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 September 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
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 November 4, 2019: 23,841,155



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)
 
September 30,
 
December 31,
 
2019
 
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
33,384

 
$
17,770

Investments, available for sale
88,165

 
135,544

Marketable equity securities
5,435

 
7,525

Interest receivable
291

 
556

Accounts receivable
11

 
15

Contract asset (Note 8)

 
16,000

Prepaid expenses and other current assets
3,830

 
2,739

Total current assets
131,116

 
180,149

Property and equipment, net
7,993

 
8,919

Restricted cash
1,157

 
1,157

Other assets
16

 

Income taxes receivable
2,358

 
2,322

Operating lease right-of-use assets, long-term (Note 11)
9,317

 

Total assets
$
151,957

 
$
192,547

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,302

 
$
1,277

Accrued expenses and other liabilities
4,434

 
5,669

Income taxes payable

 
390

Deferred revenue, current portion
7,783

 
1,413

Lease liability, current portion (Note 11)
235

 

Total current liabilities
13,754

 
8,749

Deferred revenue, net of current portion
2,750

 
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)
16,190

 

Total liabilities
32,694

 
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; 24,030,711 and 23,518,690 shares issued and 23,841,155 and 23,437,587 outstanding in 2019 and 2018, respectively
23

 
23

Additional paid-in capital
293,469

 
284,369

Accumulated other comprehensive loss
(35
)
 
(137
)
Accumulated deficit
(174,194
)
 
(116,515
)
Total stockholders’ equity
119,263

 
167,740

Total liabilities and stockholders’ equity
$
151,957

 
$
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 September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Revenue:
 
 
 
 
 
 
 
License and research and development revenue
$
10

 
$
11

 
$
1,064

 
$
10,492

Operating expenses:
 
 
 
 
 
 
 
Research and development
13,511

 
11,031

 
43,797

 
28,549

General and administrative
4,742

 
6,320

 
15,329

 
17,464

Total operating expenses
18,253

 
17,351

 
59,126

 
46,013

Loss from operations
(18,243
)
 
(17,340
)
 
(58,062
)
 
(35,521
)
Investment income
724

 
703

 
2,474

 
2,003

Unrealized gain (loss) on marketable equity securities
334

 
(732
)
 
(2,091
)
 
(1,359
)
Loss before tax provision
(17,185
)
 
(17,369
)
 
(57,679
)
 
(34,877
)
Provision for income taxes

 
18

 

 
298

Net Loss
$
(17,185
)
 
$
(17,387
)
 
$
(57,679
)
 
$
(35,175
)
Other comprehensive income:
 
 
 
 
 
 
 
Unrealized (loss) gain on investments, available for sale
(39
)
 
87

 
102

 
166

Comprehensive loss
$
(17,224
)
 
$
(17,300
)
 
$
(57,577
)
 
$
(35,009
)
 
 
 
 
 
 
 
 
Net loss per share applicable to common stockholders - basic and diluted
$
(0.72
)
 
$
(0.74
)
 
$
(2.43
)
 
$
(1.51
)
 
 
 
 
 
 
 
 
Weighted-average number of common shares used in net loss per share applicable to common stockholders - basic and diluted
23,807

 
23,421

 
23,703

 
23,349

See accompanying notes.

5


CONCERT PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
 
 
Nine Months Ended September 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

Exercise of stock options
 
9

 

 

 
36

 

 

 
36

Unrealized loss on short-term investments
 

 

 

 

 
(39
)
 

 
(39
)
Stock-based compensation expense
 

 

 

 
2,420

 

 

 
2,420

Proceeds from at-the-market offering
 
36

 

 

 
330

 

 

 
330

Net loss
 

 

 

 

 

 
(17,185
)
 
(17,185
)
Balance at September 30, 2019
 
24,031

 
189

 
$
23

 
$
293,469

 
$
(35
)
 
$
(174,194
)
 
$
119,263



6


 
 
Nine Months Ended September 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 gain 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

Exercise of stock options
 
17

 
3

 

 
38

 

 

 
38

Unrealized gain on short-term investments, net of tax $47
 

 

 

 

 
87

 

 
87

Stock-based compensation expense
 

 

 

 
2,731

 

 

 
2,731

Net loss
 

 

 

 

 

 
(17,387
)
 
(17,387
)
Balance at September 30, 2018
 
23,509

 
81

 
$
23

 
$
281,636

 
$
(241
)
 
$
(95,666
)
 
$
185,752


See accompanying notes.

7


CONCERT PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
 
Nine Months Ended 
 September 30,
 
2019
 
2018
Operating activities
 
 
 
Net loss
$
(57,679
)
 
$
(35,175
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
1,256

 
875

Stock-based compensation expense
7,711

 
8,834

Accretion of premiums and discounts on investments
(899
)
 
(234
)
Amortization of deferred lease incentive

 
(589
)
Non-cash license consideration (Note 8)

 
(10,452
)
Other noncash items

 
(46
)
Unrealized loss on marketable equity securities
2,090

 
1,359

Loss on disposal of asset
4

 
52

Non-cash lease expense (Note 11)
161

 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
4

 
155

Interest receivable
265

 
115

Prepaid expenses and other current assets
(1,091
)
 
(4
)
Contract asset
16,000

 

Other assets
(16
)
 
26

Accounts payable
207

 
457

Accrued expenses and other liabilities
(827
)
 
(100
)
Income taxes receivable
(36
)
 
(77
)
Income taxes payable
(390
)
 
372

Deferred rent

 
2,033

Deferred revenue

 
(16
)
Operating lease liability (Note 11)
(445
)
 

Net cash used in operating activities
(33,685
)
 
(32,415
)
Investing activities
 
 
 
Purchases of property and equipment
(520
)
 
(2,405
)
Purchases of investments
(93,326
)
 
(46,120
)
Maturities of investments
141,706

 
93,144

Net cash provided by investing activities
47,860

 
44,619

Financing activities
 
 
 
Proceeds from exercises of stock options
1,006

 
934

Proceeds from exercise of warrants
1,000

 

Repurchase of common stock pursuant to share surrender
(741
)
 
(1,206
)
Proceeds from at-the-market offering, net of issuance costs
174

 

Net cash provided by (used in) financing activities
1,439

 
(272
)
Net increase in cash and cash equivalents and restricted cash
15,614

 
11,932

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

 
29,222

Cash, cash equivalents and restricted cash at end of period
$
34,541

 
$
41,154

Supplemental cash flow information:
 
 
 
Cash paid for income taxes
$
453

 
$
50

Purchases of property and equipment unpaid at period end
$

 
$
99

Public offering costs unpaid at period end
$
50

 
$

Cash paid included in measurement of lease liabilities
$
2,082

 
$

Tenant improvements paid by landlord
$

 
$
4,996


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 $121.5 million at September 30, 2019. The Company believes that its cash and cash equivalents and investments at September 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, 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 $174.2 million through September 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 in the following tables 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 nine months ended September 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, or SEC, 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 nine months ended September 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, Improvements to Nonemployee Share-Based Payment Accounting, that expands the scope of Topic 718, Compensation - Stock Compensation, 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 SEC 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. 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.

In August 2018, the FASB issued ASU 2018-15, Intangible-Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The standard aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for internal-use software. The new guidance also prescribes the balance sheet, income statement and cash flow classification of the capitalized implementation costs and related amortization expense, and requires additional quantitative and qualitative disclosures. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. The Company is currently evaluating the impact ASU 2018-15 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 September 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
September 30, 2019
 
 
 
Cash equivalents:
 
 
 
Money market funds
$
21,253

 
$

 
$

 
$
21,253

U.S. Treasury obligations
4,238

 

 

 
4,238

Investments, available for sale:
 
 

U.S. Treasury obligations
38,689

 

 

 
38,689

Government agency securities
26,873

 
22,603

 

 
49,476

Marketable equity securities:
 
 
 
 
 
 
 
Corporate equity securities (Note 8)
5,435

 

 

 
5,435

Total
$
96,488

 
$
22,603

 
$

 
$
119,091


 
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.

11

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


Cash, cash equivalents, available for sale investments, and marketable equity securities included the following at September 30, 2019 and December 31, 2018:
 
 
Average maturity
 
Amortized cost
 
Unrealized gains
 
Unrealized losses
 
Fair value
September 30, 2019
 
 
 
 
 
 
 
 
 
 
Cash
 
 
 
$
7,893

 
$

 
$

 
$
7,893

Money market funds
 
 
 
21,253

 

 

 
21,253

U.S. Treasury obligations
 
52 days
 
4,238

 

 

 
4,238

Cash and cash equivalents
 
 
 
$
33,384

 
$

 
$

 
$
33,384

 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury obligations
 
169 days
 
38,683

 
14

 
(8
)
 
38,689

Government agency securities
 
88 days
 
49,443

 
34

 
(1
)
 
49,476

Investments, available for sale
 
 
 
$
88,126

 
$
48

 
$
(9
)
 
$
88,165

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

 
$

 
$
(5,016
)
 
$
5,435


 
 
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 September 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.


12

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


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

 
September 30,
2019
 
September 30,
2018
Cash and cash equivalents
$
33,384

 
$
39,597

Restricted cash
1,157

 
1,557

Total cash, cash equivalents and restricted cash shown in the statements of cash flows
$
34,541

 
$
41,154


6. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following:
 
September 30,
2019
 
December 31,
2018
Accrued professional fees and other
$
502

 
$
672

Employee compensation and benefits
2,245

 
3,067

Research and development expenses
1,687

 
1,476

Deferred lease incentive, current portion

 
454

 
$
4,434

 
$
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, or 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 stockholders 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 September 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 nine months ended September 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 ASU 2014-19, Revenue from Contracts with Customers, or ASC 606. 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 SEC on February 28, 2019.
Contract Assets
The Company did not have a contract asset as of September 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 $16.0 million that had initially been held in escrow

13

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


for indemnification purposes related to the asset purchase by Vertex Pharmaceuticals, Inc., or Vertex, and was released to the Company in February 2019.
Contract Liabilities
As of September 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 the Company's collaboration with Celgene Corporation, or 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 the Company satisfies its 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 the Company will not recognize as revenue unless Celgene exercises its rights with respect to those programs, or in the second quarter of 2020 at such time that Celgene's rights lapse; and
$2.8 million related to a payment received from GlaxoSmithKline, or GSK, that the Company will not recognize as revenue until all repayment obligations lapse.
Revenue Arrangements
Vertex

On March 3, 2017, the Company and Vertex entered into an Asset Purchase Agreement, or the Vertex 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, or the Vertex Closing Date, the transaction contemplated by the Vertex 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 Vertex 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 September 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.

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

14

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


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 nine months ended September 30, 2019, the Company recognized $2 thousand and $24 thousand in revenue, respectively, related to intellectual property cost reimbursements. For the three months and nine months ended September 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 Cipla Agreement, on January 16, 2019, or the Cipla 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. As consideration for the license, the Company received an upfront payment of $1.0 million.
The Cipla Agreement also provides Cipla the option to purchase the Company’s existing inventory of CTP-354 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 Cipla 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 Cipla Closing Date.
As of the Cipla 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 Cipla 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 with 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.
The Company did not recognize revenue for the three months ended September 30, 2019. The Company recognized $1.0 million in revenue associated with the sale of existing inventory and the Transfer of License Performance Obligation for the nine months ended September 30, 2019.


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 September 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

15

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


fair value of the underlying common stock on the date of grant, a vesting period of three or four years, and an expiration date 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 September 30, 2019, there were 1,192,083 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 September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Research and development
$
1,190

 
$
1,211

 
$
3,728

 
$
4,012

General and administrative
1,230

 
1,520

 
3,983

 
4,822

Total stock-based compensation expense
$
2,420

 
$
2,731

 
$
7,711

 
$
8,834


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 nine months ended September 30, 2019 and 2018 reflect the following weighted-average assumptions:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Expected volatility
74.37
%
 
77.72
%
 
76.86
%
 
77.19
%
Expected term
6.0 years

 
6.0 years

 
6.0 years

 
6.0 years

Risk-free interest rate
1.59
%
 
2.98
%
 
2.16
%
 
2.65
%
Expected dividend yield
%
 
%
 
%
 
%
For the three and nine months ended September 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:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(in thousands, except per share data)
Weighted average fair value of options granted, per option
 
$
6.46

 
$
10.42

 
$
8.95

 
$
17.92

Aggregate grant date fair value of options vested during the period
 
$
2,234

 
$
2,110

 
$
7,070

 
$
5,839

Total cash received from exercises of stock options
 
$
36

 
$
23

 
$
1,006

 
$
934

Total intrinsic value of stock options exercised
 
$
59

 
$
187

 
$
1,167

 
$
2,539


16

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


The following is a summary of stock option activity for the nine months ended September 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
1,032,250

 
$
13.25

 
 
 
 
      Exercised
(202,508
)
 
$
8.33

 
 
 
 
      Forfeited or expired
(184,474
)
 
$
18.44

 
 
 
 
Outstanding at September 30, 2019
4,202,674

 
$
14.96

 
6.99
 
$
390

Exercisable at September 30, 2019
2,429,295

 
$
13.70

 
6.03
 
$
390

Vested and expected to vest at September 30, 2019(1)
4,049,442

 
$
14.90

 
6.93
 
$
390


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

As of September 30, 2019, there was $17.4 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 2.5 years.

Restricted Stock Units

On July 6, 2017, the Company granted 0.5 million RSUs, or the 2017 RSU grant, to executives and employees. The awards granted to non-executive employees were service-based, whereas the awards granted to executives were 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 contemplated by the Vertex Agreement and the institution by the Patent Trial and Appeal Board, or PTAB, of the Post Grant Review, or 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.

On August 15, 2019, or the 2019 RSU grant date, the Company granted 0.4 million RSUs, or the 2019 RSU grant, to certain executives and employees. All awards are service-based and vest ratably over two years. On the first anniversary of the 2019 RSU grant date, thirty-five percent of the RSUs will vest. The remainder of the RSUs will vest on the second anniversary of the 2019 RSU grant date.

RSUs are not included in issued and outstanding common stock until the shares are vested and settled. As of September 30, 2019, all achieved RSUs from the 2017 RSU grant had vested, and no RSUs from the 2019 RSU grant 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 nine months ended September 30, 2019:

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

 
$
13.87

      Granted
412,220

 
$
10.27

      Released
(202,550
)
 
$
13.87

      Forfeited
(25,600
)
 
$
13.87

Outstanding at September 30, 2019
412,220

 
$
10.27


As of September 30, 2019, there was $4.0 million of unrecognized compensation cost related to RSUs that are expected to vest. The RSU costs are expected to be recognized over a weighted average remaining vesting period of 1.9 years.

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
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands, except per share amounts)
Numerator:
 
 
 
 
 
 
 
Net loss applicable to common stockholders - basic and diluted
$
(17,185
)
 
$
(17,387
)
 
$
(57,679
)
 
$
(35,175
)
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding - basic and diluted
23,807

 
23,421

 
23,703

 
23,349

 
 
 
 
 
 
 
 
Net loss per share applicable to common stockholders - basic and diluted
$
(0.72
)
 
$
(0.74
)
 
$
(2.43
)
 
$
(1.51
)
 
 
 
 
 
 
 
 
Anti-dilutive potential common stock equivalents excluded from the calculation of net loss per share:
 
 
 
 
 
 
 
Stock options
214

 
515

 
290

 
758

Restricted stock units
410

 
133

 
72

 
214

Warrants
61

 
132

 
72

 
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.

18

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


The Company 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 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 the Premises. 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 respect to the Lease for the Premises. Therefore, the hindsight practical expedient under ASC 842 has no impact on the accounting term as previously determined under ASC 840. As of September 30, 2019, the remaining lease term for the Premises is 9 years and 3 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 for the Premises 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 the 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 September 30, 2019, the Company had a current lease liability of $0.2 million and a non-current lease liability of $16.2 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.

19

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


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 September 30, 2019 and are depreciated over the shorter of their useful life or the related lease term.
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 September 30, 2019, the Company had a long-term lease asset of $9.3 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 nine months ended September 30, 2019, the Company recognized $1.8 million in lease expense.
For the nine months ended September 30, 2019, the Company paid $2.1 million in rent relating to the Lease. As a payment arising from an operating lease, the $2.1 million will be classified within operating activities in the Condensed Consolidated Statements of Cash Flows.
Supplemental cash flow information:
For the nine months ended September 30,
(in thousands)
2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
$
2,082

Supplemental balance sheet information:
For the nine months ended September 30,
(in thousands)
2019
2018
 
 
 
Operating lease right-of-use assets
$
9,317

$

Operating lease liability
16,425


 
 
 
Weighted average remaining lease term
9.25

10.25

Weighted average discount rate
13.08
%
%
Maturities of lease liabilities:
For the twelve months ended December 31,
 
(in thousands)
 
 
2019
$
696

*
2020
2,406

 
2021
2,969

 
2022
3,058

 
2023
3,150

 
Thereafter
17,223

 
Total lease payments
29,502

 
Less imputed interest
(13,077
)
*
Total
$
16,425

 
* Excludes the nine months ended September 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 ATM 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 million, referred to as Placement Shares, through Jefferies as its sales agent. The Company will pay Jefferies a commission equal to 3.0% of the gross sales proceeds of any Placement Shares sold through Jefferies under the ATM 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 November 4, 2019, the Company has sold 36,167 shares of its common stock in accordance with the ATM Agreement for net proceeds of $0.4 million, after payment of cash commissions of 3.0 percent of the gross proceeds to its sales agent. Additionally, the Company incurred approximately $0.3 million related to legal, accounting and other fees in connection with the ATM Agreement as of September 30, 2019.


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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. Our pipeline includes multiple clinical stage candidates and a number of preclinical compounds that we are currently assessing.
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13186723&doc=13
CTP-543
Background on Alopecia Areata
Alopecia areata is a serious, 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

22


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 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 are typically not well tolerated and often provide limited efficacy. There are currently no treatments approved by the U.S. Food and Drug Administration, or FDA, for alopecia areata.
CTP-543 Opportunity
CTP-543 was discovered by applying our deuterium chemistry technology to modify ruxolitinib, a Janus kinase, or JAK, inhibitor, which is commercially available under the name Jakafi® in the United States for the treatment of certain blood disorders and for graft versus host disease.

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 149 patients with moderate-to-severe alopecia areata was completed in the third quarter of 2019. The primary outcome measure utilized 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, and in September 2019, we announced final topline results for all three dosing cohorts in the trial. A numerically but not statistically greater percentage of patients treated with the 4 mg twice-daily dose of CTP-543 met the primary efficacy endpoint. Patients treated with either 8 mg twice-daily or 12 mg twice-daily of CTP-543 met the primary efficacy endpoint with statistically significant differences (p <0.001) relative to placebo in the percentage of patients achieving a ≥ 50% relative change from baseline at 24 weeks. The 8 mg twice-daily and 12 mg twice-daily groups were also significantly different from placebo in the number of patients achieving ≥ 75% and ≥ 90% relative change in SALT from baseline at 24 weeks. At Week 24, patients treated with 8 mg twice-daily and 12 mg twice-daily compared to placebo also rated significantly greater improvement in their alopecia areata on the Patient Global Impression of Improvement Scale. Treatment with CTP-543 was generally well tolerated. The most common side effects were headache, nasopharyngitis, upper respiratory tract infection, cough, acne and nausea. One serious adverse event of facial cellulitis was reported as possibly related to treatment; however, after a brief interruption, treatment was continued and this patient completed the trial. No thromboembolic events were reported during the trial.


23


Responders: ≥ 50% Change in SALT Relative to Baseline
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Patient SALT Improvement Thresholds
Relative Change in SALT from Baseline to Week 24
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In March 2019, we initiated an open label trial to evaluate once-daily compared to twice-daily dosing of CTP-543 in patients with moderate-to-severe alopecia areata in the United States. In June 2019, we completed enrollment of 57 adult patients in the trial. Patients 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 SALT score between Week 24 and baseline. The trial is expected to be completed in the fourth quarter of 2019.

In May 2019, we 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 in the United States and Canada. In September 2019, we completed enrollment of 66 adult patients in the trial. Patients were randomized to receive CTP-543 either 12 mg twice-daily or 24 mg once-daily

24


over a 24 week treatment period. The trial will measure the relative change in 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 dose-ranging 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 is believed to afflict 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 theory underlying current antipsychotic therapies 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 or partial agonist activity. Currently available antipsychotic drugs often 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, evidence of both impaired D-serine synthesis and increased D-serine metabolism have been reported in patients with schizophrenia relative to normal individuals.
CTP-692 Opportunity
CTP-692 is a selective deuterium-modified analog of the endogenous amino acid, D-serine. Based on published nonclinical and clinical effects of D-serine, we believe 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, nonclinical 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 nonclinical studies in rats, when administered at doses where D-serine resulted in significantly increased blood levels of serum creatinine and blood urea nitrogen, indicating renal toxicity, CTP-692 did not cause changes in blood levels of those markers, suggesting that CTP-692 could have reduced toxicity and a larger therapeutic window. In these studies, administration of CTP-692 also resulted in greater exposure than similar doses of D-serine. 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.
Clinical Development of CTP-692
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, a single dose of CTP-692 was found to result in greater plasma exposure than did the same amount of D-serine. In the single- and multiple-ascending dose trials, CTP-692 was evaluated across doses ranging from 0.5 to 4 grams

25


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. 

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 by us. Our collaborators are responsible for any future clinical development activities, expenses 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 Pharmaceuticals, Inc., or Avanir, a subsidiary of Otsuka Pharmaceuticals Co., Ltd., or Otsuka. 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 completed in September 2019. The second Phase 3 trial did not meet its primary or key secondary endpoints. 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, or BMS, announced that they entered into a definitive merger agreement pursuant to which BMS will acquire Celgene. In June 2019, BMS announced the planned divestiture of OTEZLA® (apremilast) in light of concerns raised by the U.S. Federal Trade Commission, or FTC. In August 2019, BMS announced that Celgene entered into an agreement with Amgen, Inc. to divest OTEZLA®, or the OTEZLA® Divestiture. The closing of the OTEZLA® Divestiture is contingent on BMS and Celgene entering into a consent decree with the FTC in connection with their pending merger, the closing of the pending merger between BMS and Celgene and the satisfaction of other customary closing conditions. The pending merger between BMS and Celgene is expected to close by the end of 2019, subject to the FTC's acceptance of a consent order and the satisfaction of customary closing conditions. Apremilast is a selective phosphodiesterase 4 (PDE4) inhibitor approved in various countries for the treatment of moderate-to-severe plaque psoriasis and psoriatic arthritis, and approved in the United States and Japan for the treatment of oral ulcers associated with Behçet’s Disease. We 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 2017, we completed the sale of worldwide development and commercialization rights to CTP-656, and other assets related to the treatment of cystic fibrosis (CF), to Vertex. 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

26


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 United States and agreement for reimbursement in the first of the U.K., Germany or France.

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 PTAB instituted an inter partes review, or IPR, brought against our U.S. Patent No. 9,249,149, or the '149 patent, by Incyte Corporation.  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, we 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 are working to obtain additional patents to protect CTP-543 and extend its 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 DCE Platform, and our core capabilities in deuterium chemistry, 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 $174.2 million since inception through September 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.

27


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 on our consolidated financial statements and its collaboration arrangements, see Note 2 and Note 12 to the consolidated financial statements appearing in our Annual Report on Form 10-K filed with the SEC 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;

28


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.
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 cost 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 September 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 nine months ended September 30, 2019.

29


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 January 1, 2019, we adopted ASU 2016-02 and all related amendments. For discussion regarding the impact of this accounting pronouncement, refer to Note 11 in the accompanying condensed consolidated financial statements 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 SEC 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 nine months ended September 30, 2019
The following table summarizes our results of operations for the three and nine months ended September 30, 2019.
 
Three months ended September 30,

Nine months ended September 30,
(in thousands)
2019
 
2019
Revenue:
 
 
 
License and research and development revenue
$
10

 
$
1,064

Operating expenses:
 
 
 
Research and development
13,511

 
43,797

General and administrative
4,742

 
15,329

Total operating expenses
18,253

 
59,126

Loss from operations
(18,243
)
 
(58,062
)
Investment income
724

 
2,474

Unrealized gain (loss) on equity securities
334

 
(2,091
)
Net Loss
$
(17,185
)
 
$
(57,679
)

License and Research and Development Revenue

Total revenue was $10 thousand and $1.1 million for the three and nine months ended September 30, 2019, respectively. The revenue recognized in the 2019 periods was primarily a result of the Cipla Agreement executed in the first quarter of 2019. We recognized $1.0 million in revenue associated with this arrangement for the nine months ended September 30, 2019, and no revenue for the three months ended September 30, 2019. 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, we adopted ASC 606 using the modified retrospective approach. For detailed information regarding the adoption of ASC 606, the impact on our consolidated financial statements and our collaboration arrangements, see Note 2 and Note 12 to the consolidated financial statements appearing in our Annual Report on Form 10-K filed with the SEC on February 28, 2019.

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Research and development expenses
The following table summarizes our external research and development expenses, by program, for the three and nine months ended September 30, 2019, with our internal research expenses separately classified by category.

 
 
Three Months Ended September 30,

Nine Months Ended September 30,
(in thousands)
 
2019
 
2019
CTP-543 external costs
 
$
4,246

 
$
13,197

CTP-692 external costs
 
2,469

 
9,258

External costs for other programs
 
674

 
2,661

Employee and contractor-related expenses
 
4,766

 
14,527

Facility and other expenses
 
1,356

 
4,154

Total research and development expenses
 
$
13,511

 
$
43,797

Research and development expenses were $13.5 million and $43.8 million for the three and nine months ended September 30, 2019, respectively. CTP-543 expenses primarily relate to clinical development including multiple Phase 2 clinical trials. CTP-692 expenses were attributable to the Phase 1 clinical trials completed in 2019 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 nine months ended September 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 Agreement, and costs incurred to develop our research pipeline.
General and administrative expenses
The following table summarizes our general and administrative expenses for the three and nine months ended September 30, 2019.

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
 
2019
 
2019
Employee salaries and benefits
 
$
2,431

 
$
8,178

External professional service and legal expenses
 
1,273

 
4,081

Facility, technology and other expenses
 
964

 
2,840

Depreciation and amortization
 
74

 
230

Total general and administrative expenses
 
$
4,742

 
$
15,329

Investment income

Investment income was $0.7 million and $2.5 million for the three and nine months ended September 30, 2019, respectively, and consists of interest income earned on cash equivalents and investments.
Unrealized gain (loss) on equity securities
We recorded an unrealized gain on marketable equity securities of $0.3 million during the three months ended September 30, 2019 and an unrealized loss on marketable equity securities of $2.1 million during the nine months ended September 30, 2019. The unrealized gains and losses on marketable equity securities consist 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 nine months ended September 30, 2019.

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Discussion of the three and nine months ended September 30, 2018
The following table summarizes our results of operations for the three and nine months ended September 30, 2018.
 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
2018
 
2018
Revenue:
 
 
 
License and research and development revenue
$
11

 
$
10,492

Operating expenses:
 
 
 
Research and development
11,031

 
28,549

General and administrative
6,320

 
17,464

Total operating expenses
17,351

 
46,013

Loss from operations
(17,340
)
 
(35,521
)
Investment income
703

 
2,003

Unrealized loss on equity securities
(732
)
 
(1,359
)
Loss before tax provision
(17,369
)
 
(34,877
)
Provision for income taxes
18

 
298

Net Loss
$
(17,387
)
 
$
(35,175
)

License and Research and Development Revenue

Total revenue was $11 thousand and $10.5 million for the three and nine months ended September 30, 2018, respectively. The revenue recognized in the 2018 periods 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 nine months ended September 30, 2018, with our internal research expenses separately classified by category.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
 
2018
 
2018
CTP-543 external costs
 
$
1,872

 
$
6,059

CTP-692 external costs
 
2,314

 
3,264

External costs for other programs
 
784

 
1,933

Employee and contractor-related expenses
 
4,554

 
13,198

Facility and other expenses
 
1,507

 
4,095

Total research and development expenses
 
$
11,031

 
$
28,549

Research and development expenses were $11.0 million and $28.5 million for the three and nine months ended September 30, 2018, respectively. CTP-543 expenses primarily related to Phase 2 clinical trial costs. 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 nine months ended September 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 general and administrative expenses for the three and nine months ended September 30, 2018.


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Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
 
2018
 
2018
Employee salaries and benefits
 
$
2,970

 
$
9,516

External professional service and legal expenses
 
2,070

 
4,555

Facility, technology and other expenses
 
1,156

 
3,231

Depreciation and amortization
 
124

 
162

Total general and administrative expenses
 
$
6,320

 
$
17,464

Investment income

Investment income was $0.7 million and $2.0 million for the three and nine months ended September 30, 2018, respectively, and consists of interest income earned on cash equivalents and investments.
Unrealized loss on equity securities
Unrealized loss on marketable equity securities was $0.7 million and $1.4 million for the three and nine month ended September 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 nine months ended September 30, 2018 was $18 thousand and $0.3 million, respectively. 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 held in escrow in 2018, 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.


33


LIQUIDITY AND CAPITAL RESOURCES
We have incurred cumulative losses and negative cash flows from operations since our inception in April 2006, and as of September 30, 2019, we had an accumulated deficit of $174.2 million. We generated net income for fiscal year 2015 due to a one-time payment from Auspex Pharmaceuticals, Inc., or Auspex, under a change of control provision described in the patent assignment agreement and again for fiscal year 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. In February 2014, we completed our initial public offering 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. In 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.
In July 2017, the asset purchase contemplated by the Vertex Agreement was completed, and Vertex paid us $160 million in cash consideration.
As of September 30, 2019, we had cash and cash equivalents and investments of $121.5 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:
 
Nine months ended September 30,
(in thousands)
2019
 
2018
Net cash provided by (used in):
 
 
 
Operating activities
$
(33,685
)
 
$
(32,415
)
Investing activities
47,860

 
44,619

Financing activities
1,439

 
(272
)
Net increase in cash and cash equivalents and restricted cash
$
15,614

 
$
11,932

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 nine months ended September 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 nine months ended September 30, 2019, our operating activities used cash of $33.7 million as compared to cash used by operating activities of $32.4 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-543 and CTP-692, 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 nine months ended September 30, 2019 and 2018 was $141.7 million and $93.1 million, respectively. Net cash used in purchases of investments for the nine months ended September 30, 2019 and 2018 was $93.3 million and $46.1 million, respectively.  Purchases of fixed assets for the nine months ended September 30, 2019 and 2018 was $0.5 million and $2.4 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

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2018 period to support our new office and laboratory space, discussed further in Note 11 of the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

Financing activities. During the nine months ended September 30, 2019 and 2018, our financing activities provided cash of $1.4 million and used cash of $0.3 million, respectively. The cash provided by financing activities during the nine months ended September 30, 2019 was primarily attributable to the proceeds from exercises of warrants and stock options during the period. For the nine months ended September 30, 2019, net proceeds from the ATM Agreement were $0.4 million, with $49.6 million in aggregate offering price remaining available for issuance. The cash used in financing activities during the nine months ended September 30, 2018 was primarily attributable to withholding taxes paid in lieu of shares surrendered upon the vesting of restricted stock units.

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 September 30, 2019 will enable us to fund our operating expenses and capital expenditure requirements through 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.

35


Contractual obligations
As of September 30, 2019, our contractual obligations remain consistent with those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

36


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 September 30, 2019 and December 31, 2018, we had $121.5 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 September 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 nine months ended September 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 SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, 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 Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2019, the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our Principal 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 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 September 30, 2019, we had an accumulated deficit of $174.2 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. Doing so 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 successfully conduct an international multi-center clinical trial, conduct a large-scale pivotal clinical trial, obtain marketing

39