Stock” beginning on page 255 of this proxy statement/prospectus/information statement.

Tocagen Stockholder Meeting (see page 152)

The Tocagen special meeting will be held at                 , local time, on                  , 2020, at                  located at                 , unless postponed or adjourned to a later date. Subject to availability, all of Tocagen’s stockholders as of the record date, or their duly appointed proxies, may attend the Tocagen special meeting. Tocagen is closely monitoring developments related to COVID-19. It could become necessary to change the date, time, location and/or means of holding the Tocagen special meeting (including by means of remote communication). If such a change is made, Tocagen will announce the change in advance, and details on how to participate will be issued by press release, posted on Tocagen’s website and filed as additional proxy materials. For more information on the Tocagen special meeting, see the section entitled “The Special Meeting of Tocagen’s Stockholders” beginning on page 99 of this proxy statement/prospectus/information statement.

 

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SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONDENSED

COMBINED FINANCIAL DATA

The following tables present summary historical financial data for Tocagen and Forte, summary unaudited pro forma condensed financial data for Tocagen and Forte, and comparative historical and unaudited pro forma per share data for Tocagen and Forte.

Selected Historical Financial Data of Tocagen

Not required for smaller reporting companies.

Selected Historical Consolidated Financial Data of Forte

Not required for smaller reporting companies.

Selected Unaudited Pro Forma Condensed Combined Financial Data of Tocagen and Forte

Not required for smaller reporting companies.

Comparative Historical and Unaudited Pro Forma Per Share Data

Not required for smaller reporting companies.

 

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MARKET PRICE AND DIVIDEND INFORMATION

Tocagen Common Stock is currently listed on The Nasdaq Global Select Market under the symbol “TOCA.” Forte is a private company and its common stock and preferred stock are not publicly traded.

Tocagen Common Stock

The closing price of Tocagen Common Stock on February 18, 2020, the full trading day immediately prior to the public announcement of the Merger on February 19, 2020, as reported on The Nasdaq Global Select Market, was $0.5440 per share. The closing price of Tocagen Common Stock on                                        , 2020, as reported on The Nasdaq Global Select Market, was $                per share.

Because the market price of Tocagen Common Stock is subject to fluctuation, the market value of the shares of Tocagen Common Stock that Forte stockholders will be entitled to receive in the Merger may increase or decrease.

Assuming successful application for initial listing with Nasdaq, following the consummation of the Merger, Tocagen anticipates that the Tocagen Common Stock will continue to be listed on The Nasdaq Capital Market and will trade under Tocagen’s new name “Forte Biosciences, Inc.” and new trading symbol “FBRX” on The Nasdaq Capital Market

As of                , 2020, the record date for the Tocagen special meeting, there were approximately                                                      holders of record of the Tocagen Common Stock.

Dividends

Tocagen has never declared or paid any cash dividends on the Tocagen Common Stock and does not anticipate paying cash dividends on the Tocagen Common Stock for the foreseeable future. Notwithstanding the foregoing, any determination to pay cash dividends subsequent to the Merger will be at the discretion of the combined organization’s then-current board of directors and will depend upon a number of factors, including the combined organization’s results of operations, financial condition, future prospects, contractual restrictions, restrictions imposed by applicable law and other factors the then-current board of directors deems relevant.

Forte has never declared or paid any cash dividends on shares of the Forte Capital Stock. Forte anticipates that the combined company will retain all of its future earnings to advance the clinical trials for its products, and does not anticipate paying any cash dividends on shares of its common stock in the foreseeable future. Any future determination to declare cash dividends on shares of the combined company’s common stock will be made at the discretion of its board of directors, subject to applicable law and contractual restrictions and will depend on its financial condition, results of operations, capital requirements, general business conditions and other factors that its board of directors may deem relevant.

 

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RISK FACTORS

Risks Related to the Merger

The Exchange Ratio is not adjustable based on the market price of Tocagen Common Stock so the consideration at the closing of the Merger may have a greater or lesser value than at the time the Merger Agreement was signed.

The relative proportion of the combined company that the Tocagen stockholders will own when the Merger closes will be based on the relative valuations of Tocagen and Forte as negotiated by the parties and as specified in the Merger Agreement. Following the completion of the Merger, (a) Tocagen equity holders immediately prior to the Merger are expected to own approximately 23.3% of the common stock of the combined company and (b) Forte equity holders (including shares issued in Forte’s Pre-Closing Financing) are expected to own approximately 76.7% of the capital stock of the combined company, on a fully-diluted treasury stock method basis, assuming that Forte closes its Pre-Closing Financing immediately prior to the effective time of the Merger and no adjustment resulting from Tocagen Net Cash. These estimates are based on the anticipated Exchange Ratio and are subject to adjustment as provided in the Merger Agreement. Fluctuations in Tocagen stock price will not affect Tocagen’ valuation under the Merger Agreement or the portion of the combined company to be retained by its existing stockholders. The terms of the Merger Agreement provide for adjustments to the relative valuations of both Tocagen and Forte in certain events. For example, prior to the consummation of the Merger, the Exchange Ratio at the closing of the Merger may be subject to either (i) an upward adjustment to the extent that Tocagen Net Cash at the effective time of the Merger is less than $7.5 million (and as a result, Tocagen securityholders could own less, and Forte securityholders could own more, of the combined company), (ii) a downward adjustment to the extent that Tocagen Net Cash at the effective time of the Merger is greater than $10.0 million (and as a result, Tocagen securityholders could own more, and Forte securityholders could own less, of the combined company), or (iii) an upward adjustment to the extent that the proceeds of the Pre-Closing Financing are equal to or greater than 10.0 million (and as a result, Tocagen securityholders could own less, and Forte securityholders could own more, of the combined company). In addition, if Tocagen Net Cash at the Effective Time is less than $3.0 million, Forte has the right to terminate the Merger Agreement.

Failure to complete the Merger may result in Tocagen or Forte paying a termination fee to the other party and could harm the common stock price of Tocagen and future business and operations of each company.

If the Merger is not completed, each of Tocagen and Forte is subject to the following risks:

 

•

upon termination of the Merger Agreement, Forte may be required to pay Tocagen a termination fee of $1.0 million or $3.0 million, under certain circumstances, or Tocagen may be required to pay Forte a termination fee of $500,000 or $750,000, under certain circumstances, and/or up to $250,000 in expense reimbursements;

 

•

the parties will have incurred significant expenses related to the Merger, such as legal and accounting fees, which must be paid even if the Merger is not completed; and

 

•

Tocagen may be forced to cease its operations, dissolve and liquidate its assets.

In addition, if the Merger Agreement is terminated and the board of directors of Tocagen or Forte determines to seek another business combination, there can be no assurance that either Tocagen or Forte will be able to find a partner willing to provide equivalent or more attractive consideration than the consideration to be provided by each party in the Merger or any partner at all.

If the conditions to the closing of the Merger are not met, the Merger may not occur.

Even if the change of control and related share issuance are approved by the stockholders of Tocagen, specified conditions must be satisfied or waived to complete the Merger. These conditions are set forth in the

 

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Merger Agreement and described in the section entitled “The Merger Agreement—Conditions to the Completion of the Merger” beginning on page 145 of this proxy statement/prospectus/information statement, such as Forte’s Pre-Closing Financing. Tocagen and Forte cannot assure you that all of the conditions will be satisfied or waived. If the conditions are not satisfied or waived, the Merger may not occur or will be delayed, and Tocagen and Forte each may lose some or all the intended benefits of the Merger.

The Merger may be completed even though material adverse changes may result from the announcement of the Merger, industry-wide changes and/or other causes.

In general, either Tocagen or Forte can refuse to complete the Merger if there is a material adverse change affecting the other party between February 19, 2020, the date of the Merger Agreement, and the closing of the Merger. However, certain types of changes do not permit either party to refuse to complete the Merger, even if such change could be said to have a material adverse effect on Tocagen or Forte, including:

 

•

general business or economic conditions generally affecting the industry in which Forte or Tocagen operate;

 

•

natural disasters, acts of war, armed hostilities or terrorism;

 

•

changes in financial, banking or securities markets;

 

•

any change in the stock price or trading volume of Tocagen Common Stock;

 

•

any failure by Forte to meet internal projections or forecasts or third party revenue or earnings predictions for any period ending (or for which revenues or earnings are released) on or after the date of the Merger Agreement;

 

•

the failure of Tocagen to meet internal or analysts’ expectations or projections or the results of operations of Tocagen;

 

•

any change in, or any compliance with or action taken for the purpose of complying with, any law or GAAP (or interpretations of any law or GAAP);

 

•

resulting from the announcement of this Agreement or the pendency of the Contemplated Transactions.

If adverse changes occur and Tocagen and Forte still complete the Merger, the stock price of the combined company following the closing of the Merger may suffer. This in turn may reduce the value of the Merger to the stockholders of Tocagen, Forte or both.

Some executive officers and directors of Tocagen and Forte have interests in the Merger that are different from the respective stockholders of Tocagen and Forte and that may influence them to support or approve the Merger without regard to the interests of the respective stockholders of Tocagen and Forte.

Some officers and directors of Tocagen and Forte are parties to arrangements that provide them with interests in the Merger that are different from the respective stockholders of Tocagen and Forte, including, among others, service as an officer or director of the combined company following the closing of the Merger, severance and retention benefits, the acceleration of equity award vesting, and continued indemnification. For more information regarding the interests of the Tocagen and Forte executive officers and directors in the Merger, see the sections entitled “The Merger—Interests of the Tocagen Directors and Executive Officers in the Merger” and “The Merger—Interests of the Forte Directors and Executive Officers in the Merger” of this proxy statement/prospectus/information statement.

 

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The market price of Tocagen Common Stock following the Merger may decline as a result of the Merger.

The market price of Tocagen Common Stock may decline as a result of the Merger for a number of reasons, including if:

 

•

investors react negatively to the prospects of the combined company’s business and prospects following the closing of the Merger;

 

•

the effect of the Merger on the combined company’s business and prospects following the closing of the Merger is not consistent with the expectations of financial or industry analysts; or

 

•

the combined company does not achieve the perceived benefits of the Merger as rapidly or to the extent anticipated by stockholders or financial or industry analysts.

Forte and Tocagen securityholders will have a reduced ownership and voting interest in, and will exercise less influence over the management of, the combined company following the closing of the Merger as compared to their current ownership and voting interest in the respective companies.

After the completion of the Merger, the current securityholders of Forte and Tocagen will own a smaller percentage of the combined company than their ownership in their respective companies prior to the Merger. Immediately after the Merger, it is currently estimated that Forte equity holders as of immediately prior to the Merger (including shares issued in Forte’s Pre-Closing Financing) will own approximately 76.7% of the capital stock of the combined company, with Tocagen equity holders as of immediately prior to the Merger, whose shares of Tocagen Common Stock will remain outstanding after the Merger, will own approximately 23.3% of the common stock of the combined company on a fully-diluted treasury stock method basis, calculated on a pro forma basis including after giving effect to (i) the Pre-Closing Financing by Forte immediately prior to the effective time of the Merger, and (ii) the Merger assuming Tocagen holds $7.5 million of net cash at the closing of the Merger. These estimates are based on the anticipated Exchange Ratio and are subject to adjustment as provided in the Merger Agreement.

In addition, the eight member board of directors of the combined company will initially consist of six individuals with prior affiliations with Forte and two individuals with prior affiliates with Tocagen. Consequently, securityholders of Forte and Tocagen will be able to exercise less influence over the management and policies of the combined company following the closing of the Merger than they currently exercise over the management and policies of their respective companies.

During the pendency of the Merger, Tocagen and Forte may not be able to enter into a business combination with another party at a favorable price because of restrictions in the Merger Agreement, which could adversely affect their respective businesses.

Covenants in the Merger Agreement impede the ability of Tocagen and Forte to make acquisitions, subject to specified exceptions relating to fiduciary duties, or complete other mergers, sales of assets or other business combinations that are not in the ordinary course of business pending completion of the Merger. As a result, if the Merger is not completed, the parties may be at a disadvantage to their competitors during that period. In addition, while the Merger Agreement is in effect, each party is generally prohibited from soliciting, initiating, encouraging or entering into specified extraordinary transactions, such as a merger, sale of assets or other business combination, with any third party, subject to specified exceptions, even if any such transaction could be favorable to such party’s stockholders.

 

26

Certain provisions of the Merger Agreement may discourage third parties from submitting competing proposals, including proposals that may be superior to the arrangements contemplated by the Merger Agreement.

The terms of the Merger Agreement prohibit each of Tocagen and Forte from soliciting competing proposals or cooperating with persons making unsolicited takeover proposals, except in limited circumstances when such party’s board of directors determines in good faith, after consultation with its independent financial advisor, if any, and outside counsel, that an unsolicited competing proposal constitutes, or would reasonably be expected to result in, a superior competing proposal and that failure to take such action would result in a breach of the fiduciary duties of the board of directors. In addition, if Tocagen or Forte terminate the Merger Agreement under specified circumstances, including terminating because of a decision of a board of directors to recommend a superior competing proposal, Forte may be required to pay Tocagen a termination fee of $1.0 million or $3.0 million or Tocagen may be required to pay Forte a termination fee of $500,000 or $750,000, or up to $250,000 in expense reimbursements, as defined and described under “The Merger Agreement—Termination of the Merger Agreement and Termination Fee.” This termination fee may discourage third parties from submitting competing proposals to Tocagen or Forte or their stockholders and may cause the respective boards of directors to be less inclined to recommend a competing proposal.

Because the lack of a public market for Forte’s capital stock makes it difficult to evaluate the fairness of the Merger, the shareholders of Forte may receive consideration in the Merger that is less than the fair market value of Forte’s capital stock and/or Tocagen may pay more than the fair market value of Forte’s capital stock.

The outstanding capital stock of Forte is privately held and is not traded in any public market. The lack of a public market makes it extremely difficult to determine the fair market value of Forte’s capital stock. Because the percentage of Tocagen equity to be issued to Forte shareholders was determined based on negotiations between the parties, it is possible that the value of the Tocagen Common Stock to be received by Forte shareholders will be less than the fair market value of Forte’s capital stock, or Tocagen may pay more than the aggregate fair market value for Forte’s capital stock.

Because the Merger will result in an ownership change under Section 382 of the Code for Tocagen, Tocagen’s pre-merger net operating loss (“NOL”) carryforwards and certain other tax attributes will be subject to limitations. The NOL carryforwards and other tax attributes of Forte and of the combined organization may also be subject to limitations as a result of ownership changes.

If a corporation undergoes an “ownership change” within the meaning of Section 382 of the Code (“Section 382”), the corporation’s NOL carryforwards and certain other tax attributes arising before the ownership change are subject to limitations on use after the ownership change. In general, an ownership change occurs if there is a cumulative change in the corporation’s equity ownership by certain stockholders that exceeds fifty percentage points over a rolling three-year period. Similar rules may apply under state tax laws. The Merger will result in an ownership change for Tocagen and, accordingly, Tocagen’s NOL carryforwards and certain other tax attributes will be subject to limitations (or disallowance) on their use after the Merger. Forte’s NOL carryforwards may also be subject to limitation as a result of prior shifts in equity ownership and/or the Merger. Additional ownership changes in the future could result in additional limitations on Tocagen’s, Forte’s and the combined organization’s NOL carryforwards. Consequently, even if the combined organization achieves profitability, it may not be able to utilize a material portion of Tocagen’s, Forte’s or the combined organization’s NOL carryforwards and other tax attributes, which could have a material adverse effect on cash flow and results of operations.

 

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Risks Related to Tocagen

Risks related to Tocagen’s business and financial condition

Tocagen has incurred losses since inception and anticipates that it will incur continued losses for the foreseeable future.

Tocagen is not profitable and has incurred net losses in each year since its inception in 2007, including net losses of $63.5 million, $49.0 million and $38.9 million for the years ended December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019, Tocagen had an accumulated deficit of $279.4 million.

Tocagen expects to incur significant operating losses for the foreseeable future depending on the extent of Tocagen’s preclinical and any clinical development activities. These losses, among other things, have had and will continue to have an adverse effect on Tocagen’s stockholders’ equity and working capital.

A substantial portion of Tocagen’s recent efforts and expenditures have been devoted to, and Tocagen’s prospects were substantially dependent upon, the development of Toca 511 & Toca FC for the treatment of recurrent high grade glioma. Tocagen conducted a randomized, controlled Phase 3 clinical trial (“Toca 5”) of Toca 511 & Toca FC in patients with recurrent HGG, which was designed to serve as a registrational trial. Tocagen received the data from this trial in September 2019. At the final analysis, the trial missed the primary endpoint of overall survival compared to the standard of care treatment (11.1 months median compared to 12.2 months, HR=1.06, p=0.6154). In addition, all secondary endpoints showed no meaningful difference between the arms of the trial. The failure of the Toca 5 trial to achieve its primary and secondary endpoints has significantly depressed Tocagen’s stock price and has severely harmed Tocagen’s ability to raise additional capital and to secure potential collaborative, partnering or other strategic arrangements for Tocagen’s programs, and consequently, Tocagen’s prospects to continue as a going concern have been severely diminished. Following Tocagen’s review of the full data sets from the Toca 5 trial, Tocagen determined to discontinue further development of Toca 511 & Toca FC. Tocagen continues its efforts to seek potential collaborative, partnering or other strategic arrangements for Tocagen’s programs, including a sale or other divestiture of Tocagen’s program assets. While Tocagen is currently determining third party interest in partnering or acquiring the Tocagen’s program assets, Tocagen may be unable to partner or divest the program assets in a timely manner, or at all, and therefore may not receive any return on Tocagen’s investment in the program assets, including Toca 511 & Toca FC. If the combined company does not have sufficient funds, the combined company will not be able to advance the development of its product candidates or otherwise bring its product candidates to market and generate product revenues.

Tocagen is substantially dependent on its remaining employees to facilitate the consummation of the Merger.

Tocagen has substantially reduced its workforce since September 2019 and as of March 16, 2020, Tocagen has only 12 full-time employees, of which seven full-time employees last day will be April 14, 2020, leaving five active full-time employees from April 14, 2020 through the close of the Merger. Tocagen’s ability to successfully complete the Merger depends in large part on Tocagen’s ability to retain certain of its remaining personnel. Despite Tocagen’s efforts to retain these employees, one or more may terminate their employment with Tocagen on short notice. The loss of the services of any of these employees could potentially harm Tocagen’s ability to consummate the Merger, to run Tocagen’s day-to-day business operations, as well as to fulfill Tocagen’s reporting obligations as a public company.

Management transition creates uncertainties and could harm Tocagen’s business.

Tocagen has in the past, and may again in the future, experience significant changes in executive leadership. Changes to company strategy, which can often times occur with the appointment of new executives, can create uncertainty, may negatively impact Tocagen’s ability to execute quickly and effectively, and may ultimately be unsuccessful. In addition, executive leadership transition periods are often difficult as the new executives gain

 

28

detailed knowledge of Tocagen’s operations, and friction can result from changes in strategy and management style. Management transition inherently causes some loss of institutional knowledge, which can negatively affect strategy and execution. Until Tocagen integrates new personnel, and unless they are able to succeed in their positions, Tocagen may be unable to successfully manage and grow its business, and Tocagen’s results of operations and financial condition could suffer as a result. In any event, changes in Tocagen’s organization as a result of executive management transition may have a disruptive impact on Tocagen’s ability to implement its strategy and could have a material adverse effect on Tocagen’s business, financial condition and results of operations.

The pendency of the Merger could have an adverse effect on the trading price of Tocagen’s common stock and Tocagen’s business, financial condition and prospects.

While there have been no significant adverse effects to date, the pendency of the Merger could disrupt Tocagen’s business in many ways, including:

 

•

the attention of Tocagen’s remaining management and employees may be directed toward the completion of the Merger and related matters and may be diverted from Tocagen’s day-to-day business operations; and

 

•

third parties may seek to terminate or renegotiate their relationships with Tocagen as a result of the Merger, whether pursuant to the terms of their existing agreements with Tocagen or otherwise.

Should they occur, any of these matters could adversely affect the trading price of Tocagen’s common stock or harm Tocagen’s business, financial condition and prospects.

Tocagen is dependent on ApolloBio Corp. to develop and commercialize Toca 511 & Toca FC within the greater China region, including mainland China, Hong Kong, Macao and Taiwan. Failure of ApolloBio or any other third parties to successfully develop and commercialize Toca 511 & Toca FC in the applicable jurisdictions could have a material adverse effect on Tocagen’s business.

Tocagen has granted ApolloBio an exclusive license to develop and commercialize Toca 511 & Toca FC within the greater China region, including mainland China, Hong Kong, Macao and Taiwan. Tocagen have limited contractual rights to force ApolloBio to invest significantly in the development and commercialization of Toca 511 & Toca FC.

In the event that ApolloBio or any other third party with any future development and commercialization rights to any of Tocagen’s product candidates fails to adequately develop and commercialize those product candidates because they lack adequate financial or other resources, decide to focus on other initiatives or otherwise, Tocagen’s ability to successfully develop and commercialize Tocagen’s product candidates in the applicable jurisdictions would be limited, which would adversely affect Tocagen’s business, financial condition, results of operations and prospects. In addition, Tocagen’s license agreement with ApolloBio may be terminated by either party upon a material breach by the other party that remains uncured following 60 days (or, with respect to any payment breach, 10 days) after the date of written notice of such breach, may be terminated by ApolloBio at any time by providing Tocagen 90 days’ prior written notice and may be terminated by Tocagen upon written notice to ApolloBio under specified circumstances if ApolloBio challenges the licensed patent rights. If Tocagen or ApolloBio terminate Tocagen’s license agreement, Tocagen’s ability to develop and commercialize Toca 511 & Toca FC within the greater China region, including mainland China, Hong Kong, Macao and Taiwan, would be materially harmed.

 

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The terms of Tocagen’s Loan and Security Agreement place restrictions on Tocagen’s operating and financial flexibility.

In May 2018, Tocagen entered into a Loan and Security Agreement with Oxford Finance LLC and Silicon Valley Bank, as amended in August 2018 and further amended in October 2019, which is secured by substantially all of Tocagen’s assets and intellectual property. Tocagen borrowed $26.5 million upon execution of the Loan Agreement. Approximately $8.6 million of the proceeds received were used to repay the outstanding principal, interest and final payment fees owed under Tocagen’s prior loan and security agreement. In October 2019, in connection with the second amendment to the Loan Agreement, Tocagen made a prepayment of $23.3 million, which amount was used to prepay (A) a portion equal to $21.5 million of the outstanding principal of the term loans plus all accrued and unpaid interest thereon through the prepayment date, (B) a pro rated portion of the final payment with respect to the portion of such term loans being prepaid, plus (C) all outstanding lenders’ expenses as of the amendment date.

The Loan Agreement includes affirmative and negative covenants applicable to Tocagen and any subsidiaries Tocagen creates in the future. The affirmative covenants include, among others, covenants requiring Tocagen to maintain Tocagen’s legal existence and governmental approvals, deliver certain financial reports, maintain insurance coverage, and subject all of Tocagen’s deposit accounts, securities accounts, commodity accounts or any other bank accounts, to a control agreement in favor of Oxford Finance LLC. The negative covenants include, among others, restrictions on Tocagen transferring collateral, incurring additional indebtedness, engaging in mergers or acquisitions, paying dividends in cash or making other distributions, making investments, creating liens, selling assets, and suffering a change in control, in each case subject to certain exceptions.

The Loan Agreement also includes events of default, the occurrence and continuation of which provide Oxford Finance LLC, as collateral agent, with the right to exercise remedies against Tocagen and the collateral securing the loans under the Loan Agreement, including foreclosure against Tocagen’s properties securing the Loan Agreement, including Tocagen’s cash, potentially requiring Tocagen to renegotiate Tocagen’s agreement on terms less favorable to Tocagen or to immediately cease operations. These events of default include, among other things, Tocagen’s failure to pay any amounts due under the Loan Agreement, a breach of covenants under the loan and security agreement, Tocagen’s insolvency, impairment in the perfection or priority of each lender’s security interest in the collateral, the occurrence of any default under certain other indebtedness in an amount greater than $250,000, Tocagen’s failure to obtain or maintain material governmental approvals, and a final judgment against Tocagen of at least $250,000. Further, if Tocagen is liquidated, the lender’s right to repayment would be senior to the rights of the holders of Tocagen’s common stock to receive any proceeds from the liquidation. The lenders could declare a default upon the occurrence of any event that they interpret as a material adverse change as defined under the Loan Agreement, thereby requiring Tocagen to repay the loan immediately or to attempt to reverse the declaration of default through negotiation or litigation. Any declaration by the lenders of an event of default could significantly harm Tocagen’s business and prospects and could cause the price of Tocagen’s common stock to decline.

If product liability lawsuits are brought against Tocagen, Tocagen may incur substantial liabilities and may be required to limit commercialization of Tocagen’s product candidates.

Tocagen faces an inherent risk of product liability as a result of the clinical testing of Tocagen’s product candidates and will face an even greater risk if Tocagen commercializes any products. For example, Tocagen may be sued if Tocagen’s product candidates cause or are perceived to cause injury or are found to be otherwise unsuitable during clinical testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. Claims could also be asserted under state consumer protection acts. If Tocagen cannot successfully defend itself against product liability claims, Tocagen may incur

 

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substantial liabilities or be required to limit commercialization of Tocagen’s product candidates. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:

 

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decreased demand for Tocagen’s product candidates;

 

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injury to Tocagen’s reputation;

 

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withdrawal of clinical trial participants;

 

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initiation of investigations by regulators;

 

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costs to defend the related litigation;

 

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a diversion of management’s time and Tocagen’s resources;

 

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substantial monetary awards to clinical trial participants or patients;

 

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product recalls, withdrawals or labeling, marketing or promotional restrictions;

 

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exhaustion of any available insurance and Tocagen’s capital resources;

 

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loss of revenue;

 

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the inability to commercialize any product candidate; and

 

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a decline in Tocagen’s share price.

Tocagen’s inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of any products Tocagen develops, alone or with corporate collaborators. Tocagen currently carries $5 million of product liability insurance covering Tocagen’s clinical trials. Although Tocagen maintains such insurance, Tocagen’s insurance policies may have various exclusions, and Tocagen may be subject to a product liability claim for which Tocagen has no coverage. Tocagen may have to pay any amounts awarded by a court or negotiated in a settlement that exceed Tocagen’s coverage limitations or that are not covered by Tocagen’s insurance, and Tocagen may not have, or be able to obtain, sufficient capital to pay such amounts. Even if Tocagen’s agreements with any future corporate collaborators entitle Tocagen to indemnification against losses, such indemnification may not be available or adequate should any claim arise.

Tocagen’s internal computer systems, or those used by Tocagen’s CROs, SaaS providers, contractors or consultants, may fail or suffer security breaches.

Despite the implementation of security measures, Tocagen’s internal computer systems and those of Tocagen’s CROs, SaaS providers, contractors and consultants are vulnerable to damage from computer viruses and unauthorized access. While Tocagen has not experienced any such material system failure or security breach to date, if such an event were to occur and cause interruptions in Tocagen’s operations, it could result in a material disruption of Tocagen’s development programs and Tocagen’s business operations. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in Tocagen’s regulatory approval efforts and significantly increase Tocagen’s costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of, or damage to, Tocagen’s data or applications, or inappropriate disclosure of confidential or proprietary information, Tocagen could incur liability, and the further development and commercialization of Tocagen’s product candidates could be delayed.

Tocagen business could be negatively impacted by cyber security threats.

In the ordinary course of Tocagen’s business, Tocagen uses its data centers and networks to store and access its proprietary business information. Tocagen faces various cyber security threats, including cyber security attacks to Tocagen’s information technology infrastructure and attempts by others to gain access to Tocagen’s

 

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proprietary or sensitive information. The procedures and controls Tocagen uses to monitor these threats and mitigate Tocagen’s exposure may not be sufficient to prevent cyber security incidents. The result of these incidents could include disrupted operations, lost opportunities, misstated financial data, liability for stolen assets or information, increased costs arising from the implementation of additional security protective measures, litigation and reputational damage. Any remedial costs or other liabilities related to cyber security incidents may not be fully insured or indemnified by other means.

Business disruptions could seriously harm Tocagen’s future revenue and financial condition and increase Tocagen’s costs and expenses.

Tocagen’s operations, and those of Tocagen’s CROs, contractors and consultants, could be subject to power shortages, telecommunications failures, wildfires, water shortages, floods, earthquakes, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics, such as the COVID-19 pandemic, and other natural or man-made disasters or business interruptions for which Tocagen is predominantly self-insured. The occurrence of any of these business disruptions could seriously harm Tocagen’s operations and financial condition and increase Tocagen’s costs and expenses. Tocagen’s ability to obtain clinical supplies of its product candidates could be disrupted if the operations of Tocagen’s contract manufacturers or cell line storage facilities are affected by a man-made or natural disaster or other business interruption.

A coronavirus pandemic is ongoing in many parts of the world and may result in significant disruptions to our clinical trials and/or supply chain which could have a material adverse effect on our business.

A coronavirus pandemic exists as of the filing of this proxy statement/prospectus/information statement. As the pandemic is still evolving as of this time, much of its impact remains unknown, and it is impossible to predict the impact it may have on the development of our business.

The coronavirus pandemic may result in significant delays or disruptions in our clinical trial plans, which could affect or delay the regulatory approval process of our product candidates. If the patients involved with these clinical trials become infected with the coronavirus disease, we may have more adverse events and deaths in our clinical trials as a result. We may also face difficulties enrolling patients in our clinical trials if the patient populations that are eligible for our clinical trials are impacted by the coronavirus pandemic.

Additionally, if our clinical trial patients are unable to travel to our clinical trial sites as a result of quarantines, social distancing measures, or other restrictions resulting from the coronavirus pandemic, we may experience higher drop-out rates or delays in our clinical trials.

The severity of the coronavirus pandemic could also make access to our existing supply chain difficult or impossible by delaying the delivery of key raw materials used in our product candidates and therefore delay the delivery of such products for use in our clinical trials. Any of these results could materially impact our business and have an adverse effect on our business.

Further, prolonged disruptions to businesses, manufacturing, and supply chain, including shelter-in-place or similar orders imposed by federal, state or local government authorities, and economic downturns can lead to materially adverse effects on our business operations, including layoffs and/or suspsension of our business operations.

 

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Tocagen may be subject, directly or indirectly, to federal, state, local and foreign healthcare fraud and abuse laws, false claims laws, privacy laws and other applicable healthcare laws, and the failure to comply with such laws could result in substantial penalties. Tocagen’s employees, independent contractors, consultants, principal investigators, CROs, commercial partners and vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.

Tocagen is exposed to the risk of fraud, misconduct or other illegal activity by Tocagen’s employees, independent contractors, consultants, principal investigators, CROs, commercial partners and vendors. Misconduct by these parties could include intentional, reckless and/or negligent conduct that fails to: comply with the laws of the FDA and other similar foreign regulatory bodies; provide true, complete and accurate information to the FDA and other similar foreign regulatory bodies; comply with manufacturing standards Tocagen has established; comply with federal and state data privacy, security, fraud and abuse and other healthcare laws and regulations in the United States and similar foreign fraudulent misconduct laws; or report financial information or data accurately or to disclose unauthorized activities to Tocagen.

In addition, Tocagen’s current and future operations are subject to regulation under such laws, and if Tocagen obtains FDA approval for any of Tocagen’s product candidates and begins commercializing those products in the United States, Tocagen’s potential exposure under such laws would increase significantly, along with Tocagen’s costs associated with compliance with such laws. These laws may impact, among other things, Tocagen’s current activities with principal investigators and research patients, as well as proposed and future sales, marketing and education programs. In particular, the research, promotion, sales and marketing of healthcare items and services, as well as certain business arrangements in the healthcare industry, are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of activities, including pricing, discounting, marketing and promotion, including off-label promotion of Tocagen’s products, structuring of commission(s), certain customer incentive programs and other business arrangements generally. Activities subject to these laws also involve the improper use or misrepresentation of information obtained in the course of patient recruitment for clinical trials, creating fraudulent data in Tocagen’s preclinical studies or clinical trials or illegal misappropriation of drug product, which could result in regulatory sanctions and cause serious harm to Tocagen’s reputation. The laws that may affect Tocagen’s ability to operate include, but are not limited to:

 

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the federal Anti-Kickback Statute, which prohibits, among other things, individuals and entities from knowingly and willfully soliciting, receiving, offering or paying any remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce, or in return for, either the referral of an individual for, or the purchase, lease, order or recommendation of, any good, facility, item or service for which payment may be made, in whole or in part, under a federal healthcare program, such as the Medicare and Medicaid programs. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;

 

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federal civil and criminal false claims laws, including the federal civil False Claims Act, which can be enforced by individuals on behalf of the government through civil whistleblower or qui tam actions, and civil monetary penalty laws, which impose criminal and civil penalties on individuals and entities for, among other things, knowingly presenting, or causing to be presented, claims for payment or approval from Medicare, Medicaid, or other federal healthcare programs that are false, fictitious or fraudulent, or knowingly making, using or causing to be made or used, a false statement to avoid, decrease or conceal an obligation to pay money to the federal government. In addition, the government may assert that a claim including items and services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act;

 

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the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which imposes criminal and civil liability for, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of false or fraudulent

 

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pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payor (e.g., public or private), willfully obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or covering up by any trick or device a material fact or making any materially false, fictitious or fraudulent statements in connection with the delivery of, or payment for, healthcare benefits, items or services relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;

 

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HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”), and their respective implementing regulations, which impose requirements on certain covered healthcare providers, health plans, and healthcare clearinghouses, as well as their respective business associates that perform services for them that involve the creation, use, maintenance or disclosure of, individually identifiable health information, relating to the privacy, security and transmission of individually identifiable health information without appropriate authorization;

 

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the federal physician payment transparency requirements, sometimes referred to as the “Physician Payments Sunshine Act,” created under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively the Healthcare Reform Act, and its implementing regulations, which require certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the Centers for Medicare & Medicaid Services (“CMS”), information related to payments or other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members. Beginning in 2022, applicable manufacturers also will be required to report such information regarding payments and transfers of value provided, as well as ownership and investment interests held, during the previous year to physician assistants, nurse practitioners, clinical nurse specialists, certified nurse anesthetists and certified nurse-midwives;

 

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the U.S. Federal Food, Drug and Cosmetic Act (“FD&C Act”), which prohibits, among other things, the adulteration or misbranding of drugs and medical devices; and

 

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federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers.

Additionally, Tocagen is subject to state, local and foreign equivalents of each of the healthcare fraud and abuse laws described above, among others, some of which may be broader in scope and may apply regardless of the payor. Tocagen may also be subject to state, local and foreign laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers; to report information related to payments and other transfers of value to healthcare providers or entities, or marketing expenditures; report certain information regarding drug pricing; and require registration of pharmaceutical sales representatives. Tocagen may also be subject to state and foreign laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

In the European Union, the General Data Protection Regulation (2016/679) (“GDPR”), applies to any organization established in the European Union, and in some cases to activities of organizations that are not established in the European Union. The GDPR, which is wide-ranging in scope, imposes several requirements relating to control over personal data by individuals to whom personal data relates, the information that an organization must provide to individuals, the documentation an organization must maintain, the security and confidentiality of personal data, data breach notification and the use of third party processors in connection with the processing of personal data. The GDPR also imposes strict rules on the transfer of personal data out of the

 

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European Union to the United States, provides an enforcement authority, and authorizes fines of up to 20 million Euros or up to 4% of an organization’s annual global turnover, whichever is greater, for non-compliance. Additionally, the California Consumer Privacy Act (the “CCPA”) went into effect on January 1, 2020. The CCPA creates new individual privacy rights for consumers (as that word is broadly defined in the law) and places increased privacy and security obligations on many organizations that handle the personal data of consumers or households. The CCPA requires covered companies to provide new disclosures to California consumers, provides a new right for consumers to opt-out of certain sales of personal information, and provides a new cause of action for data breaches in some cases. The California Attorney General is expected to issue regulations regarding the CCPA later this year. The CCPA impacts Tocagen’s business activities and exemplifies the vulnerability of Tocagen’s business to not only cyber threats but also the evolving regulatory environment related to personal data and protected health information.

It is not always possible to identify and deter employee misconduct, and the precautions Tocagen takes to detect and prevent inappropriate conduct may not be effective in controlling unknown or unmanaged risks or losses or in protecting Tocagen from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. Tocagen is also subject to the risk that a person or government could allege such fraud or other misconduct, even if none occurred. Efforts to ensure that Tocagen’s business arrangements will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental and enforcement authorities will conclude that Tocagen’s business practices may not comply with current or future statutes, regulations or case law interpreting applicable fraud and abuse or other healthcare laws and regulations. If any such actions are instituted against Tocagen, and Tocagen is not successful in defending itself or asserting its rights, those actions could have a significant impact on Tocagen’s business, including the imposition of significant civil, criminal and administrative penalties, damages, disgorgement, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, imprisonment, additional reporting obligations and oversight if Tocagen becomes subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with these laws, and curtailment or restructuring of Tocagen’s operations, any of which could adversely affect Tocagen’s ability to operate Tocagen’s business and Tocagen’s results of operations. In addition, the approval and commercialization of any of Tocagen’s product candidates outside the United States will also likely subject Tocagen to foreign equivalents of the healthcare laws mentioned above, among other foreign laws.

Additionally, in the United States and some foreign jurisdictions there have been, and continue to be, several legislative and regulatory changes and proposed reforms of the healthcare system in an effort to contain costs, improve quality, and expand access to care. These reform initiatives may, among other things, result in modifications to the aforementioned laws and/or the implementation of new laws affecting the healthcare industry. Similarly, a significant trend in the healthcare industry is cost containment. Third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Tocagen’s ability to commercialize any of Tocagen’s products successfully will depend in part on the extent to which coverage and adequate reimbursement for these products and will be available from third-party payors.

If Tocagen fails to comply with environmental, health and safety laws and regulations, Tocagen could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of Tocagen’s business.

Tocagen’s research and development, manufacturing processes, clinical trials and products may involve the controlled use of hazardous materials, chemicals, viruses and various radioactive compounds. Specifically, if Tocagen’s products or product candidates spread from human or companion pet patients to other people or pets, these other individuals or pets (such as the immune suppressed or the very young), might be more sensitive to the product or product candidate than the patient and may experience an adverse reaction. Tocagen is subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products, including numerous environmental, health and safety laws and

 

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regulations, such as those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. Tocagen’s operations involve the use of hazardous and flammable materials, including chemicals and biological materials. Tocagen’s operations also produce hazardous waste products. Tocagen generally contracts with third parties for the disposal of these materials and wastes. Tocagen cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from Tocagen’s use of hazardous materials, Tocagen could be held liable for any resulting damages, and any liability could exceed Tocagen’s resources. Tocagen also could incur significant costs associated with civil or criminal fines and penalties.

Although Tocagen maintains workers’ compensation insurance to cover Tocagen for costs and expenses Tocagen may incur due to injuries to Tocagen’s employees resulting from the use of hazardous materials or other work-related injuries, this insurance may not provide adequate coverage against potential liabilities. In addition, Tocagen may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair Tocagen’s research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.

Risks related to Tocagen’s intellectual property

If Tocagen fails to comply with its obligations in the agreement under which Tocagen licenses intellectual property rights from the University of Southern California (“USC”) or otherwise experiences disruptions to Tocagen’s business relationships with USC or other future licensors, Tocagen could lose license rights that are important to Tocagen’s business.

In October 2007, Tocagen entered into a license agreement with USC pursuant to which Tocagen received a worldwide, exclusive license to, among other things, manufacture and market products utilizing certain inventions that are critical to Tocagen’s business. Tocagen may enter into additional license agreements in the future. Tocagen’s existing license agreement imposes, and future license agreements may impose, various diligence, milestone payment, royalty and other obligations on Tocagen. If Tocagen fails to comply with Tocagen’s obligations under these agreements, or Tocagen is subject to a bankruptcy, the licensor may have the right to terminate the license, in which event Tocagen would not be able to market products covered by the license.

Tocagen may need to obtain licenses from third parties to advance Tocagen’s research or allow commercialization of Tocagen’s product candidates, and Tocagen has done so from time to time. Tocagen may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, Tocagen may be required to expend significant time and resources to develop or license replacement technology. If Tocagen is unable to do so, Tocagen may be unable to develop or commercialize the affected product candidates, which could harm Tocagen’s business significantly. Tocagen cannot provide any assurances that third-party patents do not exist which might be enforced against Tocagen’s current product candidates or future products, resulting in either an injunction prohibiting Tocagen’s sales, or, with respect to Tocagen’s sales, an obligation on Tocagen’s part to pay royalties and/or other forms of compensation to third parties.

In certain cases, patent prosecution of Tocagen’s licensed technology may be controlled solely by the licensor. If Tocagen’s licensors fail to obtain and maintain patent or other protection for the proprietary intellectual property Tocagen licenses from them, Tocagen could lose Tocagen’s rights to the intellectual property or Tocagen’s exclusivity with respect to those rights, and Tocagen’s competitors could market competing products using the intellectual property. In certain cases, Tocagen controls the prosecution of patents resulting from licensed technology. In the event Tocagen breaches any of Tocagen’s obligations related to such prosecution, Tocagen may incur significant liability to Tocagen’s licensing partners. Licensing of intellectual property is of critical importance to Tocagen’s business and involves complex legal, business and scientific

 

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issues and is complicated by the rapid pace of scientific discovery in Tocagen’s industry. Disputes may arise regarding intellectual property subject to a licensing agreement, including:

 

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the scope of rights granted under the license agreement and other interpretation-related issues;

 

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the extent to which Tocagen’s technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement;

 

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the sublicensing of patent and other rights under Tocagen’s collaborative development relationships;

 

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Tocagen’s diligence obligations under the license agreement and what activities satisfy those diligence obligations;

 

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the ownership of inventions and know-how resulting from the joint creation or use of intellectual property by Tocagen’s licensors and Tocagen and Tocagen’s partners; and

 

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the priority of invention of patented technology.

If disputes over intellectual property that Tocagen has licensed prevent or impair Tocagen’s ability to maintain Tocagen’s current licensing arrangements on acceptable terms, Tocagen may be unable to successfully develop and commercialize the affected product candidates.

Tocagen’s reliance on third parties may require Tocagen to share Tocagen’s trade secrets, which increases the possibility that a competitor will discover them or that Tocagen’s trade secrets will be misappropriated or disclosed.

Tocagen seeks to protect Tocagen’s proprietary technology in part by entering into confidentiality agreements and, if applicable, material transfer agreements, collaborative research agreements, consulting agreements or other similar agreements with Tocagen’s manufacturers, collaborators, advisors, employees and consultants prior to beginning research or disclosing proprietary information. These agreements typically limit the rights of the third parties to use or disclose Tocagen’s confidential information, such as trade secrets. Despite the contractual provisions employed when working with third parties, the need to share trade secrets and other confidential information increases the risk that such trade secrets become known by Tocagen’s competitors, are inadvertently incorporated into the technology of others, are used inappropriately to create new inventions or are disclosed or used in violation of these agreements. Given that Tocagen’s proprietary position is based, in part, on Tocagen’s know-how and trade secrets, a competitor’s discovery of Tocagen’s trade secrets or other unauthorized use or disclosure would impair Tocagen’s competitive position and may have a material adverse effect on Tocagen’s business.

In addition, these agreements typically restrict the ability of Tocagen’s collaborators, advisors, employees and consultants to publish data potentially relating to Tocagen’s trade secrets. Tocagen’s academic collaborators typically have rights to publish data, provided that Tocagen is notified in advance and may delay publication for a specified time in order to secure Tocagen’s intellectual property rights arising from the collaboration. In other cases, publication rights are controlled exclusively by Tocagen, although in some cases Tocagen may share these rights with other parties. Tocagen also conducts joint research and development programs that may require Tocagen to share trade secrets under the terms of Tocagen’s research and development partnerships or similar agreements. Despite Tocagen’s efforts to protect Tocagen’s trade secrets, Tocagen’s competitors may discover Tocagen’s trade secrets through breach of these agreements, independent development or publication of information including Tocagen’s trade secrets in cases where Tocagen does not have proprietary or otherwise protected rights at the time of publication. A competitor’s discovery of Tocagen’s trade secrets may impair Tocagen’s competitive position and have an adverse impact on Tocagen’s business.

 

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Tocagen may be subject to claims that Tocagen’s employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties or that Tocagen’s employees have wrongfully used or disclosed alleged trade secrets of their former employers.

Tocagen employs individuals who were previously employed at universities or other biotechnology or pharmaceutical companies, including Tocagen’s competitors or potential competitors. Although Tocagen tries to ensure that Tocagen’s employees, consultants and independent contractors do not use the proprietary information or know-how of others in their work for Tocagen, Tocagen may be subject to claims that Tocagen or Tocagen’s employees, consultants or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of any of Tocagen’s employee’s former employer or other third parties. Litigation may be necessary to defend against these claims. If Tocagen fail in defending any such claims, in addition to paying monetary damages, Tocagen may lose valuable intellectual property rights or personnel, which could adversely impact Tocagen’s business. Even if Tocagen is successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

Risks related to ownership of Tocagen’s common stock

If Tocagen fails to satisfy applicable listing standards, Tocagen’s common stock may be delisted from the Nasdaq Global Select Market.

On October 28, 2019, Tocagen received a letter from the Listing Qualifications Staff of Nasdaq notifying Tocagen that the closing bid price of Tocagen’s common stock had been below $1.00 per share for 30 consecutive business days and that Tocagen was therefore not in compliance with the minimum bid price requirement for continued listing on The Nasdaq Global Select Market, as required by Nasdaq Listing Rule 5550(a)(2). Nasdaq stated in its October 28, 2019 letter that, in accordance with Nasdaq Listing 5810(c)(3)(A), Tocagen had a grace period of 180 calendar days, or until April 27, 2020, to regain compliance with the minimum closing bid price requirement for continued listing. Tocagen regained compliance on March 5, 2020 when Tocagen’s closing bid price was at or above $1.00 for the 10^th consecutive business days during the 180-day grace period.

There is no guarantee that Tocagen will be able to maintain compliance with the Nasdaq minimum bid price requirement, which could result in Nasdaq taking steps to delist Tocagen’s common stock. Delisting from The Nasdaq Global Select Market could adversely affect Tocagen’s ability to raise additional financing through the public or private sale of equity securities, would significantly affect the ability of investors to trade Tocagen’s securities and would negatively affect the value and liquidity of Tocagen’s common stock. Delisting could also have other negative results, including the potential loss of confidence by employees, the loss of institutional investor interest and fewer business development opportunities. If Tocagen’s common stock is delisted by The Nasdaq Global Select Market, the price of Tocagen’s common stock may decline, and although Tocagen’s common stock may be eligible to trade on the Nasdaq Capital Market, the OTC Bulletin Board, another over-the-counter quotation system, or on the pink sheets, an investor may find it more difficult to dispose of their common stock or obtain accurate quotations as to the market value of Tocagen’s common stock. Further, if Tocagen are delisted, Tocagen would incur additional costs under state blue sky laws in connection with any sales of Tocagen’s securities. These requirements could severely limit the market liquidity of Tocagen’s common stock and the ability of Tocagen’s stockholders to sell Tocagen’s common stock in the secondary market.

In addition, Tocagen is required pursuant to the terms of the Merger Agreement to submit to Tocagen’s stockholders a proposal to approve an amendment to Tocagen’s amended and restated certification of incorporate to authorize Tocagen’s board of directors to effect a reverse stock split of all outstanding shares of Tocagen’s common stock. Such a reverse stock split proposal is included in this proxy statement/prospectus/information statement as Proposal No. 1. The approval of the reverse stock split by the stockholders is a condition to closing, pursuant to the Merger Agreement. If Tocagen does not maintain compliance with the Nasdaq minimum bid price prior to the Merger and this reverse stock split proposal is not approved by Tocagen’s stockholders and the

 

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parties waive this closing condition the combined company resulting from the Merger will likely not be able to obtain compliance with the minimum bid price requirement for an initial listing on The Nasdaq Capital Market and, as a consequence, Nasdaq will immediately provide the combined company with written notification that Tocagen’s common stock will be delisted.

If Tocagen’s common stock is delisted, Tocagen would expect Tocagen’s common stock to be traded in the over-the-counter market, which could adversely affect the liquidity of Tocagen’s common stock. Additionally, Tocagen could face significant material adverse consequences, including:

 

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a limited availability of market quotations for Tocagen’s common stock;

 

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a reduced amount of news and analyst coverage for Tocagen;

 

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a decreased ability to issue additional securities and a concomitant substantial impairment in Tocagen’s ability to obtain sufficient additional capital to fund Tocagen’s operations and to continue as a going concern;

 

•

reduced liquidity for Tocagen’s stockholders;

 

•

potential loss of confidence by employees and potential future partners or collaborators; and

 

•

loss of institutional investor interest and fewer business development opportunities.

The market price of Tocagen’s common stock has been volatile and may continue to be volatile in the future. This volatility may cause Tocagen’s stock price and the value of its stockholders’ investment to decline.

The market prices for securities of biotechnology companies, including Tocagen’s, have been highly volatile and may continue to be so in the future. In this regard, the market price for Tocagen’s common stock has varied between a high of $12.00 on March 5, 2019, and a low of $0.42 on December 18, 2019, in the twelve-month period ended December 31, 2019. The market price of Tocagen’s common stock is likely to continue to be volatile and subject to significant price and volume fluctuations. In addition, companies trading in the stock market in general, and the Nasdaq Global Select Market in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of Tocagen’s common stock, regardless of Tocagen’s actual operating performance.

In the past, class action litigation has often been instituted against companies whose securities have experienced periods of volatility in market price. Any such litigation brought against Tocagen could result in substantial costs, which would hurt Tocagen’s financial condition and results of operations.

Unstable market and economic conditions may have serious adverse consequences on Tocagen’s business, financial condition and stock price.

From time to time, global credit and financial markets have experienced extreme volatility and disruptions, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. Tocagen’s general business strategy may be adversely affected by any such economic downturn, volatile business environment and continued unpredictable and unstable market conditions. If the equity and credit markets deteriorate it may make any necessary debt or equity financing more difficult to complete, more costly, and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on Tocagen’s growth strategy, financial performance and stock price and could require Tocagen to delay or abandon clinical development plans. In addition, there is a risk that one or more of Tocagen’s current service providers, manufacturers and other partners may not survive an economic down-turn, which could directly affect Tocagen’s ability to attain Tocagen’s operating goals on schedule and on budget.

 

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Tocagen does not intend to pay dividends on Tocagen’s common stock so any returns will be limited to the value of Tocagen’s stock.

Tocagen has never declared or paid any cash dividends on Tocagen’s common stock. Tocagen currently anticipates that it will retain future earnings for the operation of its business and does not anticipate declaring or paying any cash dividends for the foreseeable future, including due to limitations that are currently imposed by Tocagen’s Loan Agreement. Any return to stockholders will therefore be limited to the appreciation of their stock.

Tocagen is an emerging growth company, and Tocagen cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make Tocagen’s common stock less attractive to investors.

Tocagen is an emerging growth company, as defined in the Jumpstart its Business Startups Act (“JOBS Act”). For as long as Tocagen continues to be an emerging growth company, Tocagen may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation in Tocagen’s periodic reports and proxy statements and exemptions from the requirements of holding nonbinding advisory votes on executive compensation and stockholder approval of any golden parachute payments not previously approved. Tocagen could be an emerging growth company for up to five years following the year in which Tocagen completed its initial public offering, although circumstances could cause Tocagen to lose that status earlier. Tocagen will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of Tocagen’s initial public offering (i.e. December 31, 2022), (b) in which Tocagen has total annual gross revenue of at least $1.07 billion or (c) in which Tocagen is deemed to be a large accelerated filer, which requires the market value of Tocagen’s common stock that is held by non-affiliates to exceed $700 million as of the prior June 30th, and (2) the date on which Tocagen has issued more than $1.0 billion in non-convertible debt during the prior three-year period.

Even after Tocagen no longer qualifies as an emerging growth company, Tocagen may still qualify as a “smaller reporting company” which would allow Tocagen to take advantage of many of the same exemptions from disclosure requirements including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in Tocagen’s periodic reports and proxy statements. Tocagen cannot predict if investors will find Tocagen’s common stock less attractive because Tocagen may rely on these exemptions. If some investors find Tocagen’s common stock less attractive as a result, there may be a less active trading market for Tocagen’s common stock and Tocagen’s stock price may be more volatile.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. Tocagen has irrevocably elected not to avail itself of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. As a result, changes in rules of U.S. generally accepted accounting principles or their interpretation, the adoption of new guidance or the application of existing guidance to changes in Tocagen’s business could significantly affect Tocagen’s financial position and results of operations.

Sales of a substantial number of shares of Tocagen’s common stock in the public market could cause Tocagen’s stock price to fall.

If Tocagen’s existing stockholders sell, or indicate an intention to sell, substantial amounts of Tocagen’s common stock in the public market, the market price of Tocagen’s common stock could decline. Tocagen had 23,908,937 shares of common stock outstanding as of March 6, 2020. Tocagen is unable to predict the effect that sales may have on the prevailing market price of Tocagen’s common stock.

 

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Sales of Tocagen’s common stock by current stockholders may make it more difficult for Tocagen to sell equity or equity-related securities in the future at a time and price that Tocagen deems reasonable or appropriate, and make it more difficult for other stockholders to sell shares of Tocagen’s common stock. In addition, as of December 31, 2019, 4,944,733 shares of common stock that are either subject to outstanding options, reserved for future issuance under Tocagen’s equity incentive plans or subject to outstanding warrants will become eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules and Rule 144 and Rule 701 under the Securities Act of 1933, as amended (the “Securities Act”). If these additional shares of common stock are sold, or if it is perceived that they will be sold, in the public market, the market price of Tocagen’s common stock could decline.

Tocagen has broad discretion in the use of working capital and may not use it effectively.

Tocagen’s management will have broad discretion in the application of working capital, and stockholders do not have the opportunity to assess whether working capital is being used appropriately. Because of the number and variability of factors that will determine Tocagen’s use of its working capital, its ultimate use may vary substantially from its currently intended use. Management might not apply working capital in ways that ultimately increase stockholder value. Failure by Tocagen to apply working capital effectively could harm Tocagen’s business. Pending its use, Tocagen may invest Tocagen’s working capital in short-term, investment-grade, interest-bearing securities. These investments may not yield a favorable return to Tocagen’s stockholders. If Tocagen does not invest or apply Tocagen’s working capital in ways that enhance stockholder value, Tocagen may fail to achieve expected financial results, which could cause Tocagen’s stock price to decline.

Changes in tax laws or regulations that are applied adversely to Tocagen or Tocagen’s customers may have a material adverse effect on Tocagen’s business, cash flow, financial condition or results of operations.

New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, which could affect the tax treatment of Tocagen’s domestic and foreign earnings. Any new taxes could adversely affect Tocagen’s domestic and international business operations, and Tocagen’s business and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to Tocagen. For example, legislation enacted in 2017, informally titled the Tax Cuts and Jobs Act (“Tax Act”) made many significant changes to the tax laws, including the Code. Future guidance from the Internal Revenue Service (the “IRS”) and other tax authorities with respect to the Tax Act may affect Tocagen, and certain aspects of the Tax Act could be repealed or modified in future legislation. In addition, it is uncertain if and to what extent various states will conform to the Tax Act or any newly enacted federal tax legislation. Changes in corporate tax rates, the realization of net deferred tax assets relating to Tocagen’s operations, the taxation of foreign earnings, and the deductibility of expenses under the Tax Act or future reform legislation could have a material impact on the value of Tocagen’s deferred tax assets, could result in significant one-time charges, and could increase Tocagen’s future U.S. tax expense.

Tocagen’s ability to use Tocagen’s NOL carryforwards and certain other tax attributes may be limited.

As of December 31, 2019, Tocagen had federal NOL carryforwards of $231.0 million, of which $136.6 million begin to expire in 2028 unless previously utilized and $94.4 million that do not expire but the deductibility of which is limited to 80% of taxable income in a given year. As of December 31, 2019, Tocagen had stated NOL carryforwards of $76.0 million that begin to expire in 2028, unless previously utilized. If these NOL carryforwards expire unused, they will be unavailable to offset future income and reduce future income tax liabilities. In addition, under the Tax Act, federal NOLs incurred in 2018 and in future years may be carried forward indefinitely, but the deductibility of such federal NOL carryforwards is limited. It is uncertain if and to what extent various states will conform to the Tax Act. Under Sections 382 and 383 of the Code, if a corporation undergoes an “ownership change,” generally defined as a cumulative change in its equity ownership by “5-percent shareholders” of greater than 50 percentage points (by value) over a three-year period, the corporation’s ability to use its pre-change NOL carryforwards and certain other pre-change tax attributes (such as

 

41

research tax credits) to offset its post-change taxable income and taxes, as applicable, may be limited. Tocagen has completed public offerings and multiple other rounds of financing since Tocagen’s inception which may have resulted in an ownership change or could result in one or more ownership changes in the future. As of December 31, 2019, Tocagen has not completed a Section 382 and 383 analysis regarding any limitations on Tocagen’s NOL carryforwards and research and development credit carryforwards and such limitations could be significant. Tocagen may also experience ownership changes in the future as a result of subsequent shifts in Tocagen’s stock ownership. As a result, Tocagen’s ability to use Tocagen’s NOL carryforwards and research and development credit carryforwards to offset Tocagen’s U.S. federal taxable income and taxes, as applicable, may be subject to limitations, which could potentially result in increased future tax liability to Tocagen. In addition, at the state level, similar rules may apply and there may be periods during which the use of NOL carryforwards is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.

Provisions in Tocagen’s amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire Tocagen or increase the cost of acquiring Tocagen, even if doing so would benefit Tocagen’s stockholders or remove Tocagen’s current management.

Tocagen’s amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions that may have the effect of delaying or preventing a change in control of Tocagen or changes in Tocagen’s management. Tocagen’s amended and restated certificate of incorporation and amended and restated bylaws, include provisions that:

 

•

permit Tocagen’s board of directors to issue up to 10,000,000 shares of preferred stock, with any rights, preferences and privileges as they may designate (including the right to approve an acquisition or other change in Tocagen’s control);

 

•

provide that the authorized number of directors may be changed only by resolution of the board of directors;

 

•

provide that the board of directors or any individual director may only be removed with cause and the affirmative vote of the holders of at least 66-2/3% of the voting power of all of Tocagen’s then outstanding common stock;

 

•

provide that all vacancies, including newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum;

 

•

divide Tocagen’s board of directors into three classes;

 

•

require that any action to be taken by Tocagen’s stockholders must be effected at a duly called annual or special meeting of stockholders and not be taken by written consent;

 

•

provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide notice in writing in a timely manner and also specify requirements as to the form and content of a stockholder’s notice;

 

•

do not provide for cumulative voting rights (therefore allowing the holders of a majority of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election, if they should so choose);

 

•

provide that special meetings of Tocagen’s stockholders may be called only by the chairman of the board, Tocagen’s Chief Executive Officer or by the board of directors pursuant to a resolution adopted by a majority of the total number of authorized directors; and

 

•

provide that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on Tocagen’s behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of Tocagen’s directors or officers to Tocagen or Tocagen’s

 

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stockholders, (iii) any action asserting a claim against Tocagen arising pursuant to any provision of the DGCL or Tocagen’s certificate of incorporation or bylaws, or (iv) any action asserting a claim against Tocagen governed by the internal affairs doctrine (these choice of forum provisions do not apply to suits brought to enforce a duty or liability created by the Securities Act, the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or any other claim for which the federal courts have exclusive jurisdiction).

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in Tocagen’s management.

In addition, because Tocagen is incorporated in Delaware, Tocagen is governed by the provisions of Section 203 of the DGCL, which limits the ability of stockholders owning in excess of 15% of Tocagen’s outstanding voting stock to merge or combine with Tocagen.

Any provision of Tocagen’s amended and restated certificate of incorporation or amended and restated bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for Tocagen’s stockholders to receive a premium for their shares of Tocagen’s common stock and could also affect the price that some investors are willing to pay for Tocagen’s common stock.

Tocagen’s amended and restated certificate of incorporation and amended and restated bylaws provide that the Court of Chancery of the State of Delaware is the sole and exclusive forum for substantially all disputes between Tocagen and Tocagen’s stockholders, which could limit Tocagen’s stockholders’ ability to obtain a favorable judicial forum for disputes with Tocagen or Tocagen’s directors, officers or employees.

Tocagen’s amended and restated certificate of incorporation and amended and restated bylaws provide that the Court of Chancery of the State of Delaware is the sole and exclusive forum for (i) any derivative action or proceeding brought on Tocagen’s behalf; (ii) any action asserting a breach of fiduciary duty owed by any of Tocagen’s directors, officers or other employees to Tocagen or Tocagen’s stockholders; (iii) any action asserting a claim against Tocagen or any of Tocagen’s directors, officers or other employees arising pursuant to the DGCL, Tocagen’s amended and restated certificate of incorporation or Tocagen’s amended and restated bylaws; or (iv) any action asserting a claim against Tocagen or any of Tocagen’s directors, officers or other employees that is governed by the internal affairs doctrine; provided, that these choice of forum provisions do not apply to suits brought to enforce a duty or liability created by the Securities Act, the Exchange Act, or any other claim for which the federal courts have exclusive jurisdiction. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with Tocagen or Tocagen’s directors, officers or other employees, which may discourage such lawsuits against Tocagen and Tocagen’s directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in Tocagen’s amended and restated certificate of incorporation and amended and restated bylaws to be inapplicable or unenforceable in an action, Tocagen may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect Tocagen’s business and financial condition.

Risks Related to Forte

Risks related to Forte’s business, technology and industry

Forte has incurred net losses in every year since its inception and anticipates that it will continue to incur net losses in the future.

Forte is a clinical stage healthcare company with a limited operating history. Investment in product development in the healthcare industry, including of biopharmaceutical products, is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to demonstrate adequate effect or an acceptable safety profile, gain regulatory approval and become commercially viable. Forte’s lead product candidate, FB-401, is currently in clinical development. Forte has no

 

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products approved for commercial sale and have not generated any revenue from product sales to date, and Forte continues to incur significant research and development and other expenses related to its ongoing operations. As a result, Forte is not profitable and has incurred losses in each period since its inception in 2017. For the years ended December 31, 2018 and 2019, Forte reported net losses of $0.9 million and $4.1 million, respectively. As of December 31, 2019, Forte had an accumulated deficit of $5.0 million. Forte expects to continue to incur significant losses for the foreseeable future, and Forte expects these losses to increase as Forte continues its research and development of, and seeks regulatory approvals for, its product candidate, FB-401. Forte anticipates that its expenses will increase substantially if, and as, it:

 

•

conducts clinical trials for its product candidate, FB-401;

 

•

Continues to discover and develop additional applications for FB-401;

 

•

maintain, expand and protect its intellectual property portfolio;

 

•

hires or contracts additional clinical, scientific, manufacturing and commercial personnel to support its product development and commercialization efforts;

 

•

validates a manufacturing process and specifications for FB-401;

 

•

establishes in-house manufacturing capabilities;

 

•

establishes a commercial manufacturing source and secure supply chain capacity sufficient to provide clinical trial material and commercial quantities of any product candidate for which Forte may obtain regulatory approval;

 

•

acquires or in-licenses other product candidate and technologies;

 

•

seeks various regulatory approvals;

 

•

establishes a sales, marketing and distribution infrastructure to commercialize any product candidate for which Forte may obtain regulatory approval; and

 

•

adds operational, compliance, financial and management information systems and personnel to support being a public company after the Merger.

To become and remain profitable, Forte or any potential future collaborator must develop and eventually commercialize products with significant market potential at an adequate profit margin after cost of goods sold and other expenses. This will require Forte to be successful in a range of challenging activities, including completing clinical trials, obtaining marketing approval for FB-401, manufacturing, marketing and selling products for which Forte may obtain marketing approval and satisfying any post-marketing requirements. Forte may never succeed in any or all of these activities and, even if Forte does, Forte may never generate revenue that is significant enough to achieve profitability. If Forte does achieve profitability, it may not be able to sustain or increase profitability on a quarterly or annual basis. Forte’s failure to become and remain profitable would decrease the value of its company and could impair its ability to raise capital, maintain its research and development efforts, expand its business or continue its operations.

Even if Forte succeeds in obtaining regulatory approval and commercializing its current product candidate, FB-401, Forte may continue to incur substantial research and development and other expenditures to develop and market additional applications for its current product candidate or any future product candidates. Forte may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect its business. The size of its future net losses will depend, in part, on the rate of future growth of its expenses and its ability to generate revenue. Forte’s prior losses and expected future losses have had and will continue to have an adverse effect on its stockholders’ equity and working capital.

 

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Forte will require additional capital to fund its operations and if Forte fails to obtain necessary financing, Forte will not be able to complete the development and commercialization of its product candidate, FB-401.

Forte’s operations have consumed substantial amounts of cash since inception. Forte expects to continue to spend substantial amounts to conduct clinical trials of its current and future programs, to validate the manufacturing process and specifications for its product candidate, to seek regulatory approvals for its product candidate and to launch and commercialize any products for which Forte receive regulatory approval, including potentially building its own commercial organization. As of December 31, 2019, Forte had $6.9 million of cash on hand. Based on its current operating plan, Forte believes that the cash available after the Merger will enable the combined company to fund its operating expenses, capital expenditure requirements through at least June 2021. However, its future capital requirements and the period for which its existing resources will support its operations may vary significantly from what Forte currently expects, and Forte will in any event require additional capital in order to complete clinical development of FB-401. Forte’s monthly spending levels will vary based on new and ongoing development and corporate activities. Because the length of time and activities associated with development of FB-401 is highly uncertain, Forte is unable to estimate the actual funds it will require for development and any approved marketing and commercialization activities. Forte’s future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:

 

•

the initiation, progress, timing, costs and results of clinical trials for FB-401 and any need to conduct additional such studies as may be required by a regulator;

 

•

the clinical development plans Forte establishes forFB-401;

 

•

the terms of any collaboration agreements Forte may choose to initiate or conclude;

 

•

the outcome, timing and cost of meeting regulatory requirements established by the U.S. Food and Drug Administration (“FDA”), and other comparable foreign regulatory authorities;

 

•

delay or failure in obtaining the necessary approvals from regulators or institutional review boards, or IRBs, in order to commence a clinical trial at a prospective trial site, or their suspension or termination of a clinical trial once commenced;

 

•

failure of third-party contractors, such as CROs, or investigators to comply with regulatory requirements, including GCPs;

 

•

governmental or regulatory delays and changes in regulation or policy relating to the development and commercialization of its product candidate by the FDA or other comparable foreign regulatory authorities;

 

•

undertaking and completing additional pre-clinical studies to generate data required to support the continued clinical development of a product candidate;

 

•

inability to enroll sufficient patients to complete a protocol;

 

•

difficulty in having patients complete a trial or return for post-treatment follow-up;

 

•

clinical sites deviating from trial protocol or dropping out of a trial;

 

•

problems with biopharmaceutical product candidate storage, stability and distribution;

 

•

its inability to add new or additional clinical trial sites;

 

•

varying interpretations of the data generated from its preclinical or clinical trials;

 

•

Forte’s inability to manufacture, or obtain from third parties, adequate supply of biopharmaceutical product candidate sufficient to complete its preclinical studies and clinical trials;

 

•

the costs of establishing, maintaining, and overseeing a quality system compliant with current good manufacturing practice requirements (“cGMPs”) and a supply chain for the development and manufacture of its product candidate;

 

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•

the cost of defending intellectual property disputes, including patent infringement actions brought by third parties against Forte or FB-401;

 

•

the effect of competing technological and market developments;

 

•

the cost and timing of establishing, expanding and scaling manufacturing capabilities;

 

•

the cost of establishing sales, marketing and distribution capabilities for any product candidate for which Forte may receive regulatory approval in regions where Forte chooses to commercialize its products on its own; and

 

•

potential unforeseen business disruptions or market fluctuations that delay its product development or clinical trials and increase its costs or expenses, such as business or operational disruptions, delays, or system failures due to malware, unauthorized access, terrorism, war, natural disasters, strikes, geopolitical conflicts, restrictions on trade, import or export restrictions, or public health crises, such as the current COVID-19 outbreak.

Forte does not have any committed external source of funds or other support for its development efforts, and Forte cannot be certain that additional funding will be available on acceptable terms, or at all. Until Forte can generate sufficient product or royalty revenue to finance its cash requirements, which Forte may never do, Forte expects to finance its future cash needs through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing or distribution arrangements. If Forte raises additional funds through public or private equity offerings, the terms of these securities may include liquidation or other preferences that adversely affect its stockholders’ rights. Further, to the extent that Forte raises additional capital through the sale of common stock or securities convertible into or exchangeable for common stock, Forte’s ownership interest will be diluted. If Forte raises additional capital through debt financing, Forte would be subject to fixed payment obligations and may be subject to covenants limiting or restricting its ability to take specific actions, such as incurring additional debt, making capital expenditures, declaring dividends or acquiring or licensing intellectual property rights. If Forte raises additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, Forte may have to relinquish certain valuable rights to its product candidate, technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to it. Forte also could be required to seek collaborators for one or more of its current or future product candidate at an earlier stage than otherwise would be desirable or relinquish its rights to product candidate or technologies that Forte otherwise would seek to develop or commercialize itself. If Forte is unable to raise additional capital in sufficient amounts or on terms acceptable to it, Forte may have to significantly delay, scale back or discontinue the development or commercialization of its current product candidate, FB-401, or one or more of its other research and development initiatives. Any of the above events could significantly harm its business, prospects, financial condition and results of operations and cause the price of its common stock to decline.

Forte has a limited operating history, which may make it difficult to evaluate its technology and product development capabilities and predict its future performance.

Forte is early in its development efforts. Forte was formed in 2017, has no products approved for commercial sale and has not generated any revenue from product sales. Forte’s ability to generate product revenue or profits, which Forte does not expect will occur for many years, if ever, will depend on the successful development and eventual commercialization of FB-401, which may never occur. Forte may never be able to develop or commercialize a marketable product.

Forte’s current and future programs and product candidates will require additional discovery research, preclinical development, clinical development, regulatory approval to commercialize the product, manufacturing validation, obtaining manufacturing supply, capacity and expertise, building of a commercial and distribution organization, substantial investment and significant marketing efforts before Forte generates any revenue from product sales. In addition, its drug product candidate must be approved for marketing by the FDA or certain other health regulatory agencies before Forte may commercialize any product in the respective jurisdictions.

 

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Forte’s limited operating history may make it difficult to evaluate its technology and industry and predict its future performance. Forte’s short history as an operating company makes any assessment of its future success or viability subject to significant uncertainty. Forte will encounter risks and difficulties frequently experienced by early-stage companies in evolving fields. If Forte does not address these risks successfully, its business will suffer. Similarly, Forte expects that its financial condition and operating results will fluctuate significantly from quarter to quarter and year to year due to a variety of factors, many of which are beyond its control. As a result, its stockholders should not rely upon the results of any quarterly or annual period as an indicator of future operating performance.

In addition, as an early-stage company, Forte may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown circumstances. As Forte advances FB-401, Forte will need to transition from a company with a research focus to a company capable of supporting clinical development and if successful, commercial activities. Forte may not be successful in such a transition.

If Forte fails to comply with its obligations under the license agreement with the U.S. Department of Health and Human Services, as represented by the National Institute of Allergy and Infectious Diseases (“DHHS”) or otherwise experience disruptions to its business relationship with DHHS, Forte could lose license rights that are important to its business.

Forte’s DHHS license agreement imposes various diligence, milestone payment, royalty and other obligations on Forte. If Forte fails to comply with its obligations under these agreements, or Forte is subject to a bankruptcy, the licensor may have the right to terminate the license, in which event Forte would not be able to market products covered by the license.

Forte’s near-term prospects are highly dependent on future revenues from a single product candidate, FB-401, and Forte may be unable to achieve regulatory approval for FB-401 and its commercialization.

Forte’s long-term prospects are highly dependent on future acceptance and revenues from a single product, FB-401, and Forte has no other product candidates or products in active development at this time. Forte’s success depends on its ability to eventually commercialize FB-401. Acceptance of its product in the marketplace by health care providers is uncertain, and its failure to achieve sufficient market acceptance will significantly limit its ability to generate revenue and be profitable. Market acceptance will require substantial marketing efforts and the expenditure of significant funds by it to inform health care providers of the benefits of using FB-401 and to provide further training on its use. Forte may not be able to build key relationships with health care providers to increase sales in the United States or sell FB-401 outside the United States. Product orders may be cancelled, patients or customers currently using its products may cease to do so and patients or customers expected to begin using its products may not. In addition, market acceptance of FB-401 may require that Forte make enhancements to it. Forte cannot be sure that it will be able to successfully develop such enhancements, or that if developed they will be viewed favorable by the market. Forte’s ability to achieve acceptance of FB-401 depends on its ability to demonstrate the safety, efficacy, ease-of-use and cost-effectiveness.

Topical live biotherapeutic is a novel approach and negative perception of any product candidate that Forte develops could adversely affect its ability to conduct its business or obtain regulatory approvals for FB-401.

Microbiome therapies and therapy candidates in general are a relatively new and novel approach. In the United States and the European Union, no products to date have been approved specifically demonstrating an impact on the microbiome as part of their therapeutic effect. Microbiome therapies in general may not be successfully developed or commercialized or gain the acceptance of the public or the medical community. Forte’s success will depend upon physicians who specialize in the treatment of diseases targeted by its product candidate that Forte pursue as drugs, prescribing potential treatments that involve the use of its product candidate in lieu of, or in addition to, existing treatments with which they are more familiar and for which greater clinical

 

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data may be available. Forte’s access will also depend on consumer acceptance and adoption of its products that Forte commercialize. Adverse events in clinical trials of its product candidate or in clinical trials of others developing similar products and the resulting publicity, as well as any other adverse events in the field of the microbiome, could result in delay in regulatory approval for its product candidate or a decrease in demand for any product that Forte may develop. In addition, responses by the U.S., state or foreign governments to negative public perception or ethical concerns may result in new legislation or regulations that could limit its ability to develop or commercialize any product candidate, obtain or maintain regulatory approval or otherwise achieve profitability. More restrictive statutory regimes, government regulations or negative public opinion would have an adverse effect on Forte’s business, financial condition, results of operations and prospects and may delay or impair the development and commercialization of FB-401 or demand for any products Forte may develop.

Forte’s initial product candidate targeting atopic dermatitis (“AD”) in adults will require significant additional clinical development before it can seek regulatory approval for and launch a therapeutic product commercially.

Forte’s business and future success depends on its ability to submit a BLA and obtain regulatory approval of and then successfully launch and commercialize FB-401. Forte is the sponsor of an active Investigational New Drug Application (“IND”) for its initial product candidate, which allows it to commence a Phase 2 clinical trial.

Additionally, its planned Phase 2 clinical trial is intended to allow it to evaluate the efficacy and safety of FB-401 in reducing AD in adults and pediatrics. It may be challenging to ensure that pediatric or adolescent patients adhere to clinical trial protocols. Forte’s inability to enroll a sufficient number of pediatric patients in a clinical trial could result in significant delays, could require it to abandon one or more clinical trials altogether, could impact its ability to raise additional capital and could delay or prevent its ability to obtain regulatory approvals for FB-401 in pediatric patients. In addition, if Forte is unable to obtain regulatory approval for FB-401 for an indication in pediatric patients, the commercial prospects or viability could be materially harmed, even if Forte obtains regulatory approval for an indication in adult patients.

FB-401 is in the early stages of development and will require significant additional clinical development, regulatory review and approval in multiple jurisdictions, substantial investment, access to sufficient validated and cGMP-compliant commercial manufacturing capacity and significant marketing efforts before Forte can generate any revenue from product sales. In addition, because FB-401 is its most advanced product candidate, if FB-401 encounters safety, efficacy, supply or manufacturing problems, developmental delays, regulatory or commercialization issues or other problems, its development plans, including for other product candidate, and business would be significantly harmed.

The successful development of its product candidate is highly uncertain.

Successful development of product candidate is highly uncertain and is dependent on numerous factors, many of which are beyond its control. Product candidates that appear promising in the early phases of development may fail to reach the market for several reasons, including:

 

•

clinical study results may show its product candidate to be less effective than desired or to have harmful or problematic side effects or toxicities;

 

•

clinical trial results may show its product candidate to be less effective than expected (e.g., a clinical trial could fail to meet its primary endpoint(s)) or to have unacceptable side effects or toxicities;

 

•

failure to execute the clinical trials caused by slow enrollment in clinical trials, patients dropping out of clinical trials, length of time to achieve clinical trial endpoints, additional time requirements for data analysis, inability to validate the manufacturing process or to achieve cGMP compliance for its product candidate or inability to identify a suitable bioanalytical assay method agreeable to its regulators;

 

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•

failure to receive the necessary regulatory approvals or a delay in receiving such approvals for, including but not limited to, a Biologics License Application (“BLA”), delays in BLA preparation responding to an FDA request for additional clinical data or unexpected safety or manufacturing issues;

 

•

manufacturing costs, formulation issues, manufacturing deficiencies or other factors that make FB-401 uneconomical; and

 

•

proprietary rights of others and their competing products and technologies that may prevent FB-401 from being commercialized.

The length of time necessary to complete clinical trials and to submit an application for marketing approval of a drug product candidate for a final decision by a regulatory authority may be difficult to predict for FB-401, in large part because of its limited regulatory history.

The full impact of the COVID-19 pandemic on Forte’s clincal trial plans, product development, and how the FDA reviews study data that has been significantly impacted by the pandemic is difficult to predict, but may have a material adverse impact on Forte’s business operations, clinical trial plans, and product development, including delays in IRB approval, delays in clinical trial and study participant recruitment, delay in FDA approval of our product candidates, and additional costs and resources. The pandemic’s impact on the economy and drug product manufacturing and supply chain may also adversely affect Forte’s clinical trial plans and drug development. Additionally, depending on the duration of shelter-in-place, social distancing, and similar measures, as well as business closures and stresses on our healthcare systems and clinical trial sites, Forte’s ability to recruit participants for its clinical trials may be significantly impacted. Forte may not be able to commence or complete its clinical trials as currently planned. Forte may be required to significantly modify its study protocol, policies and procedures in order to address or accommodate patients and study site needs during the pandemic.Such changes can include modification to protcol inclusion and exclusion criteria, extending the time for patient follow up visits, using telemedicine, phone interviews and other technology to monitor patient safety, all of which will need to be approved by study site IRBs. Forte will also need to timely document how the pandemic impacted study and study patients, and submit that information to the FDA for evaluation. Forte cannot provide any assurance that the pandemic will not significantly impact how the FDA reviews any protocol deviations that occur during the pandemic, or that FDA will not require it to repeat a clinical study.

Even if Forte is successful in obtaining market approval for a drug product, commercial success of any approved products will also depend in large part on marketing acceptance, the availability of insurance coverage and adequate reimbursement from third-party payors, including government payors, such as the Medicare and Medicaid programs, and managed care organizations, which may be affected by existing and future healthcare reform measures designed to reduce the cost of healthcare. Third-party payors could require Forte to conduct additional studies, including post-marketing studies related to the cost-effectiveness of the product, to qualify for reimbursement, which could be costly and divert its resources. If government and other healthcare payors were not to provide adequate insurance coverage and reimbursement levels for any of its drug products once approved, market acceptance and commercial success would be reduced.

In addition, if any of Forte’s drug product candidates, including FB-401, are approved for marketing, Forte will be subject to significant regulatory obligations regarding the submission of safety and other post-marketing information and reports and registration. If approved, any of its drug products would be subject to restrictions on its products’ labels and other conditions of regulatory approval that may limit its ability to market its products. Forte will also need to comply (and ensure that its third-party contractors comply) with cGMPs, and Good Clinical Practice (“GCP”), as Forte (and its third-party contractors) will be required to comply with these requirements for the products or product candidates used in its clinical trials or post-approval studies. In addition, Forte will need to comply with GCPs for any clinical trial conducted for any therapeutic indications Forte may develop for approval, including any additional therapeutic indications Forte develop after approval of its first drug candidate for treatment in AD. In addition, there is always the risk that Forte or a regulatory authority might identify previously unknown problems with a drug product post-approval, such as adverse events of

 

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unanticipated severity or frequency. Compliance with these requirements and other regulatory requirements is costly and any failure to comply or other issues with its product post-approval could have a material adverse effect on its business, financial condition and results of operations.

Clinical development is a lengthy and expensive process, with an uncertain outcome. Forte may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of any product candidate.

To obtain the requisite regulatory approvals to commercialize any product candidate, Forte must demonstrate through extensive clinical trials that its product candidate is safe and effective in humans for its intended use. Clinical testing is expensive, difficult to design and implement and can take many years to complete, and its outcome is inherently uncertain. Forte may be unable to establish clinical endpoints, dose levels and regimens or bioanalytical assay methods that applicable regulatory authorities would consider clinically meaningful, and a clinical trial can fail at any stage of testing. The outcome of preclinical studies and early clinical trials may not be predictive of the success of later clinical trials, and interim results of these studies or trials do not necessarily predict final results. Differences in trial design between early-stage clinical trials and later-stage clinical trials make it difficult to extrapolate the results of earlier clinical trials to later clinical trials. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidate performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval of their product candidate.

Successful completion of clinical trials is a prerequisite to submitting a BLA to the FDA, and similar marketing applications to comparable foreign regulatory authorities, for each product candidate, and, consequently, the ultimate approval and commercial marketing of any product candidate. Forte does not know whether any of its clinical trials will begin or be completed on schedule, if at all.

Forte may experience delays in completing its clinical trials. Forte also may experience numerous unforeseen events during, or as a result of, any future clinical trials that Forte could conduct that could delay or prevent its ability to receive marketing approval or commercialize its product candidate, including:

 

•

regulators or institutional review boards (“IRBs”), or ethics committees may not authorize Forte or its investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;

 

•

Forte may experience delays in reaching, or fail to reach, agreement on acceptable terms with prospective trial sites and prospective contract research organizations (“CROs”), the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

•

clinical trials of any product candidate may fail to show safety, purity or potency, or produce negative or inconclusive results and Forte may decide, or regulators may require it, to conduct additional preclinical studies or clinical trials or Forte may decide to abandon product development programs;

 

•

the number of patients required for clinical trials of any product candidate may be larger than Forte anticipates, enrollment in these clinical trials may be slower than Forte anticipates, or participants may drop out of these clinical trials or fail to return for post-treatment follow-up at a higher rate than Forte anticipates;

 

•

clinical trials of its product candidates may produce negative or inconclusive results, and Forte may decide, or regulators may require it, to conduct additional clinical trials or abandon product development programs;

 

•

regulators may require Forte to perform additional or unanticipated clinical trials to obtain approval or Forte may be subject to additional post-marketing testing requirements to maintain regulatory approval;

 

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•

regulators may revise the requirements for approving its product candidates, or such requirements may not be as Forte anticipate;

 

•

Forte’s third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to it in a timely manner, or at all, or may deviate from the clinical trial protocol or drop out of the trial, which may require that Forte add new clinical trial sites or investigators;

 

•

the cost of clinical trials of its product candidate may be more than Forte anticipates or more than its available financial resources, and Forte may need to delay or suspend one or more trials until Forte completes additional financing transactions or otherwise receives adequate funding;

 

•

the supply or quality of Forte’s product candidate or other materials necessary to conduct clinical trials of its product candidate may be insufficient or inadequate and may not achieve compliance with applicable cGMPs;

 

•

Forte’s product candidate may have undesirable side effects or other unexpected characteristics, causing it or its investigators, regulators or IRBs or ethics committees to suspend or terminate clinical trials, or reports may arise from clinical testing of its product candidate that raise safety or efficacy concerns about its product candidate;

 

•

clinical trials of Forte’s product candidate may produce negative or inconclusive results, which may result in it deciding, or regulators requiring it, to conduct additional clinical trials or suspend or terminate its clinical trials;

 

•

the FDA or other regulatory authorities may disagree with the design, implementation or results of its clinical trials, or require Forte to submit additional data such as long-term toxicology studies or impose other requirements before permitting it to initiate a clinical trial;

 

•

regulatory authorities may suspend or withdraw their approval of a product or impose restrictions on its distribution;

 

•

Forte’s limited experience in filing and pursuing a BLA necessary to gain regulatory approval;

 

•

any failure to develop substantial evidence of clinical efficacy and safety, and to develop quality standards and manufacturing processes to demonstrate consistent safety, purity, identity, and/or potency standards;

 

•

a decision by Forte, institutional review boards, or regulators to suspend or terminate its clinical trials for various reasons, including noncompliance with regulatory requirements or a finding that the participants are being exposed to unacceptable health risks;

 

•

regulatory inspections of its clinical trials, clinical trial sites or manufacturing facilities, which may, among other things, require Forte to undertake corrective action or suspend or terminate its clinical trials if regulators find it not to be in compliance with applicable regulatory requirements;

 

•

Forte’s ability to produce sufficient quantities of the product candidate to complete its clinical trials;

 

•

varying interpretations of the data generated from its clinical trials; and

 

•

changes in governmental regulations or administrative action.

Forte could also encounter delays if a clinical trial is suspended or terminated for any reason. A suspension or termination may be imposed due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or its clinical protocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a product or treatment, failure to establish or achieve clinically meaningful trial endpoints, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. Many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory

 

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approval of its product candidate. Further, the FDA or other regulatory authorities may disagree with its clinical trial design and its interpretation of data from clinical trials or may change the requirements for approval even after they have reviewed and commented on the design for its clinical trials.

Forte’s product development costs will increase if it experiences delays in clinical testing or marketing approvals. Forte does not know whether any of its clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all. Significant clinical trial delays also could shorten any periods during which Forte may have the exclusive right to commercialize its product candidate and may allow its competitors to bring products to market before Forte does, potentially impairing its ability to successfully commercialize its product candidate upon approval and harming its business and results of operations. Any delays in its future clinical development programs may harm its business, financial condition and prospects significantly.

Forte’s planned clinical trials or those of its future collaborators may reveal significant adverse events not seen in its preclinical studies or other clinical trials and may result in a safety profile that could inhibit regulatory approval or market acceptance of any of its product candidate.

Before obtaining regulatory approvals for the commercial sale of any products, Forte must demonstrate through lengthy, complex and expensive preclinical studies and clinical trials that FB-401 is both safe and effective for use in each target indication. Preclinical and clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the preclinical or clinical trial process. The results of preclinical studies as well as early clinical trials of its product candidate may not be predictive of the results of later-stage clinical trials. In addition, initial success in clinical trials may not be indicative of results obtained when such clinical trials are completed. There is typically an extremely high rate of attrition from the failure of product candidate proceeding through clinical trials. Forte believes that its product candidate will be well tolerated by participants in its clinical trials, but there is no certainty that it will be able to dose trial participants at a high enough dose that will demonstrate efficacy without unacceptable safety risk, such as an unanticipated immune response in clinical trial participants.

Forte’s FB-401 may fail to show the desired safety and efficacy profile despite having progressed through preclinical studies and initial clinical trials. A number of companies in the healthcare industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy and/or unacceptable safety issues, notwithstanding promising results in earlier preclinical studies or clinical trials. Most product candidates that commence clinical trials are never approved as products and there can be no assurance that any of its current or future clinical trials will ultimately be successful or support further clinical development of any of its product candidates.

If significant adverse events or other side effects are observed in any of its current or future clinical trials, Forte may have difficulty recruiting patients to its clinical trials, patients may drop out of its clinical trials or Forte may be required to significantly redesign or terminate trials or its development efforts of one or more product candidates altogether. Forte, the FDA, or other applicable regulatory authorities or an IRB may suspend or terminate clinical trials of a product candidate at any time for various reasons, including a belief that patients in such trials are being exposed to unacceptable health risks or adverse side effects. Some potential therapeutics developed in the healthcare industry that initially showed therapeutic promise in early-stage clinical trials have later been found to cause side effects that prevented their further development. Even if the side effects do not preclude the drug from obtaining or maintaining marketing approval, undesirable side effects may inhibit market acceptance of the approved product due to its tolerability versus other therapies. Any of these developments could materially harm Forte’s business, financial condition and prospects.

 

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Positive results from early preclinical studies and clinical trials of FB-401 are not necessarily predictive of the results of any future clinical trials of its product candidate. If Forte cannot replicate the positive results from its earlier preclinical studies and clinical trials of its product candidate in its future clinical trials, Forte may be unable to successfully develop, obtain regulatory approval for and commercialize its product candidate.

Any positive results from its preclinical studies and clinical trials of its product candidate may not necessarily be predictive of the results from required later clinical trials. Similarly, even if Forte is able to complete its planned preclinical studies or any future clinical trials of FB-401 according to its current development timeline, the positive results from such preclinical studies and clinical trials of FB-401 may not be replicated in subsequent preclinical studies or clinical trial results.

Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials after achieving positive results in early-stage development, and Forte cannot be certain that it will not face similar setbacks. These setbacks have been caused by, among other things, preclinical findings made while clinical trials were underway, or safety or efficacy observations made in preclinical studies and clinical trials, including previously unreported adverse events. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses and many companies that believed their product candidate performed satisfactorily in preclinical studies and clinical trials nonetheless failed to obtain FDA or similar regulatory approval.

If Forte encounters difficulties enrolling patients in its clinical trials, its clinical development activities could be delayed or otherwise adversely affected.

Forte may experience difficulties in patient enrollment in its clinical trials for a variety of reasons. The timely completion of clinical trials in accordance with their protocols depends, among other things, on its ability to enroll a sufficient number of patients who remain in the clinical trial until its conclusion. The enrollment of patients depends on many factors, including:

 

•

the severity of the disease or condition under investigation;

 

•

the patient eligibility and exclusion criteria defined in the protocol;

 

•

the size of the study patient population required for analysis of the primary endpoint(s) of the clinical trial;

 

•

the proximity of patients to trial sites;

 

•

the design of the clinical study or trial;

 

•

Forte’s ability to recruit investigators with the appropriate competencies and experience;

 

•

clinicians’ and patients’ perceptions as to the potential advantages and risks of the product candidate being studied in relation to other available therapies, including any new drugs that may be approved for the indications Forte is investigating;

 

•

the efforts to facilitate timely enrollment in clinical studies or trials;

 

•

the patient referral practices of physicians;

 

•

the ability to monitor patients adequately during and after treatment;

 

•

Forte’s ability or the ability of its CRO to ensure regulatory compliance and to obtain and maintain patient consents for its clinical trials; and

 

•

the risk that patients enrolled in clinical trials will drop out of the clinical trials before completion.

In addition, Forte’s clinical studies or trials will compete with other clinical studies or trials for product candidates that are in the same therapeutic areas as its product candidate, and this competition will reduce the

 

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number and types of patients available for its clinical trial, because some patients who might have opted to enroll in its clinical studies or trials may instead opt to enroll in a study or trial being conducted by one of its competitors. Since the number of qualified clinical investigators is limited, Forte expects to conduct some of its clinical studies or trials at the same clinical trial sites that some of its competitors may use, which will reduce the number of patients who are available for its clinical trials in such clinical trial site. Moreover, because its product candidate represents a departure from more commonly used methods for its targeted therapeutic areas, potential patients and their doctors may be inclined to use conventional therapies, rather than enroll patients in any future clinical study or trial related to Forte’s product candidate.

Delays in patient enrollment may result in increased costs or may affect the timing or outcome of the planned clinical studies or trials, which could prevent completion of these clinical studies or trials and adversely affect Forte’s ability to advance the development of its product candidate.

Interim top-line and preliminary data from its clinical trials that Forte announces or publishes from time to time may change as more patient data become available and are subject to audit and verification procedures that could result in material changes in the final data.

From time to time, once Forte commences future clinical trials, Forte may publish interim top-line or preliminary data from its clinical trials. Interim data from these clinical trials that Forte may complete are subject to the risk that one or more of the outcomes may materially change as patient enrollment continues and more patient data become available. Preliminary or top-line data also remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary data Forte previously published. As a result, interim and preliminary data should be viewed with caution until the final data are available. Adverse differences between preliminary or interim data and final data could significantly harm its business prospects.

If Forte fails to comply with environmental, health and safety laws and regulations, Forte could become subject to significant fines or penalties or incur costs that could have a material adverse effect on the success of its business.

Forte is subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. research and development activities involve the use of biological and hazardous materials and produce hazardous waste products. Forte generally contracts with third parties for the disposal of these materials and wastes. Forte cannot eliminate the risk of contamination or injury from these materials, which could cause an interruption of its commercialization efforts, research and development efforts and business operations, environmental damage resulting in costly clean-up and liabilities under applicable laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. Although Forte believes that the safety procedures utilized by its third-party manufacturers for handling and disposing of these materials generally comply with the standards prescribed by these laws and regulations, Forte cannot guarantee that this is the case or eliminate the risk of accidental contamination or injury from these materials. In such an event, Forte may be held liable for any resulting damages and such liability could exceed its resources and state or federal or other applicable authorities may curtail its use of certain materials and/or interrupt its business operations. Furthermore, environmental laws and regulations are complex, change frequently and have tended to become more stringent. Forte cannot predict the impact of such changes and cannot be certain of its future compliance. In addition, Forte may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair its research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.

Although Forte maintain workers’ compensation insurance to cover it for costs and expenses, Forte may incur due to injuries to its employees resulting from the use of biological waste or hazardous materials or other

 

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work-related injuries, this insurance may not provide adequate coverage against potential liabilities. Forte does not carry specific biological waste or hazardous waste insurance coverage, workers compensation or property and casualty and general liability insurance policies that include coverage for damages and fines arising from biological or hazardous waste exposure or contamination.

If product liability lawsuits are brought against it, Forte may incur substantial liabilities and may be required to limit commercialization of FB-401 upon approval.

Forte faces an inherent risk of product liability as a result of testing its product candidate in clinical trials and will face an even greater risk if it commercializes any products. For example, Forte may be sued if its product candidates, upon regulatory approval, are perceived to cause injury or are found to be otherwise unsuitable or defective. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. Claims could also be asserted under state consumer protection acts. If Forte cannot successfully defend itself against product liability claims, Forte may incur substantial liabilities or be required to limit commercialization of its product candidate. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:

 

•

inability to bring a product candidate to the market;

 

•

decreased demand for its products;

 

•

damage to its reputation;

 

•

withdrawal of clinical trial participants and patients and inability to enroll future participants or continue clinical trials;

 

•

initiation of investigations by regulators;

 

•

costs to defend the related litigation;

 

•

diversion of management’s time and its resources;

 

•

substantial monetary awards to participants or patients;

 

•

product recalls, withdrawals or labeling, marketing or promotional restrictions;

 

•

loss of revenue;

 

•

exhaustion of any available insurance and its capital resources;

 

•

the inability to commercialize any product candidate via any regulatory pathway; and

 

•

decline in its share price.

While Forte maintains clinical trial insurance, it cannot anticipate all the risks associated with its clinical trials or risks after regulatory approval and commercial launch of its product. Forte reviews its clinical trial insurance policy annually, and Forte believes that its coverage is currently adequate to cover any claims that may arise in connection with its clinical trials. There is no guarantee that Forte will be able to obtain additional clinical trial insurance at an acceptable cost in the future, which could prevent or inhibit the ongoing development of its products.

Since Forte has not yet commenced marketing of any products Forte does not yet hold product liability insurance for commercialization of its products. its inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of products Forte develop, alone or with collaborators. If and when coverage is secured, its insurance policies may also have various exclusions, and Forte may be subject to a product liability claim for which Forte has no coverage. Forte may have to pay any amounts awarded by a court or negotiated in a settlement that exceed its

 

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coverage limitations or that are not covered by its insurance, and Forte may not have, or be able to obtain, sufficient capital to pay such amounts. Even if its agreements with any future corporate collaborators entitle Forte to indemnification against losses, such indemnification may not be available or adequate should any claim arise.

The market opportunities for FB-401 may be limited and its estimates of the incidence and prevalence of its target patient populations may be inaccurate.

Forte’s projections of both the number of people who have the diseases Forte is targeting, as well as the subset of people with these diseases in a position to receive its therapies, if approved, are based on its beliefs and estimates. These estimates have been derived from a variety of sources, including scientific literature, input from key opinion leaders, patient foundations or secondary market research databases, and may prove to be incorrect. Further, new studies may change the estimated incidence or prevalence of these diseases or regulatory approvals may include limitations for use or contraindications that decrease the addressable patient population. The number of patients may turn out to be lower than expected. Additionally, the potentially addressable patient population for its product candidate may be limited or may not be amenable to treatment with its product candidate. Even if Forte obtains significant market share for its product candidate, because certain of the potential target populations are small, Forte may never achieve profitability without obtaining regulatory approval for additional indications.

Forte faces significant competition from other healthcare companies, and its operating results will suffer if Forte fails to compete effectively.

The healthcare industry is characterized by intense competition and rapid innovation. Forte’s competitors may be able to develop other compounds or products that are able to achieve similar or better results. Forte’s potential competitors include major multinational pharmaceutical, established biotechnology companies, specialty pharmaceutical companies and universities and other research institutions. Many of its competitors have substantially greater financial, technical and other resources, such as larger research and development staff, experienced marketing and manufacturing organizations and well-established sales forces. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. Established pharmaceutical companies may also invest heavily to accelerate discovery and development of novel therapeutics or to in-license novel therapeutics that could make the product candidate that Forte develop obsolete. Mergers and acquisitions in the healthcare industry may result in even more resources being concentrated amongst its competitors. Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Forte’s competitors, either alone or with collaborative partners, may succeed in developing, acquiring or licensing on an exclusive basis microbiome therapies that are more effective, safer, more easily commercialized or less costly than FB-401 or may develop proprietary technologies or secure patent protection that Forte may need for the development of its technologies and products. Forte believes the key competitive factors that will affect the development and commercial success of its product candidate are efficacy, safety, tolerability, reliability, convenience of use, compliance with regulatory requirements, acceptance by patients or prescribers, competitive pricing and reimbursement.

Forte anticipates competing with the largest healthcare companies in the world, many of which have greater financial, human, and manufacturing resources than Forte currently has. In addition to these fully integrated healthcare companies, Forte also competes with those companies whose products target the same indications as FB-401. They include pharmaceutical companies, biotechnology companies, academic institutions and other research organizations. Any treatments developed by its competitors could be superior to its product candidate. It is possible that these competitors will succeed in developing technologies that are more effective than Forte’s products or that would render its product candidate obsolete or noncompetitive. Forte anticipates that it will face increased competition in the future as additional companies enter its market and scientific developments surrounding competing therapies continue to accelerate.

 

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Even if Forte obtains regulatory approval to market FB-401, the availability and price of its competitors’ products could limit the demand and the price Forte is able to charge for FB-401. Forte may not be able to implement its business plan if the acceptance of its product candidate is inhibited by price competition or the reluctance of physicians to switch from existing methods of treatment to its product candidate, or if physicians switch to other new drug or biologic products or choose to reserve its product candidate for use in limited circumstances.

Even if FB-401 or any other product candidate that Forte develops receives marketing approval, it may fail to achieve the degree of market acceptance by physicians, patients, third-party payors, consumers and others in the medical or healthcare community necessary for commercial success.

If any product candidate Forte develops receives marketing approval, it may nonetheless fail to gain sufficient market acceptance by physicians, patients, third-party payors, consumers and others in the medical community. If the product candidate Forte develops does not achieve an adequate level of acceptance, Forte may not generate significant product revenues and Forte may not become profitable. The degree of market acceptance of any product candidate, if approved for commercial sale, will depend on a number of factors, including:

 

•

efficacy, safety and potential advantages compared to alternative treatments;

 

•

the labeled uses or limitations for use, including age limitations or contraindications, for its product candidate compared to alternative treatments

 

•

convenience and ease of administration compared to alternative treatments;

 

•

the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;

 

•

public perception of new therapies;

 

•

the strength of marketing and distribution support;

 

•

the ability to offer its products, if approved, for sale at competitive prices;

 

•

the ability to obtain sufficient third-party insurance coverage and adequate reimbursement; and

 

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the prevalence and severity of any side effects.

Forte’s operations and financial results could be adversely impacted by the 2019 Novel Coronavirus (COVID-19) outbreak in China and the rest of the world including the United States.

In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China, resulting in significant disruptions to manufacturing, supply chain, markets, and travel world-wide, especially businesses involving activities or operations in China. While the extent of the impact of the current COVID-19 coronavirus outbreak on Forte’s business and financial results is uncertain, a continued and prolonged public health crisis such as the COVID-19 coronavirus outbreak could have a negative impact on its business, financial condition and operating results. Due to the global pandemic impacting the United States, its clinical trial recruiting and participants could also be slowed or delayed, or in a more severe scenario, its business, financial condition and operating results could be more severely affected. Given the dynamic nature of these circumstances, the duration of any business disruption or potential impact to its business of the COVID-19 coronavirus is difficult to predict, which may increase its costs or expenses.

Forte will need to grow the size of its organization, and Forte may experience difficulties in managing this growth.

As of December 31, 2019, Forte had 1 full-time employee, and as of the closing of the Merger, Forte plans to have five full-time employees. As its research, development, manufacturing and commercialization plans and

 

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strategies develop, and as Forte transitions into operating as a public company after the Merger, Forte expects to need additional managerial, operational, sales, marketing, financial and other personnel. Future growth would impose significant added responsibilities on members of management, including:

 

•

identifying, recruiting, compensating, integrating, maintaining and motivating additional employees;

 

•

managing its internal research and development efforts effectively, including identification of clinical candidates, scaling its manufacturing process and navigating the clinical and FDA review process for its product candidate; and

 

•

improving its operational, financial and management controls, reporting systems and procedures.

Forte’s future financial performance and its ability to commercialize FB-401 will depend, in part, on its ability to effectively manage any future growth, and its management may also have to divert a disproportionate amount of its attention away from day-to-day activities in order to devote a substantial amount of time to managing these growth activities.

Forte currently relies, and for the foreseeable future will continue to rely, in substantial part on certain organizations, advisors and consultants to provide certain services, including many aspects of regulatory affairs, clinical management and manufacturing. There can be no assurance that the services of these organizations, advisors and consultants will continue to be available to Forte on a timely basis when needed or that Forte can find qualified replacements. In addition, if Forte is unable to effectively manage its outsourced activities or if the quality or accuracy of the services provided by consultants is compromised for any reason, its clinical trials may be extended, delayed or terminated, and Forte may not be able to obtain regulatory approval ofFB-401 or otherwise advance its business. There can be no assurance that Forte will be able to manage its existing consultants or find other competent outside contractors and consultants on economically reasonable terms, or at all.

If Forte is not able to effectively expand its organization by hiring new employees and expanding its groups of consultants and contractors, Forte may not be able to successfully implement the tasks necessary to further develop and commercialize its product candidate and, accordingly, may not achieve its research, development and commercialization goals.

Forte’s current operations are located in California, and Forte or the third parties upon whom Forte depends, may be adversely affected by natural disasters or the COVID-19 outbreak, and its business continuity and disaster recovery plans may not adequately protect Forte from a serious disaster.

Forte’s current operations are located in California. Any unplanned event, such as flood, fire, explosion, earthquake, extreme weather condition, medical epidemics, such as the COVID-19 outbreak, power shortage, telecommunication failure or other natural or manmade accidents or incidents that result in it being unable to fully utilize its facilities, or the manufacturing facilities of its third-party contract manufacturers, may have a material and adverse effect on its ability to operate its business, particularly on a daily basis, and have significant negative consequences on its financial and operating conditions. Loss of access to these facilities may result in increased costs, delays in the development of its product candidate or interruption of its business operations. Earthquakes or other natural disasters could further disrupt its operations and have a material and adverse effect on its business, financial condition, results of operations and prospects. If a natural disaster, power outage or other event occurred that prevented it from using all or a significant portion of its headquarters, that damaged critical infrastructure, such as its research facilities or the manufacturing facilities of its third-party contract manufacturers, or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible, for Forte to continue its business for a substantial period of time. The disaster recovery and business continuity plans Forte has in place may prove inadequate in the event of a serious disaster or similar event. Forte may incur substantial expenses as a result of the limited nature of its disaster recovery and business continuity plans, which, could have a material adverse effect on its business. As part of its risk management policy, Forte maintains

 

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insurance coverage at levels that Forte believes are appropriate for its business. However, in the event of an accident or incident at these facilities, Forte cannot assure you that the amounts of insurance will be sufficient to satisfy any damages and losses. If its facilities, or the manufacturing facilities of its third-party contract manufacturers, are unable to operate because of an accident or incident or for any other reason, even for a short period of time, any or all of its research and development programs may be harmed. Any business interruption may have a material and adverse effect on its business, financial condition, results of operations and prospects.

If Forte loses key management personnel, or if Forte fails to recruit additional highly skilled personnel, its ability to identify and develop new or next generation product candidate will be impaired, could result in loss of markets or market share and could make Forte less competitive.

Forte’s ability to compete in the highly competitive healthcare industry depends upon its ability to attract and retain highly qualified managerial, scientific and medical personnel. Forte is highly dependent on its management, scientific and medical personnel, including Paul Wagner, Ph.D. The loss of the services of any of its executive officers, other key employees, and other scientific and medical advisors, and its inability to find suitable replacements could result in delays in product development and harm its business.

Forte conducts its operations in California. Competition for skilled personnel in its market is intense and may limit its ability to hire and retain highly qualified personnel on acceptable terms or at all.

To retain valuable employees at its company in a competitive market, in addition to salary and cash incentives, Forte has provided stock options that vest over time. The value to employees of stock options that vest over time may be significantly affected by movements in its stock price that are beyond its control and may at any time be insufficient to counteract more lucrative offers from other companies. Despite its efforts to retain valuable employees, members of its management, scientific and development teams may terminate their employment with Forte on short notice. Employment of its key employees is at-will, which means that any of its employees could leave its employment at any time, with or without notice. Forte does not maintain “key man” insurance policies on the lives of these individuals or the lives of any of its other employees. Forte’s success also depends on its ability to continue to attract, retain and motivate highly skilled junior, mid-level and senior managers as well as junior, mid-level and senior scientific and medical personnel.

Business disruptions could seriously harm Forte’s future revenue and financial condition and increase its costs and expenses.

Forte’s operations, and those of its CROs, contract manufacturing organizations (“CMOs”), and other contractors and consultants, could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or man-made disasters or business interruptions, for which Forte is predominantly self-insured. The occurrence of any of these business disruptions could seriously harm its operations and financial condition and increase its costs and expenses. For materials to be used in its clinical trials, Forte plans to rely on an external contract manufacturing organization for the entire manufacturing supply chain. Forte’s ability to obtain clinical supplies of its product candidate could be disrupted if the operations of these suppliers are affected by a man-made or natural disaster or other business interruption.

Forte’s internal computer systems, or those used by its CROs, CMOs or other contractors or consultants, may fail or suffer security breaches.

Despite the implementation of security measures, Forte’s internal computer systems and those of its future CROs, CMOs and other contractors and consultants are vulnerable to damage from computer viruses and unauthorized access. While Forte has not experienced any such material system failure or security breach to date, if such an event were to occur and cause interruptions in its operations, it could result in a material disruption of its development programs and its business operations. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in its regulatory approval efforts and significantly increase its costs

 

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to recover or reproduce the data. Likewise, Forte currently relies on third parties for the manufacture of its product candidate and to conduct clinical trials, and similar events relating to their computer systems could also have a material adverse effect on its business. To the extent that any disruption or security breach were to result in a loss of, or damage to, its data or applications, or inappropriate disclosure of confidential or proprietary information, Forte could incur liability and the further development and commercialization of its product candidate could be delayed.

Regulators globally are also imposing greater monetary fines for privacy violations. For example, in 2016, the European Union adopted the GDPR, which became effective on May 25, 2018. The GDPR applies to any company that collects and uses personal data in connection with offering goods or services to individuals in the European Union or the monitoring of their behavior. Non-compliance with the GDPR may result in monetary penalties of up to €20 million or 4% of worldwide revenue, whichever is higher. The GDPR and other changes in laws or regulations associated with the enhanced protection of certain types of personal data, such as healthcare data or other sensitive information, could greatly increase the cost of providing its product candidate, if approved, or even prevent Forte from offering its product candidate, if approved, in certain jurisdictions.

Forte’s employees, independent contractors, consultants, commercial partners and vendors acting on its behalf may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.

Forte is exposed to the risks of employee fraud or other illegal activity by its employees, independent contractors, consultants, commercial partners and vendors acting on its behalf. Misconduct by these parties could include intentional, reckless and/or negligent conduct that fails to comply with the laws of the FDA and other similar foreign regulatory bodies, provide true, complete and accurate information to the FDA and other similar foreign regulatory bodies, comply with manufacturing standards Forte has established, comply with healthcare fraud and abuse laws in the United States and similar foreign fraudulent misconduct laws or report financial information or data accurately or to disclose unauthorized activities to us. If Forte obtains FDA approval of any of its product candidate and begin commercializing those products in the United States, its potential exposure under such laws will increase significantly, and its costs associated with compliance with such laws are also likely to increase. These laws may impact, among other things, its current activities with principal investigators and research patients, as well as proposed and future sales, marketing and education programs.

Manufacturers of biopharmaceutical products and their facilities, vendors and suppliers are subject to continual review and periodic unannounced inspections by the FDA and other regulatory authorities for compliance with cGMP regulations, which include requirements relating to quality control and quality assurance as well as to the corresponding maintenance of records and documentation. Furthermore, its manufacturing facilities must be approved by regulatory agencies before these facilities can be used to manufacture its products or product candidates, and they will also be subject to additional regulatory inspections. Any material changes Forte may make to its manufacturing process or to the components used in its products may require additional prior approval by the FDA and state or foreign regulatory authorities. Failure to comply with FDA or other applicable regulatory requirements may result in criminal prosecution, civil penalties, recall or seizure of products, partial or total suspension of production or withdrawal of a product from the market.

A variety of risks associated with testing and developing its product candidate internationally could materially adversely affect its business.

Forte may seek regulatory approval of its product candidate outside of the United States and, if so, Forte expects that it will be subject to additional risks related to operating in foreign countries if Forte obtains the necessary approvals, including:

 

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differing regulatory requirements in foreign countries;

 

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unexpected changes in tariffs, trade barriers, price and exchange controls, import or export controls, and other regulatory requirements;

 

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economic weakness, including inflation, or political instability in particular foreign economies and markets;

 

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compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;

 

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foreign taxes, including withholding of payroll taxes;

 

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foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incident to doing business in another country;

 

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difficulties staffing and managing foreign operations;

 

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workforce uncertainty in countries where labor unrest is more common than in the United States;

 

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potential liability under the Foreign Corrupt Practices Act (“FCPA”), or comparable foreign regulations;

 

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challenges enforcing its contractual and intellectual property rights, especially in those foreign countries that do not respect and protect intellectual property rights to the same extent as the United States;

 

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production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and

 

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business interruptions resulting from geo-political actions, including war and terrorism.

These and other risks associated with its international operations may materially adversely affect its ability to attain or maintain profitable operations.

Obtaining and maintaining regulatory approval of its product candidates in one jurisdiction does not guarantee that Forte will be able to obtain or maintain regulatory approval in any other jurisdiction, while a failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the regulatory approval process in others. For example, even if the FDA grants marketing approval of a product candidate, comparable regulatory authorities in foreign jurisdictions must also approve the product, manufacturing, and in many cases reimbursement of the product candidate in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and greater than, those in the United States, including additional preclinical studies or clinical trials as clinical studies conducted in one jurisdiction may not be accepted by regulatory authorities in other jurisdictions. In some cases, the price that Forte intends to charge for its products is also subject to approval by regulatory authorities. If Forte fails to comply with the regulatory requirements in international markets and/or receive applicable marketing approvals, its target market will be reduced and its ability to realize the full market potential of its product candidates will be harmed.

Forte currently has no marketing and sales organization and has no experience in marketing products. If Forte is unable to establish marketing and sales capabilities or enter into agreements with third parties to market and sell its product candidate, Forte may not be able to generate product revenue.

Forte currently have no sales, marketing or distribution capabilities and have no experience in marketing products. Forte intends to develop an in-house marketing organization and sales force, which will require significant capital expenditures, management resources and time. Forte will have to compete with other healthcare companies to recruit, hire, train and retain marketing and sales personnel.

In addition to establishing internal sales, marketing and distribution capabilities, Forte intends to optimistically pursue collaborative arrangements regarding the sales and marketing of its products, however, there can be no assurance that Forte will be able to establish or maintain such collaborative arrangements, or if

 

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Forte is able to do so, that it will have effective sales forces. Any revenue Forte receives will depend upon the efforts of such third parties, which may not be successful. Forte may have little or no control over the marketing and sales efforts of such third parties and its revenue from product sales may be lower than if Forte had commercialized its product candidate ourselves. Forte also faces competition in its search for third parties to assist it with the sales and marketing efforts of its product candidate, FB-401.

There can be no assurance that Forte will be able to develop in-house sales and distribution capabilities or establish or maintain relationships with third-party collaborators to commercialize any product in the United States or overseas.

The FDA and other regulatory authorities may implement additional regulations or restrictions on the development and commercialization of biopharmaceutical products that contain live bacteria, which may be difficult to predict.

The FDA and regulatory authorities in other countries have each expressed interest in further regulating biotechnology products and product candidates. Agencies at both the federal and state level in the United States, as well as the U.S. Congressional committees and other governments or governing agencies, have also expressed interest in further regulating the biotechnology industry. Such action may delay or prevent commercialization of some or all of Forte’s current and future product candidates. Adverse developments in clinical trials of products containing live bacteria conducted by others may cause the FDA or other oversight bodies to change the requirements for approval of any of its product candidates. These regulatory review agencies and committees and the new requirements or guidelines they promulgate may lengthen the regulatory review process, require Forte to perform additional studies or trials, increase its development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval and commercialization of its product candidate or lead to significant post-approval limitations or restrictions. As Forte advances its product candidate, Forte will be required to consult with these regulatory agencies and comply with applicable requirements and guidelines. If Forte fails to do so, Forte may be required to delay or discontinue development of such product candidate. These additional processes may result in a review and approval process that is longer than Forte otherwise would have expected, delays as a result of an increased or lengthier regulatory approval process or further restrictions on the development of its product candidate can be costly and could negatively impact its ability to complete clinical trials and commercialize its current and future product candidate in a timely manner, if at all.

Comprehensive tax reform legislation could adversely affect its business and financial condition.

Recent changes to U.S. tax laws, as well as changes to U.S. tax laws that may be enacted in the future, could impact the tax treatment of its business and financial condition. For example, on December 22, 2017, President Trump signed into law the Tax Act, that significantly reforms the Code. The Tax Act, among other things, contains significant changes to corporate taxation, including changes to U.S. federal tax rates, limitation of the tax deduction for interest expense, and the modification and repeal of many business deductions and credits (including the reduction of the business tax credit for certain clinical testing expenses incurred in the testing of certain drugs for rare diseases or conditions generally referred to as “orphan drugs”). Forte continues to examine the impact this tax reform legislation may have on its business. The impact of the Tax Act and other changes to U.S. tax laws, and regulations or interpretations thereof, on its business is uncertain and could be adverse.

Forte’s ability to use net operating losses and research and development credits to offset future taxable income or tax liability may be subject to certain limitations.

As of December 31, 2019, Forte had U.S. federal NOL carryforwards and state NOL carryforwards of approximately $2 million and $2 million, respectively. Forte’s U.S. federal NOL carryforwards arising in tax years ending on or before December 31, 2017 will begin expiring in varying amounts in 2038 and 2039, respectively, unless utilized. Its U.S. federal NOL carryforwards arising in taxable years ending after December 31, 2017 will be carried forward indefinitely. Additionally, the deductibility of its U.S. federal NOL

 

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carryforwards arising in tax years beginning after December 31, 2017 is limited to 80% of current year taxable income. These NOL carryforwards could expire unused and be unavailable to offset future taxable income or tax liabilities, respectively. In addition, in general, under Sections 382, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income or taxes. For these purposes, an ownership change generally occurs where the aggregate stock ownership of one or more stockholders or groups of stockholders who owns at least 5% of a corporation’s stock increases its ownership by more than 50 percentage points over its lowest ownership percentage within a specified testing period. Forte’s existing NOL carryforwards may be subject to limitations arising from previous ownership changes, and if Forte undergo an ownership change in connection with or after the Merger, its ability to utilize NOL carryforwards could be further limited by Section 382. In addition, future changes in its stock ownership, many of which are outside of its control, could result in an ownership change under Sections 382. Forte’s NOL carryforwards may also be impaired under state law. Accordingly, Forte may not be able to utilize a material portion of its NOL carryforwards. Furthermore, its ability to utilize its NOL carryforwards is conditioned upon its attaining profitability and generating U.S. federal and state taxable income. As described above, Forte has incurred significant net losses since its inception and anticipate that Forte will continue to incur significant losses for the foreseeable future; and therefore, Forte do not know whether or when Forte will generate the U.S. federal or state taxable income necessary to utilize its NOL carryforwards that are subject to limitation by Sections 382.

Unstable market and economic conditions may have serious adverse consequences on Forte’s business, financial condition and stock price.

As widely reported, global credit and financial markets have experienced extreme volatility and disruptions in the past, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. There can be no assurance that further deterioration in credit and financial markets and confidence in economic conditions will not occur. Forte’s general business strategy may be adversely affected by any such economic downturn, volatile business environment or continued unpredictable and unstable market conditions. If the current equity and credit markets deteriorate, or do not improve, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on its growth strategy, financial performance and stock price and could require Forte to delay or abandon clinical development plans. In addition, there is a risk that one or more of its current service providers, manufacturers and other partners may not survive these difficult economic times, which could directly affect its ability to attain its operating goals on schedule and on budget. Furthermore, its stock price may decline due in part to the volatility of the stock market and the general economic downturn.

Risks related to government regulation

Forte is very early in its development efforts. FB-401 will require significant additional clinical development before Forte seeks regulatory approval of its product candidate and launch a product commercially. If Forte is unable to advance its product candidate, FB-401, to clinical development, obtain regulatory approval and ultimately commercialize its product candidate or experiences significant delays in doing so, its business will be materially harmed.

Forte is very early in its development efforts and have invested substantially all of its efforts and financial resources in the development ofFB-401. Its ability to generate product revenues, which Forte does not expect will occur for many years, if ever, will depend on the successful development and eventual commercialization of its product candidate, which may never occur. Forte currently generates no revenue from sales of any products, and Forte may never be able to develop or commercialize a marketable product. The success of FB-401 will depend on several factors, including the following:

 

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approval of INDs for its future clinical trials on product candidates other than FB-401;

 

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successful enrollment in, and completion of, clinical trials;

 

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receipt of regulatory approvals from applicable regulatory authorities for FB-401 or any other product candidate;

 

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establishing cGMP-compliant clinical supply and commercial manufacturing operations or making arrangements with third-party manufacturers for clinical supply and commercial manufacturing;

 

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obtaining and maintaining patent and trade secret protection or regulatory exclusivity for its product candidate;

 

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launching commercial sales of its product candidate, if and when approved or allowed for marketing, whether alone or in collaboration with others;

 

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acceptance of its product candidate, if and when approved, by patients, the medical community and third-party payors;

 

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effectively competing with other therapies;

 

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obtaining and maintaining third-party insurance coverage and adequate reimbursement;

 

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enforcing and defending intellectual property rights and claims;

 

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the marketing of its products; and

 

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maintaining a continued acceptable safety profile of the product candidate following approval or commercialization.

If Forte does not achieve one or more of these factors in a timely manner or at all, Forte could experience significant delays or an inability to successfully commercialize its product candidate, which would materially harm its business. If Forte does not receive regulatory approvals for its product candidate, it may not be able to continue its operations.

Changes in the legal and regulatory environment could limit Forte’s future business activities, increase its operating or regulatory costs, reduce demand for its product candidate or result in litigation.

The conduct of Forte’s business, including the development, testing, production, storage, distribution, sale, display, advertising, marketing, labeling, health and safety practices are subject to various laws and regulations administered by federal, state and local governmental agencies in the United States, as well as to laws and regulations administered by government entities and agencies outside the United States in markets in which its products candidates and components thereof (such as packaging) may be manufactured or sold.

These laws and regulations and interpretations thereof may change, sometimes dramatically, as a result of a variety of factors, including political, economic or social events. Such changes may include changes in:

 

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FDA regulations;

 

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laws related to product candidate labeling;

 

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advertising and marketing laws and practices;

 

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laws and programs restricting the sale and advertising of certain products;

 

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increased regulatory scrutiny of, and increased litigation involving, product claims and concerns regarding the actual or possible effects or side effects of its product candidate; and

 

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state and federal consumer protection and disclosure laws.

New laws, regulations or governmental policy and their related interpretations, or changes in any of the foregoing, may alter the environment in which Forte does business and, therefore, may impact its operating results or increase its costs or liabilities

 

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Inadequate funding for the FDA, the SEC and other government agencies, or disruptions in their staffing levels related to the COVID-19 global pandemic, could hinder their ability to hire and retain key leadership and other personnel, prevent new products and services from being developed or commercialized in a timely manner or otherwise prevent those agencies from performing normal business functions on which the approval of Forte’s product candidates rely, which would negatively impact its business.

The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels, ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory, and policy changes. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of the SEC and other government agencies on which its operations may rely, including those that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable.

Disruptions at the FDA and other agencies may also slow the time necessary for new drugs to be reviewed and/or approved by necessary government agencies, which would adversely affect its business. For example, over the last several years, including beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA and the SEC, have had to furlough critical FDA, SEC and other government employees and stop critical activities. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely review and process its regulatory submissions, which could have a material adverse effect on its business, including its ability to access the public markets and obtain necessary capital in order to properly capitalize and continue its operations.

Forte’s relationships with healthcare providers, including physicians and clinical investigators, CROs, and third-party payors in connection with its current and future business activities may be subject to federal and state healthcare fraud and abuse laws, false claims laws, transparency laws, government price reporting, and health information privacy and security laws, which could expose Forte to significant losses, including, among other things, criminal sanctions, civil penalties, contractual damages, reputational harm, exclusion from federal health care programs, administrative burdens, and diminished profits and future earnings.

Healthcare providers, physicians and third-party payors in the United States and elsewhere play a primary role in the recommendation and prescription of pharmaceutical products. Arrangements with third-party payors and customers can expose pharmaceutical manufactures to broadly applicable fraud and abuse and other healthcare laws and regulations, including, without limitation, the federal Anti-Kickback Statute and the federal False Claims Act, which may constrain the business or financial arrangements and relationships through which such companies sell, market and distribute pharmaceutical products. In particular, the research, promotion, sales and marketing of healthcare items and services, as well as certain business arrangements in the healthcare industry, are subject to extensive laws designed to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, structuring and commission(s), certain customer incentive programs and other business arrangements generally. Activities subject to these laws also involve the improper use of information obtained in the course of patient recruitment for clinical trials. The applicable federal, state and foreign healthcare laws and regulations laws that may affect Forte’s ability to operate include, but are not limited to:

 

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The federal Anti-Kickback Statute, which prohibits, among other things, knowingly and willfully soliciting, receiving, offering or paying any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce, or in return for, either the referral of an individual, or the purchase, lease, order or recommendation of any good, facility, item or service for which payment may be made, in whole or in part, under a federal healthcare program, such as the Medicare and Medicaid programs. In addition, a claim including items or services resulting from a violation of the federal Anti-Kickback Statute can constitute a false or fraudulent claim under the False Claims Act (“FCA”). The Anti-Kickback Statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and a referral source on the other, including

 

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prescribers, purchasers, and formulary managers. There are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, but the exceptions and safe harbors are drawn narrowly and require strict compliance in order to offer protection;

 

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federal civil and criminal false claims laws, including the FCA, and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, false or fraudulent claims for payment to, or approval by Medicare, Medicaid, or other federal healthcare programs, knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent claim or an obligation to pay or transmit money to the federal government, or knowingly concealing or knowingly and improperly avoiding or decreasing or concealing an obligation to pay money to the federal government. Manufacturers can be held liable under the FCA even when they do not submit claims directly to government payors if they are deemed to “cause” the submission of false or fraudulent claims. The FCA also permits a private individual acting as a “whistleblower” to bring actions on behalf of the federal government alleging violations of the FCA and to share in any monetary recovery;

 

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HIPAA, which created new federal criminal statutes that prohibit knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payor (e.g., public or private) and knowingly and willfully falsifying, concealing or covering up by any trick or device a material fact or making any materially false statements in connection with the delivery of, or payment for, healthcare benefits, items or services relating to healthcare matters. A person or entity can be found guilty of violating HIPAA without actual knowledge of the statute or specific intent to violate it;

 

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HIPAA, as amended by HITECH, and their respective implementing regulations, which impose, among other things, requirements on certain covered healthcare providers, health plans, and healthcare clearinghouses as well as their respective business associates that perform services for them that involve the use, or disclosure of, individually identifiable health information, relating to the privacy, security and transmission of individually identifiable health information without appropriate authorization. HITECH also created new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil actions;

 

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the federal Physician Payments Sunshine Act, created under the Patient Protection and Affordable Care Act, and its implementing regulations, which require applicable manufacturers of certain drugs, devices, biologicals and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the United States Department of Health and Human Services information related to payments or other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members;

 

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federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers;

 

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analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, and may be broader in scope than their federal equivalents; state and foreign laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers; state and foreign laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare

 

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providers or marketing expenditures; and state and foreign laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts; and

 

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GDPR and other ex-U.S. protections.

The distribution of pharmaceutical products is subject to additional requirements and regulations, including extensive record-keeping, licensing, storage and security requirements intended to prevent the unauthorized sale of pharmaceutical products.

The scope and enforcement of each of these laws is uncertain and subject to rapid change in the current environment of healthcare reform. Federal and state enforcement bodies have recently increased their scrutiny of interactions between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. Ensuring business arrangements comply with applicable healthcare laws, as well as responding to possible investigations or inquiries by government authorities, can be time- and resource-consuming and can divert a company’s attention from the business.

The failure to comply with any of these laws or regulatory requirements subjects entities to possible legal or regulatory action. Depending on the circumstances, failure to meet applicable regulatory requirements can result in civil, criminal and administrative penalties, damages, fines, disgorgement, individual imprisonment, possible exclusion from participation in federal and state funded healthcare programs, contractual damages and the curtailment or restricting of its operations, as well as additional reporting obligations and oversight if Forte becomes subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with these laws. Any action for violation of these laws, even if successfully defended, could cause a pharmaceutical manufacturer to incur significant legal expenses and divert management’s attention from the operation of the business. Prohibitions or restrictions on sales or withdrawal of future marketed products could materially affect business in an adverse way.

After the Merger, Forte will have adopted a code of business conduct and ethics, but it is not always possible to identify and deter employee misconduct, and the precautions Forte takes to detect and prevent inappropriate conduct may not be effective in controlling unknown or unmanaged risks or losses or in protecting Forte from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. Efforts to ensure that its business arrangements will comply with applicable healthcare laws may involve substantial costs. It is possible that governmental and enforcement authorities will conclude that its business practices may not comply with current or future statutes, regulations or case law interpreting applicable fraud and abuse or other healthcare laws and regulations. If any such actions are instituted against us, and Forte is not successful in defending ourselves or asserting its rights, those actions could have a significant impact on its business, including the imposition of civil, criminal and administrative penalties, damages, disgorgement, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of its operations, any of which could adversely affect its ability to operate its business and its results of operations. In addition, the approval and commercialization of any of its product candidates outside the United States will also likely subject Forte to foreign equivalents of the healthcare laws mentioned above, among other foreign laws.

Obtaining and maintaining regulatory approval of any of its product candidates in one jurisdiction does not mean that Forte will be successful in obtaining regulatory approval for its product candidate in other jurisdictions.

Obtaining and maintaining regulatory approval does not guarantee that Forte will be able to obtain or maintain regulatory approval in any other jurisdiction, while a failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the regulatory approval process in others. For example, even if the

 

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FDA grants marketing approval of a product candidate, comparable regulatory authorities in foreign jurisdictions must also approve the manufacturing, marketing and promotion of the product candidate in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and greater than, those in the United States, including additional preclinical studies and clinical trials conducted in one jurisdiction may not be accepted by regulatory authorities in other jurisdictions. In many jurisdictions outside the United States, a product candidate must be approved for reimbursement before it can be approved for sale in that jurisdiction. In some cases, the price that Forte intends to charge for its products may also be subject to approval.

Forte may also submit marketing applications in other countries. Regulatory authorities in jurisdictions outside of the United States have requirements for approval of a product candidate with which Forte must comply prior to marketing in those jurisdictions. Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for Forte and could delay or prevent the introduction of its products in certain countries. If Forte fails to comply with the regulatory requirements in international markets and/or receive applicable marketing approvals, its target market will be reduced and its ability to realize the full market potential of its product candidate will be harmed.

Clinical development is uncertain. Forte’s clinical trials may experience delays or may never advance to the next stage of development, which would adversely affect its ability to obtain regulatory approvals to commercialize these programs on a timely basis or at all, which would have an adverse effect on its business.

To proceed with its development plans and ultimately commercialization of FB-401, Forte will be required to conduct additional clinical trials. The FDA may require additional extensive preclinical studies. Forte cannot be certain of the timely completion or outcome of its preclinical testing and studies and cannot predict if the FDA or other regulatory authorities will accept its proposed clinical programs, including the design, dose level, and dose regimen, or if the outcome of its preclinical testing and studies will ultimately support the further development of its clinical programs.

If Forte is not able to obtain, or if there are delays in obtaining required regulatory approvals for its product candidate, Forte will not be able to commercialize, or will be delayed in commercializing, its product candidate, and its ability to generate revenue will be materially impaired.

Forte’s product candidate and the activities associated with its development and commercialization, including its design, testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale, distribution, import and export are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by comparable authorities in other countries. Before Forte can commercialize any of its product candidate, Forte must obtain marketing approval. Forte has not received approval to market any of its current and future product candidates from regulatory authorities in any jurisdiction and it is possible that none of its current and future product candidates will ever obtain regulatory approval. Forte, as a company, has no experience in filing and supporting the applications necessary to gain regulatory approvals and expect to rely on third-party CROs and/or regulatory consultants to assist it in this process. Securing regulatory approval requires the submission of extensive preclinical and clinical data and supporting information to the various regulatory authorities for each therapeutic indication to establish the drug candidate’s safety, efficacy, purity, and potency.

Securing regulatory approval also requires the submission of information about the drug manufacturing process to, and inspection of manufacturing facilities by, the relevant regulatory authority. Forte’s product candidate may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude it from obtaining marketing approval or prevent or limit commercial use.

 

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The process of obtaining regulatory approvals, both in the United States and abroad, is expensive, may take many years if additional clinical trials are required, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidate involved. Changes in marketing approval policies during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted IND/BLA, or equivalent application types, may cause delays in the approval or rejection of an application. The FDA and comparable authorities in other countries have substantial discretion in the approval process and may refuse to accept any application or may decide that its data are insufficient for approval and require additional preclinical, clinical or other studies. Forte’s product candidate could be delayed in receiving, or fail to receive, regulatory approval for many reasons, including the following:

 

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the FDA or comparable foreign regulatory authorities may disagree with the design, including study population, dose level, dose regimen, endpoint measure of efficacy, and bioanalytical assay methods, or implementation of its clinical trials;

 

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Forte may be unable to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that its product candidate is safe and effective for its proposed indication;

 

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the results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign regulatory authorities for approval;

 

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Forte may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;

 

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the FDA or comparable foreign regulatory authorities may disagree with its interpretation of data from preclinical studies or clinical trials;

 

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the data collected from clinical trials of its product candidate may not be sufficient to support the submission of a BLA or other submission or to obtain regulatory approval in the United States or elsewhere;

 

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the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party manufacturers with which Forte contracts for clinical and commercial supplies; and

 

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the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering its clinical data insufficient for approval.

Of the large number of biopharmaceutical products in development, only a small percentage successfully complete the FDA or foreign regulatory approval processes and are commercialized. The lengthy approval process as well as the unpredictability of future clinical trial results may result in Forte failing to obtain regulatory approval to market its product candidate, which would significantly harm its business, results of operations and prospects.

Forte expects the novel nature of its product candidate to create further challenges in obtaining regulatory approval. As a result, its ability to develop product candidate and obtain regulatory approval may be significantly impacted.

The FDA may also require a panel of experts, referred to as an Advisory Committee, to deliberate on the adequacy of the safety and efficacy data to support approval. The opinion of the Advisory Committee, although not binding, may have a significant impact on its ability to obtain approval of any product candidate that Forte develops based on the completed clinical trials.

In addition, even if Forte were to obtain approval, regulatory authorities may approve its product candidate for fewer or more limited indications than Forte requests, may include limitations for use or contraindications that limit the suitable patient population, may not approve the price Forte intends to charge for its products, may

 

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grant approval contingent on the performance of costly post-marketing clinical trials or may approve a product candidate with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that product candidate. Any of the foregoing scenarios could materially harm the commercial prospects for Forte’s product candidate.

If Forte experiences delays in obtaining approval or if Forte fails to obtain approval of its product candidate, the commercial prospects for its product candidate may be harmed, and its ability to generate revenues will be materially impaired.

Forte’s product candidate, FB-401, may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label or result in significant negative consequences following marketing approval, if any.

Undesirable side effects caused by its product candidate could cause Forte to interrupt, delay or halt preclinical studies or could cause Forte or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive clinical label or the delay or denial of regulatory approval by the FDA or other regulatory authorities for its product candidate. Results of its clinical studies or trials could reveal a high and unacceptable severity and prevalence of side effects. In such an event, its clinical studies or trials could be suspended or terminated, and the FDA or comparable foreign regulatory authorities could order Forte to cease further development of or deny approval of its product candidate for any or all targeted indications. Additionally, its regulators could require significant modifications or amendments to ongoing clinical studies or trials that limit the available study population or lead to withdrawal of participation by already enrolled subjects. Any treatment-related side effects could affect patient recruitment or the ability of enrolled patients to complete the study or trial or result in potential product liability claims. Any of these occurrences may harm Forte’s business, financial condition and prospects significantly.

Further, clinical studies or trials by their nature utilize a sample of the potential patient population. With a limited number of patients and limited duration of exposure, rare and severe side effects of its product candidate may only be uncovered with a significantly larger number of patients exposed to the product candidate. If its product candidate receives marketing approval and Forte or others identify undesirable side effects caused by such product candidate (or any other similar drugs) after such approval, a number of potentially significant negative consequences could result, including:

 

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regulatory authorities may withdraw or limit their approval of such product candidate;

 

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regulatory authorities may require the addition of labeling statements, such as a “boxed” warning or a contraindication;

 

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Forte may be required to create a medication guide outlining the risks of such side effects for distribution to patients;

 

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Forte may be required to change the way such product candidate is distributed or administered, conduct additional clinical trials or change the labeling of the product candidate;

 

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regulatory authorities may require a Risk Evaluation and Mitigation Strategy (“REMS”), plan to mitigate risks, which could include medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools;

 

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Forte may be subject to regulatory investigations and government enforcement actions;

 

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Forte may decide to remove such product candidate from the marketplace;

 

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Forte could be sued and held liable for injury caused to individuals exposed to or using its product candidate; and

 

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Forte’s reputation may suffer.

 

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Forte believes that any of these events could prevent it from achieving or maintaining market acceptance of the affected product candidate and could substantially increase the costs of commercializing its product candidate, if approved, and significantly impact its ability to successfully commercialize its product candidate and generate revenues.

Even if Forte receives regulatory approval of any product candidate, Forte will be subject to ongoing regulatory compliance obligations and continued regulatory review, which may result in significant additional expense. Additionally, if Forte fails to comply with regulatory requirements or experience unanticipated problems with its product candidate, if approved, Forte could be subject to labeling and other restrictions, market withdrawal, and penalties.

If FB-401 is approved, it will be subject to ongoing regulatory requirements for manufacturing, labeling, packaging, storage, distribution, advertising, promotion, sampling, record-keeping, export, import, conduct of post-marketing studies and submission of safety, efficacy and other post-market information, including both federal and state requirements in the United States and requirements of comparable foreign regulatory authorities. In addition, Forte will be subject to continued compliance with cGMP and GCP requirements for any clinical trials that Forte conduct post-approval.

Manufacturers and manufacturers’ facilities are required to comply with extensive FDA, and comparable foreign regulatory authority requirements, including ensuring that quality control and manufacturing procedures conform to cGMP regulations. As such, Forte and its contract manufacturers will be subject to continual review and inspections to assess compliance with cGMP and adherence to commitments made in any NDA, other marketing application, and previous responses to inspection observations. Accordingly, Forte and others with whom Forte works must continue to expend time, money, and effort in all areas of regulatory compliance, including manufacturing, production and quality control.

The FDA has significant post-marketing authority, including, for example, the authority to require labeling changes based on new safety information and to require post-marketing studies or clinical trials to evaluate serious safety risks related to the use of a drug. Any regulatory approvals that Forte receive for its product candidate may be subject to limitations on the approved indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials and surveillance to monitor the safety and efficacy of the product candidate. The FDA may also require a REMS program as a condition of approval of its product candidate, which could entail requirements for long-term patient follow-up, a medication guide, physician communication plans or additional elements to ensure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. In addition, if the FDA or a comparable foreign regulatory authority approves its product candidate, Forte will have to comply with requirements including submissions of safety and other post-marketing information and reports and registration.

The FDA may impose consent decrees or withdraw approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with its product candidate, including adverse events of unanticipated severity or frequency, or with its third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical trials to assess new safety risks; or imposition of distribution restrictions or other restrictions under a REMS program. Other potential consequences include, among other things:

 

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restrictions on the marketing or manufacturing of its products, withdrawal of the product from the market or voluntary or mandatory product recalls;

 

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fines, warning or untitled enforcement letters or holds on clinical trials;

 

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•

refusal by the FDA to approve pending applications or supplements to approved applications filed by Forte or suspension or revocation of license approvals;

 

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product seizure or detention or refusal to permit the import or export of its product candidate; and

 

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injunctions or the imposition of civil or criminal penalties.

The FDA strictly regulates marketing, labeling, advertising, and promotion of products that are placed on the market. Products may be promoted only for the approved indications and in accordance with the provisions of the approved label or other regulatory marketing pathway. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses and a company that is found to have improperly promoted off-label uses may be subject to significant liability. However, physicians may, in their independent medical judgment, prescribe legally available products for off-label uses. The FDA does not regulate the behavior of physicians in their choice of treatments but the FDA does restrict manufacturer’s communications on the subject of off-label use of their products. In addition, the policies of the FDA and of other regulatory authorities may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of its product candidate. If Forte is slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if Forte is not able to maintain regulatory compliance, Forte may lose any marketing approval that Forte may have obtained which would adversely affect its business, prospects and ability to achieve or sustain profitability.

The policies of the FDA and of other regulatory authorities may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of its product candidate. Forte also cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative or executive action, either in the United States or abroad. For example, certain policies of the current administration may impact its business and industry. Namely, the current administration has taken several executive actions, including the issuance of a number of executive orders, that could impose significant burdens on, or otherwise materially delay, the FDA’s ability to engage in routine regulatory and oversight activities, such as implementing statutes through rulemaking, issuance of guidance and review and approval of marketing applications. It is difficult to predict how these executive actions, including any executive orders, will be implemented, and the extent to which they will impact the FDA’s ability to exercise its regulatory authority. If these executive actions impose constraints on FDA’s ability to engage in oversight and implementation activities in the normal course, its business may be negatively impacted. In addition, if Forte is slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if Forte is not able to maintain regulatory compliance, Forte may lose any marketing approval that Forte may have obtained, and Forte may not achieve or sustain profitability.

Non-compliance by Forte or any future collaborator with regulatory requirements, including safety monitoring or pharmacovigilance requirements, can also result in significant financial penalties.

Healthcare insurance coverage and reimbursement may be limited or unavailable in certain market segments for its product candidate, if approved, which could make it difficult for Forte to sell any product candidate or therapies profitably.

The success of its product candidate depends on the availability of adequate coverage and reimbursement from third-party payors. In addition, because its product candidate, FB-401, represents a new approach to the treatment of the disease it targets, Forte cannot be sure that coverage and reimbursement will be available for, or accurately estimate the potential revenue from, its product candidate or assure that coverage and reimbursement will be available for any product that Forte may develop.

Patients who are provided medical treatment for their conditions generally rely on third-party payors to reimburse all or part of the costs associated with their treatment. Adequate coverage and reimbursement from governmental healthcare programs, such as Medicare and Medicaid, and commercial payors are critical to new product acceptance.

 

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Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which drugs and treatments they will cover and the amount of reimbursement. Coverage and reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that use of a product is:

 

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a covered benefit under its health plan;

 

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safe, effective and medically necessary;

 

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appropriate for the specific patient;

 

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cost-effective; and

 

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neither experimental nor investigational.

In the United States, no uniform policy of coverage and reimbursement for products exists among third-party payors. As a result, obtaining coverage and reimbursement approval of a product from a government or other third-party payor is a time-consuming and costly process that could require Forte to provide to each payor supporting scientific, clinical and cost-effectiveness data for the use of its products on a payor-by-payor basis, with no assurance that coverage and adequate reimbursement will be obtained. Even if Forte obtains coverage for a given product, the resulting reimbursement payment rates might not be adequate for Forte to achieve or sustain profitability or may require co-payments that patients find unacceptably high. Additionally, third-party payors may not cover, or provide adequate reimbursement for, long-term follow-up evaluations required following the use of product candidate. Patients are unlikely to use its product candidate unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of its product candidate. Because its product candidate may have a higher cost of goods than conventional therapies, and may require long-term follow-up evaluations, the risk that coverage and reimbursement rates may be inadequate for Forte to achieve profitability may be greater. There is significant uncertainty related to insurance coverage and reimbursement of newly approved products. It is difficult to predict at this time what third-party payors will decide with respect to the coverage and reimbursement for its product candidate.

Payment methodologies may be subject to changes in healthcare legislation and regulatory initiatives. Additional state and federal healthcare reform measures are expected to be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for certain pharmaceutical products or additional pricing pressures.

Moreover, increasing efforts by governmental and third-party payors in the United States and abroad to cap or reduce healthcare costs may cause such organizations to limit both coverage and the level of reimbursement for newly approved products and, as a result, they may not cover or provide adequate payment for its product candidate. There has been increasing legislative and enforcement interest in the United States with respect to specialty drug pricing practices. Specifically, there have been several U.S. Congressional inquiries and federal and state legislation designed to, among other things, bring more transparency to drug pricing, reduce the cost of prescription drugs under Medicare, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs. Forte expects to experience pricing pressures in connection with the sale of any of its product candidates due to the trend toward managed healthcare, the increasing influence of health maintenance organizations, cost containment initiatives and additional legislative changes.

Ongoing healthcare legislative and regulatory reform measures may have a material adverse effect on Forte’s business and results of operations.

Changes in regulations, statutes or the interpretation of existing regulations could impact Forte’s business in the future by requiring, for example: (i) changes to its manufacturing arrangements; (ii) additions or modifications to product labeling; (iii) the recall or discontinuation of its products; or (iv) additional record-keeping requirements. If any such changes were to be imposed, they could adversely affect the operation of its business.

 

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In the United States, there have been and continue to be a number of legislative initiatives to contain healthcare costs. For example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the “ACA”), was passed, which substantially changed the way healthcare is financed by both governmental and private insurers, and significantly impacted the U.S. pharmaceutical industry. There remain judicial and Congressional challenges to certain aspects of the ACA, as well as efforts by the Trump administration to repeal or replace certain aspects of the ACA. On December 14, 2018, a Texas U.S. District Court Judge ruled that the ACA is unconstitutional in its entirety because the “individual mandate” was repealed by Congress as part of the Tax Cuts and Jobs Act of 2017. Additionally, on December 18, 2019, the U.S. Court of Appeals for the 5th Circuit upheld the District Court ruling that the individual mandate was unconstitutional and remanded the case back to the District Court to determine whether the remaining provisions of the ACA are invalid as well. On March 2, 2020, the United States Supreme Court granted the petitions for writs of certiorari to review this case, and has allotted one hour for oral arguments, which are expected to occur in the fall. It is unclear how such litigation and other efforts to repeal and replace the ACA will impact the ACA and Forte’s business. Moreover, there has been heightened governmental scrutiny recently over the manner in which drug manufacturers set prices for their marketed products, which has resulted in several Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drug products. At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.

Legislative and regulatory measures have been enacted and proposed that may expand post-approval requirements and restrict sales and promotional activities for biotechnology products. Forte cannot be sure whether additional legislative changes will be enacted, or whether FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of its product candidates, if any, may be. In addition, increased scrutiny by Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject Forte to more stringent product labeling and post-marketing testing and other requirements.

Forte expects that the ACA, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that Forte receives for any approved product. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent Forte from being able to generate revenue, attain profitability or commercialize its current and future product candidates.

Forte’s business activities may be subject to the FCPA and similar anti-bribery and anti-corruption laws of other countries in which Forte operate, as well as U.S. and certain foreign export controls, trade sanctions, and import laws and regulations. Compliance with these legal requirements could limit its ability to compete in foreign markets and subject it to liability if Forte violates them.

If Forte expand its operations outside of the United States, Forte must dedicate additional resources to comply with numerous laws and regulations in each jurisdiction in which Forte plans to operate. The FCPA prohibits any U.S. individual or business from paying, offering, authorizing payment or offering of anything of value, directly or indirectly, to any foreign official, political party or candidate for the purpose of influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the United States to comply with certain accounting provisions requiring the company to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations.

 

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Compliance with the FCPA is expensive and difficult, particularly in countries in which corruption is a recognized problem. In addition, the FCPA presents particular challenges in the pharmaceutical industry, because, in many countries, hospitals are operated by the government, and doctors and other hospital employees are considered foreign officials. Certain payments to hospitals in connection with clinical trials and other work have been deemed to be improper payments to government officials and have led to FCPA enforcement actions.

Various laws, regulations and executive orders also restrict the use and dissemination outside of the United States, or the sharing with certain non-U.S. nationals, of information classified for national security purposes, as well as certain products and technical data relating to those products. If Forte expands its presence outside of the United States, it will require Forte to dedicate additional resources to comply with these laws, and these laws may preclude Forte from developing, manufacturing, or selling certain current and future product candidates, if approved, outside of the United States, which could limit its growth potential and increase its development costs.

The failure to comply with laws governing international business practices may result in substantial civil and criminal penalties and suspension or debarment from government contracting. The Securities and Exchange Commission, or SEC, also may suspend or bar issuers from trading securities on U.S. exchanges for violations of the FCPA’s accounting provisions.

Additionally, U.S. and foreign anti-corruption, anti-money laundering, export control, sanctions, and other trade laws and regulations, which are collectively referred to as Trade Laws, prohibit companies and their employees, agents, clinical research organizations, legal counsel, accountants, consultants, contractors, and other partners from authorizing, promising, offering, providing, soliciting, or receiving directly or indirectly, corrupt or improper payments or anything else of value to or from recipients in the public or private sector. Violations of Trade Laws can result in substantial criminal fines and civil penalties, imprisonment, the loss of trade privileges, debarment, tax reassessments, breach of contract and fraud litigation, reputational harm, and other consequences. Forte has direct or indirect interactions with officials and employees of government agencies or government-affiliated hospitals, universities, and other organizations. Forte also expects its non-U.S. activities to increase in time. Forte plans to engage third parties for clinical trials and/or to obtain necessary permits, licenses, patent registrations, and other regulatory approvals and Forte can be held liable for the corrupt or other illegal activities of its personnel, agents, or partners, even if Forte do not explicitly authorize or have prior knowledge of such activities.

Compliance with applicable regulatory requirements regarding the export of any of Forte’s current and future approved products may create delays in the introduction of its products in international markets or, in some cases, prevent the export of its products to some countries altogether. Furthermore, U.S. export control laws and economic sanctions prohibit the shipment of certain products and services to countries, governments, and persons targeted by U.S. sanctions. If Forte fails to comply with export and import regulations and such economic sanctions, penalties could be imposed, including fines and/or denial of certain export privileges. Moreover, any new export or import restrictions, new legislation or shifting approaches in the enforcement or scope of existing regulations, or in the countries, persons, or products targeted by such regulations, could result in decreased use of its products by, or in its decreased ability to export its approved products to, existing or potential customers with international operations. Any decreased use of its approved products or limitation on its ability to export or sell its products would likely adversely affect Forte’s business.

Risks related to Forte’s intellectual property

If Forte is unable to obtain and maintain patent protection for any product candidate Forte develops, its competitors could develop and commercialize products or technology similar or identical to Forte’s, and its ability to successfully commercialize any product candidate Forte may develop, and its technology, may be adversely affected.

Forte’s success depends in large part on its ability to obtain and maintain patent protection in the United States and other countries with respect to its product candidate and other technologies Forte may develop. Forte

 

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seeks to protect its proprietary position by filing patent applications in the United States and abroad relating to FB-401, as well as other technologies that are important to its business. Given that the development of its technology and product candidate is at an early stage, its intellectual property portfolio with respect to certain aspects of its technology and product candidate is also at an early stage. Forte has filed or intends to file patent applications on these aspects of its technology and its product candidate; however, there can be no assurance that any such patent applications will issue as granted patents. Furthermore, in some cases, Forte has only filed provisional patent applications on certain aspects of its technology and product candidate and each of these provisional patent applications is not eligible to become an issued patent until, among other things, Forte files a non-provisional patent application within 12 months of the filing date of the applicable provisional patent application. Any failure to file a non-provisional patent application within this timeline could cause Forte to lose the ability to obtain patent protection for the inventions disclosed in the associated provisional patent applications.

Composition of matter patents for biological and pharmaceutical products are generally considered to be the strongest form of intellectual property protection for those types of products, as such patents provide protection without regard to any method of use. Forte cannot be certain, however, that the claims in its pending patent applications covering the composition of matter of its product candidate, FB-401, will be considered patentable by the United States Patent and Trademark Office (“USPTO”), or by patent offices in foreign countries, or that the claims in any of its issued patents will be considered valid and enforceable by courts in the United States or foreign countries. In particular, Forte cannot be certain that composition claims relating to microorganisms, including species of gram negative bacteria such as Roseomonas mucosa, will be considered patentable by the USPTO, or by patent offices in foreign countries, or that the claims in any of its issued patents will be considered valid and enforceable by courts in the United States or foreign countries.

Furthermore, in some cases, Forte may not be able to obtain issued claims covering compositions of matter relating to its product candidate, as well as other technologies that are important to its business, and instead may need to rely on filing patent applications with claims covering a method of use and/or method of manufacture. Method of use patents protect the use of a product for the specified method. This type of patent does not prevent a competitor from making and marketing a product that is identical to Forte’s product for an indication that is outside the scope of the patented method. Moreover, even if competitors do not actively promote their products for its targeted indications, physicians may prescribe these products “off-label” for those uses that are covered by its method of use patents. Although off-label prescriptions may infringe or contribute to the infringement of method of use patents, the practice is common and such infringement is difficult to prevent or prosecute. There can be no assurance that any such patent applications will issue as granted patents, and even if they do issue, such patent claims may be insufficient to prevent third parties, such as Forte’s competitors, from utilizing its technology. Any failure to obtain or maintain patent protection with respect to its product candidate could have a material adverse effect on Forte’s business, financial condition, results of operations, and prospects.

If any of its owned patent applications do not issue as patents in any jurisdiction, Forte may not be able to compete effectively.

Changes in either the patent laws or their interpretation in the United States and other countries may diminish its ability to protect its inventions, obtain, maintain, and enforce its intellectual property rights and, more generally, could affect the value of its intellectual property or narrow the scope of its owned or licensed patents. With respect to owned intellectual property, Forte cannot predict whether the patent applications Forte is currently pursuing will issue as patents in any particular jurisdiction or whether the claims of any issued patents will provide sufficient protection from competitors or other third parties.

The patent prosecution process is expensive, time-consuming, and complex, and Forte may not be able to file, prosecute, maintain, enforce, or license all necessary or desirable patents and patent applications at a reasonable cost or in a timely manner. It is also possible that Forte will fail to identify patentable aspects of its research and development output in time to obtain patent protection. Although Forte enters into non-disclosure

 

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and confidentiality agreements with parties who have access to confidential or patentable aspects of its research and development output, such as its employees, corporate collaborators, outside scientific collaborators, CROs, contract manufacturers, consultants, advisors and other third parties, any of these parties may breach such agreements and disclose such output before a patent application is filed, thereby jeopardizing its ability to seek patent protection. In addition, Forte’s ability to obtain and maintain valid and enforceable patents depends on whether the differences between its inventions and the prior art allow its inventions to be patentable over the prior art. Furthermore, publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, Forte cannot be certain that it was the first to make the inventions claimed in any of its owned or pending patent applications, or that Forte was the first to file for patent protection of such inventions.

If the scope of any patent protection Forte obtains is not sufficiently broad, or if Forte loses any of its patent protection, its ability to prevent its competitors from commercializing similar or identical technology and product candidate would be adversely affected.

The patent position of healthcare companies generally is highly uncertain, involves complex legal and factual questions, and has been the subject of much litigation in recent years. As a result, the issuance, scope, validity, enforceability, and commercial value of Forte’s patent rights are highly uncertain. Forte’s owned pending and future patent applications may not result in patents being issued which protect its product candidate, or other technologies or which effectively prevent others from commercializing competitive technologies and product candidates.

No consistent policy regarding the scope of claims allowable in patents in the biotechnology field has emerged in the United States. The patent situation outside of the United States is even more uncertain. Changes in either the patent laws or their interpretation in the United States and other countries may diminish Forte’s ability to protect its inventions and enforce its intellectual property rights, and more generally could affect the value of its intellectual property. In particular, its ability to stop third parties from making, using, selling, offering to sell, or importing products that infringe its intellectual property will depend in part on its success in obtaining and enforcing patent claims that cover its technology, inventions and improvements. With respect to company-owned intellectual property, Forte cannot be sure that patents will be granted with respect to any of its pending patent applications or with respect to any patent applications filed by it in the future, nor can Forte be sure that any of its existing patents or any patents that may be granted to Forte in the future will be commercially useful in protecting its products and the methods used to manufacture those products. Moreover, even its issued patents do not guarantee Forte the right to practice its technology in relation to the commercialization of its products. The area of patent and other intellectual property rights in biotechnology is an evolving one with many risks and uncertainties, and third parties may have blocking patents that could be used to prevent Forte from commercializing its patented product candidate and practicing its proprietary technology. Forte’s issued patents and those that may issue in the future may be challenged, invalidated, or circumvented, which could limit its ability to stop competitors from marketing related products or limit the length of the term of patent protection that Forte may have for its product candidate. In addition, the rights granted under any issued patents may not provide Forte with protection or competitive advantages against competitors with similar technology. Furthermore, its competitors may independently develop similar technologies. For these reasons, Forte may have competition for its product candidate. Moreover, because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that, before any particular product candidate can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantage of the patent.

Moreover, the coverage claimed in a patent application can be significantly reduced before the patent is issued, and its scope can be reinterpreted after issuance. Even if patent applications Forte own issue as patents, they may not issue in a form that will provide Forte with any meaningful protection, prevent competitors or other third parties from competing with us, or otherwise provide Forte with any competitive advantage. Any patents

 

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that Forte own may be challenged, narrowed, circumvented, or invalidated by third parties. Consequently, Forte do not know whether its product candidate or other technologies will be protectable or remain protected by valid and enforceable patents. Forte’s competitors or other third parties may be able to circumvent its patents by developing similar or alternative technologies or products in a non-infringing manner which could materially adversely affect its business, financial condition, results of operations and prospects.

The issuance of a patent is not conclusive as to its inventorship, scope, validity, or enforceability, and patents that Forte own may be challenged in the courts or patent offices in the United States and abroad. Forte may be subject to a third party preissuance submission of prior art to the USPTO or to foreign patent authorities or become involved in opposition, derivation, revocation, reexamination, post-grant and inter partes review, or interference proceedings or other similar proceedings challenging its owned patent rights. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate or render unenforceable, Forte’s owned patent rights, allow third parties to commercialize Forte’s product candidate or other technologies, and compete directly with Forte, without payment to Forte, or result in Forte’s inability to manufacture or commercialize products without infringing third-party patent rights. Moreover, Forte may have to participate in interference proceedings declared by the USPTO to determine priority of invention or in post-grant challenge proceedings, such as oppositions in a foreign patent office, that challenge its priority of invention or other features of patentability with respect to its owned patents and patent applications. Such challenges may result in loss of patent rights, loss of exclusivity, or in patent claims being narrowed, invalidated, or held unenforceable, which could limit its ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of its product candidate and other technologies. Such proceedings also may result in substantial cost and require significant time from its scientists and management, even if the eventual outcome is favorable to us.

In addition, given the amount of time required for the development, testing, and regulatory review of new product candidate, patents protecting such product candidate might expire before or shortly after such product candidate are commercialized. As a result, its intellectual property may not provide Forte with sufficient rights to exclude others from commercializing products similar or identical to ours.

Forte may in the future co-own patent rights relating to future product candidates with third parties. Forte may need the cooperation of any such co-owners of its patent rights in order to enforce such patent rights against third parties, and such cooperation may not be provided to us. Any of the foregoing could have a material adverse effect on its competitive position, business, financial conditions, results of operations, and prospects.

Forte’s rights to develop and commercialize its product candidate may be subject, in part, to the terms and conditions of future licenses granted to it by others.

Forte may rely upon licenses to certain patent rights and proprietary technology from third parties that are important or necessary to the development of its product candidate. Patent rights that Forte in-license in the future may be subject to a reservation of rights by one or more third parties. As a result, any such third parties may have certain rights to such intellectual property.

In addition, subject to the terms of any such license agreements, Forte may not have the right to control the preparation, filing, prosecution and maintenance, and Forte may not have the right to control the enforcement, and defense of patents and patent applications covering the technology that Forte licenses from third parties. Forte cannot be certain that its in-licensed patent applications (and any patents issuing therefrom) that are controlled by its licensors will be prepared, filed, prosecuted, maintained, enforced, and defended in a manner consistent with the best interests of its business. If its licensors fail to prosecute, maintain, enforce, and defend such patents rights, or lose rights to those patent applications (or any patents issuing therefrom), the rights Forte has licensed may be reduced or eliminated, its right to develop and commercialize any of its product candidates that are subject of such licensed rights could be adversely affected, and Forte may not be able to prevent competitors from making, using and selling competing products. Moreover, Forte cannot be certain that such

 

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activities by its potential future licensors will be conducted in compliance with applicable laws and regulations or will result in valid and enforceable patents or other intellectual property rights. In addition, even where Forte may have the right to control patent prosecution of patents and patent applications that Forte may license to and from third parties, Forte may still be adversely affected or prejudiced by actions or inactions of its potential future licensees, licensors and their counsel that took place prior to the date of assumption of control over patent prosecution.

Forte may not be able to protect its intellectual property and proprietary rights throughout the world.

Filing, prosecuting and defending patents on Forte’s product candidate and other technologies in all countries throughout the world would be prohibitively expensive, and the laws of foreign countries may not protect its rights to the same extent as the laws of the United States. Consequently, Forte may not be able to prevent third parties from practicing its inventions in all countries outside the United States, or from selling or importing products made using its inventions in and into the United States or other jurisdictions. Competitors may use its technologies in jurisdictions where Forte has not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where Forte has patent protection but enforcement is not as strong as that in the United States. These products may compete with Forte’s products, and Forte’s patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets, and other intellectual property protection, particularly those relating to biotechnology products, which could make it difficult for Forte to stop the infringement of its patents or marketing of competing products in violation of its intellectual property and proprietary rights generally. Proceedings to enforce its intellectual property and proprietary rights in foreign jurisdictions could result in substantial costs and divert its efforts and attention from other aspects of its business, could put its patents at risk of being invalidated or interpreted narrowly, could put its patent applications at risk of not issuing, and could provoke third parties to assert claims against us. Forte may not prevail in any lawsuits that it initiates, and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, its efforts to enforce its intellectual property and proprietary rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that Forte develops or licenses.

Many countries have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of such patent. If Forte is forced to grant a license to third parties with respect to any patents relevant to its business, its competitive position may be impaired, and its business, financial condition, results of operations, and prospects may be adversely affected.

Obtaining and maintaining Forte’s patent protection depends on compliance with various procedural, document submission, fee payment, and other requirements imposed by government patent agencies, and its patent protection could be reduced or eliminated for non-compliance with these requirements.

Periodic maintenance fees, renewal fees, annuity fees, and various other government fees on patents and applications will be due to be paid to the USPTO and various government patent agencies outside of the United States over the lifetime of its owned patents and applications. The USPTO and various non-U.S. government agencies require compliance with several procedural, documentary, fee payment, and other similar provisions during the patent application process. In some cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. There are situations, however, in which non-compliance can result in abandonment or lapse of the patent or patent application, resulting in a partial or

 

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complete loss of patent rights in the relevant jurisdiction. In such an event, potential competitors might be able to enter the market with similar or identical products or technology, which could have a material adverse effect on Forte’s business, financial condition, results of operations, and prospects.

Changes in U.S. patent law could diminish the value of patents in general, thereby impairing Forte’s ability to protect its products.

Changes in either the patent laws or interpretation of the patent laws in the United States could increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents. Assuming that other requirements for patentability are met, prior to March 2013, in the United States, the first to invent the claimed invention was entitled to the patent, while outside the United States, the first to file a patent application was entitled to the patent. After March 2013, under the Leahy-Smith America Invents Act, or the America Invents Act, enacted in September 2011, the United States transitioned to a first inventor to file system in which, assuming that other requirements for patentability are met, the first inventor to file a patent application will be entitled to the patent on an invention regardless of whether a third party was the first to invent the claimed invention. A third party that files a patent application in the USPTO after March 2013, but before Forte could therefore be awarded a patent covering an invention of ours even if Forte had made the invention before it was made by such third party. This will require Forte to be cognizant going forward of the time from invention to filing of a patent application. Since patent applications in the United States and most other countries are confidential for a period of time after filing or until issuance, Forte cannot be certain that it was the first to file any patent application related to its product candidates or other technologies.

The America Invents Act also includes a number of significant changes that affect the way patent applications will be prosecuted and also may affect patent litigation. These include allowing third party submission of prior art to the USPTO during patent prosecution and additional procedures to attack the validity of a patent by USPTO administered post-grant proceedings, including post-grant review, inter partes review, and derivation proceedings. Because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary standard in United States federal courts necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party may attempt to use the USPTO procedures to invalidate Forte’s patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district court action. Therefore, the America Invents Act and its implementation could increase the uncertainties and costs surrounding the prosecution of Forte’s owned patent applications and the enforcement or defense of its owned issued patents, all of which could have a material adverse effect on Forte’s business, financial condition, results of operations, and prospects.

In addition, the patent positions of companies in the development and commercialization of biologics and pharmaceuticals are particularly uncertain. Recent U.S. Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. This combination of events has created uncertainty with respect to the validity and enforceability of patents, once obtained. Depending on future actions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that could have a material adverse effect on Forte’s existing patent portfolio and its ability to protect and enforce its intellectual property in the future.

Issued patents covering Forte’s product candidate could be found invalid or unenforceable if challenged in court or before administrative bodies in the United States or abroad.

In patent litigation in the United States, defendant counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant

 

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information from the USPTO, or made a misleading statement, during prosecution. Third parties may raise claims challenging the validity or enforceability of Forte’s owned patents before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include re-examination, post-grant review, inter partes review, interference proceedings, derivation proceedings, and equivalent proceedings in foreign jurisdictions (e.g., opposition proceedings). Such proceedings could result in the revocation of, cancellation of, or amendment to Forte’s patents in such a way that they no longer cover its product candidate or other technologies. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, Forte cannot be certain that there is no invalidating prior art, of which Forte and the patent examiner were unaware during prosecution. If a third party were to prevail on a legal assertion of invalidity or unenforceability, Forte would lose at least part, and perhaps all, of the patent protection on its product candidate or other technologies. Such a loss of patent protection would have a material adverse impact on Forte’s business, financial condition, results of operations, and prospects.

If Forte does not obtain patent term extension and/or data exclusivity for any product candidate that Forte may develop, its business may be materially harmed.

Depending upon the timing, duration and specifics of any FDA marketing approval of any product candidate Forte may develop, one or more of its owned U.S. patents may be eligible for limited patent term extension under the Hatch-Waxman Act. The Hatch-Waxman Act permits a patent term extension of up to five years as compensation for patent term lost during the FDA regulatory review process. A patent term extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval, only one patent may be extended and only those claims covering the approved drug, a method for using it, or a method for manufacturing it may be extended. Similar extensions as compensation for patent term lost during regulatory review processes are also available in certain foreign countries and territories, such as in Europe under a Supplementary Patent Certificate. However, Forte may not be granted an extension in the United States and/or foreign countries and territories because of, for example, failing to exercise due diligence during the testing phase or regulatory review process, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents, or otherwise failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than Forte requests. If Forte is unable to obtain patent term extension or the term of any such extension is shorter than what Forte requests, its competitors may obtain approval of competing products following its patent expiration, and its business, financial condition, results of operations and prospects could be materially harmed.

Forte may be subject to claims challenging the inventorship of its patents and other intellectual property.

Forte may be subject to claims that former employees, collaborators or other third parties have an interest in its owned patent rights, trade secrets, or other intellectual property as an inventor or co-inventor. For example, Forte may have inventorship disputes arise from conflicting obligations of employees, consultants or others who are involved in developing its product candidate or other technologies. Litigation may be necessary to defend against these and other claims challenging inventorship or its ownership of its owned patent rights, trade secrets or other intellectual property. If Forte fails in defending any such claims, in addition to paying monetary damages, Forte may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, intellectual property that is important to its product candidate and other technologies. Even if Forte is successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees. Any of the foregoing could have a material adverse effect on Forte’s business, financial condition, results of operations and prospects.

If Forte is unable to protect the confidentiality of its trade secrets, its business and competitive position would be harmed.

In addition to seeking patents for its product candidate and other technologies, Forte also relies on trade secrets and confidentiality agreements to protect its unpatented know-how, technology, and other proprietary

 

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information and to maintain its competitive position. Trade secrets and know-how can be difficult to protect. Forte expects its trade secrets and know-how to over time be disseminated within the industry through independent development, the publication of journal articles describing the methodology, and the movement of personnel from academic to industry scientific positions.

Forte currently, and may continue in the future continue to, relies on third parties to assist it in developing and manufacturing its product candidate. Accordingly, Forte must, at times, share know-how and trade secrets with them. Forte may in the future also enter into research and development collaborations with third parties that may require it to share know-how and trade secrets under the terms of its research and development partnerships or similar agreements. Forte seeks to protect its know-how, trade secrets and other proprietary technology, in part, by entering into non-disclosure and confidentiality agreements, and including in its vendor and service agreements terms protecting its confidential information, know-how and trade secrets, with parties who have access to such information, such as its employees, scientific collaborators, CROs, contract manufacturers, consultants, advisors and other third parties. Forte also enters into confidentiality and invention or patent assignment agreements with its employees and consultants as well as trains its employees not to bring or use proprietary information or technology from former employers to Forte or in their work, and Forte reminds former employees when they leave their employment of their confidentiality obligations. However, Forte cannot guarantee that Forte has entered into such agreements with each party that may have or have had access to its trade secrets or proprietary technology and processes. Forte also seeks to preserve the integrity and confidentiality of its data and other confidential information by maintaining physical security of its premises and physical and electronic security of its information technology systems.

Despite Forte’s efforts, any of the aforementioned parties may breach the agreements and disclose Forte’s proprietary information, including its trade secrets, or there may be a lapses or failures in its physical and electronic security systems which lead to its proprietary information being disclosed, and Forte may not be able to obtain adequate remedies in the event of any such breaches. Monitoring unauthorized uses and disclosures is difficult, and Forte does not know whether the steps it has taken to protect its proprietary technologies will be effective. If any of its scientific advisors, employees, contractors and consultants who are parties to these agreements breaches or violates the terms of any of these agreements, Forte may not have adequate remedies for any such breach or violation, and Forte could lose its trade secrets as a result. Moreover, if confidential information that is licensed or disclosed to Forte by its partners, collaborators, or others is inadvertently disclosed or subject to a breach or violation, Forte may be exposed to liability to the owner of that confidential information. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive, and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of its trade secrets were to be lawfully obtained or independently developed by a competitor or other third party, Forte would have no right to prevent them from using that technology or information to compete with us. If any of its trade secrets were to be disclosed to or independently developed by a competitor or other third party, Forte’s competitive position would be materially and adversely harmed.

Forte may not be successful in obtaining, through acquisitions, in-licenses or otherwise, necessary rights to its product candidate or other technologies.

Forte currently have rights to certain intellectual property, through licenses from third parties, to develop its product candidate. Some healthcare companies and academic institutions are competing with Forte in the field of microbiome therapies and may have patents and have filed and are likely filing patent applications potentially relevant to Forte’s business. In order to avoid infringing these third-party patents, Forte may find it necessary or prudent to obtain licenses to such patents from such third party intellectual property holders. Forte may also require licenses from third parties for certain technologies that Forte may evaluating for use with its current or future product candidate. However, Forte may be unable to secure such licenses or otherwise acquire or in-license any compositions, methods of use, processes, or other intellectual property rights from third parties that Forte identifies as necessary for its current or any future product candidate at a reasonable cost or on

 

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reasonable terms, if at all. The licensing or acquisition of third party intellectual property rights is a competitive area, and several more established companies may pursue strategies to license or acquire third party intellectual property rights that Forte may consider attractive or necessary. These established companies may have a competitive advantage over Forte due to their size, capital resources and greater clinical development and commercialization capabilities. In addition, companies that perceive Forte to be a competitor may be unwilling to assign or license rights to us. Forte also may be unable to license or acquire third party intellectual property rights on terms that would allow Forte to make an appropriate return on its investment or at all.

In the event that Forte tries to obtain rights to required third party intellectual property rights, and are ultimately unsuccessful, Forte may be required to expend significant time and resources to redesign its technology, product candidate, or the methods for manufacturing them or to develop or license replacement technology, all of which may not be feasible on a technical or commercial basis. If Forte is unable to do so, Forte may be unable to develop or commercialize the affected product candidate which could harm its business, financial condition, results of operations, and prospects significantly.

Forte may be subject to claims that its employees, consultants, or advisors have wrongfully used or disclosed alleged trade secrets of their current or former employers or claims asserting ownership of what Forte regards as its own intellectual property.

Many of Forte’s employees, consultants, and advisors are currently or were previously employed at universities or other healthcare companies, including its competitors and potential competitors. Although Forte tries to ensure that its employees, consultants, and advisors do not use the proprietary information or know-how of others in their work for Forte, Forte may be subject to claims that Forte or these individuals have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such individual’s current or former employer. Litigation may be necessary to defend against these claims. If Forte fails in defending any such claims, in addition to paying monetary damages, Forte may lose valuable intellectual property rights or personnel. Even if Forte is successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.

In addition, while it is Forte’s policy to require its employees and contractors who may be involved in the conception or development of intellectual property to execute agreements assigning such intellectual property to Forte, Forte may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property that Forte regards as its own. The assignment of intellectual property rights may not be self-executing, or the assignment agreements may be breached, and Forte may be forced to bring claims against third parties, or defend claims that they may bring against us, to determine the ownership of what Forte regards as its intellectual property. Such claims could have a material adverse effect on Forte’s business, financial condition, results of operations, and prospects.

Third-party claims of intellectual property infringement, misappropriation or other violation against Forte or its collaborators may prevent or delay the development and commercialization of Forte’s product candidate and other technologies.

The field of developing therapeutics that target the microbiome is competitive and dynamic. Due to the focused research and development that is taking place by several companies, including Forte and its competitors, in this field, the intellectual property landscape is in flux, and it may remain uncertain in the future. As such, there may be significant intellectual property related litigation and proceedings relating to Forte’s owned, and other third party, intellectual property and proprietary rights in the future.

Forte’s commercial success depends in part on its and its collaborators’ ability to avoid infringing, misappropriating and otherwise violating the patents and other intellectual property rights of third parties. There is a substantial amount of complex litigation involving patents and other intellectual property rights in the biotechnology and pharmaceutical industries, as well as administrative proceedings for challenging patents,

 

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including interference, derivation and reexamination proceedings before the USPTO or oppositions and other comparable proceedings in foreign jurisdictions. As discussed above, recently, due to changes in U.S. law referred to as patent reform, new procedures including inter partes review and post-grant review have been implemented. As stated above, this reform adds uncertainty to the possibility of challenge to Forte’s patents in the future.

Numerous U.S. and foreign issued patents and pending patent applications owned by third parties exist relating to microbiome technologies and in the fields in which Forte is developing its product candidate. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that its product candidate and other technologies may give rise to claims of infringement of the patent rights of others. Forte cannot assure you that its product candidate and other technologies that Forte has developed, are developing or may develop in the future will not infringe existing or future patents owned by third parties. Forte may not be aware of patents that have already been issued and that a third party, for example, a competitor in the fields in which Forte is developing its product candidate and other technologies might assert are infringed by its current or future product candidate or other technologies, including claims to compositions, formulations, methods of manufacture or methods of use or treatment that cover its product candidate or other technologies. It is also possible that patents owned by third parties of which Forte is aware, but which Forte does not believe are relevant to its product candidate or other technologies, could be found to be infringed by its product candidate or other technologies. In addition, because patent applications can take many years to issue, there may be currently pending patent applications that may later result in issued patents that its product candidate or other technologies may infringe. Forte cannot provide any assurances that third-party patents do not exist which might be enforced against its current technology, manufacturing methods, product candidate, or future methods or products resulting in either an injunction prohibiting its manufacture or future sales, or, with respect to its future sales, an obligation on its part to pay royalties and/or other forms of compensation to third parties, which could be significant.

Third parties may have patents or obtain patents in the future and claim that the manufacture, use or sale of Forte’s product candidate or other technologies infringes upon these patents. In the event that any third party claims that Forte infringes their patents or that Forte is otherwise employing their proprietary technology without authorization and initiates litigation against us, even if Forte believes such claims are without merit, a court of competent jurisdiction could hold that such patents are valid, enforceable and infringed by Forte’s product candidate or other technologies. In this case, the holders of such patents may be able to block Forte’s ability to commercialize the applicable product candidate or technology unless Forte obtains a license under the applicable patents, or until such patents expire or are finally determined to be held invalid or unenforceable. Such a license may not be available on commercially reasonable terms or at all. Even if Forte is able to obtain a license, the license would likely obligate Forte to pay license fees or royalties or both, and the rights granted to Forte might be non-exclusive, which could result in its competitors gaining access to the same intellectual property. If Forte is unable to obtain a necessary license to a third-party patent on commercially reasonable terms, Forte may be unable to commercialize its product candidate or other technologies, or such commercialization efforts may be significantly delayed, which could in turn significantly harm Forte’s business.

Defense of infringement claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of management and other employee resources from Forte’s business, and may impact its reputation. In the event of a successful claim of infringement against Forte, Forte may be enjoined from further developing or commercializing its infringing product candidate or other technologies. In addition, Forte may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties, pay royalties and/or redesign its infringing product candidate or technologies, which may be impossible or require substantial time and monetary expenditure. In that event, Forte would be unable to further develop and commercialize its product candidate, FB-401, or other technologies, which could harm its business significantly.

 

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Engaging in litigation to defend against third parties alleging that Forte has infringed, misappropriated or otherwise violated their patents or other intellectual property rights is very expensive, particularly for a company of its size, and time-consuming. Some of its competitors may be able to sustain the costs of litigation or administrative proceedings more effectively than Forte can because of greater financial resources. Patent litigation and other proceedings may also absorb significant management time. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings against Forte could impair its ability to compete in the marketplace. The occurrence of any of the foregoing could have a material adverse effect on Forte’s business, financial condition or results of operations.

Forte may become involved in lawsuits to protect or enforce its patents and other intellectual property rights, which could be expensive, time-consuming, and unsuccessful.

Competitors may infringe Forte’s patents, or Forte may be required to defend against claims of infringement. In addition, its patents also may become involved in inventorship, priority or validity disputes. To counter or defend against such claims can be expensive and time-consuming. In an infringement proceeding, a court may decide that a patent owned by Forte is invalid or unenforceable, the other party’s use of its patented technology falls under the safe harbor to patent infringement under 35 U.S.C. § 271(e)(1), or may refuse to stop the other party from using the technology at issue on the grounds that its owned patents do not cover the technology in question. An adverse result in any litigation proceeding could put one or more of its owned patents at risk of being invalidated or interpreted narrowly. Even if Forte establishes infringement, the court may decide not to grant an injunction against further infringing activity and instead award only monetary damages, which may or may not be an adequate remedy. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of Forte’s confidential information could be compromised by disclosure during this type of litigation.

Even if resolved in Forte’s favor, litigation or other legal proceedings relating to intellectual property claims may cause Forte to incur significant expenses and could distract its personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions, or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of Forte’s common stock. Such litigation or proceedings could substantially increase its operating losses and reduce the resources available for development activities or any future sales, marketing, or distribution activities. Forte may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of its competitors may be able to sustain the costs of such litigation or proceedings more effectively than Forte can because of their greater financial resources and more mature and developed intellectual property portfolios. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on Forte’s ability to compete in the marketplace.

If Forte’s trademarks and trade names are not adequately protected, then Forte may not be able to build name recognition in its markets of interest and its business may be adversely affected.

Forte’s registered or unregistered trademarks or trade names may be challenged, infringed, circumvented or declared generic or determined to be infringing on other marks. Forte may not be able to protect its rights to these trademarks and trade names, which Forte needs to build name recognition among potential partners or customers in its markets of interest. At times, competitors or other third parties may adopt trade names or trademarks similar to Forte’s, thereby impeding Forte’s ability to build brand identity and possibly leading to market confusion. If Forte asserts trademark infringement claims, a court may determine that the marks Forte has asserted are invalid or unenforceable, or that the party against whom Forte has asserted trademark infringement has superior rights to the marks in question. In this case, Forte could ultimately be forced to cease use of such trademarks. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of Forte’s registered or unregistered trademarks or trade names. Over the long term, if Forte is unable to establish name recognition based on its

 

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trademarks and trade names, then Forte may not be able to compete effectively, and its business may be adversely affected. Forte’s efforts to enforce or protect its proprietary rights related to trademarks, trade secrets, domain names, copyrights or other intellectual property may be ineffective and could result in substantial costs and diversion of resources and could adversely affect its business, financial condition, results of operations and prospects.

Intellectual property rights do not necessarily address all potential threats.

The degree of future protection afforded by Forte’s intellectual property rights is uncertain because intellectual property rights have limitations and may not adequately protect its business or permit Forte to maintain its competitive advantage. For example:

 

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others may be able to make products that are similar to Forte’s product candidate or utilize similar technology but that are not covered by the claims of the patents that Forte may own;

 

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Forte, or its current or future licensors or collaborators, might not have been the first to make the inventions covered by the issued patent or pending patent application that Forte own now or in the future;

 

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Forte, or its current or future licensors or collaborators, might not have been the first to file patent applications covering certain of its or their inventions;

 

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others may independently develop similar or alternative technologies or duplicate any of Forte’s technologies without infringing Forte’s owned intellectual property rights;

 

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it is possible that Forte’s current or future pending owned patent applications will not lead to issued patents;

 

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issued patents that Forte hold rights to may be held invalid or unenforceable, including as a result of legal challenges by its competitors or other third parties;

 

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Forte’s competitors or other third parties might conduct research and development activities in countries where Forte do not have patent rights and then use the information learned from such activities to develop competitive products for sale in its major commercial markets;

 

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Forte may not develop additional proprietary technologies that are patentable;

 

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the patents of others may harm Forte’s business; and

 

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Forte may choose not to file a patent in order to maintain certain trade secrets or know-how, and a third party may subsequently file a patent covering such intellectual property.

Should any of these events occur, they could have a material adverse effect on Forte’s business, financial condition, results of operations and prospects.

Risks related to Forte’s reliance on third parties

Forte will rely on third parties to conduct its clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines or comply with regulatory requirements, Forte may not be able to obtain regulatory approval of or commercialize any potential product candidate.

Forte will depend upon third parties, including independent investigators, to conduct its clinical trials under agreements with universities, medicinal institutions, CROs, strategic partners and others. Forte expects to have to negotiate budgets and contracts with CROs and trial sites, which may result in delays to its development timelines and increased costs.

 

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Forte will rely heavily on third parties over the course of its clinical trials, and, as a result, will have limited control over the clinical investigators and limited visibility into their day-to-day activities, including with respect to their compliance with the approved clinical protocol. Nevertheless, Forte is responsible for ensuring that each of its clinical trials is conducted in accordance with the applicable protocol, legal and regulatory requirements and scientific standards, and its reliance on third parties does not relieve Forte of its regulatory responsibilities. Forte and these third parties are required to comply with GCP requirements, which are regulations and guidelines enforced by the FDA and comparable foreign regulatory authorities for product candidate in clinical development. Regulatory authorities enforce these GCP requirements through periodic inspections of trial sponsors, clinical investigators and trial sites. If Forte or any of these third parties fail to comply with applicable GCP requirements, the clinical data generated in its clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require Forte to suspend or terminate these trials or perform additional preclinical studies or clinical trials before approving its marketing applications. Forte cannot be certain that, upon inspection, such regulatory authorities will determine that any of its clinical trials comply with the GCP requirements. In addition, its clinical trials must be conducted with drug product produced under cGMP requirements and may require a large number of patients.

Forte’s failure or any failure by these third parties to comply with these regulations or to recruit a sufficient number of patients may require Forte to repeat clinical trials, which would delay the regulatory approval or commercialization process. Moreover, its business may be implicated if any of these third parties violates federal or state fraud and abuse or false claims laws and regulations or healthcare privacy and security laws.

Any third parties conducting Forte’s future clinical trials will not be its employees and, except for remedies that may be available to Forte under its agreements with such third parties, Forte cannot control whether or not they devote sufficient time and resources to its ongoing clinical programs. These third parties may also have relationships with other commercial entities, including Forte’s competitors, for whom they may also be conducting clinical trials or other product development activities, which could affect their performance on Forte’s behalf. If these third parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to Forte’s clinical protocols or regulatory requirements or for other reasons, Forte’s clinical trials may be extended, delayed or terminated and Forte may not be able to complete development of, obtain regulatory approval of or successfully commercialize its product candidate. As a result, its financial results and the commercial prospects for its product candidate would be harmed, its costs could increase and its ability to generate revenue could be delayed.

If any of its relationships with these third-party CROs or others terminate, Forte may not be able to enter into arrangements with alternative CROs or other third parties or to do so on commercially reasonable terms. Switching or adding additional CROs involves additional cost and requires management time and focus. In addition, there is a natural transition period when a new CRO begins work. As a result, delays may occur, which can materially impact Forte’s ability to meet its desired clinical development timelines. Though Forte carefully manages its relationships with its CROs, there can be no assurance that Forte will not encounter similar challenges or delays in the future or that these delays or challenges will not have a material adverse impact on its business, financial condition and prospects.

Forte expects to rely on third parties to manufacture its clinical supply of product candidate, and Forte intends to rely on third parties to produce and process its products, if approved.

Forte currently relies on outside vendors to supply raw materials and other important components. Forte has not yet caused any product candidate to be manufactured or processed on a commercial scale and may not be able to do so for any of its product candidates. Forte will make changes as Forte works to optimize the manufacturing process for its product candidates, and Forte cannot be sure that even minor changes in the process will result in therapies that are safe and effective.

 

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The facilities used to manufacture Forte’s product candidate must be approved by the FDA or other foreign regulatory agencies pursuant to inspections that will be conducted after Forte submits a marketing application to the FDA or other foreign regulatory agencies. Forte does not currently control all aspects of the manufacturing process of, and are currently largely dependent on, its contract manufacturing partners for compliance with regulatory requirements, known as cGMP requirements, for manufacture of its product candidate. If and when its manufacturing facility becomes operational, Forte will be responsible for compliance with cGMP requirements. If Forte or its contract manufacturers cannot successfully manufacture in conformance with its specifications and the strict regulatory requirements of the FDA or other regulatory authorities, Forte and they will not be able to secure and/or maintain regulatory approval for their manufacturing facilities with respect to the manufacture of its product candidate. In addition, Forte has no control over the ability of its contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or a comparable foreign regulatory authority does not approve these facilities for the manufacture of its product candidate or if it withdraws any such approval in the future, Forte may need to find alternative manufacturing facilities, which would significantly impact its ability to develop, obtain regulatory approval for or market its product candidate, if approved.

For more information, see “Risk Factors—Risks Related to Manufacturing and Supply” below.

If Forte’s sole contract manufacturing organization for materials to be used in its clinical trials fails to supply Forte with the necessary materials, Forte may be unable to complete its clinical trials on a timely basis, if at all.

Forte has entered into a services agreement with a third party to handle the manufacturing supply chain for drug substance synthesis for its planned clinical trials. If this manufacturer is unable or unwilling to provide Forte with sufficient quantities of its microbiome candidate to meet its demands or fails to meet its standards of quality or other specification or to achieve drug cGMP compliance, Forte may not be able to locate any alternative suppliers or enter into commercially reasonable agreements with substitute suppliers in a timely manner or at all.

A coronavirus pandemic is ongoing in many parts of the world and can result in significant disruptions to Forte’s supply of the investigational product for its clinical trials which could have a material adverse effect on its business.

As the COVID-19 pandemic is still evolving as of this time, much of its impact remains unknown, and it is impossible to predict the impact it may have on the development of Forte’s product candidates and the impact on its business. The severity of the coronavirus pandemic could also make access to Forte’s existing supply chain difficult or impossible by delaying the delivery of key raw materials used in its product candidates and therefore delay the delivery of such products for use in its clinical trials. Any of these results could materially impact Forte’s business and have an adverse effect on its business.

Third-party relationships are important to Forte’s business. If Forte is unable to maintain its collaborations, enter into new relationships or if these relationships are not successful, its business could be adversely affected.

Forte has limited capabilities for product development and do not yet have any capability for sales, marketing or distribution. Accordingly, Forte enters into relationships with other companies to provide it with important technologies, and Forte may receive additional technologies and funding under these and other collaborations in the future. Relationships Forte enter into, may pose a number of risks, including the following:

 

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third parties have, and future third-party collaborators may have, significant discretion in determining the efforts and resources that they will apply;

 

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current and future third parties may not perform their obligations as expected;

 

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current and future third parties may not pursue development and commercialization of any product candidate that achieve regulatory approval or may elect not to continue or renew development or commercialization programs based on clinical trial results, changes in the third parties’ strategic focus or available funding, or external factors, such as a strategic merger that may divert resources or create competing priorities;

 

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third parties may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing;

 

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current and future third parties could independently develop, or develop with third parties, products that compete directly or indirectly with Forte’s products and product candidate if the third parties believe that the competitive products are more likely to be successfully developed or can be commercialized under terms that are more economically attractive than ours;

 

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product candidates discovered in collaboration with Forte may be viewed by its current or future third parties as competitive with their own product candidate or products, which may cause such third parties to cease to devote resources to the commercialization of its product candidate;

 

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current and future third parties may fail to comply with applicable regulatory requirements regarding the development, manufacture, distribution or marketing of a product candidate or product;

 

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current and future third parties with marketing and distribution rights to one or more of Forte’s product candidates that achieve regulatory approval may not commit sufficient resources to the marketing and distribution of such product or products;

 

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disagreements with current or future third parties, including disagreements over proprietary rights, contract interpretation or the preferred course of development, might cause delays or terminations of the research, development or commercialization of product candidate, might lead to additional responsibilities for Forte with respect to product candidate, or might result in litigation or arbitration, any of which would be time-consuming and expensive;

 

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current and future third parties may not properly maintain or defend its intellectual property rights or may use its proprietary information in such a way as to invite litigation that could jeopardize or invalidate its intellectual property or proprietary information or expose Forte to potential litigation;

 

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current and future third parties may infringe the intellectual property rights of third parties, which may expose Forte to litigation and potential liability;

 

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if a current or future third parties of ours is involved in a business combination, the collaborator might deemphasize or terminate the development or commercialization of any product candidate licensed to it by Forte; and

 

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current and future relationships may be terminated by the collaborator, and, if terminated, Forte could be required to raise additional capital to pursue further development or commercialization of the applicable product candidate.

If Forte’s relationships do not result in the successful discovery, development and commercialization of products or if one of its third parties terminates its agreement with Forte, Forte may not receive any future research funding or milestone or royalty payments under the collaboration. If Forte does not receive the funding Forte expects under these agreements, its development of its technology and product candidates could be delayed, and Forte may need additional resources to develop product candidate and its technology. All of the risks relating to product development, regulatory approval and commercialization described in this prospectus also apply to the activities of its collaborators.

 

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Additionally, if any of Forte’s current or future third parties terminate their agreement with Forte, Forte may find it more difficult to attract new collaborators and its perception in the business and financial communities could be adversely affected.

Relationships are complex and time-consuming to negotiate and document. In addition, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators. Forte faces significant competition in seeking appropriate collaborators. Forte’s ability to reach a definitive agreement for a collaboration will depend, among other things, upon its assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. If Forte is unable to reach agreements with suitable third parties on a timely basis, on acceptable terms, or at all, Forte may have to curtail the development of a product candidate, reduce or delay its development program or one or more of its other development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase its expenditures and undertake development or commercialization activities at its own expense. If Forte elects to increase its expenditures to fund development or commercialization activities on its own, Forte may need to obtain additional expertise and additional capital, which may not be available to it on acceptable terms, or at all. If Forte fails to enter into relationships or does not have sufficient funds or expertise to undertake the necessary development and commercialization activities, Forte may not be able to further develop its product candidates, bring them to market and generate revenue from sales of drugs or continue to develop its technology, and its business may be materially and adversely affected.

Risks related to manufacturing and supply

Forte’s product candidate relies on the availability of specialty raw materials, which may not be available to Forte on acceptable terms or at all.

Forte’s product candidate requires certain specialty raw materials, some of which Forte obtain from small companies with limited resources and experience to support a commercial product. The suppliers may be ill-equipped to support Forte’s needs, especially in non-routine circumstances like an FDA inspection or medical crisis, such as widespread contamination. Forte does not currently have contracts in place with all of the suppliers that Forte may need at any point in time, and if needed, may not be able to contract with them on acceptable terms or at all. Accordingly, Forte may experience delays in receiving key raw materials to support clinical or commercial manufacturing.

Forte’s product candidate requires specialized manufacturing capabilities. If Forte or any of its third-party manufacturers encounter difficulties in manufacturing its product candidate, its ability to provide supply of its product candidate for clinical trials or its products for patients, if approved, could be delayed or stopped, or Forte may be unable to maintain a commercially viable cost structure.

The manufacturing process used to produce Forte’s product candidate is complex and novel, and it has not yet been validated for investigational and commercial production. As a result of these complexities, the cost to manufacture Forte’s product candidate is higher than traditional small molecule chemical compounds and the manufacturing process is less reliable and is more difficult to reproduce. Furthermore, its cGMP manufacturing process development and scale-up is at an early stage. The actual cost to manufacture and process its product candidate could be greater than Forte expects and could materially and adversely affect the commercial viability of its product candidate.

Forte’s manufacturing process may be susceptible to manufacturing issues associated with interruptions in the manufacturing process, contamination, equipment or reagent failure, improper installation or operation of equipment, vendor or operator error, and variability in product characteristics. Even minor deviations from normal manufacturing processes could result in reduced production yields, lot failures, product defects, product recalls, product liability claims and other supply disruptions. If microbial, viral or other contaminations are

 

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discovered in Forte’s product candidate or in the manufacturing facilities in which its product candidate are made, production at such manufacturing facilities may be interrupted for an extended period of time to investigate and remedy the contamination. Further, as product candidate are developed through preclinical to late-stage clinical trials toward approval and commercialization, it is common that various aspects of the development program, such as manufacturing methods, are altered along the way in an effort to optimize processes and results. Such changes carry the risk that they will not achieve these intended objectives, and any of these changes could cause its product candidate to perform differently and affect the results of planned clinical trials or other future clinical trials. Further, changes made to its manufacturing process will require prior approval by FDA, which can delay Forte’s clinical trials and regulatory approval of its product candidate.

Although Forte continues to optimize its manufacturing process for its product candidate, doing so is a difficult and uncertain task, and there are risks associated with scaling to the level required for advanced clinical trials or commercialization, including, among others, cost overruns, potential problems with process scale-up, process reproducibility, stability issues, lot consistency, and timely availability of reagents and/or raw materials. Forte ultimately may not be successful in transferring its production system from its contract manufacturer to any manufacturing facilities Forte establishes itself, or its contract manufacturer may not have the necessary capabilities to complete the implementation and development process. If Forte is unable to adequately validate or scale-up the manufacturing process for its product candidate with its current manufacturer, Forte will need to transfer to another manufacturer and complete the manufacturing validation process, which can be lengthy. If Forte is able to adequately validate and scale-up the manufacturing process for its product candidate with a contract manufacturer, Forte will still need to negotiate with such contract manufacturer an agreement for commercial supply, and it is not certain Forte will be able to come to agreement on terms acceptable to it. As a result, Forte may ultimately be unable to reduce the cost of goods for its product candidate to levels that will allow for an attractive return on investment if and when that product candidate is commercialized upon approval.

The manufacturing process for any products that Forte may develop is subject to the FDA and foreign regulatory authority approval process, and Forte will need to contract with manufacturers who can meet all applicable FDA and foreign regulatory authority requirements on an ongoing basis. If Forte or its CMOs are unable to reliably produce products to specifications acceptable to the FDA or other regulatory authorities, Forte may not obtain or maintain the approvals Forte needs to commercialize such products. Even if Forte obtains regulatory approval for any of its product candidates, there is no assurance that either Forte or its CMOs will be able to manufacture the approved product to specifications acceptable to the FDA or other regulatory authorities, to produce it in sufficient quantities to meet the requirements for the potential launch of the product, or to meet potential future demand. Any of these challenges could delay completion of clinical trials, require bridging clinical trials or the repetition of one or more clinical trials, increase clinical trial costs, delay approval of its product candidate, impair commercialization efforts, increase Forte’s cost of goods, and have an adverse effect on its business, financial condition, results of operations and growth prospects. Forte’s future success depends on its ability to manufacture its products on a timely basis with acceptable manufacturing costs, while at the same time maintaining good quality control and complying with applicable regulatory requirements, and an inability to do so could have a material adverse effect on its business, financial condition, and results of operations. In addition, Forte could incur higher manufacturing costs if manufacturing processes or standards change, and Forte could need to replace, modify, design, or build and install equipment, all of which would require additional capital expenditures. Specifically, because its product candidate may have a higher cost of goods than conventional therapies, the risk that coverage and reimbursement rates may be inadequate for Forte to achieve profitability may be greater.

Forte may depend on third parties for clinical and commercial supplies, including, in some instances, a single supplier.

Forte may depend on third-party suppliers for clinical and commercial supplies, including the active ingredients which are used in its product candidate. These supplies may not always be available to Forte at the

 

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standards Forte require or on terms acceptable to it, or at all, and Forte may not be able to locate alternative suppliers in a timely manner, or at all. If Forte is unable to obtain necessary clinical or commercial supplies, its manufacturing operations and clinical trials and the clinical trials of its collaborators may be delayed or disrupted, and its business and prospects may be materially and adversely affected as a result.

Forte may rely on a sole supplier for certain of its supplies. If this sole supplier is unable to supply to Forte in the quantities it requires, or at all, or otherwise defaults on its supply obligations to Forte, Forte may not be able to obtain alternative supplies from other suppliers on acceptable terms, in a timely manner, or at all.

Forte has limited experience manufacturing its drug product candidate for purposes of clinical trials and at commercial scale, and if Forte decides to establish its own manufacturing facility for its drug product candidate, Forte cannot assure you that it can manufacture its drug product candidate in compliance with regulations at a cost or in quantities necessary to make them commercially viable.

Forte may establish a manufacturing facility for its product candidate for production as investigational new drugs for purposes of clinical trials. Forte has limited experience in cGMP compliant manufacturing of its drug product candidate for purposes of clinical trials or at a commercial scale. In the future, Forte may develop its manufacturing capacity in part by expanding its current facility or building additional facilities. This activity will require substantial additional funds, and Forte would need to hire and train a significant number of qualified employees to staff these facilities. Forte may not be able to develop cGMP-compliant manufacturing facilities that are adequate to produce materials for additional later-stage clinical trials or commercial use. The equipment and facilities employed in the manufacture of pharmaceuticals are subject to stringent qualification requirements by regulatory agencies, including validation of facility, equipment, systems, processes and analytics. Forte may be subject to lengthy delays and expense in conducting validation studies, if Forte can meet the requirements at all.

Risks Related to Combined Company

In determining whether you should vote approve the proposals contained in this proxy statement/prospectus/information statement, you should carefully read the following risk factors in addition to the risks described above.

The combined company will need to raise additional financing in the future to fund its operations, which may not be available to it on favorable terms or at all.

The combined company will require substantial additional funds to conduct the costly and time-consuming clinical efficacy trials necessary to pursue regulatory approval of each potential product candidate and to continue the development of FB-401. The combined company’s future capital requirements will depend upon a number of factors, including: the number and timing of future product candidates in the pipeline; progress with and results from preclinical testing and clinical trials; the ability to manufacture sufficient drug supplies to complete preclinical and clinical trials; the costs involved in preparing, filing, acquiring, prosecuting, maintaining and enforcing patent and other intellectual property claims; and the time and costs involved in obtaining regulatory approvals and favorable reimbursement or formulary acceptance. Raising additional capital may be costly or difficult to obtain and could significantly dilute stockholders’ ownership interests or inhibit the combined company’s ability to achieve its business objectives. If the combined company raises additional funds through public or private equity offerings, the terms of these securities may include liquidation or other preferences that adversely the rights of its common stockholders. Further, to the extent that the combined company raises additional capital through the sale of common stock or securities convertible or exchangeable into common stock, its stockholder’s ownership interest in the combined company will be diluted. In addition, any debt financing may subject the combined company to fixed payment obligations and covenants limiting or restricting its ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If the combined company raises additional capital through marketing and distribution

 

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arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, the combined company may have to relinquish certain valuable intellectual property or other rights to its product candidates, technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to it. Even if the combined company were to obtain sufficient funding, there can be no assurance that it will be available on terms acceptable to the combined company or its stockholders.

The market price of the combined company’s common stock is expected to be volatile, and the market price of the common stock may drop following the Merger.

The market price of the combined company’s common stock following the Merger could be subject to significant fluctuations. Market prices for securities of early-stage pharmaceutical, biotechnology and other life sciences companies have historically been particularly volatile. Some of the factors that may cause the market price of the combined company’s common stock to fluctuate include:

 

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the ability of the combined company to obtain regulatory approvals for its product candidates, and delays or failures to obtain such approvals;

 

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failure of any of the combined company’s product candidates, if approved, to achieve commercial success;

 

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failure by the combined company to maintain its existing third-party license and supply agreements;

 

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failure by the combined company or its licensors to prosecute, maintain, or enforce its intellectual property rights;

 

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changes in laws or regulations applicable to the combined company’s product candidates;

 

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any inability to obtain adequate supply of the combined company’s product candidates or the inability to do so at acceptable prices;

 

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adverse regulatory authority decisions;

 

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introduction of new products, services or technologies by the combined company’s competitors;

 

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failure to meet or exceed financial and development projections the combined company may provide to the public;

 

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failure to meet or exceed the financial and development projections of the investment community;

 

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the perception of the pharmaceutical industry by the public, legislatures, regulators and the investment community;

 

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announcements of significant acquisitions, strategic collaborations, joint ventures or capital commitments by the combined company or its competitors;

 

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disputes or other developments relating to proprietary rights, including patents, litigation matters, and the combined company’s ability to obtain patent protection for its technologies;

 

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additions or departures of key personnel;

 

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significant lawsuits, including patent or stockholder litigation;

 

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if securities or industry analysts do not publish research or reports about the combined company’s business, or if they issue an adverse or misleading opinion regarding its business and stock;

 

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changes in the market valuations of similar companies;

 

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general market or macroeconomic conditions;

 

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sales of its common stock by the combined company or its stockholders in the future;

 

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trading volume of the combined company’s common stock;

 

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announcements by commercial partners or competitors of new commercial products, clinical progress or the lack thereof, significant contracts, commercial relationships or capital commitments;

 

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adverse publicity generally, including with respect to other products and potential products in such markets;

 

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the introduction of technological innovations or new therapies that compete with potential products of the combined company;

 

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changes in the structure of health care payment systems; and

 

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period-to-period fluctuations in the combined company’s financial results.

Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may also adversely affect the trading price of the combined company’s common stock.

In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm the combined company’s profitability and reputation.

Additionally, a decrease in the stock price of the combined company may cause the combined company’s common stock to no longer satisfy the continued listing standards of Nasdaq. If the combined company is not able to maintain the requirements for listing on Nasdaq, it could be delisted, which could have a materially adverse effect on its ability to raise additional funds as well as the price and liquidity of its common stock.

The combined company will incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies.

The combined company will incur significant legal, accounting and other expenses that Forte did not incur as a private company, including costs associated with public company reporting requirements. The combined company will also incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act, as well as new implemented by the SEC and Nasdaq. These rules and regulations are expected to increase the combined company’s legal and financial compliance costs and to make some activities more time consuming and costly. For example, the combined company’s management team will consist of the executive officers of Forte prior to the Merger, some of whom have not previously managed and operated a public company. These executive officers and other personnel will need to devote substantial time to gaining expertise regarding operations as a public company and compliance with applicable laws and regulations. These rules and regulations also may make it difficult and expensive for the combined company to obtain directors’ and officers’ liability insurance. As a result, it may be more difficult for the combined company to attract and retain qualified individuals to serve on the combined company’s board of directors or as executive officers of the combined company, which may adversely affect investor confidence in the combined company and could cause the combined company’s business or stock price to suffer.

Anti-takeover provisions in the combined company’s charter documents and under Delaware law could make an acquisition of the combined company more difficult and may prevent attempts by the combined company stockholders to replace or remove the combined company management.

Provisions in the combined company’s certificate of incorporation and bylaws may delay or prevent an acquisition or a change in management. In addition, because the combined company will be incorporated in Delaware, it is governed by the provisions of Section 203 of the DGCL, which prohibits stockholders owning in excess of 15% of the outstanding combined company voting stock from merging or combining with the combined company. Although Tocagen and Forte believe these provisions collectively will provide for an

 

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opportunity to receive higher bids by requiring potential acquirors to negotiate with the combined company’s board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by the combined company’s stockholders to replace or remove then current management by making it more difficult for stockholders to replace members of the board of directors, which is responsible for appointing the members of management.

The certificate of incorporation of the combined company will provide that the Court of Chancery of the State of Delaware is the exclusive forum for substantially all disputes between the combined company and its stockholders, which could limit its stockholders’ ability to obtain a favorable judicial forum for disputes with the combined company or its directors, officers or other employees.

The certificate of incorporation of the combined company will provide that the Court of Chancery of the State of Delaware is the sole and exclusive forum for any derivative action or proceeding brought on the combined company’s behalf, any action asserting a breach of fiduciary duty owed by any of its directors, officers or other employees to the combined company or its stockholders, any action asserting a claim against it arising pursuant to any provisions of the DGCL, its certificate of incorporation or its bylaws, or any action asserting a claim against it that is governed by the internal affairs doctrine; provided, that these choice of forum provisions do not apply to suits brought to enforce a duty or liability created by the Securities Act, the Exchange Act, or any other claim for which the federal courts have exclusive jurisdiction. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with the combined company or its directors, officers or other employees, which may discourage such lawsuits against the combined company and its directors, officers and other employees. If a court were to find the choice of forum provision contained in the certificate of incorporation to be inapplicable or unenforceable in an action, the combined company may incur additional costs associated with resolving such action in other jurisdictions.

Tocagen and Forte do not anticipate that the combined company will pay any cash dividends in the foreseeable future.

The current expectation is that the combined company will retain its future earnings, if any, to fund the development and growth of the combined company’s business. As a result, capital appreciation, if any, of the common stock of the combined company will be its stockholders’ sole source of gain, if any, for the foreseeable future.

An active trading market for the combined company’s common stock may not develop and its stockholders may not be able to resell their shares of common stock for a profit, if at all.

Prior to the Merger, there had been no public market for Forte’s common stock. An active trading market for the combined company’s shares of common stock may never develop or be sustained. If an active market for its common stock does not develop or is not sustained, it may be difficult for its stockholders to sell their shares at an attractive price or at all.

Future sales of shares by existing stockholders could cause the combined company’s stock price to decline.

If existing stockholders of Tocagen and Forte sell, or indicate an intention to sell, substantial amounts of the combined company’s common stock in the public market after legal restrictions on resale discussed in this proxy statement/prospectus/information statement lapse, the trading price of the common stock of the combined company could decline. Neither Tocagen nor Forte is able to predict the effect that sales may have on the prevailing market price of the combined company’s common stock.

 

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If equity research analysts do not publish research or reports, or publish unfavorable research or reports, about the combined company, its business or its market, its stock price and trading volume could decline.

The trading market for the combined company’s common stock will be influenced by the research and reports that equity research analysts publish about it and its business. Equity research analysts may elect not to provide research coverage of the combined company’s common stock after the completion of the Merger, and such lack of research coverage may adversely affect the market price of its common stock. In the event it does have equity research analyst coverage, the combined company will not have any control over the analysts, or the content and opinions included in their reports. The price of the combined company’s common stock could decline if one or more equity research analysts downgrade its stock or issue other unfavorable commentary or research. If one or more equity research analysts ceases coverage of the combined company or fails to publish reports on it regularly, demand for its common stock could decrease, which in turn could cause its stock price or trading volume to decline.

The combined company will have broad discretion in the use of proceeds from the Pre-Closing Financing and may invest or spend the proceeds in ways with which its stockholders do not agree and in ways that may not increase the value of their investments.

The combined company will have broad discretion over the use of proceeds from the Pre-Closing Financing. Its stockholders may not agree with the combined company’s decisions, and its use of the proceeds may not yield any return on its stockholders’ investments. The combined company’s failure to apply the net proceeds of the Pre-Closing Financing effectively could compromise its ability to pursue its growth strategy and the combined company might not be able to yield a significant return, if any, on its investment of these net proceeds. The combined company’s stockholders will not have the opportunity to influence its decisions on how to use the net proceeds from the Pre-Closing Financing.

If the combined company fails to maintain proper and effective internal controls, its ability to produce accurate financial statements on a timely basis could be impaired.

The combined company will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of Nasdaq. The Sarbanes-Oxley Act requires, among other things, that the combined company maintain effective disclosure controls and procedures and internal control over financial reporting. The combined company must perform system and process evaluation and testing of its internal control over financial reporting to allow management to report on the effectiveness of its internal controls over financial reporting in its Annual Report on Form 10-K filing for that year, as required by Section 404 of the Sarbanes-Oxley Act. As a private company, Forte has never been required to test its internal controls within a specified period. This will require that the combined company incur substantial professional fees and internal costs to expand its accounting and finance functions and that it expends significant management efforts. The combined company may experience difficulty in meeting these reporting requirements in a timely manner.

The combined company may discover weaknesses in its system of internal financial and accounting controls and procedures that could result in a material misstatement of its financial statements. The combined company’s internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.

If the combined company is not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act, or if it is unable to maintain proper and effective internal controls, the combined company may not be able to produce timely and accurate financial statements. If that were to happen, the market price of its common stock could decline and it could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities.

 

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If the combined company fails to attract and retain management and other key personnel, it may be unable to continue to successfully develop or commercialize its product candidates or otherwise implement its business plan.

The combined company’s ability to compete in the highly competitive pharmaceuticals industry depends on its ability to attract and retain highly qualified managerial, scientific, medical, legal, sales and marketing and other personnel. The combined company will be highly dependent on its management and scientific personnel. The loss of the services of any of these individuals could impede, delay or prevent the successful development of the combined company’s product pipeline, completion of its planned clinical trials, commercialization of its product candidates or in-licensing or acquisition of new assets and could impact negatively its ability to implement successfully its business plan. If the combined company loses the services of any of these individuals, it might not be able to find suitable replacements on a timely basis or at all, and its business could be harmed as a result. The combined company might not be able to attract or retain qualified management and other key personnel in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses.

The combined company is expected to take advantage of reduced disclosure and governance requirements applicable to smaller reporting companies, which could result in its common stock being less attractive to investors.

Following the Merger, the combined company is expected to have a public float of less than $250 million and therefore will qualify as a smaller reporting company under the rules of the SEC. As a smaller reporting company, the combined company will be able to take advantage of reduced disclosure requirements, such as simplified executive compensation disclosures and reduced financial statement disclosure requirements in its SEC filings. Decreased disclosures in the combined company’s SEC filings due to its status as a smaller reporting company may make it harder for investors to analyze its results of operations and financial prospects. Tocagen and Forte cannot predict if investors will find the combined company’s common stock less attractive if it relies on these exemptions. If some investors find its common stock less attractive as a result, there may be a less active trading market for its common stock and its stock price may be more volatile. The combined company may take advantage of the reporting exemptions applicable to a smaller reporting company until it is no longer a smaller reporting company, which status would end once it has a public float greater than $250 million. In that event, the combined company could still be a smaller reporting company if its annual revenues were below $100 million and it has a public float of less than $700 million.

 

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CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

This proxy statement/prospectus/information statement and the documents incorporated by reference into this proxy statement/prospectus/information statement contain forward-looking statements. These forward-looking statements are based on current expectations and beliefs and involve numerous risks and uncertainties that could cause actual results to differ materially from expectations. These forward-looking statements should not be relied upon as predictions of future events as it cannot be assured that the events or circumstances reflected in these statements will be achieved or will occur. You can identify forward-looking statements by the use of forward-looking terminology including “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “pro forma,” “should,” “will,” “would,” or the negative of these words and phrases or other variations of these words and phrases or comparable terminology. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. For example, forward-looking statements include, but are not limited to statements about:

 

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the strategies, prospects, plans, expectations and objectives of management of Tocagen or Forte for future operations of the combined company following the closing of the Merger;

 

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the progress, scope or duration of the development of product candidates or programs;

 

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the benefits that may be derived from, or the commercial or market opportunity of, product candidates;

 

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the ability of Tocagen or Forte to protect their intellectual property rights;

 

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the ability of Tocagen to maintain compliance with Nasdaq listing standards;

 

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the anticipated operations, financial position, losses, costs or expenses of Tocagen, Forte or the combined company following the closing of the Merger;

 

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statements regarding future economic conditions or performance;

 

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statements concerning proposed products or product candidates;

 

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the approval and closing of the Merger, including the timing of the Merger, the ability of Tocagen to obtain a sufficient number of proxies to approve the Merger, other conditions to the completion of the Merger, the Exchange Ratio, and relative ownership levels as of the closing of the Merger;

 

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the expected benefits of and potential value created by the Merger for the stockholders of Tocagen; and

 

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Forte’s ability to complete the Pre-Closing Financing in connection with the Merger;

 

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statements of belief and any statement of assumptions underlying any of the foregoing.

For a discussion of the factors that may cause Tocagen, Forte or the combined company’s actual results, performance or achievements following closing of the proposed Merger to differ materially from any future results, performance or achievements expressed or implied in such forward-looking statements, or for a discussion of risk associated with the ability of Tocagen and Forte to complete the Merger and the effect of the Merger on the business of Tocagen, Forte and the combined company following the completion of the Merger, see “Risk Factors” beginning on page 24 of this proxy statement/prospectus/information statement. Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in reports filed with the SEC by Tocagen. See “Where You Can Find More Information” beginning on page 271 of this proxy statement/prospectus/information statement. There can be no assurance that the Merger will be completed, or if it is completed, that it will close within the anticipated time period or that the expected benefits of the Merger will be realized.

If any of these risks or uncertainties materializes or any of these assumptions proves incorrect, the results of Tocagen, Forte or the combined company following completion of the Merger could differ materially from the forward-looking statements. All forward-looking statements in this proxy statement/prospectus/information statement are current only as of the date on which the statements were made. Tocagen and Forte do not undertake any obligation (and expressly disclaim any such obligation) to publicly update any forward-looking statement to reflect events or circumstances after the date on which any statement is made or to reflect the occurrence of unanticipated events.

 

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THE SPECIAL MEETING OF TOCAGEN’S STOCKHOLDERS

Date, Time and Place

The Tocagen special meeting will be held on                                        , 2020, at                located at                commencing at                local time. Tocagen is sending this proxy statement/prospectus/information statement to its common stockholders in connection with the solicitation of proxies by the Tocagen Board for use at the Tocagen special meeting and any adjournments or postponements of the Tocagen special meeting. This proxy statement/prospectus/information statement is first being furnished to Tocagen’s common stockholders on or about                , 2020.

Tocagen is closely monitoring developments related to COVID-19. It could become necessary to change the date, time, location and/or means of holding the Tocagen special meeting (including by means of remote communication). If such a change is made, Tocagen will announce the change in advance, and details on how to participate will be issued by press release, posted on Tocagen’s website and filed as additional proxy materials.

Purpose of the Tocagen Special Meeting

The purpose of the Tocagen special meeting is:

 

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Proposal No. 1 (Reverse Split). To consider and vote upon a proposal to approve an amendment to Tocagen’s amended and restated certificate of incorporation to effect a reverse stock split of Tocagen Common Stock at a ratio within the range between 1-for-8 and 1-for-12, with such ratio to be mutually agreed upon by Tocagen and Forte prior to the Effective Time, such amendment in the form attached as Annex E to this proxy statement/prospectus/information statement.

 

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Proposal No. 2 (Nasdaq Listing Rules). To consider and vote upon a proposal to approve (i) the issuance of shares of Tocagen capital stock pursuant to the Merger, which will represent more than 20% of the shares of Tocagen Common Stock outstanding immediately prior to the Merger, and (ii) the change of control of Tocagen resulting from the Merger, pursuant to the Nasdaq Listing Rules 5635(a) and 5635(b), respectively.

 

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Proposal No. 3 (Postponement or Adjournment of Special Meeting). To consider and vote upon a postponement or adjournment of the Tocagen special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposal Nos. 1 or 2.

Tocagen will transact no other business at the special meeting except such business as may properly be brought before the special meeting or any adjournment or postponement thereof. Proposal Nos. 1 through 3 described above are collectively the “Tocagen Stockholder Matters,” and Proposal Nos. 1 and 2 above are collectively the “Closing Tocagen Stockholder Matters.”

Recommendation of the Tocagen Board

The Tocagen Board has unanimously determined that the Tocagen Stockholder Matters are fair to, advisable for and in the best interests of Tocagen and its stockholders. The Tocagen Board recommends that Tocagen’s common stockholders vote “FOR” each of Proposal Nos. 1, 2 and 3.

Record Date and Voting Power

Only holders of record of Tocagen Common Stock at the close of business on the record date,                , 2020, are entitled to notice of, and to vote at, the Tocagen special meeting. There were approximately                 holders of record of Tocagen Common Stock at the close of business on the record date. At the close of business on the record date,                  shares of Tocagen Common Stock were issued and outstanding. Each share of Tocagen Common Stock entitles the holder thereof to one vote on each matter submitted for stockholder

 

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approval. See the section titled “Principal Stockholders of Tocagen” beginning on page 263 of this proxy statement/prospectus/information statement for information regarding persons known to Tocagen’s management to be the beneficial owners of more than 5% of the outstanding shares of Tocagen Common Stock.

Voting and Revocation of Proxies

The proxy accompanying this proxy statement/prospectus/information statement is solicited on behalf of the Tocagen Board for use at the Tocagen special meeting.

If you are a stockholder of record of Tocagen as of the record date referred to above, you may vote in person at the Tocagen special meeting or vote by proxy. Whether or not you plan to attend the Tocagen special meeting, Tocagen urges you to vote by proxy to ensure your vote is counted. You may still attend the Tocagen special meeting and vote in person if you have already voted by proxy. As a stockholder of record you may vote in any of the following ways:

 

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to vote in person, attend the Tocagen special meeting and Tocagen will provide you a ballot when you arrive;

 

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to vote using the proxy card, simply mark, sign and date your proxy card and return it promptly in the postage-paid envelope provided. If you return your signed proxy card to Tocagen before the Tocagen special meeting, Tocagen will vote your shares of Tocagen Common Stock as you direct on the proxy card; or

 

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to vote by telephone or on the Internet, dial the number on the proxy card or voting instruction form or visit the website on the proxy card or voting instruction form to complete an electronic proxy card. You will be asked to provide the Tocagen number and control number from the enclosed proxy card. Your vote must be received by 11:59 p.m., Eastern time on                , 2020 to be counted.

If your shares of Tocagen Common Stock are held by your broker as your nominee, that is, in “street name,” the enclosed voting instruction card is sent by the institution that holds your shares. Please follow the instructions included on that voting instruction card regarding how to instruct your broker to vote your shares of Tocagen Common Stock. If you do not give instructions to your broker, your broker can vote your shares of Tocagen Common Stock with respect to “routine” items but not with respect to “non-routine” items such as Proposal No. 2, and, as a result, absent specific instructions from the beneficial owner of such shares, brokers are not empowered to vote those shares. Routine items are proposals considered routine under certain rules applicable to brokers on which your broker may vote shares held in “street name” in the absence of your voting instructions. On non-routine items for which you do not give your broker instructions, your shares of Tocagen Common Stock will be treated as “broker non-votes.” Broker non-votes, if any, will be treated as shares that are present at the special meeting for purposes of determining whether a quorum exists but will not be counted or deemed to be present in person or by proxy for the purpose of voting on Proposal No. 2.

All properly executed proxies that are not revoked will be voted at the Tocagen special meeting and at any adjournments or postponements of the Tocagen special meeting in accordance with the instructions contained in the proxy. If a holder of Tocagen Common Stock executes and returns a proxy and does not specify otherwise, the shares represented by that proxy will be voted “FOR” Proposal No. 1 to approve an amendment to the amended and restated certificate of incorporation of Tocagen effecting the Reverse Split; “FOR” Proposal No. 2 to approve the issuance of Tocagen capital stock pursuant to the Merger and the change of control resulting from the Merger; and “FOR” Proposal No. 3 to approve the postponement or adjournment of the Tocagen special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposal Nos. 1 or 2 in accordance with the recommendation of the Tocagen Board.

 

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Tocagen’s common stockholders of record, other than those Tocagen stockholders who have executed voting agreements, may change their vote at any time before their proxy is voted at the Tocagen special meeting in one of three ways. First, a stockholder of record of Tocagen can send a written notice to the Secretary of Tocagen stating that the stockholder would like to revoke its proxy. Second, a stockholder of record of Tocagen can submit new proxy instructions either on a new proxy card or by telephone or via the Internet. Third, a stockholder of record of Tocagen can attend the Tocagen special meeting and vote in person. Attendance alone will not revoke a proxy. If a Tocagen stockholder who owns shares of Tocagen Common Stock in “street name” has instructed a broker to vote its shares of Tocagen Common Stock, the stockholder must follow directions received from its broker to change those instructions.

Required Vote

The presence, in person or represented by proxy, at the Tocagen special meeting of the holders of a majority of the shares of Tocagen Common Stock outstanding and entitled to vote at the Tocagen special meeting is necessary to constitute a quorum at the meeting. Abstentions and broker non-votes will be counted towards a quorum. Approval of Proposal No. 1 requires the affirmative vote of holders of a majority of Tocagen Common Stock having voting power outstanding on the record date for the Tocagen special meeting. Approval of Proposals Nos. 2 and 3 requires the affirmative vote of a majority of the votes cast in person or by proxy at the special Meeting.

Votes will be counted by the inspector of election appointed for the Tocagen special meeting, who will separately count “FOR” and “AGAINST” votes, abstentions and broker non-votes. Abstentions will have the same effect as votes “AGAINST” for Proposal No. 1. Abstentions and broker non-votes (if applicable) will have no effect on the outcome of Proposal Nos. 2 and 3 but will be used to determine whether a quorum is present at the Tocagen special meeting.

Each of Proposal Nos. 1 and 2 is a condition to the consummation of the Merger. Therefore, the Merger cannot be consummated without the approval of Proposal Nos. 1 and 2. Proposal No. 3 is not a condition to the consummation of the Merger. Proposal Nos. 1 and 2 are not conditioned on Proposal No. 3 being approved.

As of February 19, 2020, the directors and executive officers of Tocagen and other stockholders who signed support agreements beneficially owned approximately 6% of the outstanding shares of Tocagen Common Stock entitled to vote at the Tocagen special meeting. Pursuant to the support agreements, each such director, executive officer and other signatory stockholder has agreed to be present (in person or by proxy) at the Tocagen special meeting to vote all shares of Tocagen Common Stock owned by him or her as of the record date in favor of Proposal Nos. 1 and 2. Additionally, each such stockholder has agreed, solely in his or her capacity as a stockholder of Tocagen, to vote against any competing acquisition proposal and any action, proposal or transaction that would reasonably be expected to result in a material breach of the support agreements. As of March 23, 2020, Tocagen is not aware of any affiliate of Forte owning any shares of Tocagen Common Stock entitled to vote at the Tocagen special meeting.

Solicitation of Proxies

In addition to solicitation by mail, the directors, officers, employees and agents of Tocagen may solicit proxies from Tocagen’s common stockholders by personal interview, telephone, email or otherwise. Forte will bear the costs of printing and filing this proxy statement/prospectus/information statement and proxy card. Arrangements will also be made with brokerage firms and other custodians, nominees and fiduciaries who are record holders of Tocagen Common Stock for the forwarding of solicitation materials to the beneficial owners of Tocagen Common Stock. In addition, Tocagen has engaged The Proxy Advisory Group, a proxy solicitation firm, to solicit proxies from Tocagen’s common stockholders for a fee of $22,500 plus costs associated with solicitation campaigns. Tocagen will also reimburse reasonable out-of-pocket expenses. Tocagen will reimburse these brokers, custodians, nominees and fiduciaries for the reasonable out-of-pocket expenses they incur in

 

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connection with the forwarding of solicitation materials. Fees paid to the SEC in connection with filing the statement/prospectus/information statement, and any amendments and supplements thereto, with the SEC will be paid by Forte.

Other Matters

As of the date of this proxy statement/prospectus/information statement, the Tocagen Board does not know of any business to be presented at the Tocagen special meeting other than as set forth in the notice accompanying this proxy statement/prospectus/information statement. If any other matters should properly come before the Tocagen special meeting, it is intended that the shares represented by proxies will be voted with respect to such matters in accordance with the judgment of the persons voting the proxies.

 

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THE MERGER

This section and the section titled “The Merger Agreement” in this proxy statement/prospectus/information statement describe the material aspects of the Merger, including the Merger Agreement. While Tocagen and Forte believe that this description covers the material terms of the Merger and the Merger Agreement, it may not contain all of the information that is important to you. You should carefully read this entire proxy statement/prospectus/information statement for a more complete understanding of the Merger and the Merger Agreement, including the Merger Agreement attached as Annex A, the fairness opinion of Ladenburg attached as Annex B, and the other documents to which you are referred herein. See the section titled “Where You Can Find More Information” in this proxy statement/prospectus/information statement.

Background of the Merger

Tocagen is a clinical-stage, cancer-selective gene therapy biotechnology company focused on developing broadly applicable product candidates designed to activate a patient’s immune system against their own cancer. Tocagen’s cancer-selective gene therapy platform is built on Retroviral Replicating Vectors, which are designed to selectively deliver therapeutic genes into the DNA of cancer cells. Tocagen’s gene therapy approach is designed to fight cancer through immunotherapeutic mechanisms of action without the autoimmune toxicities commonly experienced with other immunotherapies.

As part of the ongoing consideration and evaluation of its long-term prospects and strategies, the Tocagen Board frequently reviews, with Tocagen’s management and outside advisors, strategic and financial alternatives in light of developments in Tocagen’s business, the sectors in which it competes, the economy generally and financial markets, all with the goal of enhancing value for its stockholders and fighting cancer. As part of this process, from time to time, members of Company senior management and/or its advisors have engaged in business development and/or strategic discussions with industry participants.

Tocagen had been developing its lead product candidate, Toca 511 (vocimagene amiretrorepvec) & Toca FC (extended-release flucytosine), for the treatment of recurrent HGG, a brain cancer with limited treatment options, low survival rates and, therefore, a significant unmet medical need. Tocagen conducted a randomized, controlled Phase 3 clinical trial (Toca 5) of Toca 511 & Toca FC in patients with recurrent HGG, which was designed to serve as a registrational trial.

On September 11, 2019, at a regularly scheduled, in-person meeting, the Tocagen Board met in consultation with its management and representatives of Cooley LLP (“Cooley”). At this meeting, the Tocagen Board reviewed the failure of top-line Toca 5 clinical trial results to meet the primary endpoint of overall survival and discussed plans to review the data with regulatory authorities in the United States and Europe. Given the results, there also was a preliminary discussion of strategic options for Tocagen and management, including potential cost saving measures and financing alternatives.

On September 12, 2019, Tocagen announced that, at the final analysis, the Toca 5 trial missed the primary endpoint of overall survival compared to the standard of care treatment. In addition, all secondary endpoints showed no meaningful difference between the arms of the trial.

On October 1, 2019, at a special telephonic meeting, the Tocagen Board met in consultation with its management and representatives of Cooley. At this meeting, the Tocagen Board concluded that Toca 511 & Toca FC likely could not be approved in the United States or European Union without additional clinical trials that would require substantial capital and time to complete. Additionally, in an effort to preserve cash while assessing strategic options, the Tocagen Board approved a reduction of approximately 65% of its workforce.

On October 14, 2019, at a regularly scheduled, in-person meeting, the Tocagen Board met in consultation with its management and representatives of Cooley. At this meeting, the Tocagen Board and management

 

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discussed Tocagen’s projected cash runway; a potential liquidation; timeline for a potential strategic transaction; and various transaction considerations, including synergies and strategic considerations; current assets and their potential value, market opportunities and regulatory and clinical hurdles for Tocagen’s assets. The Tocagen Board then approved the discontinuation of further development of Toca 511 & Toca FC and in light of this decision, determined to pursue all strategic alternatives, including a reverse merger, sale of the technology assets, primarily the Retroviral Replicating Vectors platform, including the lead program Toca 511 & Toca FC (the “RRV Platform Assets”) and Retroviral non-Replicating Vectors platform (the “RNV Platform Assets”) as well as other non-cash assets (collectively, the “Company Assets”) or other strategic transactions. In order to facilitate the review of strategic alternatives, the Tocagen Board decided to form a committee comprised of Faheem Hasnain, Franklin Berger and David Parkinson, each of whom is a nonexecutive, independent director and has expertise and experience in acquiring and selling companies (the “Strategic Transaction Committee”). The Tocagen Board then directed senior management and the Strategic Transaction Committee to vet and recommend a financial advisor to assist in the process. Following the board meeting, Tocagen also held discussions with four potential financial advisors with expertise in mergers and acquisitions in the pre-commercial biotechnology industry.

On October 18, 2019, in connection with the sale of the RNV Asset Platform, a Confidentiality Agreement was entered into between Tocagen and Party A, which included a customary standstill provision, which is still in effect, that contained a don’t ask, don’t waive clause but allowed Party A to privately and confidentially approach the Tocagen Board or senior management to make acquisition proposals during the standstill period.

On October 21, 2019, in connection with the sale of the RRV Asset Platform, a Confidentiality Agreement was entered into between Tocagen and Party B, which included a customary standstill provision, which is still in effect, that contained a don’t ask, don’t waive clause but allowed Party B to privately and confidentially approach the Tocagen Board or senior management to make acquisition proposals during the standstill period.

On October 22, 2019, the Strategic Transaction Committee had a telephonic meeting, during which representatives of Ladenburg presented the advisor’s qualifications to act as a financial advisor to the Strategic Transaction Committee. Ladenburg reviewed timelines for a potential strategic transaction, including a reverse merger and strategic partner selection criteria. In a closed session, the Strategic Transactions Committee then reviewed and discussed other potential advisor choices and relevant qualifications, including the views of Tocagen management who had met the potential advisors. Following these discussions, and based on Ladenburg’s presentation and relevant industry experience, expertise and qualifications in reverse mergers and private financings, and the absence of any discernible conflicts, the Strategic Transaction Committee approved the engagement of Ladenburg and directed management to have Ladenburg send process letters to potential strategic partners, subject to management negotiating a satisfactory engagement letter and completion of reference checks.

On October 24, 2019, after completing a series of reference checks, Tocagen engaged Ladenburg, pursuant to which Ladenburg agreed to act as exclusive financial advisor to Tocagen to assist in the review of Tocagen’s business and assets, and to explore strategic opportunities for enhancing stockholder value, including a reverse merger.

From mid-October 2019 through late November 2019, Ladenburg and Tocagen made outreach on a no-name basis to a broad selection of private and public companies in the life sciences industry. These companies consisted of private companies in the initial public offering (“IPO”) queue, private companies not in the IPO queue, private companies that had failed in earlier attempts at an IPO, companies that might be interested in purchasing certain of the Company Assets, publicly traded ex-U.S. companies seeking a Nasdaq or New York Stock Exchange listing and also public companies in the U.S. that were believed to have a strategic fit with Tocagen or were seeking a merger transaction as a de facto financing event. A total of 148 companies were contacted as part of Ladenburg and Tocagen’s outreach process. Of these companies, 107 were contacted for a potential reverse merger and 41 companies were contacted in connection with the potential sale of the Company Assets.

 

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In evaluating potential merger partners, Ladenburg focused on companies with: (i) a perceived lower financing risk at closing, (ii) a strong product pipeline with multiple mid-to-late or commercial-stage assets, (iii) strong news flows, (iv) an experienced management team, (v) high-quality existing investors or new investors willing to support a potential transaction, (vi) a capital structure with no debt or a path to restructuring existing debt, and (vii) audited financial statements or the ability to produce audited financial statements for the last two fiscal years (collectively, the “Specified Criteria”). Prospective strategic partners were removed from consideration if their valuation was considered to be too high, they possessed a single asset in a high-risk space, or their management team was not viewed as prepared to operate as a publicly traded company following a potential transaction. Among the companies initially identified for the reverse merger transaction were Party C, Party D, and Party E. Forte was not included because Ladenburg believed Forte was pursuing a separate transaction.

In determining who to contact about purchasing the Company Assets, the Tocagen management team identified 100 companies across various biotech industry sectors, including (i) collaborative partners, (ii) parties who Tocagen previously had business development discussions with or that previously reached out to Company for business development discussions, (iii) companies in the brain cancer space, (iv) companies in the oncology space, (v) companies focused on rare or orphan diseases, (vi) immunotherapy companies, and (vii) gene and cell therapy companies. Among several companies identified for the sale of the Company Assets were Party B, Party F, Party G, Party H, and Party I.

On October 26, 2019, in connection with the reverse merger transaction, a Confidentiality Agreement was entered into between Tocagen and Party D, which included a customary standstill provision, which is still in effect, that contained a don’t ask, don’t waive clause but allowed Party D to privately and confidentially approach the Tocagen Board or senior management to make acquisition proposals during the standstill period.

On October 28, 2019, in connection with the reverse merger transaction, a Confidentiality Agreement was entered into between Tocagen and Party C, which included a customary standstill provision, which is still in effect, that contained a don’t ask, don’t waive clause but allowed Party C to privately and confidentially approach the Tocagen Board or senior management to make acquisition proposals during the standstill period.

On November 1, 2019, Party A was granted access to the dataroom.

On November 11, 2019, in connection with the reverse merger transaction, a Confidentiality Agreement was entered into between Tocagen and Party E, which included a customary standstill provision, which is still in effect, that contained a don’t ask, don’t waive clause but allowed Party E to privately and confidentially approach the Tocagen Board or senior management to make acquisition proposals during the standstill period.

On November 21, 2019, Ladenburg sent a process letter to Forte after learning that they were no longer engaged with a different transaction.

Later that day, on November 21, 2019, at a regularly scheduled, in-person meeting the Tocagen Board met in consultation with Tocagen management and representatives of Cooley and Ladenburg. Of the 148 companies contacted by Ladenburg during the outreach process, 107 companies were contacted for a reverse merger (of these companies, 29 companies received a process letter, 15 companies executed confidentiality agreements, and 9 submitted a proposal) and 41 companies were contacted for a potential sale of the Company Assets (of these companies, 15 companies executed confidentiality agreements, 8 companies received a process letter, and 6 submitted a proposal). Ladenburg reviewed the proposals received to date, the application of the proposed selection criteria to each of the potential strategic partners and the proposed financial terms offered by each of the parties.

Of the six companies that submitted proposals for the Company Assets, Party B, Party F and Party G submitted proposals to purchase the RRV Platform Assets and Party A, Party H and Party I submitted proposals to purchase the RNV Platform Assets.

 

 

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Following the meeting, on November 21, 2019, Forte submitted a proposal to acquire Tocagen through a reverse merger.

On December 2, 2019, members of Tocagen management and representatives from Ladenburg met to review the various reverse merger proposals. Of the 10 proposals submitted to date, Tocagen’s management instructed Ladenburg to have 4 reverse merger parties present to the Tocagen Board in San Diego on December 11, 2019, including Forte, Party C, Party D and Party E.

On December 6, 2019, a Confidentiality Agreement was entered into between Tocagen and Forte, which included a customary standstill provision, which is still in effect, that contained a don’t ask, don’t waive clause but allowed Company Forte to privately and confidentially approach the Tocagen Board or senior management to make acquisition proposals during the standstill period.

On December 11, 2019, Forte, Party C, Party D and Party E presented to the Tocagen Board, Tocagen management and representatives of Ladenburg. Based on these presentations and other considerations arising from a review of the potential for a successful strategic transaction, including assessment based upon the Specified Criteria, the Tocagen Board concluded that, of the 4 companies that presented, it would enter into a further phase of diligence and discussion regarding a potential strategic transaction with two companies, Forte Biosciences and Party E, with Forte identified as the most desired candidate based on Forte’s product pipeline, proposed equity split, management team and ability to obtain financing. Next, the Tocagen Board discussed the potential sale of the Company Assets. After reviewing and discussing the proposals, and the fact that one of Party F’s potential affiliates was Mr. Harry Gruber, a board member of Tocagen, Mr. Gruber recused himself from discussions related to the sale of the Company Assets. The Tocagen Board then determined to move forward with Party A for the sale of the RNV Platform Assets and Party B for the sale of the RRV Platform Assets.

On December 12, 2019, Tocagen entered into a nonbinding term sheet with Party A for the sale of the RNV Platform Assets.

Also, on December 12, 2019, Ladenburg contacted Party E and Forte to inform them of their selection as the lead candidates and outlined for each company a list of key topics that would be the focus of near-term diligence efforts.

On December 13, 2019, based on diligence, including the presentation from Party E, the challenges to financing Party E and the proposed exchange ratio, at the direction of Tocagen’s management, Ladenburg sent a non-binding term sheet only to Forte. This term sheet proposed post-closing ownership split of 72.7% and 27.3% for Forte and Tocagen equityholders (on a treasury stock method basis), respectively, and proposed a concurrent financing of no less than $10.0 million to be dilutive proportionally to Forte and Tocagen. The term sheet also included the ability for Tocagen to sell the Company Assets and assumed an adjustment to the exchange ratio if Tocagen’s net cash was less than $4.0 million or more than $6.0 million.

Tocagen continued diligence discussions and term sheet negotiations with Forte from December 12, 2019 through December 19, 2019. Negotiations focused on valuations and the concurrent financing in the case of the Forte and projected cash balance and liabilities in the case of Tocagen.

On December 15, 2019, Party F sent an indication of interest to purchase the RRV Platform, proposing a 30 day exclusivity period with an option to extend for an additional 30 days.

On December 16, 2019, representatives of Forte sent a revised draft term sheet to Ladenburg, which proposed a post-closing ownership split of 76.2% and 23.8% for Forte and Tocagen equityholders, respectively, an adjustment to the exchange ratio if Tocagen’s net cash was less than $5.0 million or more than $7.5 million, a Tocagen net cash closing condition of $5.0 million and the acceleration or termination of all outstanding warrants to purchase Tocagen common stock and Tocagen options.

 

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On December 17, 2019, Tocagen granted Forte data room access.

On December 17 and 18, 2019, Tocagen and Forte exchanged further comments on the proposed term sheet and agreed to a post-closing ownership split of 72.7% and 27.3% for Forte and Tocagen equityholders, respectively, an adjustment to the exchange ratio if Tocagen’s net cash was less than $7.5 million or more than $10.0 million, a Tocagen net cash closing condition of $3.0 million and removed the requirement to accelerate or terminate the outstanding warrants to purchase Tocagen common stock and Tocagen options.

On December 19, 2019, at a special telephonic meeting, the Tocagen Board met in consultation with Tocagen management and representatives of Cooley and Ladenburg and discussed the proposed term sheet with Forte. In that meeting, the Tocagen Board approved the term sheet with Forte, which included a 30 day exclusivity period with an exception for the sale of the Company Assets. Later that day, the term sheet was executed by the Tocagen and Forte.

On December 19, 2019, Party G sent an indication of interest to purchase the RRV Platform, proposing a 45 day exclusivity period. Party G had previously entered into a confidentiality agreement with the Tocagen on January 4, 2018, which did not include a standstill.

Also, on December 19, 2019, Tocagen granted Party B data room access.

On December 20, 2019, Party B sent an indication of interest to purchase the RRV Platform, which did not include a request for exclusivity.

On December 20, 2019, the Strategic Transaction Committee held a meeting to discuss bids for the Company Assets. Tocagen received three bids for the RRV Assets from Party B, Party F and Party G. After reviewing and discussing the proposals, and the fact that one of Party F’s affiliate was Mr. Harry Gruber, a board member of Tocagen, the Strategic Transaction Committee approved Tocagen entering into a Term Sheet with Party B, having determined that the bid provided the most value to Tocagen’s stockholders and that Party B had the financial resources and ability to close a deal quickly.

On December 21, 2019, Tocagen let Party B know that their indication of interest had been accepted and that the parties should move forward to negotiate a definitive agreement.

From December 23, 2019 through December 31, 2019, representatives of Party B conducted due diligence primarily through phone calls with members of Tocagen Board and senior management.

On December 24, 2019, Cooley provided a draft merger agreement to Forte and its outside counsel, Wilson Sonsini Goodrich & Rosati, P.C. (“WSGR”).

On December 31, 2019, Party B notified Tocagen that it was not going forward with the transaction on the RRV Platform Assets because of their findings in due diligence.

On January 2, 2020, WSGR provided a revised draft of the merger agreement to Cooley. The draft included revisions including, among others, (a) removing Tocagen’s ability to terminate for a Superior Offer, (b) setting the Forte termination fee equal to $500,000 and the Tocagen termination fee equal to $1.0 million, (c) requiring that Tocagen pay all of Forte’s transaction expenses in the event the Tocagen Stockholder Matters are not approved at the Tocagen Stockholders’ Meeting (the “Expense Reimbursement”), and (d) providing Forte with the ability (i) to engage in discussions regarding an acquisition proposal if such proposal was unsolicited and necessary under Forte’s board’s fiduciary obligations and (ii) terminate the merger agreement in connection with a Forte board adverse change recommendation (collectively, the “Forte Fiduciary Outs”).

 

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On January 2, 2020, the Strategic Transaction Committee had a telephonic meeting and discussed Party B pulling out of the term sheet for the RRV Platform Assets and the potential conflicts of interest with Party F. After determining that, despite the potential conflict, Party F had the next best offer for the Company Assets based on the offer price and the Strategic Transaction Committee’s belief a deal could be consummated quickly, the Strategic Transaction Committee directed Ladenburg to restart dialogue with Party F. That same day, Ladenburg reached out to Party F through email informing them that Tocagen would be willing to pursue a transaction with Party F.

On January 6, 2020, representatives of Party F contacted Tocagen and, between January 6 and January 8, 2020, a term sheet on the RRV Platform Assets was negotiated. The primary items negotiated included the length of the exclusivity period and the exclusion of the RNV Platform Assets. The parties agreed to a 30 day exclusivity period with an automatic extension for an additional 30 days if the parties were negotiating in good faith.

On January 6, 2020, Cooley provided an initial draft of the Support and Lock-Up Agreements to WSGR.

On January 8, 2020 the term sheet with Party F for the RRV Platform Assets was executed (the “Party F Term Sheet”).

On January 9, 2020, at a special telephonic meeting, the Tocagen Board met in consultation with Tocagen management and representatives of Cooley and Ladenburg. Representatives of Ladenburg reviewed with the Tocagen Board the timeline for the completion of the Merger, and Tocagen management reviewed the current cash forecast through the projected date of the completion of the Merger. The Tocagen Board also approved a plan to further reduce its employee base, whereby all of Tocagen’s employees below the level of Vice President would be notified on January 16, 2020 that their employment would end on March 16, 2020.

On January 10, 2020, WSGR provided Cooley with a draft of the securities purchase agreement for the concurrent financing.

On January 10, 2020, Cooley provided a revised draft of the merger agreement to WSGR. The draft included revisions including, adding back Tocagen’s ability to terminate for a Superior Offer and removing the Expense Reimbursement and the Forte Fiduciary Outs.

On January 14, Cooley provided WSGR with a revised draft of the securities purchase agreement, revising certain conditions to closing to increase deal certainty.

On January 15, 2020, Martin Duvall, Tocagen’s Chief Executive Officer, Mark Foletta, Tocagen’s Executive Vice President, Chief Financial Officer, and Paul Wagner, Forte’s Chief Executive Officer met in San Francisco and discussed the transaction timeline, and the status of due diligence and the merger agreement. Mr. Wagner also updated the status of his investor meetings at the JP Morgan Healthcare Conference and the expected timing of executing the securities purchase agreement with certain investors. That same day, WSGR provided a revised draft of the merger agreement, which draft included revisions, including the Forte Fiduciary Outs.

On January 22, 2020, a telephonic meeting with representatives from Ladenburg, Mr. Duvall and Mr. Foletta and Mr. Wagner was held to discuss the status of Forte’s financing and expected timing of execution of the securities purchase agreement.

Later that same day, on January 22, 2020, the Strategic Transaction Committee had a telephonic meeting to discuss the status of the Merger, including delays in Forte obtaining a signed securities purchase agreement, an update of the sales of the Company Assets and a review of the updated cash forecast.

 

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On January 28 and 29, 2020 Mr. Duvall and Mr. Wagner exchanged multiple messages relating to the status of the Forte securities purchase agreements.

On January 30, 2020, Cooley provided a revised draft of the merger agreement to WSGR. The draft included revisions including, among others, adding back in Tocagen’s ability to terminate for a Superior Offer and increasing the Forte termination fee to $750,000 in such event, capping the Expense Reimbursement at 50% of such expenses not to exceed $250,000 and accepting the Forte Fiduciary Outs on the conditions that (a) the Forte form of support agreement would not contain a provision releasing the Forte stockholders from their obligations thereunder upon a Forte board adverse change in recommendation (the “Forte Stockholder Out”) and (b) increasing the Tocagen termination fee to $1.5 million upon a termination by Tocagen for certain Forte triggering events. That same day, WSGR provided a revised draft of the lockup agreement.

On February 3, 2020, Mr. Foletta and Mr. Wagner discussed the primary remaining issues in the merger agreement. These included the Forte Fiduciary Outs, break-up fees under different termination scenarios and the Expense Reimbursement.

That same day, WSGR provided a revised draft of the merger agreement to Cooley. The draft included revisions including, among others, increasing the Forte termination fee to $750,000 in all applicable events (not just upon as a result of a Superior Offer). WSGR also noted that Forte would require that the Forte Stockholder Out be included in the form of Forte Support Agreement.

On February 4, 2020, WSGR provided a revised draft of the form of Forte support agreement to Cooley. The draft included revisions including, among others, the inclusion of the Forte Stockholder Out requiring only 35% of the Forte common stock to be voted in favor of the Merger upon a Forte board adverse change in recommendation.

On February 7, 2020, exclusivity with Party F was extended 30 days under the terms of the Party F Term Sheet.

On February 11, 2020, Cooley provided a revised draft of the merger agreement to WSGR. The draft included revisions including, among others, reverting back to a $500,000 Forte termination fee for all applicable events other than a Superior Offer (which remained at $750,000) and increasing the Tocagen termination fee to $3.0 million upon a termination by Tocagen for Forte triggering events. Cooley and WSGR continued to exchange drafts of the merger agreement until February 19, 2020.

On February 12, 2020, at a special telephonic meeting, the Tocagen Board met in consultation with Tocagen management and representatives of Cooley and Ladenburg. The status and timeline was reviewed with the remaining open items, including Forte’s securities purchase agreement for its concurrent financing, the terms of the financing and the Board nominees from each of Forte and Tocagen. Representatives of Ladenburg then reviewed with the Tocagen Board Ladenburg’s analysis of the Exchange Ratio for the conversion of Forte capital stock into Tocagen common stock. A representative of Cooley reviewed the key terms of the proposed transaction between Tocagen and Forte, including: structure and timing considerations; the formula for determining the Exchange Ratio for the conversion of Forte capital stock into Tocagen common stock as well as the relative percentages of ownership of the existing Tocagen equityholders, on the one hand, and the Forte equityholders, on the other hand, following the completion of the proposed transaction; the planned concurrent financing of Forte; the closing conditions in the merger agreement as well as the securities purchase agreement for Forte’s planned concurrent financing; and the termination provisions and termination fees set forth in the merger agreement. Representatives from Cooley then reviewed with the Tocagen Board the fiduciary duties of the board members in the context of the proposed Transaction. During the various discussions, members of the Tocagen Board asked questions and discussed the terms and features of the proposed transaction, including provisions of the merger agreement and related documentation, as well as Tocagen’s cash forecast and ability to satisfy its obligations prior to the projected closing date in light of the net cash expectations contained in the merger agreement and its impact on the relative valuations.

 

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On February 16, 2020, WSGR provided a revised securities purchase agreement and form of warrant. WSGR and Cooley exchanged drafts on the Securities Purchase Agreement, warrant, support agreements and lockup agreements, finalizing each on February 19, 2020.

On February 19, 2020, at a special telephonic meeting, the Tocagen Board met in consultation with Tocagen management and representatives of Cooley and Ladenburg. The Tocagen Board was updated on Forte’s financing and was informed that Forte had secured approximately $14.0 million in financing. The Tocagen Board was informed that the investors had negotiated for 100% warrant coverage, with an exercise price equal to that price per share of Tocagen common stock (after the conversion of such warrants in the Merger) wherein Tocagen’s market value, after the Merger, would be $120 million. The warrants expire 30 days after the announcement of Forte’s phase 2 clinical trial data planned for 2021. A representative of Ladenburg reviewed the impact of the financing and then rendered Ladenburg’s oral opinion to the Tocagen Board, subsequently confirmed by delivery of a written opinion later that day, that subject to the assumptions, qualifications, limitations and other matters set forth therein, the Exchange Ratio was fair, from a financial point of view, to the Tocagen stockholders. After further discussion among the Tocagen Board, the board unanimously (i) determined that the Merger and the other transactions contemplated by the merger agreement were fair to, advisable and in the best interests of Tocagen and its stockholders, (ii) approved and declared advisable the merger agreement and the transactions contemplated thereby, including the authorization and issuance of shares of Tocagen common stock to the stockholders of Forte pursuant to the terms of the merger agreement, the change of control of Tocagen, and other actions contemplated by the merger agreement, and (iii) determined to recommend, upon the terms and subject to the conditions set forth in the merger agreement, that the Tocagen stockholders vote to approve the Closing Tocagen Stockholder Matters.

The Merger Agreement, Securities Purchase Agreement, Support Agreements and lockup agreements were signed later that day and a press release was issued after market close.

On March 8, 2020, exclusivity with Party F ended without the parties being able to reach an agreement on terms and Tocagen began outreach to additional parties on March 9, 2020 with respect to the RRV Asset Platform.

Structure

Under the Merger Agreement, Merger Sub, a wholly owned subsidiary of Tocagen formed in connection with the Merger, will merge with and into Forte, with Forte surviving as a wholly owned subsidiary of Tocagen. Substantially concurrent with the completion of the Merger, Tocagen will be renamed “Forte Biosciences, Inc.” and expects to trade on Nasdaq under the symbol “FBRX.”

Tocagen Reasons for the Merger

At a meeting held on February 19, 2020, among other things, the Tocagen Board unanimously (i) determined that the Contemplated Transactions are fair to, advisable and in the best interests of Tocagen and its stockholders, (ii) approved and declared advisable the Merger Agreement and the Contemplated Transactions, including the authorization and issuance of shares of Tocagen Common Stock to the stockholders of Forte pursuant to the terms of the Merger Agreement, the change of control of Tocagen, and other actions contemplated by the Merger Agreement and (iii) determined to recommend, upon the terms and subject to the conditions set forth in the Merger Agreement, that the stockholders of Tocagen vote to approve the Tocagen Stockholder Matters.

 

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The Tocagen Board considered the following reasons in reaching its conclusion to approve the Merger Agreement and the Merger, all of which the Tocagen Board viewed as supporting its decision to approve the business combination with Forte:

 

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the Tocagen Board and its financial advisor undertook a comprehensive and thorough process of reviewing and analyzing potential strategic transactions, including the sale of existing assets and reverse mergers to identify the opportunity that would, in the Tocagen Board’s opinion, create the most value for Tocagen’s stockholders.

 

•

the Tocagen Board believes that, as a result of arm’s length negotiations with Forte, Tocagen and its representatives negotiated the most favorable Exchange Ratio for Tocagen shareholders that Forte was willing to agree to, and that the terms of the Merger Agreement include the most favorable terms to Tocagen in the aggregate to which Forte was willing to agree.

 

•

the Tocagen Board believes, after a thorough review of strategic alternatives and discussions with Tocagen senior management, financial advisors and legal counsel, that the Merger is more favorable to Tocagen’s stockholders than the potential value that might have resulted from other strategic options available to Tocagen, including a liquidation of Tocagen and the distribution of any available cash.

 

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the Tocagen Board believes, based in part on a scientific diligence and analysis process conducted over several weeks by Tocagen’s management and reviewed with the Tocagen Board, that with respect to Forte’s product pipeline and the potential market opportunity for Forte’s products, that Forte’s product candidates represent a sizeable potential market opportunity, and may thereby create value for the stockholders of the combined organization and an opportunity for Tocagen’s stockholders to participate in the potential growth of the combined organization.

 

•

the Tocagen Board also reviewed with the management of Tocagen the current plans of Forte for developing FB-401 for treatment of atopic dermatitis to confirm the likelihood that the combined company would possess sufficient financial resources to allow the management team to focus on the continued development and anticipated commercialization of FB-401. The Tocagen Board also considered the possibility that the combined company would be able to take advantage of the potential benefits resulting from the combination of Tocagen’s public company structure with Forte’s business to raise additional funds in the future, if necessary.

 

•

the Tocagen Board also considered the strength of the balance sheet of the combined company, which includes the cash that Forte currently holds, plus the gross proceeds from the Pre-Closing Financing of at least $14.0 million, in addition to the cash that Tocagen is expected to have in connection with the consummation of the Merger.

 

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the Tocagen Board also considered that the combined company will be led by an experienced industry chief executive and a board of directors with representation from the current boards of directors of Tocagen and Forte.

 

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the Tocagen Board considered Ladenburg’s presentation and its opinion to the Tocagen Board as to the fairness, from a financial point of view, to Tocagen of the Exchange Ratio, as more fully described below under the caption “The Merger—Opinion of the Tocagen Financial Advisor.”

The Tocagen Board also reviewed various reasons impacting the financial condition, results of operations and prospects of Tocagen, including:

 

•

The Tocagen Board and Ladenburg have undertaken a comprehensive and thorough process of reviewing and analyzing the potential merger transaction as well as reaching out to candidates for a variety of strategic transactions to identify the opportunity that would, in the Tocagen Board’s opinion, create the most value for its stockholders;

 

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•

The Tocagen Board believes that, as a result of arm’s length negotiations with Forte, Tocagen and its representatives negotiated the most favorable exchange ratio that Forte was willing to agree to, and that the terms of the Merger Agreement include the most favorable terms to Tocagen in the aggregate to which Forte was willing to agree;

 

•

The Tocagen Board believes, after a thorough review of strategic alternatives and Tocagen’s discussions with its financial advisors and legal counsel, as well as Tocagen management’s discussions with Forte’s senior management, that, compared to the Merger, no alternatives or other strategic options that may have been available to Tocagen, including remaining a standalone public company, were reasonably likely to create greater value for Tocagen’s stockholders;

 

•

the consequences of Tocagen’s Phase 3 clinical trial of Toca 511 & Toca FC failing to meet its primary or secondary endpoints and the likelihood that Tocagen’s prospects as a stand-alone company were unlikely to change for the benefit of Tocagen’s stockholders in the foreseeable future;

 

•

the risks associated with the need to obtain substantial amounts of financing to continue its operations and to continue the development of its gene therapy programs if Tocagen were to remain an independent company;

 

•

the risks and delays associated with, and uncertain value and costs to Tocagen’s stockholders of, liquidating Tocagen, including, without limitation, the uncertainties of continuing cash burn while contingent liabilities are resolved and uncertainty of timing of release of cash until contingent liabilities are resolved;

 

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The fact that the liquidation of the Tocagen would result in a payment of between $0.14 and $0.36 per share of Tocagen Common Stock, representing between $0.23 and $0.30 less per share than the value of the Exchange Ratio on a per share basis; and

 

•

Tocagen’s potential inability to maintain its listing on Nasdaq without completing the Merger.

The Tocagen Board also reviewed the terms and conditions of the Merger Agreement and related transactions, as well as the safeguards and protective provisions included therein intended to mitigate risks, including:

 

•

the initial estimated Exchange Ratio used to establish the number of shares of Tocagen Common Stock to be issued to Forte’s stockholders in the Merger was determined based on the relative valuations of Tocagen and Forte, and thus the relative percentage ownership of Tocagen’s stockholders and Forte’s stockholders immediately following the completion of the Merger is subject to change based on the amount of Tocagen Net Cash;

 

•

the limited number and nature of the conditions to Forte’s obligation to consummate the Merger and the limited risk of non-satisfaction of such conditions as well as the likelihood that the Merger will be consummated on a timely basis;

 

•

the respective rights of, and limitations on, Tocagen and Forte under the Merger Agreement to consider certain unsolicited Acquisition Proposals under certain circumstances should Tocagen or Forte receive a superior offer;

 

•

the reasonableness of the potential termination fee (i) of up to $750,000 and related reimbursement of up to 50% of certain transaction expenses capped at $250,000, which could become payable by Tocagen if the Merger Agreement is terminated in certain circumstances and (ii) of up to $3.0 million, which could become payable by Forte if the Merger Agreement is terminated in certain circumstances;

 

•

the support agreements, pursuant to which certain directors, officers and stockholders of Tocagen and Forte have agreed, solely in their capacity as stockholders of Tocagen and Forte, respectively, to vote all of their shares of Tocagen Common Stock or Forte Capital Stock in favor of the approval or adoption, respectively, of the Merger Agreement;

 

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•

the agreement of Forte to provide the written consent of Forte stockholders necessary to adopt the Merger Agreement thereby approving the Merger and related transactions within three business days of this Registration Statement becoming effective;

 

•

the belief that the terms of the Merger Agreement, including the parties’ representations, warranties and covenants, and the conditions to their respective obligations, are reasonable under the circumstances; and

 

•

Tocagen’s right to sell assets related to Toca 511, Toca Fc, the RRV platform, cell lines, reagents and assays, in Vivo Car-T Technology and immortal MSC technology, subject to certain limitations and include cash proceeds as part of the Tocagen Net Cash calculation.

In the course of its deliberations, the Tocagen Board also considered a variety of risks and other countervailing factors related to entering into the Merger, including:

 

•

(i) the $500,000 termination fee payable by Tocagen to Forte upon the occurrence of certain events, (ii) the $750,000 termination fee payable by Tocagen to Forte in the event of a termination by Tocagen in connection with entering into a definitive agreement in connection with a superior offer, (iii) up to $250,000 in expense reimbursement payable by Tocagen to Forte in the event of a termination by Forte in connection with the Tocagen Stockholder Matters not being approved at the Tocagen special meeting, and (iv) the potential effect of the fees describe in clauses (i) – (iii) in deterring other potential acquirers from proposing an alternative transaction that may be more advantageous to Tocagen’s stockholders;

 

•

the substantial expenses to be incurred in connection with the Merger, including the costs associated with any related litigation;

 

•

the possible volatility, at least in the short term, of the trading price of Tocagen Common Stock resulting from the announcement of the Merger;

 

•

the risk that the Merger might not be consummated in a timely manner or at all and the potential adverse effect of the public announcement of the Merger or delay or failure to complete the Merger on the reputation of Tocagen;

 

•

the likely detrimental effect on Tocagen’s cash position, stock price and ability to initiate another process and to successfully complete an alternative transaction should the Merger not be completed;

 

•

the risk to Tocagen’s business, operations and financial results in the event that the Merger is not consummated, including the diminution of Tocagen’s cash and the significant challenges associated with the need to raise additional capital through the public or private sale of equity securities;

 

•

the likelihood of disruptive stockholder litigation following announcement of the Merger;

 

•

the early-stage clinical data of Forte’s product candidates, which, in the future, may not be successfully developed into products that are marketed and sold;

 

•

the strategic direction of the combined company following the completion of the Merger, which will be determined by a board of directors initially comprised of a majority of the directors designated by Forte; and

 

•

various other risks associated with the combined organization and the Merger, including those described in the section titled “Risk Factors” beginning on page 24 of this proxy statement/prospectus/information statement.

The foregoing information and factors considered by the Tocagen Board are not intended to be exhaustive but are believed to include all of the material factors considered by the Tocagen Board. In view of the wide variety of reasons considered in connection with its evaluation of the Merger and the complexity of these matters, the Tocagen Board did not find it useful to attempt, and did not attempt, to quantify, rank or otherwise assign

 

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relative weights to these reasons. In considering the reasons described above, individual members of the Tocagen Board may have given different weight to different reasons. The Tocagen Board conducted an overall analysis of the factors described above, including thorough discussions with, and questioning of, Tocagen’s management team, the legal and financial advisors of Tocagen, and considered the reasons overall to be favorable to, and to support, its determination.

Forte Reasons for the Merger

In the course of reaching its decision to approve the Merger, the Forte Board consulted with its senior management, financial advisors and legal counsel, reviewed a significant amount of information and considered numerous reasons, including, among others:

 

•

Forte’s need for capital to support the clinical development of its product candidates and the potential to access public market capital, including sources of capital from a broader range of investors than it could otherwise obtain if it continued to operate as a privately-held company;

 

•

the expectation that the Merger would be a more time- and cost-effective means to access capital than other options considered;

 

•

the potential to provide its current stockholders with greater liquidity by owning stock in a public company;

 

•

the fact that shares of Tocagen Common Stock issued to Forte stockholders will be registered pursuant to a registration statement on Form S-4 by Tocagen and will become freely tradable by Forte’s stockholders who are not affiliates of Forte and who are not parties to lock-up agreements;

 

•

the likelihood that the Merger will be consummated on a timely basis;

 

•

the terms and conditions of the Merger Agreement, including, without limitation, the following:

 

•

the determination that the Exchange Ratio (subject to adjustment based upon the proceeds from the Pre-Closing Financing and Tocagen Net Cash) that is not subject to adjustment based on trading prices is appropriate to reflect the expected relative percentage ownership of Tocagen’s stockholders and Forte’s stockholders (including the Forte stockholders purchasing shares sold in the Pre-Closing Financing) based on the judgment of the Forte Board;

 

•

the expectation that the Merger will qualify as a transaction described under Section 368(a) of the Code for U.S. federal income tax purposes, with the result that Forte’s stockholders will generally not recognize taxable gain or loss for U.S. federal income tax purposes upon the exchange of Forte Common Stock for Tocagen Common Stock pursuant to the Merger;

 

•

the rights of Forte under the Merger Agreement to consider certain unsolicited competing proposals under certain circumstances should Forte receive a Superior Proposal; and

 

•

the conclusion of the Forte Board that the potential termination fee of $500,000, or $750,000 under certain circumstances, and/or expense reimbursements of up to $250,000, payable by Tocagen to Forte and the circumstances when such fee may be payable, were reasonable.

The Forte Board also considered a number of uncertainties and risks in its deliberations concerning the Merger and the Contemplated Transactions, including the following:

 

•

the risk that the Merger might not be completed in a timely manner, or at all, and the potential adverse effect of the public announcement of the Merger or delay or failure to complete the Merger on the reputation of Forte and the ability of Forte to obtain financing in the future;

 

•

the termination fee of $1.0 million, or $3.0 million under certain circumstances, payable by Forte to Tocagen upon the occurrence of certain events, and the potential effect of such termination fee in deterring other potential acquirers from proposing a competing transaction that may be more advantageous to Forte’s stockholders;

 

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•

the expenses to be incurred in connection with the Merger and related administrative challenges associated with combining the companies;

 

•

the additional public company expenses and obligations that Forte’s business will be subject to following the Merger to which it has not previously been subject; and

 

•

various other risks associated with the company and the Merger, including the risks described in the section entitled “Risk Factors” beginning on page 24 of this proxy statement/prospectus/information statement.

The foregoing information and factors considered by the Forte Board are not intended to be exhaustive but are believed to include all of the material factors considered by the Forte Board. In view of the wide variety of reasons considered in connection with its evaluation of the Merger and the complexity of these matters, the Forte Board did not find it useful, and did not attempt, to quantify, rank or otherwise assign relative weights to these reasons. In considering the reasons described above, individual members of the Forte Board may have given different weight to different reasons. The Forte Board conducted an overall analysis of the reasons described above, including thorough discussions with, and questioning of, Forte’s management and Forte’s legal advisors, and considered the reasons overall to be favorable to, and to support, its determination.

Tocagen’s Unaudited Financial Projections Regarding Forte

As a matter of course, Tocagen does not publicly disclose long-term projections of future financial results due to the inherent unpredictability and subjectivity of underlying assumptions and estimates. However, in connection with the Tocagen Board’s evaluation of the Merger, preliminary internal financial projections for Forte were prepared by the management of Forte and provided to the management of Tocagen, and then adjusted by the management of Tocagen (such adjusted projections, the “Tocagen-prepared Forte financial projections”) solely for use by Ladenburg in connection with the rendering of its fairness opinion and performing its related financial analyses, as described below under “The Merger—Opinion of the Tocagen Financial Advisor.” A summary of the Tocagen-prepared Forte financial projections is set forth below.

The inclusion of the Tocagen-prepared Forte financial projections should not be deemed an admission or representation by Tocagen, Ladenburg, Forte or any of their respective officers, directors, affiliates, advisors, or other representatives with respect to such Tocagen-prepared Forte financial projections. The Tocagen-prepared Forte financial projections are not included to influence your views on the Merger and are summarized in this proxy statement/prospectus/information statement solely to provide stockholders access to certain non-public information considered by the Tocagen Board in connection with its evaluation of the Merger and provided to Tocagen’s financial advisor, Ladenburg, to assist with its financial analyses as described in the section titled “The Merger—Opinion of the Tocagen Financial Advisor.” The information from the Tocagen-prepared Forte financial projections should be evaluated, if at all, in conjunction with the historical financial statements and other information regarding Tocagen and Forte in this proxy statement/prospectus/information statement.

The Tocagen-prepared Forte financial projections were not prepared with a view toward public disclosure, nor were they prepared with a view toward compliance with published guidelines of the SEC, the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information, or GAAP. Neither the independent registered public accounting firm of Tocagen nor Forte nor any other independent accountant has audited, reviewed, compiled, examined or performed any procedures with respect to the accompanying unaudited prospective financial information for the purpose of its inclusion herein, and accordingly, neither the independent registered public accounting firm of Tocagen nor Forte nor any other independent accountant expresses an opinion or provides any form of assurance with respect thereto for the purpose of this proxy statement/prospectus/information statement. Tocagen-prepared Forte financial projections include unlevered free cash flow, which is a non-GAAP financial measure.

 

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The financial projections prepared by Forte and supplied to Tocagen were prepared solely for internal use as part of Forte’s ongoing strategic planning processes and are subjective in many respects. As a result, the Tocagen-prepared Forte financial projections, after being revised by Tocagen, are susceptible to multiple interpretations and periodic revisions based on actual experience and business developments. Although Forte and Tocagen believe their respective assumptions to be reasonable, all financial projections are inherently uncertain, and Forte and Tocagen expect that differences will exist between actual and projected results. Although presented with numerical specificity, the Tocagen-prepared Forte financial projections reflect numerous variables, estimates, and assumptions made by Forte’s and Tocagen’s respective management at the time such projections were prepared by Forte and adjusted by Tocagen, and also reflect general business, economic, market, and financial conditions and other matters, all of which are difficult to predict and many of which are beyond Forte’s and Tocagen’s control. In addition, the Tocagen-prepared Forte financial projections cover multiple years, and this information by its nature becomes subject to greater uncertainty with each successive year. Accordingly, there can be no assurance that the estimates and assumptions made in preparing the Tocagen-prepared Forte financial projections will prove accurate or that any of the Tocagen-prepared Forte financial projections will be realized.

The Tocagen-prepared Forte financial projections included certain assumptions relating to, among others things, Forte’s and Tocagen’s respective expectations, which may not prove to be accurate, relating to the business, earnings, cash flow, assets, liabilities and prospects of Forte.

The Tocagen-prepared Forte financial projections assume, among other things, (i) that FB-401 will only be available to the United States market, (ii) that FB-401 will launch in 2024 for atopic dermatitis for mild and moderate cases, (iii) stock based compensation is excluded from the discounted cash flow analysis and (iv) a 32.5% probability of success in the years 2022 to 2031 based on FB-401’s clinical phase of development.

The Tocagen-prepared Forte financial projections are subject to many risks and uncertainties and you are urged to review the section titled “Risk Factors” beginning on page 24 of this proxy statement/prospectus/information statement for a description of risk factors relating to the Merger and Forte’s business. You should also read the section titled “Cautionary Note Concerning Forward-Looking Statements” beginning on page 98 of this proxy statement/prospectus/information statement for additional information regarding the risks inherent in forward-looking information such as the Tocagen-prepared Forte financial projections.

The inclusion of the Tocagen-prepared Forte financial projections herein should not be regarded as an indication that Forte, Tocagen, Ladenburg or any of their respective affiliates or representatives considered or consider the Tocagen-prepared Forte financial projections to be necessarily indicative of actual future events, and the Tocagen-prepared Forte financial projections should not be relied upon as such. The Tocagen-prepared Forte financial projections do not take into account any circumstances or events occurring after the date they were prepared. Tocagen and the combined company do not intend to, and disclaim any obligation to, update, correct, or otherwise revise the Tocagen-prepared Forte financial projections to reflect circumstances existing or arising after the date the Tocagen-prepared Forte financial projections were generated or to reflect the occurrence of future events, even in the event that any or all of the assumptions or other information underlying the Tocagen-prepared Forte financial projections are shown to be in error. Furthermore, the Tocagen-prepared Forte financial projections do not take into account the effect of any failure of the Merger to be consummated and should not be viewed as accurate or continuing in that context.

In light of the foregoing factors and the uncertainties inherent in financial projections, stockholders are cautioned not to place undue reliance, if any, on the Tocagen-prepared Forte financial projections.

 

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The following table, which is subject to the financial projection statements above, presents a selected summary of the Tocagen-prepared Forte financial projections that were made available to Ladenburg and the Tocagen Board.

 

Years		2020				2021				2022				2023				2024				2025				2026				2027				2028				2029				2030				2031
Revenue			—				—				—				—			$	65.1			$	203.7			$	389.7			$	606.2			$	821.8			$	948.4			$	1,064.5			$	1,196.9
Net Cash Flows from Operations		($	11.7	)		($	5.2	)		($	14.4	)		($	62.5	)		($	24.2	)		$	46.4			$	177.5			$	387.1			$	547.5			$	644.1			$	710.9			$	830.9
Unlevered Free Cash Flow		($	11.7	)		($	5.2	)		($	14.4	)		($	62.5	)		($	24.2	)		$	33.4			$	127.8			$	278.7			$	394.2			$	463.7			$	511.9			$	598.3
Risk Adjusted Unlevered Free Cash Flow		($	11.7	)		($	5.2	)		($	4.7	)		($	20.3	)		($	7.9	)		$	10.8			$	41.5			$	90.6			$	128.1			$	150.7			$	166.4			$	194.4

Opinion of the Tocagen Financial Advisor

As stated above, pursuant to an engagement letter dated October 24, 2019, Tocagen retained Ladenburg to act as a financial advisor in connection with the Merger and to render the Opinion to the Tocagen Board as to the fairness of the Exchange Ratio, from a financial point of view, to the stockholders of Tocagen. On February 19, 2020, at the request of the Tocagen Board, Ladenburg rendered the oral opinion, subsequently confirmed by delivery of the written opinion dated February 19, 2020, to the Tocagen Board, that the Exchange Ratio was fair, from a financial point of view, to the stockholders of Tocagen as of the date of such Opinion and based upon the various assumptions, qualifications and limitations set forth therein.

The full text of the Opinion is attached as Annex B to this proxy statement/prospectus/information statement and is incorporated by reference. Tocagen encourages its stockholders to read the Opinion in its entirety for the assumptions made, procedures followed, other matters considered and limits of the review by Ladenburg. The summary of the Opinion set forth herein is qualified by reference to the full text of the Opinion. Ladenburg provided its Opinion for the sole benefit and use by the Tocagen Board in its consideration of the Merger. The Opinion is not a recommendation to the Tocagen Board or to any stockholder as to how to vote with respect to the proposed Merger or to take any other action in connection with the Merger or otherwise.

In connection with the Opinion, Ladenburg took into account an assessment of general economic, market and financial conditions as well as its experience in connection with similar transactions and securities valuations generally and, among other things:

 

•

Reviewed a draft dated February 19, 2020 of the Merger Agreement, which was the most recent draft made available to Ladenburg prior to the delivery of the Opinion;

 

•

Reviewed and analyzed certain publicly available financial and other information for each of Tocagen and Forte, respectively, including equity research on comparable companies and on Tocagen, and certain other relevant financial and operating data furnished to Ladenburg by the management of Tocagen, including information Tocagen obtained from Forte;

 

•

Reviewed and analyzed certain relevant historical financial and operating data concerning Forte furnished to Ladenburg by the management of Tocagen, which Tocagen obtained from Forte;

 

•

Discussed with certain members of the management of Tocagen the historical and current business operations, financial condition and prospects of Tocagen and Forte;

 

•

Reviewed and analyzed certain operating results of Forte as compared to operating results and the reported price and trading histories of certain publicly traded companies that Ladenburg deemed relevant;

 

•

Reviewed and analyzed certain internal financial analyses, projections as to cost and expenses, reports, preliminary internal market opportunity assumptions and other information concerning Forte prepared by the management of Forte as well as projections for Forte prepared and adjusted by the management of Tocagen which was then provided to us and utilized by us upon instruction of Tocagen;

 

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•

Reviewed and analyzed certain financial terms of the Merger Agreement as compared to the publicly available financial terms of certain selected business combinations that Ladenburg deemed relevant;

 

•

Reviewed and analyzed certain financial terms of completed initial public offerings for certain companies that we deemed relevant;

 

•

Reviewed certain pro forma financial effects of the Merger;

 

•

Reviewed and analyzed such other information and other factors, and conducted such other financial studies, analyses and investigations as Ladenburg deemed relevant for the purposes of the Opinion; and

 

•

Took into account Ladenburg’s experience in other transactions, as well as its experience in securities valuations and general knowledge of the industry in which Forte operates.

In conducting Ladenburg’s review and arriving at Ladenburg’s Opinion, Ladenburg has, with Tocagen’s consent, assumed and relied, without independent investigation, upon the accuracy and completeness of all financial and other information provided to Ladenburg by Tocagen and Forte, respectively, or which is publicly available or was otherwise reviewed by Ladenburg. Ladenburg has not undertaken any responsibility for the accuracy, completeness or reasonableness of, or independent verification of, such information. Ladenburg has relied upon, without independent verifications, the assessment of Tocagen management and Forte management as to the viability of, and risks associated with, the current and future products and services of Forte (including without limitation, the development, testing and marketing of such products and services, the receipt of all necessary governmental and other regulatory approvals for the development, testing and marketing thereof, and the life and enforceability of all relevant patents and other intellectual and other property rights associated with such products and services). In addition, Ladenburg has not conducted, nor have assumed any obligation to conduct, any physical inspection of the properties or facilities of Tocagen or Forte. Ladenburg has been instructed by Tocagen, and has assumed, with Tocagen’s consent, that Tocagen Net Cash at the closing of the Merger will be $7.5 million, assuming the disposition of the Company Assets. Furthermore, Tocagen has assumed, with Tocagen’s consent, that there will be no further adjustments to the Exchange Ratio between the date hereof and the date the final Exchange Ratio is determined, unless the Tocagen Net Cash at the closing of the Merger is less than $7.5 million or greater than $10.0 million. Ladenburg has further been advised that Tocagen may sell certain legacy Tocagen assets, technology and intellectual property (the “Legacy Assets”). It is understood that the net cash proceeds received by, or due to, Tocagen within 90 days of the closing of the Merger in any such sale or license of the Legacy Assets entered into prior to the closing of the Merger, would be added to Tocagen Net Cash. Ladenburg has therefore assumed that the only value attributed to Tocagen will be its net cash and the value of its Nasdaq listing. With respect to the financial forecasts supplied to Ladenburg by Tocagen regarding Forte, Ladenburg has, with Tocagen’s consent, assumed that the financial forecasts were reasonably prepared on the basis reflecting the best currently available estimates and judgments of the management of Tocagen and Forte, as applicable, as to the future operating and financial performance of Forte and that the financial forecasts provided a reasonable basis upon which Ladenburg could form its Opinion.

Ladenburg expressly disclaimed any undertaking or obligation to advise any person of any change in any fact or matter affecting Ladenburg’s Opinion of which Ladenburg has become aware after the date of its Opinion. Ladenburg assumed there were no material changes in the assets, liabilities, financial condition, results of operations, business or prospects of Tocagen or Forte since the date of the last financial statements made available to Tocagen. Ladenburg did not make or obtain any independent evaluations, valuations or appraisals of the assets or liabilities of Tocagen or Forte, nor was Ladenburg furnished with such materials. In addition, Ladenburg did not evaluate the solvency or fair value of Tocagen or Forte under any state or federal laws relating to bankruptcy, insolvency or similar matters. Ladenburg’s Opinion does not address any legal, tax or accounting matters related to the Merger Agreement or the Merger, as to which Ladenburg has assumed that Tocagen and the Tocagen Board have received such advice from legal, tax and accounting advisors as each has determined appropriate. Ladenburg’s Opinion addresses only the fairness of the Exchange Ratio, from a financial point of view, to the stockholders of Tocagen. Ladenburg expresses no view as to any other aspect or implication of the Merger or any other agreement, arrangement or understanding entered into in connection with the Merger or

 

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otherwise, and Ladenburg expressed no opinion as to the terms of the Pre-Closing Financing. Ladenburg’s Opinion is necessarily based upon economic and market conditions and other circumstances as they existed and could be evaluated by Ladenburg on the date of its Opinion. It should be understood that although subsequent developments may affect Ladenburg’s Opinion, Ladenburg does not have any obligation to update, revise or reaffirm its Opinion and Ladenburg expressly disclaims any responsibility to do so.

Ladenburg did not consider any potential legislative or regulatory changes currently being considered or recently enacted by the United States or any foreign government, or any domestic or foreign regulatory body, or any changes in accounting methods or generally accepted accounting principles that may be adopted by the SEC, the Financial Accounting Standards Board, or any similar foreign regulatory body or board.

For purposes of rendering the Opinion, Ladenburg assumed in all respects material to Ladenburg’s analysis, that the representations and warranties of each party contained in the Merger Agreement were true and correct, that each party will perform all of the standards of the covenants and agreements required to be performed by it under the Merger Agreement and that all conditions to the consummation of the Merger will be satisfied without waiver thereof. Ladenburg assumed that the final form of the Merger Agreement was substantially similar to the last draft reviewed by Ladenburg. Ladenburg also assumed that all governmental, regulatory and other consents and approvals contemplated by the Merger Agreement will be obtained and that in the course of obtaining any of those consents no restrictions will be imposed or waivers made that would have an adverse effect on the contemplated benefits of the Merger. Ladenburg assumed that the Merger will be consummated in a manner that complies with the applicable provisions of the Securities Act, the Exchange Act and all other applicable federal and state statutes, rules and regulations. Tocagen informed Ladenburg, and Ladenburg assumed, that the Merger will be treated as a tax-free reorganization within the meaning of 368(a) of the Code.

It is understood that the Ladenburg Opinion is intended for the benefit and use of the Tocagen Board in its consideration of the financial terms of the Merger (except as set forth in the engagement letter (as described below)). Ladenburg’s Opinion does not constitute a recommendation to the Tocagen Board on whether or not to approve the Merger or to any stockholder or any other person as to how to vote with respect to the Merger or to take any other action in connection with the Merger or otherwise. The Opinion does not address the Company’s underlying business decision to proceed with the Merger or the relative merits of the Merger compared to other alternatives available to the Company. Ladenburg expresses no opinion as to the prices or ranges of prices at which shares of securities of any person, including Tocagen, will trade at any time, including following the announcement or consummation of the Merger. Ladenburg has not been requested to opine as to, and the Opinion does not in any manner address, the amount or nature of compensation to any of the officers, directors or employees of any party to the Merger, or any class of such persons, relative to the compensation to be paid to the holders of Tocagen Common Stock in connection with the Merger or with respect to the fairness of any such compensation.

The issuance of the Opinion was approved by a fairness opinion committee of Ladenburg. The Opinion may not be published or otherwise used or referred to, nor shall any public reference to Ladenburg be made, without Ladenburg’s prior written consent.

Principal Financial Analyses

The following is a summary of the principal financial analyses performed by Ladenburg to arrive at its Opinion. Some of the summaries of financial analyses include information presented in tabular format. In order to fully understand the financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data set forth in the tables without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of the financial analyses. Ladenburg performed certain procedures, including each of the financial analyses described below and reviewed with the Tocagen Board the assumptions on which such analyses were based and other factors, including the historical and projected financial results of Tocagen and Forte.

 

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Transaction Overview as of the Date of the Opinion

Based upon the Exchange Ratio of 1.7514 at the time of the signing of the Merger Agreement, it was estimated that at the closing: (a) Forte equity holders as of immediately prior to the Merger (including the shares issued in the approximately $14 million Pre-Closing Financing) will own approximately 74.5% of the Fully Diluted Closing Tocagen Common Stock, and (b) the Tocagen equity holders as of immediately prior to the Merger (excluding for this purpose certain out-of-the-money Tocagen options) will own approximately 25.5% of the Fully Diluted Closing Tocagen Common Stock, in each case, subject to adjustment of the Exchange Ratio as set forth in the Merger Agreement and described herein.

Implied Equity Value

Ladenburg estimated an implied equity value for Forte of approximately $44 million, which was calculated by multiplying 40,700,140 (the shares of Forte outstanding including the shares issued in the Pre-Closing Financing) by $1.0783 (the implied price per share of Forte Common Stock). These combined shares represent the assumed Forte shares as of the signing of the Merger Agreement (on a fully-diluted, as-converted treasury stock method basis and after giving effect to the Pre-Closing Financing).

Implied Total Enterprise Value

For purposes of the Opinion, Ladenburg calculated an implied total enterprise value for Forte of $30.0 million by subtracting an assumed Forte net cash balance of approximately $14 million (to be raised in the Pre-Closing Financing) from the implied equity value of approximately $44 million, which was based on Forte’s projected indebtedness, cash and cash equivalents at closing.

Analysis of Selected Initial Public Offering Transactions

Ladenburg reviewed certain publicly available information for the IPOs of 11 dermatology focused biopharmaceutical companies which have completed an IPO since January 2014 and whose lead product at the time of IPO was in pre-clinical through Phase 2 stage of clinical development. Although the companies referred to below were used for comparison purposes, none of these companies are directly comparable to Forte. Accordingly, an analysis of the results of such a comparison is not purely mathematical, but instead involves complex considerations and judgments concerning differences in historical and projected financial and operating characteristics of the selected companies below. These companies, which are referred to as the “Selected Precedent IPO Companies,” were:

 

•

Aclaris Therapeutics, Inc.

 

•

Anaptys Bio, Inc.

 

•

Cara Therapeutics, Inc.

 

•

Dermira, Inc.

 

•

Evelo Biosciences, Inc.

 

•

Foamix Pharmaceuticals Ltd.

 

•

Hoth Therapeutics, Inc.

 

•

Kiniksa Pharmaceuticals, Ltd.

 

•

Krystal Biotech, Inc.

 

•

Menlo Therapeutics Inc.

 

•

Sienna Biopharmaceuticals, Inc.

 

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The total enterprise value at IPO is defined as the pre-money equity value plus indebtedness, liquidation value of preferred stock and non-controlling interest, minus cash and cash equivalents at the time of its IPO. The Selected Precedent IPO Companies had total enterprise values between $45 million and $498 million. Ladenburg derived a median total enterprise value of $168 million for the Selected Precedent IPO Companies. Using the 25th percentile and the 75th percentile of the implied total enterprise values, Ladenburg then calculated a range of implied total equity values for Forte (by adding an estimated $13.9 million in cash at closing), which was $111.3 million to $199.0 million. This compares to Forte’s implied equity value as per the Merger Agreement of approximately $43.9 million.

Selected Precedent IPO Companies

 

First Trade Date		Issuer		Enterprise Value ($M)
2/15/2019		Hoth Therapeutics, Inc.			$45.0
5/23/2018		Kiniksa Pharmaceuticals, Ltd.			498.2
5/8/2018		Evelo Biosciences, Inc.			315.2
1/24/2018		Menlo Therapeutics Inc.			180.2
9/19/2017		Krystal Biotech, Inc.			45.3
7/26/2017		Sienna Biopharmaceuticals, Inc.			189.9
1/25/2017		AnaptysBio, Inc.			168.6
10/6/2015		Aclaris Therapeutics, Inc.			116.6
10/2/2014		Dermira, Inc.			127.5
9/17/2014		Foamix Pharmaceuticals Ltd.			78.2
1/30/2014		Cara Therapeutics, Inc.			167.5

Analysis of Selected Publicly Traded Companies

Ladenburg reviewed selected financial data of six publicly traded companies in the biopharmaceutical industry which had a lead candidate in pre-clinical through Phase 2 stage of clinical development and focused on the dermatology space (the “Selected Publicly Traded Companies”). Although the companies referred to below were used for comparison purposes, none of those companies is directly comparable to Forte. Accordingly, an analysis of the results of such a comparison is not purely mathematical but instead involves complex considerations and judgments concerning differences in historical and projected financial and operating characteristics of the selected companies below. The total enterprise values are based on closing stock prices on February 18, 2020. The Selected Publicly Traded Companies were:

 

•

BiomX Inc.

 

•

Edesa Biotech, Inc.

 

•

Evelo Biosciences, Inc.

 

•

Hoth Therapeutics, Inc.

 

•

Krystal Biotech, Inc.

 

•

XBiotech Inc.

The Selected Publicly Traded Companies had implied total enterprise values between $24 million and $877 million. Ladenburg derived a median implied total enterprise value of $165 million for the Selected Publicly Traded Companies. Using the 25th percentile and the 75th percentile of the implied total enterprise values, Ladenburg then calculated a range of implied total equity values for Forte (by adding an estimated $14 million in cash at closing), which was $76.5 million to $510.1 million. This compares to Forte’s implied equity value as per the Merger Agreement of approximately $44 million.

 

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