Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-Q
_____________________ 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 001-36310
_____________________ 
CONCERT PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
_____________________
 
Delaware
20-4839882
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
65 Hayden Avenue, Suite 3000N
Lexington, Massachusetts
(Address of principal executive offices)
02421
(Zip Code)
(781) 860-0045
(Registrant’s telephone number, including area code) 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.001 per share
CNCE
The NASDAQ Global Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
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
x
 
 
 
 
Non-accelerated filer
¨ 
Smaller reporting company
x

 
 
 
 
Emerging growth company
x
 
 



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of shares outstanding of the registrant’s common stock as of July 26, 2019: 23,799,826



TABLE OF CONTENTS
 
 
 
Page No.
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1A.
 
 
 
Item 6.
 
 
 
 


3


PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements.
CONCERT PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Amounts in thousands, except share and per share data)
 
June 30,
 
December 31,
 
2019
 
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
43,714

 
$
17,770

Investments, available for sale
92,923

 
135,544

Marketable equity securities
5,100

 
7,525

Interest receivable
436

 
556

Accounts receivable
38

 
15

Contract asset (Note 8)

 
16,000

Prepaid expenses and other current assets
3,104

 
2,739

Total current assets
145,315

 
180,149

Property and equipment, net
8,375

 
8,919

Restricted cash
1,157

 
1,157

Other assets
20

 

Income taxes receivable
2,358

 
2,322

Operating lease right-of-use assets, long-term (Note 11)
9,376

 

Total assets
$
166,601

 
$
192,547

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
610

 
$
1,277

Accrued expenses and other liabilities
5,178

 
5,669

Income taxes payable

 
390

Deferred revenue, current portion
1,413

 
1,413

Lease liability, current portion (Note 11)
202

 

Total current liabilities
7,403

 
8,749

Deferred revenue, net of current portion
9,120

 
9,120

Deferred lease incentive, net of current portion

 
4,088

Deferred rent, net of current portion

 
2,850

Lease liability, net of current portion (Note 11)
16,377

 

Total liabilities
32,900

 
24,807

Commitments (Note 11)

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.001 par value per share; 5,000,000 shares authorized; no shares issued and outstanding in 2019 and 2018, respectively

 

Common stock, $0.001 par value per share; 100,000,000 shares authorized; 23,985,844 and 23,518,690 shares issued and 23,796,288 and 23,437,587 outstanding in 2019 and 2018, respectively
23

 
23

Additional paid-in capital
290,683

 
284,369

Accumulated other comprehensive gain (loss)
4

 
(137
)
Accumulated deficit
(157,009
)
 
(116,515
)
Total stockholders’ equity
133,701

 
167,740

Total liabilities and stockholders’ equity
$
166,601

 
$
192,547

See accompanying notes.

4


CONCERT PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
(Amounts in thousands, except per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenue:
 
 
 
 
 
 
 
License and research and development revenue
$
49

 
$
2

 
$
1,054

 
$
10,481

Operating expenses:
 
 
 
 
 
 
 
Research and development
14,496

 
8,862

 
30,286

 
17,518

General and administrative
4,978

 
5,514

 
10,587

 
11,144

Total operating expenses
19,474

 
14,376

 
40,873

 
28,662

Loss from operations
(19,425
)
 
(14,374
)
 
(39,819
)
 
(18,181
)
Investment income
883

 
660

 
1,750

 
1,300

Unrealized (loss) gain on marketable equity securities
(126
)
 
669

 
(2,425
)
 
(627
)
Loss before tax provision
(18,668
)
 
(13,045
)
 
(40,494
)
 
(17,508
)
Provision for income taxes

 
280

 

 
280

Net Loss
$
(18,668
)
 
$
(13,325
)
 
$
(40,494
)
 
$
(17,788
)
Other comprehensive income:
 
 
 
 
 
 
 
Unrealized gain on investments, available for sale
44

 
154

 
141

 
79

Comprehensive loss
$
(18,624
)
 
$
(13,171
)
 
$
(40,353
)
 
$
(17,709
)
 
 
 
 
 
 
 
 
Net loss per share applicable to common stockholders - basic and diluted
$
(0.78
)
 
$
(0.57
)
 
$
(1.71
)
 
$
(0.76
)
 
 
 
 
 
 
 
 
Weighted-average number of common shares used in net loss per share applicable to common stockholders - basic and diluted
23,790

 
23,402

 
23,650

 
23,313

See accompanying notes.

5


CONCERT PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
 
 
Six Months Ended June 30, 2019
 
 
Common Stock
 
Additional paid-in capital
 
Accumulated other comprehensive income
 
Accumulated deficit
 
Total stockholders’ equity
 
 
Issued
 
In Treasury
 
Amount
 
 
 
(in thousands)
Balance at December 31, 2018
 
23,519

 
81

 
$
23

 
$
284,369

 
$
(137
)
 
$
(116,515
)
 
$
167,740

Exercise of stock options
 
154

 
47

 

 
805

 

 

 
805

Release of restricted stock units
 
202

 
61

 

 
(741
)
 

 

 
(741
)
Unrealized gain on short-term investments
 

 

 

 

 
97

 

 
97

Stock-based compensation expense
 

 

 

 
2,929

 

 

 
2,929

Exercise of stock warrants
 
71

 

 

 
1,000

 

 

 
1,000

Offering expenses incurred
 

 

 

 
(206
)
 

 

 
(206
)
Net loss
 

 

 

 

 

 
(21,826
)
 
(21,826
)
Balance at March 31, 2019
 
23,946

 
189

 
$
23

 
$
288,156

 
$
(40
)
 
$
(138,341
)
 
$
149,798

Exercise of stock options
 
40

 

 

 
165

 

 

 
165

Unrealized gain on short-term investments
 

 

 

 

 
44

 

 
44

Stock-based compensation expense
 

 

 

 
2,362

 

 

 
2,362

Net loss
 

 

 

 

 

 
(18,668
)
 
(18,668
)
Balance at June 30, 2019
 
23,986

 
189

 
$
23

 
$
290,683

 
$
4

 
$
(157,009
)
 
$
133,701



6


 
 
Six Months Ended June 30, 2018
 
 
Common Stock
 
Additional paid-in capital
 
Accumulated other comprehensive income
 
Accumulated deficit
 
Total stockholders’ equity
 
 
Issued
 
In Treasury
 
Amount
 
 
 
(in thousands)
Balance at December 31, 2017
 
23,148

 
8

 
$
23

 
$
273,059

 
$
(407
)
 
$
(76,243
)
 
$
196,432

Exercise of stock options
 
145

 
17

 

 
658

 

 

 
658

Release of restricted stock units
 
174

 
53

 

 
(1,206
)
 

 

 
(1,206
)
Unrealized loss on short-term investments
 

 

 

 

 
(75
)
 

 
(75
)
Stock-based compensation expense
 

 

 

 
3,299

 

 

 
3,299

Adoption of ASC 606 as of January 1, 2018
 

 

 

 

 

 
15,752

 
15,752

Net loss
 

 

 

 

 

 
(4,463
)
 
(4,463
)
Balance at March 31, 2018
 
23,467

 
78

 
$
23

 
$
275,810

 
$
(482
)
 
$
(64,954
)
 
$
210,397

Exercise of stock options
 
25

 

 

 
253

 

 

 
253

Unrealized loss on short-term investments
 

 

 

 

 
154

 

 
154

Stock-based compensation expense
 

 

 

 
2,804

 

 

 
2,804

Net loss
 

 

 

 

 

 
(13,325
)
 
(13,325
)
Balance at June 30, 2018
 
23,492

 
78

 
$
23

 
$
278,867

 
$
(328
)
 
$
(78,279
)
 
$
200,283



7


CONCERT PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
 
Six Months Ended 
 June 30,
 
2019
 
2018
Operating activities
 
 
 
Net loss
$
(40,494
)
 
$
(17,788
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
849

 
509

Stock-based compensation expense
5,291

 
6,103

Accretion of premiums and discounts on investments
(606
)
 
(123
)
Amortization of deferred lease incentive

 
(393
)
Non-cash license consideration (Note 8)

 
(10,452
)
Unrealized loss on marketable equity securities
2,425

 
627

Loss on disposal of asset
4

 

Non-cash lease expense (Note 11)
102

 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(23
)
 
130

Interest receivable
120

 
117

Prepaid expenses and other current assets
(365
)
 
(500
)
Contract asset
16,000

 

Other assets
(20
)
 
17

Accounts payable
(508
)
 
183

Accrued expenses and other liabilities
(83
)
 
(1,205
)
Income taxes receivable
(36
)
 

Income taxes payable
(390
)
 
230

Deferred rent

 
1,356

Deferred revenue

 
(16
)
Operating lease liability (Note 11)
(291
)
 

Net cash used in operating activities
(18,025
)
 
(21,205
)
Investing activities
 
 
 
Purchases of property and equipment
(472
)
 
(1,521
)
Purchases of investments
(49,208
)
 
(9,429
)
Maturities of investments
92,576

 
63,144

Net cash provided by investing activities
42,896

 
52,194

Financing activities
 
 
 
Proceeds from exercises of stock options
970

 
911

Proceeds from exercise of warrants
1,000

 

Repurchase of common stock pursuant to share surrender
(741
)
 
(1,206
)
Payment of public offering costs
(156
)
 

Net cash provided by (used in) financing activities
1,073

 
(295
)
Net increase in cash and cash equivalents and restricted cash
25,944

 
30,694

Cash, cash equivalents and restricted cash at beginning of period
18,927

 
29,222

Cash, cash equivalents and restricted cash at end of period
$
44,871

 
$
59,916

Supplemental cash flow information:
 
 
 
Cash paid for income taxes
$
444

 
$
50

Purchases of property and equipment unpaid at period end
$
24

 
$
320

Public offering costs unpaid at period end
$
50

 
$

Cash paid included in measurement of lease liabilities
$
1,388

 
$

Tenant improvements paid by landlord
$

 
$
4,202

See accompanying notes.

8

CONCERT PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



1. Nature of Business

Concert Pharmaceuticals, Inc., or Concert or the Company, was incorporated on April 12, 2006 as a Delaware corporation with operations based in Lexington, Massachusetts. The Company is a clinical stage biopharmaceutical company that applies its extensive knowledge of deuterium chemistry to discover and develop novel small molecule drugs. The Company’s approach starts with previously studied compounds, including approved drugs, that the Company believes can be improved with deuterium substitution to provide better pharmacokinetic or metabolic properties, enhancing clinical safety, tolerability or efficacy. The Company believes this approach may enable drug discovery and clinical development that is more efficient and less expensive than conventional small molecule drug research and development. The Company’s pipeline includes multiple clinical-stage candidates and a number of preclinical compounds that it is currently assessing.
The Company had cash and cash equivalents and investments of $136.6 million at June 30, 2019. The Company believes that its cash and cash equivalents and investments at June 30, 2019 will be sufficient to allow the Company to fund its current operating plan for at least the next twelve months. The Company may pursue additional cash resources through public or private financings and by establishing collaborations with or licensing its technology to other companies and through other arrangements.
Since its inception, the Company has generated an accumulated deficit of $157.0 million through June 30, 2019. The Company's operating results may fluctuate significantly from year to year, depending on the timing and magnitude of clinical trial and other development activities under its current development programs. Substantially all the Company's net losses have resulted from costs incurred in connection with its research and development programs and from general and administrative costs associated with its operations. The Company expects to continue to incur significant expenses and increasing operating losses for at least the next several years.

The Company is subject to risks common to companies in the biotechnology industry, including, but not limited to, risks of failure or unsatisfactory results of nonclinical studies and clinical trials, the need to obtain additional financing to fund the future development of its pipeline, the need to obtain marketing approval for its product candidates, the need to successfully commercialize and gain market acceptance of its product candidates, dependence on key personnel, protection of proprietary technology, compliance with government regulations, development by competitors of technological innovations and ability to transition from pilot-scale manufacturing to large-scale production of products.

Unless otherwise indicated, all amounts are in thousands except share and per share amounts.

2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals and revisions of estimates, considered necessary for a fair presentation of the condensed consolidated financial statements have been included. Interim results for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2019 or any other future period.
The accompanying condensed consolidated financial statements reflect the accounts of Concert and its subsidiaries. All intercompany transactions between the Company and its subsidiaries have been eliminated. Management has determined that the Company operates in one segment: the development of pharmaceutical products on its own behalf or in collaboration with others. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission on February 28, 2019.
Use of Estimates and Summary of Significant Accounting Policies

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles, or GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenue, expenses and the disclosure of contingent assets and liabilities and the Company's ability to continue as a going concern. In preparing the consolidated financial statements, management used estimates in the following areas, among others: revenue recognition; lease accounting; income tax expense; stock-based compensation expense; accrued expenses; and the

9

CONCERT PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


evaluation of the existence of conditions and events that raise substantial doubt regarding the Company’s ability to continue as a going concern. Actual results could differ from those estimates.
With the exception of the adoption of Accounting Standards Update, or ASU, 2016-02 during the six months ended June 30, 2019 discussed in Note 11, there have been no material changes to the significant accounting policies previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board, or FASB, issued ASU 2016-02, Leases, or Topic 842. ASU 2016-02 requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by leases. On January 1, 2019, the Company adopted ASU 2016-02 and all related amendments. For discussion regarding the impact of this accounting pronouncement, refer to Note 11 appearing elsewhere in this Quarterly Report on Form 10-Q.

In June 2018, the FASB issued ASU 2018-07, or Topic 718, Improvements to Nonemployee Share-Based Payment Accounting, that expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 provides that an entity should apply the requirements of Topic 718 to nonemployee awards except for certain exemptions specified in the amendment. The Company adopted this new standard effective January 1, 2019, and it did not have a material effect on the consolidated financial statements and related disclosures.

In August 2018, the Securities and Exchange Commission issued Release No. 33-10532 that amends and clarifies certain financial reporting requirements. The principal change to the Company’s financial reporting is the inclusion of the annual disclosure requirement of changes in stockholders’ equity in Rule 3-04 of Regulation S-X to interim periods. The Company adopted this new rule beginning with its first Quarterly Report on Form 10-Q for the quarter ended March 31, 2019.

Pending Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses, or Topic 326, Measurement of Credit Losses on Financial Instruments. The new standard requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. ASU 2016-13 will become effective for the Company for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact ASU 2016-13 will have on its financial statements and related disclosures.


3. Fair Value Measurements

The Company has certain financial assets and liabilities that are recorded at fair value which have been classified as Level 1, 2 or 3 within the fair value hierarchy as described in the accounting standards for fair value measurements:

Level 1—quoted prices for identical instruments in active markets;
Level 2—quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and
Level 3—valuations derived from valuation techniques in which one or more significant value drivers are unobservable.

The tables below present information about the Company’s financial assets and liabilities that are measured and carried at fair value as of June 30, 2019 and December 31, 2018 (in thousands) and indicate the level within the fair value hierarchy where each measurement is classified.

10

CONCERT PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


 
Level 1
 
Level 2
 
Level 3
 
Total
June 30, 2019
 
 
 
Cash equivalents:
 
 
 
Money market funds
$
20,539

 
$

 
$

 
$
20,539

U.S. Treasury obligations
2,998

 

 

 
2,998

Government agency securities
4,418

 
5,488

 

 
9,906

Investments, available for sale:
 
 

U.S. Treasury obligations
18,722

 

 

 
18,722

Government agency securities
44,431

 
29,770

 

 
74,201

Marketable equity securities:
 
 
 
 
 
 
 
Corporate equity securities (Note 8)
5,100

 

 

 
5,100

Total
$
96,208

 
$
35,258

 
$

 
$
131,466


 
Level 1
 
Level 2
 
Level 3
 
Total
December 31, 2018
 
 
 
Cash equivalents:
 
 
 
Money market funds
$
7,643

 
$

 
$

 
$
7,643

U.S. Treasury obligations
1,748

 

 

 
1,748

Investments, available for sale:
 
 
 
U.S. Treasury obligations
34,103

 
746

 

 
34,849

Government agency securities
64,733

 
35,962

 

 
100,695

Marketable equity securities:
 
 
 
 
 
 
 
Corporate equity securities (Note 8)
7,525

 

 

 
7,525

Total
$
115,752

 
$
36,708

 
$

 
$
152,460



4. Cash, Cash Equivalents, Investments and Marketable Equity Securities
Cash equivalents include all highly liquid investments maturing within 90 days from the date of purchase. Investments consist of securities with original maturities greater than 90 days when purchased. The Company classifies these investments as available-for-sale and records them at fair value in the accompanying consolidated balance sheets. In accordance with ASU 2016-01, unrealized gains or losses from equity securities are included in net income. Unrealized gains or losses from other investments, including debt securities, are included in accumulated other comprehensive income (loss). Premiums or discounts from par value are amortized to investment income over the life of the underlying investment.
Cash, cash equivalents, available for sale investments, and marketable equity securities included the following at June 30, 2019 and December 31, 2018:

11

CONCERT PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


 
 
Average maturity
 
Amortized cost
 
Unrealized gains
 
Unrealized losses
 
Fair value
June 30, 2019
 
 
 
 
 
 
 
 
 
 
Cash
 
 
 
$
10,271

 
$

 
$

 
$
10,271

Money market funds
 
 
 
20,539

 

 

 
20,539

U.S. Treasury obligations
 
31 days
 
2,998

 

 

 
2,998

Government agency securities
 
36 days
 
9,906

 

 

 
9,906

Cash and cash equivalents
 
 
 
$
43,714

 
$

 
$

 
$
43,714

 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury obligations
 
101 days
 
18,711

 
11

 

 
18,722

Government agency securities
 
103 days
 
74,131

 
70

 

 
74,201

Investments, available for sale
 
 
 
$
92,842

 
$
81

 
$

 
$
92,923

 
 
 
 
 
 
 
 
 
 
 
June 30, 2019
 
 
 
Acquisition value
 
Unrealized gains
 
Unrealized losses
 
Fair value
Marketable equity securities (Note 8)
 
 
 
$
10,451

 
$

 
$
(5,351
)
 
$
5,100


 
 
Average maturity
 
Amortized cost
 
Unrealized gains
 
Unrealized losses
 
Fair value
December 31, 2018
 
 
 
 
 
 
 
 
 
 
Cash
 
 
 
$
8,379

 
$

 
$

 
$
8,379

Money market funds
 
 
 
7,643

 

 

 
7,643

U.S. Treasury obligations
 
31 days
 
1,748

 

 

 
1,748

Cash and cash equivalents
 
 
 
$
17,770

 
$

 
$

 
$
17,770

 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury obligations
 
151 days
 
$
34,856

 
$
2

 
$
(9
)
 
$
34,849

Government agency securities
 
153 days
 
100,748

 
7

 
(60
)
 
100,695

Investments, available for sale
 
 
 
$
135,604

 
$
9

 
$
(69
)
 
$
135,544

 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
Acquisition value
 
Unrealized gains
 
Unrealized losses
 
Fair value
Marketable equity securities (Note 8)
 
 
 
$
10,451

 
$

 
$
(2,926
)
 
$
7,525

Although available to be sold to meet operating needs or otherwise (and therefore classified as current assets), securities are generally held through maturity. The cost of securities sold is determined based on the specific identification method for purposes of recording realized gains and losses. During 2019 and 2018, there were no realized gains or losses on sales of investments, and no investments were adjusted other than for temporary declines in fair value.

5. Restricted Cash
Restricted cash as of June 30, 2019 and 2018 is held as collateral for stand-by letters of credit issued by the Company to its landlords in connection with the current and previous leases of the Company's Lexington, Massachusetts facilities.

Cash, cash equivalents and restricted cash consisted of the following:


12

CONCERT PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


 
June 30,
2019
 
June 30,
2018
Cash and cash equivalents
$
43,714

 
$
58,359

Restricted cash
1,157

 
1,557

Total cash, cash equivalents and restricted cash shown in the statements of cash flows
$
44,871

 
$
59,916



6. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following:
 
June 30,
2019
 
December 31,
2018
Accrued professional fees and other
$
699

 
$
672

Employee compensation and benefits
1,501

 
3,067

Research and development expenses
2,978

 
1,476

Deferred lease incentive, current portion

 
454

 
$
5,178

 
$
5,669



7. Income Taxes

Deferred tax assets and deferred tax liabilities are recognized based on temporary differences between the financial reporting and tax basis of assets and liabilities using statutory rates. A valuation allowance is recorded against deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized.

The Company’s ability to use its operating loss carryforwards and tax credits to offset future taxable income is subject to restrictions under Sections 382 and 383 of the United States Internal Revenue Code (the “Internal Revenue Code”). Net operating loss and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50 percent, as defined under Sections 382 and 383 of the Internal Revenue Code. Such changes would limit the Company’s use of its operating loss carryforwards and tax credits. In such a situation, the Company may be required to pay income taxes, even though significant operating loss carryforwards and tax credits exist.

The Company records a provision or benefit for income taxes on ordinary pre-tax income or loss based on its estimated effective tax rate for the year. As of June 30, 2019, the Company forecasts an ordinary pre-tax loss for the year ended December 31, 2019 and, since it maintains a full valuation allowance on its deferred tax assets, the Company did not record an income tax benefit for the three or six months ended June 30, 2019.

8. Revenue

The Company's revenue is generated through collaborative licensing agreements, patent assignments, and sales of intellectual property. The Company generates its revenue through one segment and the revenue recognized under each of the Company's arrangements during the current and prior period is described below.

On January 1, 2018, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2014-19, Revenue from Contracts with Customers ("ASC 606" or "the new revenue standard"). The Company adopted ASC 606 using the modified retrospective approach. For detailed information regarding the adoption of ASC 606, the impact on its consolidated financial statements and its collaboration arrangements, see Note 2 and Note 12 to the accompanying consolidated financial statements appearing in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2019.



13

CONCERT PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Contract Assets
The Company did not have a contract asset as of June 30, 2019 as compared to $16.0 million as of December 31, 2018. The decrease in the contract asset balance is the result of the receipt of the Vertex indemnification payment in February 2019 previously held in escrow in the amount of $16.0 million.
Contract Liabilities
As of June 30, 2019 and December 31, 2018, the Company had $10.5 million in contract liabilities related to unsatisfied performance obligations as well as variable consideration paid in advance but currently constrained from recognition.
The contract liabilities consist of the following deferred revenue:
 
$7.8 million related to our collaboration with Celgene, $1.4 million of which is attributable to the CTP-730 program and is currently expected to be recognized as revenue in the next twelve months as we satisfy our remaining research and development activities pursuant to mutually agreed upon development plans, and $6.4 million of which is attributable to two additional license programs that we will not recognize as revenue until Celgene exercises its rights with respect to those programs, or at such time that Celgene's rights lapse, as detailed in Note 12 to the accompanying consolidated financial statements appearing in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2019; and
$2.8 million related to a payment received from GlaxoSmithKline, or GSK, that we will not recognize as revenue until all repayment obligations lapse.
Revenue Arrangements
Vertex

On March 3, 2017, the Company and Vertex Pharmaceuticals, Inc. ("Vertex") entered into an Asset Purchase Agreement pursuant to which, subject to the satisfaction or waiver of the conditions therein, the Company sold and assigned to Vertex, CTP-656, a deuterated analog of ivacaftor, now known as VX-561, and other cystic fibrosis assets of the Company. On July 25, 2017, the Closing Date, the transaction contemplated by the Asset Purchase Agreement closed and Vertex paid the Company $160 million in cash consideration. In addition, Vertex has agreed to pay the Company an aggregate of up to $90 million upon the achievement of certain milestone events. In February 2019, the $16.0 million initially held in escrow was released to the Company.

As of December 31, 2018, the Vertex indemnification variable consideration represented a contract asset to be released from escrow 18 months following the Closing Date and was classified as a current asset in the accompanying consolidated balance sheet. In February 2019, the $16.0 million initially held in escrow was released to the Company. Additionally, the variable consideration related to the regulatory milestone payments are fully constrained due to the uncertainty associated with the achievement of the respective milestones. Accordingly, no contract asset was recorded as of June 30, 2019.

Processa

On October 4, 2017, the Company entered into a License and Option Agreement, or the Option, with Promet Therapeutics, LLC, or Promet, pursuant to which the Company granted Promet an option to obtain an exclusive license to CTP-499, a deuterated analog of 1-(S)-5-hydroxyhexyl-3,7-dimethylxanthine, or HDX, an active metabolite of pentoxifylline, provided certain conditions were met. On October 5, 2017, Promet closed an asset purchase agreement with Heatwurx, Inc., a public company, creating Processa Pharmaceuticals, Inc., or Processa.

On March 21, 2018, the Company entered into an Amendment to the Option, or the Amendment, and a Securities Purchase Agreement, both with Promet and Processa. Pursuant to the Amendment, the Company granted Promet, who then assigned to Processa, an exclusive, worldwide, royalty-bearing license to develop, manufacture and commercialize CTP-499, now known as PCS-499. Upon transfer of the license and as consideration for the license, the Company received 2,090,301 shares of common stock of Processa.

The Company is also eligible to receive royalties on worldwide net sales.


14

CONCERT PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


The Amendment contained one performance obligation: an exclusive, worldwide, royalty-bearing license to develop, commercialize and sublicense CTP-499. The Company determined that the transaction price was $10.5 million, which was based on the fair value of the non-cash consideration received on March 19, 2018, which consisted of 2,090,301 shares of publicly traded common stock of Processa. The transaction price of $10.5 million was allocated to the single performance obligation. The performance obligation was considered satisfied at contract inception as the exclusive license transferred control to the customer at this point in time. Accordingly, revenue of $10.5 million was recognized during the first quarter of 2018.

Subsequent changes to the fair value of the underlying securities are recognized as unrealized gains or losses on marketable equity securities within the condensed consolidated statement of operations and comprehensive loss.
The Amendment contains consideration that is variable based on royalties upon the customer's commercial success with the licensed product. The consideration related to royalty payments is considered variable consideration that is fully constrained in accordance with the royalty recognition constraint. The variable consideration related to royalties will be recognized in the period the products are sold by Processa and the Company has a present right to payment.

For the three and six months ended June 30, 2019, the Company recognized $20 thousand and $22 thousand in revenue, respectively, related to intellectual property cost reimbursements. For the three months and six months ended June 30, 2018, the Company recognized $10.5 million in revenue related to the transfer of the license.

Cipla

The Company entered into a License Agreement, or the Agreement, on January 16, 2019, or the Closing Date, with Cipla Technologies LLC, or Cipla, pursuant to which the Company granted Cipla an exclusive, worldwide, royalty-bearing license to develop, manufacture and commercialize CTP-354, a novel GABAA receptor subtype-selective modulator. Upon transfer of the license and as consideration for the license, the Company received an upfront payment of $1.0 million.
The Agreement also provides Cipla the option to purchase the Company’s existing inventory held as of the Effective Date valued in aggregate at $0.3 million. Additionally, upon the achievement of certain milestone events, Cipla has agreed to pay the Company an aggregate of up to $57.0 million. The first milestone payment the Company may be entitled to receive is $3.0 million when the first IND for the first CTP-354 product goes into effect.
Furthermore, the Company is eligible to receive royalties on worldwide net sales of future product sales at defined percentages ranging from the mid-single to high-single digits.
The Agreement contained one performance obligation: an exclusive, worldwide, royalty-bearing license to develop, manufacture, commercialize and sublicense CTP-354, referred to as the Transfer of License Performance Obligation. The Company concluded the option to purchase existing inventory did not provide Cipla a material right, and as such, was treated as a separate contract. The transaction price was determined to be $1.0 million, based on the upfront consideration received as of the Closing Date.
As of the Closing Date, the Transfer of License Performance Obligation was satisfied as the control of CTP-354 transferred to Cipla, the customer. As a result, the full transaction price was recognized as revenue on the Closing Date. The sale of existing inventory is recognized as goods are transferred to the customer.
The arrangement with Cipla contains consideration that is variable based on the customer’s achievement of certain development and regulatory milestones in addition to royalties upon the customer’s commercial success with the licensed product. The next milestone payment the Company may be entitled to receive of $3.0 million related to the first IND for the first CTP-354 product going into effect is considered variable consideration that is fully constrained due to the uncertainty associated to the achievement of the development milestone. The consideration related to royalties is also variable consideration that is fully constrained in accordance with the royalty recognition constraint. The variable consideration related to royalties will be recognized in the period the products are sold by Cipla and the Company has a present right to payment.
For the three and six months ended June 30, 2019, the Company recognized $22 thousand and $1.0 million in revenue associated to the sale of existing inventory and the Transfer of License Performance Obligation, respectively.





15

CONCERT PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


9. Stock-Based Compensation
The Company’s equity incentive plans provide for the issuance of a variety of stock-based awards, including incentive stock options, nonstatutory stock options and awards of stock, to directors, officers and employees of the Company, as well as consultants and advisors to the Company. As of June 30, 2019, the Company has granted awards in the form of stock options and restricted stock units, or RSUs. The stock options generally have been granted with an exercise price equal to the fair value of the underlying common stock on the date of grant, a vesting period of three or four years, and all options expire no later than ten years from the date of grant.
Effective January 1, 2019, an additional 937,503 shares were added to the Company’s 2014 Stock Incentive Plan, or the 2014 Plan, for future issuance pursuant to the terms of the 2014 Plan. As of June 30, 2019, there were 1,639,915 shares of common stock available for future award grants under the 2014 Plan.
Total stock-based compensation expense related to all stock-based options and awards recognized in the condensed consolidated statements of operations and comprehensive loss consisted of:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Research and development
$
1,063

 
$
1,274

 
$
2,538

 
$
2,801

General and administrative
1,299

 
1,530

 
2,753

 
3,302

Total stock-based compensation expense
$
2,362

 
$
2,804

 
$
5,291

 
$
6,103



Stock Options

Stock options are valued using the Black-Scholes-Merton option valuation model and compensation cost is recognized based on such fair value over the period of vesting. The weighted average fair value of options granted in the three and six months ended June 30, 2019 and 2018 reflect the following weighted-average assumptions:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Expected volatility
76.89
%
 
77.10
%
 
77.13
%
 
77.17
%
Expected term
6.0 years

 
6.0 years

 
6.0 years

 
6.0 years

Risk-free interest rate
1.82
%
 
2.77
%
 
2.22
%
 
2.64
%
Expected dividend yield
%
 
%
 
%
 
%
For the three and six months ended June 30, 2019 and 2018, expected volatility was estimated using a weighted-average of the Company's historical volatility of its common stock and the historical volatility of the common stock of a group of similar companies that were publicly traded. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available.

The following table provides certain information related to the Company's outstanding stock options:

16

CONCERT PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(in thousands, except per share data)
Weighted average fair value of options granted, per option
 
$
7.41

 
$
13.38

 
$
9.23

 
$
18.14

Aggregate grant date fair value of options vested during the period
 
$
2,394

 
$
2,268

 
$
4,836

 
$
3,729

Total cash received from exercises of stock options
 
$
165

 
$
242

 
$
970

 
$
911

Total intrinsic value of stock options exercised
 
$
228

 
$
243

 
$
1,108

 
$
2,352

The following is a summary of stock option activity for the six months ended June 30, 2019:
 
Number of
Option Shares
 
Weighted
Average
Exercise
Price per
Share
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
 
 
 
 
 
(In years)
 
(In thousands)
Outstanding at December 31, 2018
3,557,406

 
$
15.26

 
 
 
 
      Granted
930,450

 
$
13.62

 
 
 
 
      Exercised
(193,808
)
 
$
8.52

 
 
 
 
      Forfeited or expired
(118,286
)
 
$
20.38

 
 
 
 
Outstanding at June 30, 2019
4,175,762

 
$
15.06

 
7.07
 
$
4,243

Exercisable at June 30, 2019
2,296,989

 
$
13.46

 
5.96
 
$
3,757

Vested and expected to vest at June 30, 2019(1)
4,008,832

 
$
14.98

 
7.00
 
$
4,216


(1) 
This represents the number of vested stock option shares as of June 30, 2019, plus the number of unvested stock option shares that the Company estimated as of June 30, 2019 would vest, based on the unvested stock option shares at June 30, 2019 and an estimated forfeiture rate of 7%.

As of June 30, 2019, there was $19.6 million of unrecognized compensation cost related to stock options that are expected to vest. The stock option costs are expected to be recognized over a weighted average remaining vesting period of 2.6 years.

Restricted Stock Units

On July 6, 2017, the Company granted 0.5 million restricted stock units, or RSUs, to executives and employees. The awards granted to employees are service-based, whereas the awards granted to executives are a blend of service-based and performance-based. Assuming all service and performance conditions were achieved, fifty percent of the RSUs would vest on March 31, 2018, and the remaining fifty percent of the RSUs would vest on March 31, 2019. Certain executive awards were subject to the achievement of defined performance criteria prior to March 31, 2018, including the closing of the Asset Purchase Agreement with Vertex Pharmaceuticals, Inc. and the institution by the Patent Trial and Appeal Board ("PTAB") of the Post Grant Review ("PGR") petition filed by the Company against Incyte Corporation. In January 2018, the PTAB decided not to institute the PGR petition and, as a result, the corresponding performance-based awards did not vest on March 31, 2018.

The Company used the accelerated attribution method to recognize expense over the required service period based on its estimate of the number of performance-based awards that vested. For any change in the estimate of the number of performance-based awards that were probable of vesting, the Company cumulatively adjusted compensation expense in the period that the change in estimate was made.

RSUs are not included in issued and outstanding common stock until the shares are vested and settled. As of June 30, 2019, all achieved RSUs had vested. The fair value of an RSU is measured based on the market price of the underlying common stock as of the date of grant.

17

CONCERT PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


The following is a summary of RSU activity, including both service-based and performance-based RSUs for the six months ended June 30, 2019:

 
Number of
RSU Shares
 
Weighted
Average
Grant Date Fair Value
 
 
 
 
Outstanding at December 31, 2018
228,150

 
$
13.87

      Granted

 
$

      Released
(202,550
)
 
$
13.87

      Forfeited
(25,600
)
 
$
13.87

Outstanding at June 30, 2019

 
$


As of June 30, 2019, there was no unrecognized compensation cost related to RSUs.

10. Loss Per Share
Basic net loss per common share is calculated by dividing net loss allocable to common stockholders by the weighted-average common shares outstanding during the period, without consideration of common stock equivalents. For purposes of the diluted net loss per share calculation, common stock equivalents are excluded from the calculation if their effect would be anti-dilutive. As such, basic and diluted net loss per share applicable to common stockholders are the same for periods with a net loss.
The following table illustrates the determination of loss per share for each period presented.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands, expect per share amounts)
Numerator:
 
 
 
 
 
 
 
Net loss applicable to common stockholders - basic and diluted
$
(18,668
)
 
$
(13,325
)
 
$
(40,494
)
 
$
(17,788
)
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding - basic and diluted
23,790

 
23,402

 
23,650

 
23,313

 
 
 
 
 
 
 
 
Net loss per share applicable to common stockholders - basic and diluted
$
(0.78
)
 
$
(0.57
)
 
$
(1.71
)
 
$
(0.76
)
 
 
 
 
 
 
 
 
Anti-dilutive potential common stock equivalents excluded from the calculation of net loss per share:
 
 
 
 
 
 
 
Stock options
227

 
786

 
326

 
880

Restricted stock units

 
140

 
91

 
254

Warrants
61

 
132

 
78

 
132


11. Lease

The FASB issued ASU 2016-02, or the leasing standard or ASC 842, in February 2016. ASU 2016-02 requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. ASU 2016-02 also requires certain qualitative and quantitative disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases.
The Company has adopted ASU 2016-02, effective January 1, 2019. The Company has elected to employ the transitionary relief recently offered by the FASB under ASU 2018-11, and implement the new standard without the restatement of

18

CONCERT PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


comparative periods’ financial information. ASU 2018-11 also provides for recognizing the effects of applying ASU 2016-02 as a cumulative-effect adjustment to retained earnings as of January 1, 2019; however, no such adjustment was required as of January 1, 2019.
The Company has elected to employ the package of practical expedients offered under ASC 842, which allow the Company to not reassess the following:
the presence of a lease in any expired or existing contracts;
the lease classification for any expired or existing leases; and
the initial direct costs for any existing leases.

The Company currently leases 55,522 square feet of office and laboratory space, or the Lease, located at 65 Hayden Avenue, Lexington, Massachusetts, or the Premises, which was classified as an operating lease under ASC 840. The Lease is also classified as an operating lease under ASC 842 in accordance with the Company’s election of the practical expedient under ASC 842. Pursuant to the package of practical expedients, the Company will also not reassess initial direct costs for 65 Hayden Avenue. Additionally, the Company has made the policy election to adopt the practical expedient to not separate lease components from nonlease components for the right-to-use asset class of office and laboratory space. This policy election results in the Company accounting for the lease component, the use of the Premises, and the non-lease components, which include the use of the parking garage, building elevators, and HVAC, as a single lease component.
The Company occupied the Premises in the third quarter of 2018; however the Company gained access to the space on January 1, 2018 in order to start making certain tenant improvements. Accordingly, for accounting purposes the lease commencement date was determined to be January 1, 2018 under the prior guidance of ASC 840, and therefore the Company had begun recognizing lease expense as of that date. The Lease term extends ten years following January 1, 2019. The Company is entitled to two five-year options to extend the Lease; however, these options were not included in the calculation of the Lease asset or liability. The Company has elected to employ the provision under ASC 842 to use hindsight with respect to determining the lease term (i.e., consideration of the actual outcome of lease renewals, termination options, and purchase options) and in assessing any impairment of right-of-use assets for existing leases. The Company notes no events such as renewals or termination options have occurred with the Lease of 65 Hayden Avenue. Therefore, the hindsight practical expedient under ASC 842 has no impact on the accounting term as previously determined under ASC 840. As of June 30, 2019, the remaining lease term for the Premises is 9 years and 6 months.
The Lease provides for annual base rent of approximately $2.8 million in the first year following the Base Rent Commencement Date of January 1, 2019, which increases on a yearly basis by 3.0% (subject to an abatement of base rent of approximately $0.5 million at the beginning of the second year of the Lease term if the Company is not in default under the Lease). There are no variable payments, exercise purchase options, penalties, fees, or residual value guarantees under the Lease. The Company is also obligated to pay the Landlord for certain costs, taxes and operating expenses related to the Premises, subject to certain exclusions; however the Company has concluded that these payments are not in-substance fixed payments and therefore are not included in the calculation of the related lease liability and asset under ASC 842.
The Company recorded the liability associated with the Lease of 65 Hayden Avenue at the present value of the lease payments not yet paid, discounted using the discount rate for the Lease established at the commencement date. As our Lease does not provide an implicit rate, the Company had to estimate the incremental borrowing rate, or IBR, as of the commencement date. The IBR is defined under ASC 842 as the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments in a similar economic environment.
The IBR for the Lease was determined by establishing a credit rating of the Company using the Rank Order Model. Based on the established credit rating, the Company determined a borrowing rate using the Recovery Rate method, adjusted for the risk-free rate, which resulted in an IBR of approximately 13%. The Company used this IBR of 13% to discount the remaining lease payments over the remaining lease term and recorded a lease liability of $16.9 million on January 1, 2019. This lease liability will be amortized over the remaining lease term in an amount equal to the difference between the cash rent paid and the monthly interest calculated on the remaining lease liability. As of June 30, 2019, the Company had a current lease liability of $0.2 million and a non-current lease liability of $16.4 million recorded in its condensed consolidated balance sheets.
The Company received an improvement allowance from the Landlord of approximately $5.0 million for certain permitted costs related to the design of Company improvements to the Premises, consisting of normal tenant improvements. The Company is deemed to be the owner of these tenant improvements during the lease term. These $5.0 million of improvements are included in the Company’s property, plant and equipment balances in its condensed consolidated balance sheets as of June 30, 2019 and are depreciated over the shorter of their useful life or the related lease term.

19

CONCERT PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


On January 1, 2019, the Company recorded a right-of-use asset in the amount $9.5 million, which represents the lease liability of $16.9 million, adjusted for previously accrued rent of $2.9 million and previously recorded unamortized lease incentives (the improvement allowance) in the amount of $4.5 million. The right-of-use asset will be amortized over the remaining lease term in an amount equal to the difference between the calculated straight-line expense of the total lease payments less the monthly interest calculated on the remaining lease liability. As of June 30, 2019, the Company had a long-term lease asset of $9.4 million recorded in its condensed consolidated balance sheets.
The Company will recognize lease expense, calculated as the remaining cost of the lease allocated over the remaining lease term on a straight-line basis. Lease expense will be presented as part of continuing operations in the condensed consolidated statement of operations and comprehensive loss. For the six months ended June 30, 2019, the Company recognized $1.2 million in lease expense.
For the six months ended June 30, 2019, the Company paid $1.4 million in rent relating to the Lease. As a payment arising from an operating lease, the $1.4 million will be classified within operating activities in the Condensed Consolidated Statements of Cash Flows.
Supplemental cash flow information:
For the six months ended June 30,
(in thousands)
2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
$
1,388

Supplemental balance sheet information:
For the six months ended June 30,
(in thousands)
2019
2018
 
 
 
Operating lease right-of-use assets
$
9,376

$

Operating lease liability
16,579


 
 
 
Weighted average remaining lease term
9.50

10.26

Weighted average discount rate
13.08
%
%
Maturities of lease liabilities:
For the twelve months ended December 31,
 
(in thousands)
 
 
2019
$
1,390

*
2020
2,406

 
2021
2,969

 
2022
3,058

 
2023
3,150

 
Thereafter
17,223

 
Total lease payments
30,196

 
Less imputed interest
(13,617
)
*
Total
$
16,579

 
* Excludes the six months ended June 30, 2019
 
 







20

CONCERT PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


12. Open Market Sale Agreement

On March 1, 2019, the Company entered into an Open Market Sale Agreement, or the Agreement, with Jefferies LLC, or Jefferies, with respect to an at-the-market offering program under which the Company may offer and sell, from time to time at its sole discretion, shares of its common stock, par value $0.001 per share, having an aggregate offering price of up to $50,000,000, referred to as Placement Shares, through Jefferies as its sales agent. The Company will pay Jefferies a commission equal to 3.0 percent (3.0%) of the gross sales proceeds of any Placement Shares sold through Jefferies under the Agreement, and also has provided Jefferies with customary indemnification and contribution rights. In addition, the Company has agreed to reimburse certain legal expenses and fees by Jefferies in connection with the offering up to a maximum of $50,000, in addition to certain ongoing disbursements of Jefferies' counsel. As of June 30, 2019 the Company incurred approximately $0.2 million related to legal, accounting and other fees in connection with the Agreement. The Company has not issued or sold any securities under the Agreement.


21



Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q. Statements contained or incorporated by reference in this Quarterly Report on Form 10-Q that are not based on historical fact are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, projections, intentions, goals, strategies, plans, prospects and the beliefs and assumptions of our management including, without limitation, our expectations regarding results of operations, general and administrative expenses, research and development expenses, current and future development and manufacturing efforts, regulatory filings, nonclinical and clinical trial results, and the sufficiency of our cash for future operations. You should read the “Risk Factors” section in Part II—Item 1A. of this report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.


OVERVIEW
We are a clinical stage biopharmaceutical company applying our extensive knowledge of deuterium chemistry to discover and develop novel small molecule drugs. Selective incorporation of deuterium into known molecules has the potential, on a case-by-case basis, to provide better pharmacokinetic or metabolic properties, thereby enhancing their clinical safety, tolerability or efficacy. Our approach typically starts with previously studied compounds, including approved drugs, which we believe may be improved with deuterium substitution. Our technology provides the opportunity to develop products that may compete with the non-deuterated drug in existing markets or to leverage its known activity to expand into new indications and may enable compounds not otherwise well-suited for human drug development to be clinically developed. Our deuterated chemical entity platform, or DCE Platform®, has broad potential across numerous therapeutic areas.  The Company’s pipeline includes multiple clinical-stage candidates and a number of preclinical compounds that it is currently assessing.

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13035231&doc=13

CTP-543
Background on Alopecia Areata
Alopecia areata is a chronic autoimmune disease affecting approximately 650,000 Americans at any given time that results in partial or complete loss of hair on the scalp and/or body. Alopecia areata occurs when the immune system attacks the hair follicles and is characterized as non-scarring hair loss. It presents in a number of patterns including:
Patchy: coin-sized or larger patch or patches of hair loss;
Totalis: no hair on the head; and
Universalis: no hair anywhere on the body.
Onset can occur at any age including childhood, and it affects both women and men equally. While the average age of onset is between 25-35 years, the disease does occur in children, and onset in the first two decades is associated with more severe

22


disease. The emotional effect of alopecia areata can be considerable and may result in anxiety and depression or affect personal attributes such as self-esteem and confidence.  Alopecia areata may also be associated with other autoimmune conditions such as thyroid disease, vitiligo, allergic rhinitis, asthma, lupus, rheumatoid arthritis, and ulcerative colitis.   The most common form of treatment is corticosteroids including intralesional injections or topical application. However, they often are not an effective treatment option.  There are currently no FDA-approved treatments for alopecia areata.
CTP-543 Opportunity
CTP-543 was discovered by applying Concert's deuterium chemistry technology to modify ruxolitinib, a Janus kinase ("JAK") inhibitor, which is commercially available under the name Jakafi® in the United States for the treatment of certain blood disorders.

In January 2018, we announced that the FDA had granted Fast Track designation to CTP-543 for the treatment of alopecia areata.
Clinical Development of CTP-543
In 2016, we completed single and multiple ascending dose Phase 1 trials with our investigational treatment CTP-543, which enrolled a total of 77 healthy volunteers. The pharmacokinetic measurements showed increased exposure with increasing doses of CTP-543. CTP-543 was well-tolerated across all dose groups and there were no serious adverse events reported in subjects who received CTP-543. In the multiple ascending dose Phase 1 trial of CTP-543, pharmacodynamic analyses were performed to assess the inhibition of IL-6- and IFN-gamma-mediated JAK/STAT signaling. Consistent with the expected pharmacological activity of a JAK1/JAK2 inhibitor, CTP-543 demonstrated a dose-related reduction of IL-6-stimulated phosphorylation of STAT3 in an ex-vivo assay. Also, IFN-gamma-mediated STAT1 signaling, which is believed to play a key role in the pathogenesis of alopecia areata, was significantly inhibited in disease-relevant immune cell types at all doses evaluated.

We also conducted a Phase 1 crossover study evaluating the metabolite profiles of CTP-543 and ruxolitinib. In this study, except for the presence of deuterium, no new metabolites were observed with CTP-543.

A Phase 2 double-blind, randomized, sequential dose-ranging trial to evaluate three sequential doses of CTP-543 (4, 8 and 12 mg twice-daily) and a placebo control in patients with moderate-to-severe alopecia areata is ongoing. The primary outcome measure will utilize the severity of alopecia tool (SALT) after 24 weeks of dosing. In November 2018, we announced interim topline results from the 4 mg and 8 mg twice-daily cohorts of our Phase 2 trial. At 24 weeks, patients treated with an 8 mg twice-daily dose of CTP-543 met the primary efficacy endpoint vs. placebo (p <0.001), with patients achieving 50% relative reduction in SALT between Week 24 and baseline.  Regrowth of hair did not appear to plateau at Week 24.  In the primary analysis, the response observed in the 8 mg twice daily dose was significantly different than the 4 mg twice daily dose (p < 0.05). Compared to placebo, a significant relative reduction in mean SALT score was first observed in the 8 mg cohort at Week 12 (p <0.05). The average baseline SALT score across all patients enrolled in the trial was approximately 88. Treatment with CTP-543 was generally well tolerated. The most common side effects in the 4 mg and 8 mg cohorts were headache, upper respiratory tract infection, cough, acne and nausea and no serious adverse events were reported. The 12 mg twice-daily cohort of CTP-543 compared to placebo is ongoing. Results from the complete Phase 2 trial, including the 12 mg cohort, are expected in the third quarter of 2019.


















23


Primary Analysis: Responders at Week 24
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13035231&doc=14

Responders by Visit: Patients with > 50% Change in SALT Relative to Baseline
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13035231&doc=12

In March 2019, the Company initiated an open label trial to evaluate once-daily versus twice-daily dosing of CTP-543 in patients with moderate-to-severe alopecia areata in the United States. In June 2019, the Company completed enrollment of 57 adult patients with chronic, moderate-to-severe alopecia areata. Patients in the trial were randomized to receive CTP-543 either 8 mg twice-daily or 16 mg once-daily over a 24 week treatment period. The trial will measure the change in Severity of Alopecia Tool (SALT) score between Week 24 and baseline. The trial is expected to be completed in the fourth quarter of 2019.

In May 2019, the Company initiated a second open label trial to evaluate once-daily compared to twice-daily dosing of CTP-543 in patients with moderate-to-severe alopecia areata. Approximately 60 patients with moderate-to-severe alopecia areata are expected to be enrolled at sites in the United States and Canada. Patients in the trial will be randomized to receive

24


CTP-543 either 12 mg twice-daily or 24 mg once-daily over a 24 week treatment period. The trial will measure the relative change in Severity of Alopecia Tool (SALT) score between Week 24 and baseline. The trial is expected to be completed in the first half of 2020.

All patients who complete 24 weeks of treatment in the 12 mg twice-daily cohort of the Phase 2 trial, the two ongoing open label studies and future studies, are eligible to enroll into an open label extension study of CTP-543. The open label extension study began enrolling patients in April 2019.

CTP-692
Background on Schizophrenia
Schizophrenia is a chronic and devastating neuropsychiatric disorder that is a leading cause of disability worldwide. The disease afflicts nearly 1% of the world’s population, affecting both men and women equally, and striking all ethnic and socioeconomic groups with a similar level of prevalence. The illness is characterized by multiple symptoms that are categorized into three clusters known as positive symptoms (hallucinations and delusional behaviors), negative symptoms (anhedonia, social withdrawal and apathy), and cognitive dysfunction (diminished capacity for learning, memory, and executive function). The underlying basis of the current antipsychotic therapy is that excessive dopaminergic neurotransmission and dysfunctional D2 receptor signaling plays a key pathophysiological role in the disease, and consequently all typical and atypical antipsychotics in clinical practice possess some level of D2 antagonist activity. Currently available antipsychotic drugs exhibit efficacy for positive symptoms, but have been limited in their capacity to treat negative symptoms and cognitive deficits.

There is an extensive body of evidence supporting N-methyl-D-aspartate, or NMDA, receptor hypofunction as a key underlying mechanism of schizophrenia. The NMDA receptor comprises two binding domains and, in addition to requiring glutamate binding, activation with a co-agonist such as D-serine or glycine is necessary for NMDA receptor activation. D-Serine is believed to be the most important human NMDA synaptic co-agonist. It has been postulated for some time that administration of NMDA co-agonists could benefit patients with schizophrenia since there is evidence that plasma and cerebral spinal fluid, or CSF, levels of endogenous D-serine are reduced in patients with schizophrenia. In addition, higher activity of the D-serine-metabolizing enzyme D-amino acid oxidase has been reported in post-mortem brain tissue of patients with schizophrenia than in normal individuals.
CTP-692 Opportunity
CTP-692 is a selective deuterium-modified analog of the endogenous amino acid, D-serine. Based on published preclinical and clinical effects of D-serine, the Company believes that CTP-692 has the potential to help restore NMDA receptor activity in key areas of the brain to improve clinical outcomes in patients with schizophrenia. Clinical studies have shown that levels of D-serine measured in the plasma and CSF of patients with schizophrenia are significantly lower than healthy controls. Academic studies have demonstrated that oral dosing of D-serine can result in dose-dependent improvement in positive, negative, and cognitive symptoms in patients with schizophrenia when added to D2-modulating antipsychotics. However, preclinical studies have demonstrated that D-serine can cause nephrotoxicity in rats. In addition, in some patients who received high doses of D-serine, clinical findings suggesting renal impairment were observed. As a result, the clinical development of D-serine has historically been limited.

In preclinical studies, CTP-692 has shown clear dose separation from D-serine in causing increased levels of serum creatinine and blood urea nitrogen, suggesting that CTP-692 could have reduced toxicity and a larger therapeutic window. CTP-692 also provides greater exposure than doses of D-serine in several preclinical species. It therefore may be better-suited for development as a human therapeutic agent. CTP-692 will initially be developed as an adjunctive therapy along with standard antipsychotic medicines in patients with schizophrenia.

The Phase 1 program was designed to assess CTP-692’s safety, tolerability and pharmacokinetics in healthy volunteers. The Phase 1 program included three studies: a crossover comparison of CTP-692 versus D-serine, a single-ascending dose study that also assessed the effect of food on the pharmacokinetics of CTP-692, and a multiple-ascending dose trial assessing CTP-692 dosed orally over seven days.

In the crossover study, CTP-692 was found to have increased plasma exposure compared to D-serine. In the single- and multiple-ascending dose trials, CTP-692 was evaluated across doses ranging from 0.5 to 4 grams compared to placebo in a total of 72 volunteers. CTP-692 demonstrated a favorable safety, tolerability and pharmacokinetic profile with no serious adverse events reported. Importantly, key blood and urine markers of kidney function did not indicate any signs of renal impairment. 

25



In the fourth quarter of 2019 we expect to advance CTP-692 into a Phase 2 trial as an adjunctive treatment for schizophrenia.

Preclinical Pipeline

We are currently assessing a number of preclinical assets as potential development candidates.

COLLABORATION PRODUCT CANDIDATES
We have several collaborative arrangements with companies to develop deuterium-modified versions of their marketed products. In each of these collaborations, the deuterium-modified compound was independently discovered at Concert. Our collaborators are responsible for any future clinical development activities and disclosures associated with the following programs.

AVP-786 is a combination of deudextromethorphan and an ultra-low dose of quinidine being investigated for the treatment of neurologic and psychiatric disorders that is being developed under a collaboration with Avanir, a subsidiary of Otsuka Pharmaceuticals Co., Ltd. In November 2015, Avanir announced the initiation of the Phase 3 clinical program to evaluate the safety and efficacy of AVP-786 for the treatment of agitation associated with dementia of the Alzheimer's type. It enrolled 932 patients in two North American Phase 3 double-blind, placebo controlled trials. The first North American Phase 3 trial completed in February 2019 and the second Phase 3 trial is expected to be completed in October 2019 and both are expected to be part of the NDA package. In October 2017, Avanir initiated a global Phase 3 trial which is expected to enroll approximately 400 patients to evaluate the safety and efficacy of AVP-786 for the treatment of agitation associated with dementia of the Alzheimer's type. In February 2019, Avanir initiated a Phase 2/3 trial to evaluate the safety and efficacy of AVP-786 for the treatment of negative symptoms of schizophrenia in approximately 370 patients.
CTP-730 is a deuterated analog of apremilast that is being developed under a collaboration with Celgene. In January 2019, Celgene and Bristol-Myers Squibb Company announced that they have entered into a definitive merger agreement pursuant to which Bristol-Myers Squibb will acquire Celgene. In June 2019, Bristol-Myers Squibb announced the planned divestiture of OTEZLA® (apremilast) in light of concerns raised by the U.S. Federal Trade Commission (FTC) during the FTC’s continued review of the proposed transaction. The divestiture would be conditioned upon the closing of Bristol-Myers Squibb’s acquisition of Celgene. Apremilast is a selective phosphodiesterase 4 (PDE4) inhibitor approved in various countries for the treatment of moderate to severe plaque psoriasis and psoriatic arthritis. We have completed the Phase 1 clinical evaluation of CTP-730. Once daily dosing of 50 mg of CTP-730 administered for seven days in the Phase 1 clinical trial demonstrated similar steady state exposure to historical data for 30 mg of apremilast twice daily. Treatment with CTP-730 was generally well-tolerated and no serious adverse events were observed. Celgene is responsible for any development of CTP-730 beyond the completed Phase 1 clinical trials. Celgene is assessing the path forward for CTP-730. However, CTP-730 has not advanced into new trials at this time.
Jazz Pharmaceuticals is evaluating several formulation and technology options as part of its once nightly oxybate program. Jazz Pharmaceuticals initially evaluated JZP-386, a deuterium containing high sodium analog of Xyrem, which demonstrated favorable deuterium-related effects. However its current once-nightly development efforts are focused on lower sodium compounds. The collaboration with Jazz Pharmaceuticals provides for the evaluation of deuterium as an option for a once nightly sodium oxybate product (D-SXB).
ASSET PURCHASE AGREEMENT WITH VERTEX PHARMACEUTICALS FOR CTP-656
In July of 2017, we completed a previously announced Asset Purchase Agreement under which Vertex acquired worldwide development and commercialization rights to CTP-656 and other assets related to the treatment of cystic fibrosis (CF). CTP-656, now known as VX-561, is an investigational cystic fibrosis transmembrane conductance regulator (CFTR) potentiator that has the potential to be used as part of future once-daily combination regimens of CFTR modulators that treat the underlying cause of cystic fibrosis. We received $160 million in cash upon closing, and if VX-561 is approved as part of a combination regimen to treat cystic fibrosis, we are eligible to receive up to $90 million in additional milestones based on regulatory approval in the U.S. and agreement for reimbursement in the first of the U.K., Germany or France.






26


INTELLECTUAL PROPERTY

CTP-543

We hold a U.S. patent covering the composition of matter of deuterated analogs of ruxolitinib and corresponding U.S. patent applications. The patent and the patent applications are expected to expire in 2033. We have corresponding patent applications in Europe and Japan, which if they issue as patents, are expected to expire in 2033. We have retained all of the CTP-543 patent rights.

The Patent Trial and Appeal Board, or PTAB, instituted an inter partes review, or IPR, brought against our U.S. Patent No. 9,249,149 by Incyte Corporation (the "149 patent").  The '149 patent claims deuterated analogs of ruxolitinib including CTP-543.  In April 2019, the PTAB issued a final written decision in connection with the IPR that found that the claims of the '149 patent are not patentable. The '149 patent remains valid and enforceable until appeals have been exhausted. In June 2019, the Company filed a Notice of Appeal with the Federal Circuit.

The PTAB decision does not prohibit us from developing CTP-543 for alopecia areata and we remain committed to the development of the program. We also intend to explore additional patents to protect the commercial opportunity.

FINANCIAL OPERATIONS OVERVIEW
Since our inception in 2006, we have devoted substantially all of our resources to our research and development efforts, including activities to develop our deuterated chemical entity platform, or DCE Platform®, and our core capabilities in deuterium chemistry, to identify potential product candidates, undertake nonclinical studies and clinical trials, manufacture clinical trial material in compliance with current good manufacturing practices, provide general and administrative support for these operations and establish our intellectual property. We have generated an accumulated deficit of $157.0 million since inception through June 30, 2019 and will require substantial additional capital to fund our research and development. We do not have any products approved for sale and have not generated any revenue from product sales. We have funded our operations primarily through the public offering and private placement of our equity, debt financing, funding from collaborations and patent assignments, an asset sale, and other arrangements.

Our operating results may fluctuate significantly from year to year, depending on the timing and magnitude of cash payments received pursuant to collaboration and licensing arrangements and other agreements and the timing and magnitude of clinical trial and other development activities under our current development programs. Substantially all of our net losses have resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations.
We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We expect our expenses will increase substantially in connection with our ongoing activities as we continue research and development efforts and develop and conduct additional nonclinical studies and clinical trials with respect to our product candidates.

We do not expect to generate revenue from product sales unless and until we, or our collaborators, obtain marketing approval for one or more of our product candidates, which we expect will take a number of years and is subject to significant uncertainty. If we obtain, or believe that we are likely to obtain, marketing approval for any product candidates for which we retain commercialization rights, and intend to commercialize a product, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. We expect to seek to fund our operations through a combination of equity offerings, debt financings, additional collaborations and licensing arrangements, and other sources for at least the next several years. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would force us to delay, limit, reduce or terminate our research and development programs and could have a material adverse effect on our financial condition and our ability to develop our products. We will need to generate significant revenues to achieve sustained profitability and we may never do so.
Revenue
We have not generated any revenue from the sales of approved products. All of our revenue to date has been generated through collaboration, license and research arrangements with collaborators and nonprofit organizations for the development and commercialization of product candidates, a patent assignment agreement, and an asset sale. On January 1, 2018, we adopted ASC 606 using the modified retrospective approach. For detailed information regarding the adoption of ASC 606, the impact

27


on our consolidated financial statements and its collaboration arrangements, see Note 2 and Note 12 to the consolidated financial statements appearing in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2019.

The terms of these agreements may include one or more of the following types of payments: non-refundable license fees, payments for research and development activities, payments based upon the achievement of specified milestones, payment of license exercise or option fees relating to product candidates and royalties on any net product sales. To date, we have received non-refundable upfront payments, several milestone payments, payments for research and development services provided to our collaborators, a change in control payment pursuant to a patent assignment agreement, and a payment for the sale of an asset. However, we have not yet earned any license exercise or option fees, sales-based milestone payments or royalty revenue as a result of product sales.

In the future, we will seek to generate revenue from a combination of product sales and milestone payments and royalties on product sales in connection with our current collaborations, our asset sale with Vertex, or other collaborations we may enter into.
Research and development expenses
Research and development expenses consist primarily of costs incurred for the development of our product candidates, which include:
 
employee-related expenses, including salary, benefits, travel and stock-based compensation expense;
expenses incurred under agreements with contract research organizations and investigative sites that conduct our clinical trials;
the cost of acquiring, developing and manufacturing clinical trial materials;
facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies;
platform-related lab expenses, which includes costs related to synthesis, analysis and in vitro and in vivo characterization of deuterated compounds to support the selection and progression of potential product candidates;
expenses related to consultants and advisors; and
costs associated with nonclinical activities and regulatory operations.
Research and development costs are expensed as incurred. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and our clinical sites.

A significant portion of our research and development costs have been external costs, which we track on a program-by-program basis. These external costs include fees paid to investigators, consultants, central laboratories and contract research organizations in connection with our clinical trials, and costs related to acquiring and manufacturing clinical trial materials. Our internal research and development costs are primarily personnel-related costs, depreciation and other indirect costs. We do not track our internal research and development expenses on a program-by-program basis as they are deployed across multiple projects under development.

The successful development of any of our product candidates is highly uncertain. As such, at this time, we cannot reasonably predict with certainty the duration and completion costs of the current or future clinical trials of any of our product candidates or if, when, or to what extent we will generate revenues from the commercialization and sale of any of our product candidates that obtain marketing approval. We may never succeed in achieving regulatory approval for any of our product candidates. The duration, costs, and timing of clinical trials and development of our product candidates will depend on a variety of factors, including:
 
the scope and rate of progress of our ongoing as well as any additional clinical trials and research and development activities;
conduct of and results from ongoing as well as any additional clinical trials and research and development activities;
significant and changing government regulation;
the terms and timing and receipt of any regulatory approvals;
the performance of our collaborators;
our ability to manufacture any of our product candidates that we are developing or may develop in the future; and
the expense and success of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, including potential claims that we infringe other parties' intellectual property.

28


A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials or other research and development activities beyond those that we currently anticipate will be required for the completion of clinical development of a product candidate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.

Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, due to the increased size and duration of later-stage clinical trials and the manufacturing that is typically required for those later-stage clinical trials. We expect research and development costs to increase significantly for the foreseeable future as our product candidate development programs progress but we do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our clinical development programs and plans.
General and administrative expenses
General and administrative expenses consist primarily of salaries and related costs for personnel, including stock-based compensation for our employees in executive, operational, finance, legal, business development and human resource functions. Other general and administrative expenses include facility-related costs, depreciation and other expenses not allocated to research and development expense and professional fees for directors, accounting and legal services and expenses associated with obtaining and maintaining patents. In both 2019 and 2018, we incurred expenses for intellectual property matters related to CTP-543.
We anticipate that our general and administrative expenses will increase in the future as our pipeline grows and matures. Additionally, if and when we believe a regulatory approval of the first product candidate that we intend to commercialize on our own appears likely, we anticipate an increase in payroll and related expenses as a result of our preparation for commercial operations, especially as it relates to the sales, marketing and distribution of our product candidates.
Investment income
Investment income consists of interest income earned on cash equivalents and investments. The amount of investment income earned in any particular period may vary primarily as a result of the amount of cash equivalents and investments held during the period and the types of securities included in our portfolio during the period. Our current investment policy is to maintain a diversified investment portfolio of U.S. government-backed securities and money market mutual funds consisting of U.S. government-backed securities.
Unrealized Gains (Losses) on Marketable Equity Securities
Unrealized gains (losses) on marketable equity securities consists of changes in the fair value of common shares of Processa held by us, discussed further in Note 8 in the accompanying condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
Income Taxes
We record a provision or benefit for income taxes on pre-tax income or loss based on our estimated effective tax rate for the year. As of June 30, 2019, we forecast an ordinary pre-tax loss for the year ended December 31, 2019 and, since we maintain a full valuation allowance on our deferred tax assets, we did not record an income tax benefit for the three and six months ended June 30, 2019.
Critical Accounting Policies and Significant Judgments and Estimates
Our critical accounting policies are those policies which require the most significant judgments and estimates in the preparation of our condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. On

29


January 1, 2019, the Company adopted ASU 2016-02 and all related amendments. For discussion regarding the impact of this accounting pronouncement, refer to Note 11 appearing elsewhere in this quarterly report on Form 10-Q.

With the exception of the adoption of ASU 2016-02, there were no material changes to our critical accounting policies as detailed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, which was filed with the Securities and Exchange Commission on February 28, 2019.

Pending and Recently Adopted Accounting Pronouncements
For detailed information regarding recently issued accounting pronouncements and the actual and expected impact on our condensed consolidated financial statements, see Note 2 in the accompanying condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.


RESULTS OF OPERATIONS
Discussion of the three and six months ended June 30, 2019
The following table summarizes our results of operations for the three and six months ended June 30, 2019.
 
Three months ended
June 30,

Six months ended
June 30,
(in thousands)
2019
 
2019
Revenue:
 
 
 
License and research and development revenue
$
49

 
$
1,054

Operating expenses:
 
 
 
Research and development
14,496

 
30,286

General and administrative
4,978

 
10,587

Total operating expenses
19,474

 
40,873

Loss from operations
(19,425
)
 
(39,819
)
Investment income
883

 
1,750

Unrealized loss on equity securities
(126
)
 
(2,425
)
Net Loss
$
(18,668
)
 
$
(40,494
)

License and Research and Development Revenue

Total revenue was $49 thousand and $1.1 million for the three and six months ended June 30, 2019, respectively. The revenue recognized in the 2019 periods was primarily a result of the Cipla licensing arrangement executed in the first quarter of 2019. For the three and six months ended June 30, 2019, the Company recognized $22 thousand and $1.0 million in revenue, respectively, associated with this arrangement. For additional details related to the licensing arrangement with Cipla, see Note 8 in the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

On January 1, 2018, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2014-19, Revenue from Contracts with Customers ("ASC 606" or "the new revenue standard"). The Company adopted ASC 606 using the modified retrospective approach. For detailed information regarding the adoption of ASC 606, the impact on its consolidated financial statements and its collaboration arrangements, see Note 2 and Note 12 to the consolidated financial statements appearing in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2019.
Research and development expenses
The following table summarizes our external research and development expenses, by program, for the three and six months ended June 30, 2019, with our internal research expenses separately classified by category.


30


 
 
Three Months Ended June 30,

Six Months Ended June 30,
(in thousands)
 
2019
 
2019
CTP-543 external costs
 
$
5,018

 
$
8,951

CTP-692 external costs
 
2,758

 
6,789

External costs for other programs
 
629

 
1,988

Employee and contractor-related expenses
 
4,692

 
9,761

Facility and other expenses
 
1,399

 
2,797

Total research and development expenses
 
$
14,496

 
$
30,286

Research and development expenses were $14.5 million and $30.3 million for the three and six months ended June 30, 2019, respectively. CTP-543 expenses primarily relate primarily to clinical development including multiple ongoing Phase 2 clinical trials. CTP-692 expenses was attributable to the ongoing Phase 1 clinical trials as well as manufacturing costs to support the continued advancement of the CTP-692 program. Employee-related expenses consisted primarily of cash and non-cash stock-based compensation expenses for the three and six months ended June 30, 2019. Facility-related expenses consisted primarily of rent and maintenance of our premises. External costs for other programs consisted of a $0.5 million payment to the non-profit organization Fast Forward in the first quarter of 2019 related to an existing CTP-354 agreement which was triggered by the upfront payment from the Cipla arrangement, and costs incurred to develop our research pipeline.
General and administrative expenses
The following table summarizes our external general and administrative expenses for the three and six months ended June 30, 2019.

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
 
2019
 
2019
Employee salaries and benefits
 
$
2,747

 
$
5,747

External professional service and legal expenses
 
1,197

 
2,808

Facility, technology, and other expenses
 
959

 
1,876

Depreciation and amortization
 
75

 
156

Total general and administrative expenses
 
$
4,978

 
$
10,587

Investment income

Investment income was $0.9 million and $1.8 million for the three and six months ended June 30, 2019, respectively, and consists of interest income earned on cash equivalents and investments.
Unrealized loss on equity securities
Unrealized loss on marketable equity securities was $0.1 million and $2.4 million for the three and six month ended June 30, 2019, respectively, and consists of changes in the fair value of common shares of Processa held by us, discussed further in Note 8 of the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
Provision for Income Taxes

There was no income tax expense for the three and six months ended June 30, 2019.

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Discussion of the three and six months ended June 30, 2018
The following table summarizes our results of operations for the three and six months ended June 30, 2018.
 
Three months ended
June 30,
 
Six months ended
June 30,
(in thousands)
2018
 
2018
Revenue:
 
 
 
License and research and development revenue
$
2

 
$
10,481

Operating expenses:
 
 
 
Research and development
8,862

 
17,518

General and administrative
5,514

 
11,144

Total operating expenses
14,376

 
28,662

Loss from operations
(14,374
)
 
(18,181
)
Investment income
660

 
1,300

Unrealized gain (loss) on equity securities
669

 
(627
)
Loss before tax provision
(13,045
)
 
(17,508
)
Provision for income taxes
280

 
280

Net Loss
$
(13,325
)
 
$
(17,788
)

License and Research and Development Revenue

Total revenue was $2 thousand and $10.5 million for the three and months ended June 30, 2018, respectively. The revenue recognized in the 2018 was primarily attributable to the licensing arrangement executed with Processa, discussed further in Note 8 in the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
Research and development expenses
The following table summarizes our external research and development expenses, by program, for the three and six months ended June 30, 2018, with our internal research expenses separately classified by category.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
 
2018
 
2018
CTP-543 external costs
 
$
2,133

 
$
4,187

CTP-692 external costs
 
764

 
950

External costs for other programs
 
515

 
1,149

Employee and contractor-related expenses
 
4,133

 
8,645

Facility and other expenses
 
1,317

 
2,587

Total research and development expenses
 
$
8,862

 
$
17,518

Research and development expenses were $8.9 million and $17.5 million for the three and six months ended June 30, 2018, respectively. CTP-543 expenses primarily related to an ongoing Phase 2 clinical trial. CTP-692 expenses were attributable to preclinical studies and the manufacture of clinical drug product to support the advancement of the program into Phase 1 clinical trials. Employee-related expenses consisted primarily of cash and non-cash stock-based compensation expenses for the three and six months ended June 30, 2018. Facility-related expenses consisted primarily of rent and maintenance of our premises. External costs for other programs consisted of costs incurred to develop our research pipeline.
General and administrative expenses
The following table summarizes our external general and administrative expenses for the three and six months ended June 30, 2018.


32


 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
 
2018
 
2018
Employee salaries and benefits
 
$
2,976

 
$
6,546

External professional service and legal expenses
 
1,457

 
2,485

Facility, technology, and other expenses
 
1,062

 
2,075

Depreciation and amortization
 
19

 
38

Total general and administrative expenses
 
$
5,514

 
$
11,144

Investment income

Investment income was $0.7 million and $1.3 million for the three and six months ended June 30, 2018, respectively, and consists of interest income earned on cash equivalents and investments.
Unrealized gain (loss) on equity securities
Unrealized gain on marketable equity securities was $0.7 million and unrealized loss on marketable equity securities was $0.6 million for the three and six month ended June 30, 2018, respectively, and consists of changes in the fair value of common shares of Processa held by us, discussed further in Note 8 of the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
Provision for Income Taxes

Income tax expense for the three and six months ended June 30, 2018 was $0.3 million. We recorded a provision for income taxes of $0.3 million for interest owed to Federal and State tax authorities due to the deferral of $16 million in income from Vertex for cash currently held in escrow, as discussed further in Note 8 in the accompanying condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

OFF-BALANCE SHEET ARRANGEMENTS
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.


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LIQUIDITY AND CAPITAL RESOURCES
We have incurred cumulative losses and negative cash flows from operations since our inception in April 2006, and as of June 30, 2019, we had an accumulated deficit of $157.0 million. We generated net income for fiscal year 2015 due to a one-time payment from Auspex Pharmaceuticals, Inc. under a change of control provision described in the patent assignment agreement and again in 2017 from the closing of our sale of CTP-656 to Vertex, but we anticipate that we will continue to incur losses for at least the next several years. We expect that our research and development and general and administrative expenses will continue to increase and, as a result, we will need additional capital to fund our operations, which we may raise through a combination of equity offerings, debt financings, additional collaborations and licensing arrangements, and other sources.
We have financed our operations to date primarily through the public offering and private placement of our equity, debt financing and funding from collaborations, patent assignments, and an asset sale. During February 2014, we completed our initial public offering, or IPO, whereby we sold 6,649,690 shares of common stock at a price to the public of $14.00 per share, raising aggregate net proceeds of $83.1 million. During March 2015, we sold 3,300,000 shares of common stock through an underwritten public offering at a price to the public of $15.15 per share, raising aggregate net proceeds of $46.7 million.
In June 2015, we received proceeds of $50.2 million in connection with the change in control payment from Auspex, relating to Teva Pharmaceutical Industries Ltd.’s acquisition of Auspex.
On July 25, 2017, the Vertex Asset Purchase Agreement was completed and Vertex paid us $160 million in cash consideration.
As of June 30, 2019, we had cash and cash equivalents and investments of $136.6 million. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. Currently, our funds are held in U.S. government-backed securities and money market mutual funds consisting of U.S. government-backed securities.
Cash flows
The following table sets forth the primary sources and uses of cash for each of the periods set forth below:
 
Six months ended
June 30,
(in thousands)
2019
 
2018
Net cash provided by (used in):
 
 
 
Operating activities
$
(18,025
)
 
$
(21,205
)
Investing activities
42,896

 
52,194

Financing activities
1,073

 
(295
)
Net increase in cash and cash equivalents and restricted cash
$
25,944

 
$
30,694

Operating activities. The cash used for operating activities generally approximates our net loss adjusted for non-cash items and changes in operating assets and liabilities. During the six months ended June 30, 2019, we received a $16 million payment from Vertex for an indemnification payment previously held in escrow, discussed further in Note 8 of the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
During the six months ended June 30, 2019, our operating activities used cash of $18.0 million as compared to cash used by operating activities of $21.2 million during the prior year period. Cash used in operating activities during both 2019 and 2018 was primarily driven by our development activities associated with CTP-692 and CTP-543, our wholly owned development programs.
Investing activities. Net cash provided by investing activities consisted of proceeds from the maturity of investments, purchases of investments and purchases of fixed assets. Net cash provided by maturities of investments for the six months ended June 30, 2019 and 2018 was $92.6 million and $63.1 million, respectively. Net cash used in purchases of investments for the six months ended June 30, 2019 and 2018 was $49.2 million and $9.4 million, respectively.  Purchases of fixed assets for the six months ended June 30, 2019 and 2018 was $0.5 million and $1.5 million, respectively. The decrease in the purchases of fixed assets during the 2019 period is primarily due to new office and laboratory equipment purchased in the 2018 period to support the new office and laboratory space at 65 Hayden, Lexington, Massachusetts, discussed further in Note 11 of the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.


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Financing activities. During the six months ended June 30, 2019 and 2018, our financing activities provided cash of $1.1 million and used cash of $0.3 million, respectively. The cash provided by financing activities during the six months ended June 30, 2019 was primarily attributable to the proceeds from exercises of warrants and stock options during the period. The cash used in financing activities during the six months ended June 30, 2018 was primarily attributable to withholding taxes paid in lieu of shares surrendered upon the vesting of restricted stock.

Operating capital requirements

We do not anticipate commercializing any of our product candidates for several years. Although we generated net income in 2017 and 2015 due to one-time payments from Vertex and Auspex, respectively, we anticipate that we will continue to generate losses for the foreseeable future, and we expect the losses to increase as we continue the development of, and seek regulatory approvals for, our product candidates, and begin to commercialize any approved products for which we retain commercialization rights. We are subject to all of the risks incident in the development of new drug products, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business, as well as additional risks stemming from the unproven nature of deuterated drugs.

Based on our current expectations, including with respect to our development plans, we believe our existing cash and cash equivalents and investments as of June 30, 2019 will enable us to fund our operating expenses and capital expenditure requirements into the second half of 2020. However, we will require additional capital for the further development of our existing product candidates and may also need to raise additional funds sooner to pursue other development activities related to additional product candidates.

To date, we have not generated any revenue from product sales. We do not expect to generate significant revenue from product sales unless and until we, or our collaborators, obtain marketing approval of and commercialize one of our current or future product candidates. Because our product candidates are in various stages of development and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete development and commercialization of our product candidates or whether or when we will achieve profitability. We anticipate that we will continue to generate losses for the foreseeable future, and we expect the losses to increase as we continue the development of, and seek marketing approvals for, our product candidates, and begin to commercialize any approved products for which we retain commercialization rights.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings and additional collaborations, strategic alliances and licensing arrangements, and other arrangements. Except for any obligations of our collaborators to reimburse us for research and development expenses or to make milestone payments under our agreements with them, we do not have any additional committed external sources of funds. Additional capital may not be available on reasonable terms, if at all. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. If we raise additional funds through the issuance of additional debt or equity securities, it could result in dilution to our existing stockholders, increased fixed payment obligations and the issuance of securities with rights senior to those of our common stock. We may become subject to covenants under any future indebtedness that could limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, which could adversely impact our ability to conduct our business.

Our expectation with respect to the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including those discussed in the “Risk Factors” section of this Quarterly Report on Form 10-Q. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. If we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, financial condition and results of operations could be materially adversely affected.
Contractual obligations
As of June 30, 2019, the Company's contractual obligations remain consistent with those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018.

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Item 3.
Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risk related to changes in interest rates.  Our current investment policy is to maintain a diversified investment portfolio in U.S. government-backed securities and money market mutual funds consisting of U.S. government-backed securities. Our cash is deposited in and invested through highly rated financial institutions in North America. As of June 30, 2019 and December 31, 2018, we had $136.6 million and $153.3 million of cash, cash equivalents and investments, respectively. The fair value of cash equivalents and short-term investments is subject to change as a result of potential changes in market interest rates. Due to the short-term maturities of our cash equivalents and the low risk profile of these investments, an immediate 100 basis point change in interest rates at levels as of June 30, 2019 would not have a material effect on the fair market value of our cash equivalents and short term investments.

We contract with suppliers of raw materials and contract manufacturers internationally. Transactions with these providers are predominantly settled in U.S. dollars and, therefore, we believe that we have only minimal exposure to foreign currency exchange risks. We do not hedge against foreign currency risks.

Inflation generally affects us by increasing our cost of labor and clinical trial costs. We do not believe that inflation had a material effect on our business, financial condition or results of operations during the six months ended June 30, 2019.

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Item 4.
Controls and Procedures.

Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their control objectives.
Our management, with the participation of our Chief Executive Officer and Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2019, the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our Chief Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of such date.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION
 
Item 1A.
Risk Factors.
Our business is subject to numerous risks. The following important factors, among others, could cause our actual results to differ materially from those expressed in forward-looking statements made by us or on our behalf in this Quarterly Report on Form 10-Q and other filings with the Securities and Exchange Commission, or the SEC, press releases, communications with investors and oral statements. Actual future results may differ materially from those anticipated in our forward-looking statements. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

RISKS RELATED TO OUR FINANCIAL POSITION AND NEED FOR ADDITIONAL CAPITAL

We have incurred significant losses since inception, expect to incur losses for at least the next several years and may never sustain profitability.
As of June 30, 2019, we had an accumulated deficit of $157.0 million. We have not generated any revenues from product sales and have financed our operations to date primarily through the public offering of our common stock, private placements of our preferred stock, debt financings and funding from collaborations or other agreements. We have not completed development of any product candidate and have devoted substantially all of our financial resources and efforts to research and development, including nonclinical studies and our clinical development programs. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. Our net losses may fluctuate significantly from quarter to quarter and year to year. Net losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital.
We anticipate that our expenses will increase substantially if and as we:
 
continue to develop and conduct nonclinical studies and clinical trials with respect to our product candidates;
seek to identify additional product candidates;
in-license or acquire additional product candidates;
seek marketing approvals for our product candidates that successfully complete clinical trials;
establish sales, marketing, distribution and other commercial infrastructure in the future to commercialize various products for which we may obtain marketing approval;
require the manufacture of larger quantities of product candidates for clinical development and potentially commercialization;
maintain, expand and protect our intellectual property portfolio;
hire additional personnel;
add equipment and physical infrastructure to support our research and development; and
continue to implement the infrastructure necessary to support our product development and help us comply with our obligations as a public company.

Our ability to become and remain profitable depends on our ability to generate revenue. We do not expect to generate significant revenue unless and until we are, or one of our collaborators is, able to successfully commercialize one or more of our product candidates. This will require success in a range of challenging activities, including completing clinical trials of our product candidates, obtaining marketing approval for these product candidates, manufacturing, marketing and selling those products for which we, or our collaborators, may obtain marketing approval, satisfying any post-marketing requirements and obtaining reimbursement for our products from private insurance or government payors. We, and our collaborators, may never succeed in these activities and, even if we do, or one of our collaborators does, we may never generate revenues that are large enough for us to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our Company and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our pipeline of product candidates or continue our operations. A decline in the value of our Company could cause our stockholders to lose all or part of their investments in us.
We have a limited operating history and no history of commercializing pharmaceutical products, which may make it difficult to evaluate the prospects for our future viability.
We began operations in April 2006. Our operations to date have been limited to financing and staffing our Company, developing our technology and product candidates and establishing collaborations. We have not yet demonstrated an ability to

38


successfully conduct an international multi-center clinical trial, conduct a large-scale pivotal clinical trial, obtain marketing approvals, manufacture product on a commercial scale or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. Consequently, predictions about our future success or viability may not be as accurate as they could be if we had a longer operating history or a history of successfully developing and commercializing pharmaceutical products.
We will need substantial additional funding. If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts.

Developing pharmaceutical products, including conducting nonclinical studies and clinical trials, is a very time-consuming, expensive and uncertain process that takes years to complete. We expect our expenses to increase in connection with our ongoing activities, particularly as we initiate new clinical trials of, initiate new research and nonclinical development efforts for and seek marketing approval for, our product candidates, or if we in-license or acquire product candidates. In addition, if we obtain marketing approval for any of our product candidates, we may incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution to the extent that such sales, marketing and distribution are not the responsibility of one of our collaborators. In particular, the costs that we may be required to incur for the manufacture of any product candidate that receives marketing approval may be substantial. Manufacturing a drug at commercial scale may require specialized facilities, processes and materials. Furthermore, we will continue to incur costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we may be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts.

In any event, our existing cash and cash equivalents and investments will not be sufficient to fund all of the efforts that we plan to undertake or to fund the completion of development of any of our product candidates. Accordingly, we will be required to obtain further funding through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.
We believe our existing cash and cash equivalents and investments as of June 30, 2019 will enable us to fund our operating expenses and capital expenditure requirements into the second half of 2020. Our estimate as to how long we expect our cash and cash equivalents and investments to be able to continue to fund our operations is based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Changing circumstances could cause us to consume capital significantly faster than we currently anticipate, and we may need to spend more money than currently expected because of circumstances beyond our control. Our future funding requirements, both short-term and long-term, will depend on many factors, including: 

the progress, timing, costs and results of clinical trials of, and research and nonclinical development efforts for, our product candidates and potential product candidates, including current and future clinical trials;
our current collaboration agreements and achievement of milestones under these agreements;
our ability to enter into and the terms and timing of any additional collaborations, licensing, product acquisition or other arrangements that we may establish;
the number of product candidates that we pursue and their development requirements;
the outcome, timing and costs of seeking regulatory approvals;
our headcount growth and associated costs as we expand our research and development and establish a commercial infrastructure;
the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against intellectual property related claims;
potential litigation costs; and
the costs of operating as a public company.
Raising additional capital may cause dilution to our stockholders or require us to relinquish rights to our technologies or product candidates.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of public or private equity offerings, debt financings, additional collaborations and licensing arrangements, and other sources. We do not have any committed external source of funds, other than potential milestone payments under the Asset Purchase Agreement with Vertex, as well as potential milestone payments and royalties under our existing license agreements, each of which is subject to the achievement of development, regulatory and/or sales-based milestones with respect to our product candidates. To the extent that we raise additional capital through the sale of common stock, convertible securities or

39


other equity securities, the ownership interests of our stockholders may be materially diluted, and the terms of these securities could include liquidation or other preferences and anti-dilution protections that could adversely affect the rights of our stockholders. In addition, debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely impact our ability to conduct our business.

If we raise additional funds through collaborations or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Any future indebtedness could adversely affect our ability to operate our business.

We could in the future incur indebtedness containing financial obligations and restrictive covenants, which could have significant adverse consequences, including:

requiring us to dedicate a portion of our cash resources to the payment of interest and principal, reducing money available to fund working capital, capital expenditures, product development and other general corporate purposes;
increasing our vulnerability to adverse changes in general economic, industry and market conditions;
subjecting us to restrictive covenants that may reduce our ability to take certain corporate actions or obtain further debt or equity financing;
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and
placing us at a competitive disadvantage compared to our competitors that have less debt or better debt servicing options.

Any financial obligations or restrictive covenants could negatively impact our ability to conduct our business.
RISKS RELATED TO THE DISCOVERY, DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCT CANDIDATES
Clinical drug development involves a lengthy and expensive process with an uncertain outcome.

Clinical testing is expensive, time-consuming and uncertain as to outcome. We cannot guarantee that any clinical trials will be conducted as planned or completed on schedule, if at all. The clinical development of our product candidates is susceptible to the risk of failure inherent at any stage of drug development, including failure to demonstrate efficacy in a clinical trial or across a broad or definable population of patients, the occurrence of severe or medically or commercially unacceptable adverse events, fraudulent conduct by clinical investigators, failure to comply with protocols, applicable regulatory requirements or other determinations made by the Food and Drug Administration, or FDA, or any comparable foreign regulatory authority that a drug product is not approvable. It is possible that even if one or more of our product candidates has a beneficial effect, that effect will not be detected during clinical evaluation as a result of one or more of a variety of factors, including the size, duration, design, measurements, conduct or analysis of our clinical trials. Conversely, as a result of the same factors, our clinical trials may indicate an apparent positive effect of a product candidate that is greater than the actual positive effect, if any. Similarly, in our clinical trials, we may fail to detect toxicity of or intolerability caused by our product candidates, or mistakenly believe that our product candidates are toxic or not well tolerated when that is not in fact the case.

While we believe that our DCE Platform may enable drug discovery and clinical development that is more efficient and less expensive than conventional small molecule drug research and development, we may not be able to realize the advantages that we expect. In addition, while a key element of our drug discovery and development strategy involves utilizing existing information regarding non-deuterated compounds to assist the discovery and development of deuterated analogs of those compounds, not all of the product candidates that we develop are based on drugs or drug candidates that progressed into advanced clinical development. Particularly in these situations, existing information regarding the corresponding non-deuterated compound may not be sufficient to mitigate drug development risks.

In addition to the risk of failure inherent in drug development, certain of the deuterated compounds that we, and our collaborators, are developing and may develop in the future may be particularly susceptible to failure to the extent they are based on compounds that others have previously studied or tested, but did not progress in development due to safety,

40


tolerability or efficacy concerns or otherwise. Deuteration of these compounds may not be sufficient to overcome the problems experienced with the corresponding non-deuterated compound.
We may not be able to continue further clinical development of our wholly owned development programs, including CTP-543 and CTP-692. If we are unable to develop, obtain marketing approval for or commercialize our wholly owned development programs, ourselves or through a collaboration, or experience significant delays in doing so, our business could be materially harmed.
We currently have no products approved for sale. The success of our wholly owned development programs will depend on several factors, including: 

in the case of CTP-543, our ability to safely and effectively treat moderate-to-severe alopecia areata;
in the case of CTP-692, our ability to safely and effectively treat schizophrenia in patients concurrently receiving antipsychotic medication;
successful and timely completion of clinical trials;
receipt of marketing approvals from applicable regulatory authorities;
the performance of our future collaborators, if any, for our programs;
the extent of any required post-marketing approval commitments to applicable regulatory authorities;
establishment of supply arrangements with third party raw materials suppliers and manufacturers;
our ability to manufacture or arrange for the manufacture of our active pharmaceutical ingredients and drug products
with sufficient quality, quantity, and reproducibility to support clinical trials and potential future commercialization;
establishment of arrangements with third party manufacturers to obtain finished drug products that are appropriately packaged for sale;
obtaining and maintaining patent, trade secret protection, regulatory exclusivity, and freedom to operate, both in the United States and internationally;
amount of commercial sales, if and when approved;
a continued acceptable safety profile of our programs following any marketing approval; and
agreement by third party payors to reimburse patients for the costs of treatment with our products, and the terms of such reimbursement.

If we are unable to successfully develop, receive marketing approval for, and commercialize our wholly owned development programs, or experience delays as a result of any of these factors or otherwise, our business could be materially harmed.
If clinical trials of our product candidates fail to satisfactorily demonstrate safety and efficacy to the FDA and other regulators, we, or our collaborators, may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of these product candidates.

We, or our collaborators, must complete nonclinical development and then conduct extensive clinical trials to demonstrate the safety and efficacy of our product candidates in humans in order to obtain marketing approval from regulatory authorities for the sale of our product candidates. Clinical testing is expensive, difficult to design and implement, can take many years to complete and is inherently uncertain as to outcome. Further, the outcome of nonclinical studies and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. Moreover, nonclinical and clinical data are often susceptible to varying interpretations and analyses. Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials after achieving positive results in earlier development, and we cannot be certain that we will not face similar setbacks.

Any inability to successfully complete nonclinical and clinical development could result in additional costs to us, or our collaborators, and impair our ability to generate revenues from product sales, regulatory and commercialization milestones and royalties. In addition, if (1) we, or our collaborators, are required to conduct additional or larger clinical trials or other testing of our product candidates beyond the trials and testing that we, or they, contemplate, (2) we, or our collaborators, are unable to successfully complete clinical trials of our product candidates or other testing, (3) the results of these trials or tests are unfavorable, uncertain or are only modestly favorable, or (4) there are unacceptable safety concerns associated with our product candidates, we, or our collaborators, in addition to incurring additional costs, may:
 
be delayed in obtaining marketing approval for our product candidates;
not obtain marketing approval at all;
obtain approval for indications or patient populations that are not as broad as intended or desired;
obtain approval with labeling that includes significant use or distribution restrictions or significant safety warnings, including boxed warnings;

41


be subject to additional post-marketing testing or other requirements; or
be required to remove the product from the market after obtaining marketing approval.

Even if we, or our collaborators, believe that the results of clinical trials for our product candidates warrant marketing approval, the FDA or comparable foreign regulatory authorities may disagree and may not grant marketing approval of our product candidates.
If we, or our collaborators, experience any of a number of possible unforeseen events in connection with clinical trials of our product candidates, potential marketing approval or commercialization of our product candidates could be delayed or prevented.
We, or our collaborators, may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent marketing approval of our product candidates, including:
 
toxicity or serious adverse effects may be observed in our nonclinical studies causing us to delay or abandon clinical trials;
clinical trials of our product candidates may produce unfavorable or inconclusive results;
unexpectedly high placebo response rates;
rater variability in the assessment of clinical endpoints;
we, or our collaborators, may decide, or regulators may require us or them, to conduct additional clinical trials and or develop and or validate new clinical endpoints for our clinical trials, or abandon product development programs;
the number of patients required for clinical trials of our product candidates may be larger than we, or our collaborators, anticipate, patient enrollment in these clinical trials may be slower than we, or our collaborators, anticipate or participants may drop out of these clinical trials at a higher rate than we, or our collaborators, anticipate;
our third party contractors or those of our collaborators, including those manufacturing our product candidates or components or ingredients thereof or conducting clinical trials on our behalf or on behalf of our collaborators, may fail to comply with regulatory requirements or meet their contractual obligations to us or our collaborators in a timely manner or at all;
regulators or institutional review boards may not authorize us, our collaborators or our or their investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;
we, or our collaborators, may have delays in reaching or fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites;
patients that enroll in a clinical trial may misrepresent their eligibility to do so or may otherwise not comply with the clinical trial protocol, resulting in the need to drop the patients or the sites from the clinical trial, increase the needed enrollment size for the clinical trial, extend the clinical trial’s duration or cause spurious results;
investigators may provide inaccurate or false data, resulting in spurious clinical results, an inadequate data set or regulators’ unwillingness to approve a product;
regulators, institutional review boards or data monitoring committees may require that we, or our collaborators, or our or their investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or their standards of conduct, a finding that the participants are being exposed to unacceptable health risks, undesirable side effects or other unexpected characteristics of the product candidate or findings of undesirable effects caused by a chemically or mechanistically similar drug or drug candidate;
the FDA or comparable foreign regulatory authorities may disagree with our or our collaborators’ clinical trial design or our or their interpretation of data from nonclinical studies and clinical trials;
the FDA or comparable foreign regulatory authorities may change their requirements for approvability for a given product or for an indication after we have initiated work based on their previous guidance;
the supply or quality of raw materials or manufactured product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient, inadequate or not available at an acceptable cost, or we may experience interruptions in supply;