FORTE BIOSCIENCES, INC. The following discussion and analysis of financial condition and results of operations should be read together with the consolidated financial statements ofForte Biosciences, Inc. ("Forte", "we", "our") and the accompanying notes appearing inTocagen's Registration Statement on Form S-4 as (Registration No. 333-237371), initially filed onMarch 25, 2020 , as amended, and declared effective by theSecurities and Exchange Commission , orSEC , onMay 13, 2020 . This discussion of the financial condition and results of operations regarding matters that are not historical facts, are forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended, and the Private Securities Litigation Act of 1995 and, known as the PSLRA. These include statements regarding management's intention, plans, beliefs, expectations or forecasts for the future, and, therefore, you are cautioned not to place undue reliance on them. No forward-looking statement can be guaranteed, and actual results may differ materially from those projected. The Company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise, except to the extent required by law. We use words such as "anticipates," "believes," "plans," "expects," "projects," "intends," "may," "will," "should," "could," "estimates," "predicts," "potential," "continue," "guidance," and similar expressions to identify these forward-looking statements that are intended to be covered by the safe-harbor provisions of the PSLRA. Such forward-looking statements are based on our expectations and involve risks and uncertainties; consequently, actual results may differ materially from those expressed or implied in the statements due to a number of factors, including, but not limited to, risks relating to the sufficiency of the Company's cash balance to fund the Company's activities, and the expectations with respect thereto; the business and prospects of the Company; Forte's plans to develop and potentially commercialize its product candidates, including FB-401; the timing of initiation of Forte's planned clinical trials; the timing of the availability of data from Forte's clinical trials; the timing of any planned investigational new drug application or new drug application; Forte's plans to research, develop and commercialize its current and future product candidates; Forte's ability to successfully enter into collaborations, and to fulfill its obligations under any such collaboration agreements; the clinical utility, potential benefits and market acceptance of Forte's product candidates; Forte's commercialization, marketing and manufacturing capabilities and strategy; Forte's ability to identify additional products or product candidates with significant commercial potential; developments and projections relating to Forte's competitors and its industry; the impact of government laws and regulations; Forte's ability to protect its intellectual property position; Forte's estimates regarding future revenue, expenses, capital requirements and need for additional financing following the proposed transaction; and the impact of COVID-19 on the Company, the Company's industry or the economy generally. The known risks and uncertainties are described in detail under the caption "Risk Factors" and elsewhere in this Form 10-Q and our Registration Statement filed on Form S-4 (Registration No. 333-237371), initially filed onMarch 25, 2020 , as amended, and declared effective by theSEC , onMay 13, 2020 . Forward-looking statements included in this Form 10-Q are based on information available to Forte as of the date of this Form 10-Q. Accordingly, our actual results may materially differ from our current expectations, estimates and projections. Forte undertakes no obligation to update such forward-looking statements to reflect events or circumstances after the date of this presentation.
Overview
Forte Biosciences Inc. (www.fortebiorx.com) ("Forte", "we", "our") is a clinical-stage biopharmaceutical company focused on advancing through clinical trials our lead product candidate, FB-401, which is a live biotherapeutic for the treatment of inflammatory skin disease, including pediatric and adult patients with atopic dermatitis. There is currently a significant unmet need for safe and effective therapies for pediatric atopic dermatitis patients. FB401 was developed in collaboration with theNational Institutes of Health ("NIH"), and theNational Institute of Allergy and Infectious Diseases ("NIAID"). 15 -------------------------------------------------------------------------------- Forte entered into a business combination ("Merger") betweenForte Subsidiary, Inc. ("Forte Subsidiary") andTocagen, Inc. ("Tocagen"), a publicly traded biotechnology company. The merger closed onJune 15, 2020 , in whichTelluride Merger Sub, Inc. a wholly-owned subsidiary ofTocagen , merged with and into Forte Subsidiary, with Forte Subsidiary surviving that Merger as a wholly-owned subsidiary ofTocagen . Immediately prior to the closing of the Merger, then outstandingTocagen common stocks were adjusted with a reverse split ratio of 1-for-15. At the closing of the Merger, each share of Forte Subsidiary's common stock was converted into the right to receive approximately 3.1624 shares ofTocagen common stock (before giving effect of the reverse split). Immediately prior to closing of the Merger,Tocagen changed its name toForte Biosciences, Inc. Our common stock is publicly traded on the Nasdaq Capital Market under the ticker symbol FRBX. Prior to the Merger, Forte Subsidiary was a privately held company incorporated inDelaware onMay 3, 2017 .
FB-401
We are developing a new approach to treating inflammatory skin disease using a
topical live biotherapeutic, FB-401, which consists of three therapeutic strains
of a commensal gram-negative bacteria, Roseomonas mucosa that were specifically
selected for their impact on key parameters of inflammatory skin disease.
Genetic-based microbiome identification revealed significant differences in the
Gram-negative skin biome between atopic dermatitis ("AD") patients and healthy
volunteers ("HV"). Over 50% of AD patients did not have any culturable
Gram-negative flora. Our extensive preclinical and mechanism of action data
demonstrate that FB-401 improves atopic dermatitis disease parameters by driving
tissue repair and anti-inflammation as well as suppressing potentially harmful
bacteria like S. aureus. Specifically, Forte believes that FB-401:
• drives immune pathways that are defective;
• suppresses Staphylococcus aureus growth; and
• improves skin barrier function.
To date, a Phase 1/2a study has been completed with pediatric and adult
patients, demonstrating significant reduction in atopic dermatitis disease and
pruritus, as well as control of S. aureus while tapering/eliminating steroid
use. Forte is currently planning to initiate a double-blinded randomized Phase 2
clinical trial for mild to moderate AD in the third quarter of 2020.
Intellectual Property
OnJune 18, 2020 , we announced the issuance of our seventhU.S. patent (10,682,379), broadening protection to include methods for culturing gram negative bacteria from the skin. Together with the sixU.S. patents previously issued, we now have extensive patent protection covering the composition and method of use of our technology focused on inflammatory skin conditions. We also have two pending foreign patent applications, both of which are international patent applications filed under the Patent Cooperation Treaty. InDecember 2017 , Forte Subsidiary entered into an exclusive license agreement with DHHS, as amended inMay 2020 . Under the agreement, the DHHS granted Forte Subsidiary an exclusive, sublicensable, worldwide license to certain patent rights under which we may develop and commercialize pharmaceutical and biological compositions comprising Gram-negative bacteria for the topical treatment of dermatological diseases and conditions.
Revenue
We have no products approved for commercial sale and have not generated any
revenue from product sales. In the future, we may generate revenue from product
sales, royalties on product sales, or license fees, milestones, or other upfront
payments if we enter into any collaborations or license agreements. We expect
that our future revenue will fluctuate from quarter to quarter for many reasons,
including the uncertain timing and amount of any such payments and sales.
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Research and Development Expenses
Research and development expenses consist primarily of costs incurred to advance our product candidate, FB-401. Our research and development expenses include external research and development expenses incurred under arrangements with third parties, such as contract research and manufacturing organizations, consultants, and our scientific advisors. We expense research and development costs as incurred. Nonrefundable advance payments for goods and services that will be used in future research and development activities are capitalized as an asset and expensed when the service has been performed or when the goods have been received. We expect our research and development expenses to increase for the foreseeable future as we continue to conduct our ongoing regulatory and commercialization activities, initiate new clinical trials and build our pipeline. The process of commercialization and conducting clinical trials necessary to obtain regulatory approval is costly and time consuming. We may never succeed in achieving marketing approval for any of our product candidates. Due to the numerous risks and uncertainties associated with product development, we cannot determine with certainty the duration, costs and timing of our clinical trials, and, as a result, the actual costs to complete our planned clinical trials may exceed the expected costs.
General and Administrative Expenses
General and administrative expenses consist primarily of professional fees for legal, auditing, tax and business consulting services, personnel expenses and travel costs. We expect that general and administrative expenses will increase in the future as we expand our operating activities. In addition, we expect to incur significant additional costs associated with being aSEC registrant. These increases will likely include legal fees, costs associated with Sarbanes-Oxley compliance, accounting fees, directors' and officers' liability insurance premiums, and other expenses.
Critical Accounting Policies and Estimates
Critical accounting policies are those that, in management's view, are most important in the portrayal of our financial condition and results of operations. Aside from the changes disclosed in Note 2 to the Notes to Condensed Consolidated Financial Statements included in Item 1, Part I of this Quarterly Report on Form 10-Q, management believes there have been no material changes during the three months endedJune 30, 2020 to the critical accounting policies discussed in Forte Subsidiary's Management's Discussion and Analysis of Financial Condition and Results of Operations section ofTocagen's Registration Statement on Form S-4 as filed with theU.S. Securities and Exchange Commission (the "SEC") onMarch 25, 2020 , as amended and declared effective by theSEC onMay 13, 2020 . The preparation of financial statements in conformity with accounting principles generally accepted inthe United States requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and judgments. We based our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Actual results may differ materially from these estimates.
COVID-19
The pandemic caused by an outbreak of a new strain of coronavirus, or COVID-19,
has resulted, and is likely to continue to result, in significant national and
global economic disruption and may adversely affect our operations. We are
actively monitoring the impact of COVID-19 and the possible effects on its
financial condition, liquidity, operations, suppliers, industry, and workforce.
However, the full extent, consequences, and duration of the COVID-19 pandemic
and the resulting impact on us cannot currently be predicted. We will continue
to evaluate the impact that these events could have on our operations, financial
position, and the results of operations and cash flows during fiscal year 2020
and beyond.
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Results of Operations
Comparison of Three and Six Months Ended
The following tables summarize our results of operations for the three and six
months ended
Three Months Three Months
Ended Ended
June 30, 2020 June 30, 2019 Change in $ Change in %
Operating expenses:
Research and development $ 1,937 $ 310 $ 1,627 525 %
General and administrative 760 319 441 138 %
In process research and development
assets acquired 32,057 - 32,057 100 %
$ 34,754 $ 629
Six Months Six Months
Ended Ended
June 30, 2020 June 30, 2019
Operating expenses:
Research and development $ 3,291 $ 1,173 $ 2,118 181 %
General and administrative 1,433 643 790 123 %
In process research and development
assets acquired 32,057 - 32,057 100 %
$ 36,781 $ 1,816 Research and Development Expenses
Research and development expenses were
Research and development expenses were
General and Administrative Expenses
General and administrative expenses were$0.8 million for the three months endedJune 30, 2020 compared to$0.3 million for the same period in 2019. This increase of$0.5 million was primarily due to a$0.2 million increase in legal costs, a$0.2 million increase in compensation related expenses and a$0.1 million increase in other expenses. General and administrative expenses were$1.4 million for the six months endedJune 30, 2020 compared to$0.6 million for the same period of 2019. This increase of$0.8 million was primarily due to a$0.4 million increase in legal expenses, a$0.2 million increase in compensation expense, and a$0.2 million increase in other expenses.
In-process research and development assets acquired
In connection with the Merger, we recognized a charge of
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Other Expense
Other expense consists primarily of foreign exchange income or loss partially offset by income earned from our cash.
Liquidity and Capital Resources
We have no products approved for commercial sale and have not generated any revenue from product sales. We have never been profitable and have incurred operating losses in each year since inception. Our net losses were approximately$36.8 million for the six months endedJune 30, 2020 , which includes a$32.1 million charge for in-process research and development expenses. As ofJune 30, 2020 , we had an accumulated deficit of approximately$41.8 million . Substantially all of our operating losses, excluding the charge of in-process research and development expenses, resulted from expenses incurred in connection with our research and development programs and from general and administrative costs associated with our operations. We expect to incur significant expenses and increasing operating losses for the foreseeable future as we continue the clinical development of FB-401. In addition, operating as aSEC registrant will involve the hiring of additional financial and other personnel, upgrading financial information systems, and incurring costs associated with operating as a public company. We expect that our operating losses will fluctuate significantly from quarter-to-quarter and year-to-year due to timing of clinical development programs. Prior to the closing of the Merger, we had raised net cash proceeds of approximately$9.9 million in a Series A financing round from private placements of preferred stock. In connection with the Merger, we issued 3,804,817 shares of our common stock (after giving effect to the exchange ratio and reverse split), and warrants to purchase 2,752,546 shares of our common stock (after giving effect to the exchange ratio and reverse split) for gross proceeds of$19.4 million . In addition, onJune 16, 2020 , we issued an additional 411,112 shares of common stock for gross proceeds of$4.6 million . As ofJune 30, 2020 , we had cash of approximately$27.7 million . While we expect our existing cash will enable us to fund operations and capital expenditure requirements for at least the next 12 months from the date of this Form 10-Q, we may not have sufficient funds to reach commercialization. We expect to require substantial additional capital to continue and complete our clinical development activities and fund our operations. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our development, regulatory and commercialization efforts. Failure to raise capital as and when needed, on favorable terms, if at all, would have a negative impact on our financial condition and our ability to develop and commercialize our product candidates.
The following table shows a summary of our cash flows for the six months ended
Six Months Ended
June 30,
2020 2019
Net cash (used in) provided by:
Operating activities $ (6,881 ) $ (1,565 )
Investing activities 3,583 -
Financing activities 24,108 4,856
Net increase in cash $ 20,810 $ 3,291
Operating Activities
Cash used in operating activities was $6.9 million for the six months ended June
30, 2020 compared to $1.6 million for the same period of 2019. The increase of
$5.3 million was principally due to increases in manufacturing activity related
to the development of FB-401, our product candidate, and Merger related
expenses.
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Investing activities
Cash provided from investing activities of
Financing Activities
Net cash provided by financing activities was$24.1 million for the six months endedJune 30, 2020 was primarily from net proceeds received from the sale of the company's common stock. Net cash provided by financing activities for the six months endedJune 30, 2019 of$4.9 million was from net proceeds received from the sale of our preferred stock.
Future Capital Requirements
We have not generated any revenue from product sales. We do not know when, or if, we will generate any revenue from product sales. We do not expect to generate any revenue from product sales unless and until we obtain regulatory approval and commercialize our product candidates. At the same time, we expect our expenses to increase in connection with our ongoing development and manufacturing activities, particularly as we continue the research, development, manufacture and clinical trials of, and seek regulatory approval for FB-401. Immediately prior to the closing of the Merger, we received gross proceeds of$19.4 million from the issuance of our common stock. Immediately after the closing the Merger, we raised gross proceeds of$4.6 million from the issuance of our common stock. We expect to incur additional costs associated with operating as aSEC registrant. We anticipate that we will need substantial additional funding in connection with our continuing operations. As ofJune 30, 2020 , we had approximately$27.7 million in cash. We expect our research and development expenses to substantially increase in connection with our ongoing activities, particularly as we continue to advance FB-401 in the clinic.
Our future capital requirements are difficult to forecast and will depend on many factors, including but not limited to:
• the terms and timing of any strategic alliance, licensing and other
arrangements that Forte may establish;
• the initiation and progress of Forte's ongoing clinical trials for its
product candidates;
• the number of programs Forte pursues;
• the outcome, timing and cost of regulatory approvals;
• the cost and timing of hiring new employees to support Forte's continued
growth;
• the costs involved in patent filing, prosecution, and enforcement; and
• the costs and timing of having clinical supplies of Forte's product
candidates manufactured.
If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Any future debt financing may impose upon us covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. Any equity or debt financing may contain terms that are not favorable to us or our stockholders. If we are unable to raise additional funds when needed, we may be required to delay, reduce or terminate some or all of our development programs and clinical trials. We may also be required to sell or license to other parties rights to develop or commercialize our drug candidates that we would prefer to retain.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.
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Contractual Obligations
See Note 5 to the Condensed Consolidated Financial Statements included elsewhere in this Form 10-Q.
Recent Accounting Standards
See Note 2 to the Condensed Consolidated Financial Statements included elsewhere in this Form 10-Q.
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