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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________
FORM 10-Q
_________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
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)
 
Delaware20-4839882
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
     65 Hayden Avenue, Suite 3000N
Lexington, Massachusetts
   02421
      (Address of principal executive offices)    (Zip Code)
(781860-0045
(Registrant’s telephone number, including area code) 
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.001 per shareCNCENasdaq 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      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      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 filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
The number of shares outstanding of the registrant’s common stock as of October 30, 2020: 30,649,249



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



REFERENCES TO CONCERT
Throughout this Quarterly Report on Form 10-Q, “Concert,” “the Company,” “we,” “us” and “our,” except where the context requires otherwise, refer to Concert Pharmaceuticals, Inc. and its consolidated subsidiary, and “our board of directors” refers to the board of directors of Concert Pharmaceuticals, Inc.

FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.
The forward-looking statements in this Quarterly Report on Form 10-Q include, among other things, statements about:
ongoing and planned clinical trials for our product candidates, whether conducted by us or by our collaborators, including the timing of initiation, enrollment and completion of these trials and of the anticipated results;
our plans to identify, develop and commercialize novel small molecule drugs based on our knowledge of deuterium chemistry;
our plans to enter into collaborations for the development and commercialization of product candidates;
our expected benefits from our current and any future collaboration, development or license arrangements;
our ability to receive research and development funding and achieve anticipated milestones under our collaborations;
our expectations regarding any future milestone payments we may receive as part of our asset purchase agreement with Vertex Pharmaceuticals, Inc. with respect to VX-561 and payments from our other collaboration and license arrangements;
the timing of and our ability to obtain and maintain marketing approvals for our product candidates;
the rate and degree of market acceptance and clinical utilization of our products;
our commercialization, marketing and manufacturing capabilities and strategy;
our intellectual property position and strategy;
the outcome of our inter partes review proceeding regarding U.S. Patent No. 9,249,149 covering CTP-543 and the post grant review petition challenging U.S. Patent No. 10,561,659 covering CTP-543;
our freedom to operate with respect to third-party patents;
our expectations regarding our DCE Platform® and the potential advantages of our product candidates;
our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;
conditions and events that raise doubt about our ability to continue as a going concern;
risks associated with the COVID-19 pandemic, which may adversely impact our business, clinical trials and supply chain;
developments relating to our competitors and our industry; and
the impact of government laws and regulations.
We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in Part II, Item 1A. Risk Factors, that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, collaborations or investments that we may make.
4


You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
5


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,
 20202019
Assets
Current assets:
Cash and cash equivalents$33,675 $53,043 
Investments, available for sale90,496 53,395 
Marketable equity securities2,956 5,375 
Interest receivable314 260 
Deferred offering costs139 143 
Accounts receivable130 72 
Income taxes receivable, current2,390  
Prepaid expenses and other current assets6,269 4,567 
Total current assets136,369 116,855 
Property and equipment, net6,730 7,753 
Restricted cash1,157 1,157 
Other assets71 96 
Income taxes receivable 2,358 
Operating lease right-of-use assets, long-term9,046 9,252 
Total assets$153,373 $137,471 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$265 $881 
Accrued expenses and other liabilities6,224 8,336 
Deferred revenue, current portion 7,783 
Lease liability, current portion880 268 
Total current liabilities7,369 17,268 
Deferred revenue, net of current portion2,750 2,750 
Lease liability, net of current portion15,310 15,996 
Total liabilities25,429 36,014 
Commitments (Note 11)
Stockholders’ equity:
Preferred stock, $0.001 par value per share; 5,000,000 shares authorized; no shares issued and outstanding as of September 30, 2020 and December 31, 2019
  
Common stock, $0.001 par value per share; 100,000,000 shares authorized; 30,018,551 and 24,065,676 shares issued and 29,817,950 and 23,865,075 shares outstanding as of September 30, 2020 and December 31, 2019, respectively
29 24 
Additional paid-in capital374,937 296,145 
Accumulated other comprehensive gain (loss)35 (31)
Accumulated deficit(247,057)(194,681)
Total stockholders’ equity127,944 101,457 
Total liabilities and stockholders’ equity$153,373 $137,471 
See accompanying notes.
6


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,
 2020201920202019
Revenue:
License and research and development revenue$1,501 $10 $7,895 $1,064 
Operating expenses:
Research and development16,347 13,511 45,121 43,797 
General and administrative4,514 4,742 13,917 15,329 
Total operating expenses20,861 18,253 59,038 59,126 
Loss from operations(19,360)(18,243)(51,143)(58,062)
Investment income183 724 1,101 2,474 
Unrealized gain (loss) on marketable equity securities269 334 (2,419)(2,091)
Loss before income taxes(18,908)(17,185)(52,461)(57,679)
Income tax benefit  (85) 
Net loss$(18,908)$(17,185)$(52,376)$(57,679)
Other comprehensive (loss) income:
Unrealized (loss) gain on investments, available for sale(141)(39)66 102 
Comprehensive loss$(19,049)$(17,224)$(52,310)$(57,577)
Net loss per share applicable to common stockholders - basic and diluted$(0.60)$(0.72)$(1.71)$(2.43)
Weighted-average number of common shares used in net loss per share applicable to common stockholders - basic and diluted31,547 23,807 30,707 23,703 
See accompanying notes.
7


CONCERT PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
Nine Months Ended September 30, 2020
 Common StockAdditional paid-in capitalAccumulated other comprehensive incomeAccumulated deficitTotal stockholders’ equity
 IssuedIn TreasuryAmount
 (Amounts in thousands)
Balance at December 31, 201924,066 200 $24 $296,145 $(31)$(194,681)$101,457 
Exercise of stock options51 — — 435 — — 435 
Unrealized gain on short-term investments— — — — 523 — 523 
Stock-based compensation expense— — — 2,477 — — 2,477 
Sale of common stock and pre-funded warrants, net of underwriters' discount and costs5,735 — 5 70,059 — — 70,064 
Net loss— — — — — (20,477)(20,477)
Balance at March 31, 202029,852 200 $29 $369,116 $492 $(215,158)$154,479 
Exercise of stock options27 — — 109 — — 109 
Unrealized loss on short-term investments— — — — (316)— (316)
Stock-based compensation expense— — — 2,804 — — 2,804 
Net loss— — — — — (12,991)(12,991)
Balance at June 30, 202029,879 200 $29 $372,029 $176 $(228,149)$144,085 
Exercise of stock options4 — — 13 — — 13 
Release of restricted stock units136 — — — — —  
Unrealized loss on short-term investments— — — — (141)— (141)
Stock-based compensation expense— — — 2,895 — — 2,895 
Net loss— — — — — (18,908)(18,908)
Balance at September 30, 202030,019 200 $29 $374,937 $35 $(247,057)$127,944 
8


CONCERT PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
Nine Months Ended September 30, 2019
 Common StockAdditional paid-in capitalAccumulated other comprehensive incomeAccumulated deficitTotal stockholders’ equity
 IssuedIn TreasuryAmount
 (Amounts in thousands)
Balance at December 31, 201823,519 81 $23 $284,369 $(137)$(116,515)$167,740 
Exercise of stock options154 47 — 805 — — 805 
Release of restricted stock units202 61 — (741)— — (741)
Unrealized gain on short-term investments— — — — 97 — 97 
Stock-based compensation expense— — — 2,929 — — 2,929 
Exercise of stock warrants71 — — 1,000 — — 1,000 
Offering expenses incurred— — — (206)— — (206)
Net loss— — — — — (21,826)(21,826)
Balance at March 31, 201923,946 189 $23 $288,156 $(40)$(138,341)$149,798 
Exercise of stock options40 — — 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, 201923,986 189 $23 $290,683 $4 $(157,009)$133,701 
Exercise of stock options9 — — 36 — — 36 
Unrealized loss on short-term investments— — — — (39)— (39)
Stock-based compensation expense— — — 2,420 — — 2,420 
Proceeds from at-the-market offering36 — — 330 — — 330 
Net loss— — — — — (17,185)(17,185)
Balance at September 30, 201924,031 189 $23 $293,469 $(35)$(174,194)$119,263 
See accompanying notes.
9


CONCERT PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
 Nine Months Ended
September 30,
 20202019
Operating activities
Net loss$(52,376)$(57,679)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization1,208 1,256 
Stock-based compensation expense8,176 7,711 
Accretion of premiums and discounts on investments(39)(899)
Unrealized loss on marketable equity securities2,419 2,090 
Loss on disposal of asset4 4 
Non-cash lease expense206 161 
Changes in operating assets and liabilities:
Accounts receivable(58)4 
Deferred offering costs(52) 
Interest receivable(54)265 
Prepaid expenses and other current assets(1,702)(1,091)
Contract asset 16,000 
Other assets24 (16)
Accounts payable(615)207 
Accrued expenses and other liabilities(2,061)(827)
Income taxes receivable(32)(36)
Income taxes payable (390)
Deferred revenue(7,783) 
Operating lease liability(74)(445)
Net cash used in operating activities(52,809)(33,685)
Investing activities
Purchases of property and equipment(185)(520)
Purchases of investments(156,670)(93,326)
Maturities of investments119,675 141,706 
Net cash (used in) provided by investing activities(37,180)47,860 
Financing activities
Proceeds from exercises of stock options557 1,006 
Proceeds from exercise of warrants 1,000 
Repurchase of common stock pursuant to share surrender (741)
Proceeds from common stock and pre-funded warrants sold, net of underwriters' discount and costs70,064  
Proceeds from at-the-market offering, net of issuance costs 174 
Net cash provided by financing activities70,621 1,439 
Net (decrease) increase in cash and cash equivalents and restricted cash(19,368)15,614 
Cash, cash equivalents and restricted cash at beginning of period54,200 18,927 
Cash, cash equivalents and restricted cash at end of period$34,832 $34,541 
Supplemental cash flow information:
Cash paid for income taxes$ $453 
Public offering costs unpaid at period end$87 $50 
Cash paid included in measurement of lease liabilities$1,685 $2,082 
Pre-funded stock warrants issued$16,736 $ 
See accompanying notes.
10

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


1. Nature of Business

Concert Pharmaceuticals, Inc., or the Company, was incorporated on April 12, 2006 as a Delaware corporation and has its operations based in Lexington, Massachusetts. The Company is a clinical stage biopharmaceutical company that is developing small molecule drugs that it discovered through the application of its deuterated chemical entity platform, or DCE Platform®. 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. The Company’s pipeline consists of clinical stage candidates targeting autoimmune and central nervous system, or CNS, disorders, and a number of preclinical compounds that it is currently assessing.

Liquidity and Going Concern

As of September 30, 2020, the Company had cash, cash equivalents and investments of $124.2 million and net working capital of $129.0 million. The Company has incurred cumulative net losses of $247.1 million since its inception and requires capital to continue future development activities. The Company does not have any products approved for sale and has not generated any revenue from product sales. The Company has funded its operations primarily through the public offering and private placement of its equity, debt financing, funding from collaborations and patent assignments, an asset sale and other arrangements. The Company expects its expenses to increase in connection with its ongoing activities, particularly as it initiates new clinical trials such as the Phase 3 trial of CTP-543 in alopecia areata. See Notes 12-14 for information regarding the Company's recently completed equity financings.

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.

Under Accounting Standards Codification, or ASC, Topic 205-40, Presentation of Financial Statements - Going Concern, management is required at each reporting period to evaluate whether there are conditions and events, considered in the aggregate, that raise substantial doubt about an entity's ability to continue as a going concern within one year after the date that the financial statements are issued. This evaluation initially does not take into consideration the potential mitigating effect of management's plans that have not been fully implemented as of the date the financial statements are issued. When substantial doubt exists, management evaluates whether the mitigating effect of its plans sufficiently alleviates the substantial doubt about the Company's ability to continue as a going concern. The mitigating effect of management's plans, however, is only considered if both (i) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued and (ii) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued. Generally, to be considered probable of being effectively implemented, the plans must have been approved by the Company's board of directors before the date that the financial statements are issued.

Successful completion of the Company’s development program and, ultimately, the attainment of profitable operations are dependent upon future events, including obtaining adequate financing to support the Company’s cost structure and operating plan. Management’s plans to alleviate its financing requirements include, among other things, pursuing one or more of the following steps to raise additional capital, none of which can be guaranteed or are entirely within the Company’s control:

raise funding through the sale of the Company's common stock;
raise funding through debt financing; and
establish collaborations with potential partners to advance the Company’s product pipeline.

Based on the Company’s current operating plan, management believes that its current cash, cash equivalents and available for sale investments will allow the Company to meet its liquidity requirements into the second half of 2021. The Company's history of significant losses, the negative cash flows from operations, the limited liquidity resources currently on hand and the dependence by the Company on its ability, about which there can be no certainty, to obtain additional financing to fund its operations after the current resources are exhausted raises substantial doubt about the Company's ability to continue as a going concern for a period of at least twelve months from the issuance date of this Quarterly Report on Form 10-Q. The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business, and do not include any adjustments that may result from the outcome of this uncertainty.

11

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

If the Company is unable to raise capital when needed or on attractive terms, or if it is unable to procure collaboration arrangements to advance its programs, the Company would be forced to discontinue some of its operations or develop and implement a plan to further extend payables, reduce overhead or scale back its current operating plan until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan would be successful.

2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The 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 nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2020 or any other future period.
The accompanying condensed consolidated financial statements reflect the accounts of the Company 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 fiscal year ended December 31, 2019 filed with the Securities and Exchange Commission, or SEC, on February 27, 2020.
Unless otherwise indicated, all amounts in the following tables are in thousands except share and per share amounts.
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; prepaid and accrued research and development expenses; stock-based compensation expense; and the 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.
During the nine months ended September 30, 2020, 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, 2019.
Recently Adopted Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or 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. This 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 adopted this new standard effective January 1, 2020, on a prospective basis, and it did not have a material effect on the consolidated financial statements and related disclosures.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard includes removal of certain exceptions to the general principles of ASC 740, Income Taxes, and simplification in several other areas. ASU 2019-12 is effective for public business entities for annual reporting periods beginning after December 15, 2020, and interim periods within those reporting periods, and early adoption is permitted. The Company adopted this new standard effective January 1, 2020, and it did not have a material effect on the consolidated financial statements and related disclosures. For a detailed discussion of the adoption of ASU 2019-12, refer to Note 7.

Pending Accounting Pronouncements

12

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

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses. This 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. As a smaller reporting company, ASU 2016-13 will become effective for the Company for fiscal years beginning after December 15, 2022, and early adoption is permitted. The Company is currently evaluating the impact that ASU 2016-13 will have on its financial statements and related disclosures.

3. Fair Value Measurements

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

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

The tables below present information about the Company’s financial assets and liabilities that are measured and carried at fair value as of September 30, 2020 and December 31, 2019 and indicate the level within the fair value hierarchy where each measurement is classified. The carrying amounts reflected in the condensed consolidated balance sheets for cash, prepaid expenses and other current assets, restricted cash, accounts payable and accrued expenses approximate their fair value due to their short-term nature.
Level 1Level 2Level 3Total
September 30, 2020
Cash equivalents:
Money market funds$30,021 $ $ $30,021 
Government agency securities1,002   1,002 
Investments, available for sale:
U.S. Treasury obligations43,890   43,890 
Government agency securities20,610 25,996  46,606 
Marketable equity securities:
Corporate equity securities (Note 8)2,956   2,956 
Total$98,479 $25,996 $ $124,475 
Level 1Level 2Level 3Total
December 31, 2019
Cash equivalents:
Money market funds$40,782 $ $ $40,782 
Government agency securities 2,000  2,000 
Investments, available for sale:
U.S. Treasury obligations34,499   34,499 
Government agency securities10,997 7,899  18,896 
Marketable equity securities:
Corporate equity securities (Note 8)5,375   5,375 
Total$91,653 $9,899 $ $101,552 

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. Unrealized gains or losses from equity securities are included in net income. Unrealized gains or losses from other investments, including debt securities,
13

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

are included in accumulated other comprehensive (loss) income. Premiums or discounts from par value are amortized to investment income over the life of the underlying investment.

Cash, cash equivalents, available for sale investments and marketable equity securities included the following as of September 30, 2020 and December 31, 2019:
Average MaturityAmortized CostUnrealized GainsUnrealized LossesFair Value
September 30, 2020
Cash$2,652 $— $— $2,652 
Money market funds30,021 — — 30,021 
Government agency securities30 days1,002 — — 1,002 
Cash and cash equivalents$33,675 $— $— $33,675 
U.S. Treasury obligations126 days$43,816 $74 $ $43,890 
Government agency securities119 days46,568 38  46,606 
Investments, available for sale$90,384 $112 $ $90,496 
September 30, 2020Acquisition ValueUnrealized GainsUnrealized LossesFair Value
Marketable equity securities (Note 8)$10,451 $ $(7,495)$2,956 

Average MaturityAmortized CostUnrealized GainsUnrealized LossesFair Value
December 31, 2019
Cash$10,261 $— $— $10,261 
Money market funds40,782 — — 40,782 
Government agency securities8 days2,000 — — 2,000 
Cash and cash equivalents$53,043 $— $— $53,043 
U.S. Treasury obligations108 days$34,475 $24 $ $34,499 
Government agency securities74 days18,874 22  18,896 
Investments, available for sale$53,349 $46 $ $53,395 
December 31, 2019Acquisition ValueUnrealized GainsUnrealized LossesFair Value
Marketable equity securities (Note 8)$10,451 $ $(5,076)$5,375 
Although available to be sold to meet operating needs or otherwise, securities are generally held through maturity. The Company classifies all investments as current assets, as these assets are readily available for use in current operations. The cost of securities sold is determined based on the specific identification method for purposes of recording realized gains and losses. During 2020 and 2019, 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, 2020 and 2019 was held as collateral for stand-by letters of credit issued by the Company to its landlord in connection with the current lease for its principal facilities located at 65 Hayden Avenue, Lexington, Massachusetts. For additional information regarding the Company's lease, refer to Note 11. Cash, cash equivalents and restricted cash consisted of the following as of September 30, 2020 and 2019:
14

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

September 30,
2020
September 30,
2019
Cash and cash equivalents$33,675 $33,384 
Restricted cash1,157 1,157 
Total cash, cash equivalents and restricted cash shown in the statements of cash flows$34,832 $34,541 

6. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following as of September 30, 2020 and December 31, 2019:
September 30,
2020
December 31,
2019
Accrued professional fees and other$503 $862 
Employee compensation and benefits2,651 3,222 
Research and development expenses3,070 4,252 
Total$6,224 $8,336 

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 U.S. 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%, 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, 2020, the Company forecasts an ordinary pre-tax loss for the year ended December 31, 2020 and, since it maintains a full valuation allowance on its deferred tax assets, the Company did not record an income tax benefit relating to this period. During the nine months ended September 30, 2020, the Company recorded a benefit for income taxes of $85 thousand for interest accrued in a prior period under the installment sales method for the sale of CTP-656 to Vertex Pharmaceuticals, Inc., or Vertex.

The Company adopted ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, effective January 1, 2020. Under ASU 2019-12, the Company, having a full valuation and a loss in continuing operations, will no longer include the impacts of items in other comprehensive income in determining intra-period allocation of tax expense for continuing operations. Under ASU 2019-12, the Company can apply this change to intra-period tax allocation on a prospective basis. For the nine months ended September 30, 2020, the Company applied the tax allocation rules of ASU 2019-12 to the $66 thousand of unrealized gains on available for sale investments recognized in other comprehensive income, which did not have a material impact on the consolidated financial statements or related disclosures.

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. The revenue recognized under each of the Company's arrangements during the current and prior periods is described below.
Contract Assets
In February 2019, the Company received $16.0 million that had previously been held in escrow for indemnification purposes related to the asset purchase by Vertex. The Company did not have a contract asset as of September 30, 2020 or December 31, 2019.
15

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

Contract Liabilities
As of September 30, 2020 and December 31, 2019, the Company had $2.8 million and $10.6 million, respectively, in contract liabilities related to unsatisfied performance obligations as well as variable consideration paid in advance but currently constrained from recognition.
The contract liabilities as of September 30, 2020 consisted of $2.8 million of deferred revenue related to a payment received from GlaxoSmithKline that the Company will not recognize as revenue until all repayment obligations lapse.

During the three and nine months ended September 30, 2020, the Company recognized $1.4 million and $7.8 million, respectively, in deferred revenue. In April 2020, the Company recognized $6.4 million in deferred revenue upon the expiration of two licensing options under the Company's collaboration agreement with Celgene. During the three months ended September 30, 2020, the Company recognized $1.4 million in deferred revenue upon the satisfaction of obligations to perform research and development services and to supply nonclinical and clinical trial material in connection with the termination of the agreement with Celgene. The Company also recognized $78 thousand in patent reimbursement costs in connection with the termination of the agreement with Celgene. As of September 30, 2020, no further performance obligations remain outstanding from the revenue arrangement with Celgene.
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.

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 that had previously been 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, 2020 or December 31, 2019.

Processa

On October 4, 2017, the Company entered into an Option and License 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 with both 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. In December 2019, Processa implemented a reverse stock split, and the Company now owns 298,615 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, manufacture and commercialize 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
16

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 statements 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, 2020, the Company recognized $3 thousand and $14 thousand in revenue, respectively, related to intellectual property cost reimbursements. 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.

Cipla

The Company entered into a License Agreement, or the Cipla Agreement, with Cipla Technologies LLC, or Cipla, on January 16, 2019, or the Cipla Closing Date, 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 Cipla Closing Date, valued in the 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 investigational new drug application, or 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 and commercialize CTP-354, referred to as the Transfer of License Performance Obligation. The Company concluded that 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 related to the Cipla Agreement for the three or nine months ended September 30, 2020 or for the three months ended September 30, 2019. The Company recognized $1.0 million in revenue for the nine months ended September 30, 2019 associated with the sale of existing inventory and the Transfer of License Performance Obligation.

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, 2020, 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
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CONCERT PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

closing market price of the Company's common stock on the date of grant, a vesting period of one, three or four years, and an expiration date no later than ten years from the date of grant.
Effective January 1, 2020, an additional 954,603 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, 2020, there were 1,155,611 shares of common stock available for future awards 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,
 2020201920202019
Research and development$1,555 $1,190 $4,226 $3,728 
General and administrative1,340 1,230 3,950 3,983 
Total stock-based compensation expense$2,895 $2,420 $8,176 $7,711 
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, 2020 and 2019 reflect the following weighted-average assumptions:
 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
Expected volatility70.11 %74.37 %68.59 %76.86 %
Expected term6.0 years6.0 years6.0 years6.0 years
Risk-free interest rate0.37 %1.59 %1.32 %2.16 %
Expected dividend yield % % % %
For the three and nine months ended September 30, 2019, 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. For the three and nine months ended September 30, 2020, expected volatility was estimated using solely the historical volatility of the Company's common stock because the Company had accumulated sufficient historical pricing data.

The following table provides certain information related to the Company's outstanding stock options:
 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
(Amounts in thousands, except per share data)
Weighted-average fair value of options granted, per option$5.68 $6.46 $6.53 $8.95 
Aggregate grant date fair value of options vested during the period$2,198 $2,234 $6,434 $7,070 
Total cash received from exercises of stock options$13 $36 $557 $1,006 
Total intrinsic value of stock options exercised$21 $59 $304 $1,167 
The following is a summary of stock option activity for the nine months ended September 30, 2020:
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CONCERT PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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, 20194,112,609 $15.01 
      Granted720,154 $10.62 
      Exercised(81,253)$6.87 
      Forfeited or expired(59,630)$19.15 
Outstanding at September 30, 20204,691,880 $14.43 6.77$1,360 
Exercisable at September 30, 20203,102,777 $14.42 5.90$1,299 
Vested and expected to vest at September 30, 2020(1)
4,579,705 $14.46 6.72$1,357 
(1)Represents the number of vested stock option shares as of September 30, 2020, plus the number of unvested stock option shares that the Company estimated as of September 30, 2020 would vest, based on the unvested stock option shares as of September 30, 2020 and an estimated forfeiture rate of 6%.

As of September 30, 2020, there was $13.4 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 2.3 years.

Restricted Stock Units

On August 15, 2019, or the 2019 RSU grant date, the Company granted