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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 June 30, 2021
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 July 31, 2021: 32,173,778



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 subsidiaries, 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 or royalties we may receive as part of our agreement with Avanir Pharmaceuticals Inc. with respect to AVP-786 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


SUMMARY OF THE MATERIAL RISKS ASSOCIATED WITH OUR BUSINESS
Our business is subject to numerous risks and uncertainties, including those described in the “Risk Factors” section in Part II, Item 1A. of this Quarterly Report on Form 10-Q. The principal risks and uncertainties affecting our business include the following:
Our business may be adversely affected by the ongoing COVID-19 pandemic.
We have incurred significant losses since inception, expect to incur losses for at least the next several years and may never sustain profitability.
Based on our current operating plan, there is substantial doubt regarding our ability to continue as a going concern.
We will need substantial additional funding. If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our development programs or commercialization efforts.
Clinical drug development involves a lengthy and expensive process with an uncertain outcome.
We may not be able to continue further clinical development of our wholly owned development programs, including CTP-543. If we are unable to develop, obtain marketing approval for or commercialize our wholly owned development programs, ourselves or through a collaboration, or experience significant delays in doing so, our business could be materially harmed.
If clinical trials of our product candidates fail to satisfactorily demonstrate safety and efficacy to the FDA and other regulators, we, or our collaborators, may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of these product candidates.
If we, or our collaborators, experience any of a number of possible unforeseen events in connection with clinical trials of our product candidates, potential marketing approval or commercialization of our product candidates could be delayed or prevented.
If we, or our collaborators, experience delays or difficulties in the enrollment of patients in clinical trials, our, or their, receipt of necessary marketing approvals could be delayed or prevented.
Serious adverse events, undesirable side effects or other unexpected properties of our product candidates, including those that we have licensed to collaborators, may be identified during development that could delay or prevent the product candidate’s marketing approval.
We rely on third parties to conduct our clinical trials and some aspects of our research and nonclinical testing. If they terminate their relationships with us or do not perform satisfactorily, our business may be materially harmed.
We depend on collaborations with third parties for the development and commercialization of some of our product candidates and expect to continue to do so in the future. Our prospects with respect to those product candidates will depend in significant part on the success of those collaborations.
We expect to seek to establish additional collaborations, and if we are not able to establish them on commercially reasonable terms, we may have to alter our development and commercialization plans.
If we are unable to obtain and maintain sufficient patent protection for our product candidates, or if the scope of the patent protection is not sufficiently broad, our competitors could develop and commercialize products similar or identical to ours, and our ability to successfully commercialize our product candidates may be adversely affected.
Third parties may sue us alleging that we are infringing their intellectual property rights, and such litigation could be costly and time consuming and could prevent or delay us from developing or commercializing our product candidates.
We contract with third parties for the manufacture and distribution of our product candidates for nonclinical and clinical testing and expect to continue to do so in connection with our future development and commercialization efforts. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or such quantities at an acceptable cost, or that the product candidates will not be of sufficient quality or
6


reproducibility or produced on our desired schedule, which could delay, prevent or impair our development or commercialization efforts.
Even if we complete the necessary nonclinical studies and clinical trials, the marketing approval process is expensive, time consuming and uncertain and we may not obtain approvals for the commercialization of some or all of our product candidates. As a result, we cannot predict when or if, and in which territories, we, or our collaborators, will obtain marketing approval to commercialize a product candidate.
We face substantial competition from other pharmaceutical and biotechnology companies and our operating results may suffer if we fail to compete effectively.
The summary risk factors described above should be read together with the text of the full risk factors below, in the section entitled “Risk Factors” and the other information set forth in this Quarterly Report on Form 10-Q, including our consolidated financial statements and the related notes, as well as in other documents that we file with the Securities and Exchange Commission. The risks summarized above or described in full below are not the only risks that we face. Additional risks and uncertainties not precisely known to us, or that we currently deem to be immaterial may also materially adversely affect our business, financial condition, results of operations and future growth prospects.
7


PART I. FINANCIAL INFORMATION
 
Item 1.Financial Statements.
CONCERT PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Amounts in thousands, except share and per share data)
June 30,December 31,
 20212020
Assets
Current assets:
Cash and cash equivalents$122,399 $77,202 
Investments, available for sale 52,766 
Marketable equity securities2,446 1,969 
Interest receivable1 145 
Deferred offering costs15  
Accounts receivable240 686 
Income taxes receivable, current 2,346 
Prepaid expenses and other current assets7,882 7,610 
Total current assets132,983 142,724 
Property and equipment, net5,752 6,363 
Restricted cash1,157 1,157 
Other assets21 51 
Operating lease right-of-use asset, long-term8,792 8,968 
Total assets$148,705 $159,263 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$ $230 
Accrued expenses and other liabilities7,631 9,017 
Lease liability, current portion1,039 931 
Total current liabilities8,670 10,178 
Accrued expenses, net of current portion62 108 
Deferred revenue, long-term2,750 2,750 
Lease liability, net of current portion14,507 15,065 
Total liabilities25,989 28,101 
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 June 30, 2021 and December 31, 2020, respectively
  
Common stock, $0.001 par value per share; 100,000,000 shares authorized; 32,374,379 and 32,062,799 shares issued and 32,173,778 and 31,862,198 shares outstanding as of June 30, 2021 and December 31, 2020, respectively
31 31 
Additional paid-in capital409,452 400,636 
Accumulated other comprehensive loss(76)(58)
Accumulated deficit(286,691)(269,447)
Total stockholders’ equity122,716 131,162 
Total liabilities and stockholders’ equity$148,705 $159,263 
See accompanying notes.
8


CONCERT PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(Amounts in thousands, except per share data)
 Three Months Ended June 30,Six Months Ended June 30,
 2021202020212020
Revenue:
License and research and development revenue$17 $6,387 $22 $6,394 
Other revenue32,000  32,000  
Total revenue32,017 6,387 32,022 6,394 
Operating expenses:
Research and development20,184 14,788 38,684 28,774 
General and administrative5,614 4,731 11,099 9,403 
Total operating expenses25,798 19,519 49,783 38,177 
Income (loss) from operations6,219 (13,132)(17,761)(31,783)
Investment income15 355 40 918 
Unrealized (loss) gain on marketable equity securities(809)(299)477 (2,688)
Income (loss) before income taxes5,425 (13,076)(17,244)(33,553)
Income tax benefit (85) (85)
Net income (loss)$5,425 $(12,991)$(17,244)$(33,468)
Other comprehensive (loss) income:
Unrealized (loss) gain on investments, available for sale(2)(316)(18)207 
Comprehensive income (loss)$5,423 $(13,307)$(17,262)$(33,261)
Net income (loss) attributable to common stockholders - basic and diluted5,415 (12,991)(17,244)(33,468)
Net income (loss) per share applicable to common stockholders - basic and diluted$0.16 $(0.41)$(0.51)$(1.11)
Weighted-average number of common shares used in net income (loss) per share applicable to common stockholders:
Basic33,974 31,455 33,934 30,283 
Diluted34,083 31,455 33,934 30,283 
See accompanying notes.
9


CONCERT PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
Six Months Ended June 30, 2021
 Common StockAdditional paid-in capitalAccumulated other comprehensive lossAccumulated deficitTotal stockholders’ equity
 IssuedIn TreasuryAmount
 (Amounts in thousands)
Balance at December 31, 2020
32,063 200 $31 $400,636 $(58)$(269,447)$131,162 
Exercise of stock options10 — — 89 — — 89 
Release of restricted stock units136 — — — — —  
Unrealized loss on short-term investments— — — — (16)— (16)
Stock-based compensation expense— — — 3,431 — — 3,431 
Proceeds from at-the-market offering, net of issuance costs165 — — 2,042 — — 2,042 
Net loss— — — — — (22,669)(22,669)
Balance at March 31, 2021
32,374 200 $31 $406,198 $(74)$(292,116)$114,039 
Unrealized loss on short-term investments— — — — (2)— (2)
Stock-based compensation expense— — — 3,254 — — 3,254 
Net income— — — — — 5,425 5,425 
Balance at June 30, 2021
32,374 200 $31 $409,452 $(76)$(286,691)$122,716 
10


Six Months Ended June 30, 2020
 Common StockAdditional paid-in capitalAccumulated other comprehensive
(loss) income
Accumulated deficitTotal stockholders’ equity
 IssuedIn TreasuryAmount
 (Amounts in thousands)
Balance at December 31, 2019
24,066 200 $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, 2020
29,852 200 $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, 2020
29,879 200 $29 $372,029 $176 $(228,149)$144,085 
See accompanying notes.
11


CONCERT PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
 Six Months Ended
June 30,
 20212020
Operating activities
Net loss$(17,244)$(33,468)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization785 805 
Stock-based compensation expense6,685 5,281 
Accretion of premiums and discounts on investments35 (114)
Unrealized (gain) loss on marketable equity securities(477)2,688 
Loss on disposal of asset 4 
Non-cash lease expense176 133 
Changes in operating assets and liabilities:
Accounts receivable(87)22 
Deferred offering costs (30)
Interest receivable144 16 
Prepaid expenses and other current assets(272)170 
Other assets30 27 
Accounts payable(230)(529)
Accrued expenses and other liabilities(1,481)(1,184)
Income taxes receivable2,346 (88)
Deferred revenue (6,370)
Operating lease liability(450)113 
Net cash used in operating activities(10,040)(32,524)
Investing activities
Purchases of property and equipment(140)(126)
Purchases of investments (145,152)
Maturities of investments52,713 81,245 
Net cash provided by (used in) investing activities52,573 (64,033)
Financing activities
Proceeds from exercise of stock options89 544 
Proceeds from common stock and pre-funded warrants sold, net of underwriters’ discount and costs 70,064 
Proceeds from at-the-market offering, net of issuance costs2,575  
Net cash provided by financing activities2,664 70,608 
Net increase (decrease) in cash, cash equivalents and restricted cash45,197 (25,949)
Cash, cash equivalents and restricted cash at beginning of period78,359 54,200 
Cash, cash equivalents and restricted cash at end of period$123,556 $28,251 
Supplemental cash flow information:
Purchases of property and equipment unpaid at period end$36 $ 
Public offering costs unpaid at period end$15 $13 
Cash paid included in measurement of lease liabilities$1,484 $965 
Pre-funded stock warrants issued$ $16,736 
See accompanying notes.
12

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. As discussed in detail in the “Overview” section in Part I, Item 2. of this Quarterly Report on Form 10-Q, the Company’s most advanced product candidate is CTP-543, which it is evaluating in a Phase 3 clinical program for the treatment of alopecia areata, a serious autoimmune dermatological condition. The Company is also assessing a number of earlier-stage pipeline candidates.

Liquidity and Going Concern

As of June 30, 2021, the Company had cash and cash equivalents of $122.4 million and net working capital of $124.3 million. The Company has incurred cumulative net losses of $286.7 million since 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 financed 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 conducts its Phase 3 clinical trials of CTP-543 in alopecia areata. For information regarding the Company’s recently completed equity financings, see Note 12.

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 and cash equivalents will allow the Company to meet its liquidity requirements into the second quarter of 2022. The Company’s history of significant losses, its negative cash flows from operations, its limited liquidity resources currently on hand and its dependence on its ability to obtain additional financing to fund its operations after the current resources are exhausted, about which there can be no certainty, have resulted in management’s assessment that there is 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
13

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

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.

If the Company is unable to raise capital when needed or on acceptable 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 six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2021 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, 2020 filed with the Securities and Exchange Commission, or SEC, on February 25, 2021.
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 six months ended June 30, 2021, 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, 2020.

Pending Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update, or 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
14

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

Level 3—valuations derived from valuation techniques in which one or more significant value drivers are unobservable.

The tables below present information about the Company’s financial assets and liabilities that are measured and carried at fair value as of June 30, 2021 and December 31, 2020 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
June 30, 2021
Cash equivalents:
Money market funds$118,845 $ $ $118,845 
Marketable equity securities:
Corporate equity securities (Note 8)2,446   2,446 
Total$121,291 $ $ $121,291 
Level 1Level 2Level 3Total
December 31, 2020
Cash equivalents:
Money market funds$69,928 $ $ $69,928 
Investments, available for sale:
U.S. Treasury obligations25,528   25,528 
Government agency securities8,737 18,501  27,238 
Marketable equity securities:
Corporate equity securities (Note 8)1,969   1,969 
Total$106,162 $18,501 $ $124,663 

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, 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 June 30, 2021 and December 31, 2020:
Amortized CostUnrealized GainsUnrealized LossesFair Value
June 30, 2021
Cash$3,554 $— $— $3,554 
Money market funds118,845 — — 118,845 
Cash and cash equivalents$122,399 $— $— $122,399 
June 30, 2021Acquisition ValueUnrealized GainsUnrealized LossesFair Value
Marketable equity securities (Note 8)$10,451 $ $(8,005)$2,446 

15

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

Average MaturityAmortized CostUnrealized GainsUnrealized LossesFair Value
December 31, 2020
Cash$7,274 $— $— $7,274 
Money market funds69,928 — — 69,928 
Cash and cash equivalents$77,202 $— $— $77,202 
U.S. Treasury obligations70 days$25,523 $5 $ $25,528 
Government agency securities82 days27,225 13  27,238 
Investments, available for sale$52,748 $18 $ $52,766 
December 31, 2020Acquisition ValueUnrealized GainsUnrealized LossesFair Value
Marketable equity securities (Note 8)$10,451 $ $(8,482)$1,969 
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 2021 and 2020, there were no realized gains or losses on sales of investments, and no investments were adjusted other than for temporary declines in fair value.

5. Restricted Cash
Restricted cash as of June 30, 2021 and 2020 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 June 30, 2021 and 2020:
June 30,
2021
June 30,
2020
Cash and cash equivalents$122,399 $27,094 
Restricted cash1,157 1,157 
Total cash, cash equivalents and restricted cash shown in the statements of cash flows$123,556 $28,251 



6. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following as of June 30, 2021 and December 31, 2020:
June 30,
2021
December 31,
2020
Accrued professional fees and other$705 $709 
Employee compensation and benefits1,691 3,690 
Research and development expenses5,235 4,618 
Accrued expenses and other liabilities$7,631 $9,017 
Employee compensation and benefits, net of current portion$62 $108 
Accrued expenses and other liabilities, net of current portion$62 $108 


16

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

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 June 30, 2021, the Company forecasts an ordinary pre-tax loss for the year ended December 31, 2021 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 six months ended June 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 six months ended June 30, 2021, the Company applied the tax allocation rules of ASU 2019-12 to the $18 thousand of unrealized losses 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, intellectual property sales and asset sales. 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
The Company did not have a contract asset as of June 30, 2021 or December 31, 2020.
Contract Liabilities
As of June 30, 2021 and December 31, 2020, the Company had $2.8 million in contract liabilities related to variable consideration paid in advance but currently constrained from recognition. The $2.8 million of contract liabilities consisted of deferred revenue related to a payment received from GlaxoSmithKline that the Company will not recognize as revenue until all repayment obligations lapse.
Revenue Arrangements
Vertex

In July 2017, the Company completed the sale of worldwide development and commercialization rights to CTP-656, now known as VX-561, and other assets related to the treatment of cystic fibrosis to Vertex. Pursuant to the Asset Purchase Agreement with Vertex, or the Vertex Agreement, the Company received $160.0 million in cash upon closing. Additionally, upon the achievement of certain milestone events, Vertex agreed to pay the Company an aggregate of up to $90.0 million, or the Milestone Obligation.
In May 2021, the Company entered into an amendment to the Vertex Agreement, or the Vertex Amendment. Pursuant to the Vertex Amendment, Vertex paid the Company $32.0 million in cash in exchange for the removal of the Milestone Obligation.
17

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

As a result of the Vertex Amendment, the Company is not entitled to receive any further payments pursuant to the Vertex Agreement.

The Vertex Amendment changes the future obligations due from Vertex under the Vertex Agreement and was therefore treated as a contract modification. Since the Vertex Amendment does not provide for any new distinct goods and services, and the single performance obligation related to the arrangement was previously satisfied, the Company recognized the $32.0 million payment from Vertex as Other Revenue during the three months ended June 30, 2021.

Previously, the variable consideration related to the Milestone Obligation was considered fully constrained due to the uncertainty associated with the achievement of the milestones. Pursuant to the Vertex Amendment, Vertex is no longer obligated to make these future milestone payments, and as a result, they are no longer considered variable consideration. There are no performance obligations or variable consideration remaining associated with the Vertex Agreement.

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 with Heatwurx, Inc., a public company, creating Processa Pharmaceuticals, Inc., or Processa.

On March 19, 2018, the Company entered into an amendment to the Option, or the Promet Amendment, and a Securities Purchase Agreement with both Promet and Processa. Pursuant to the Promet 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 Promet 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 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 in the condensed consolidated statements of operations and comprehensive loss.
The Promet 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 six months ended June 30, 2021 and June 30, 2020, the Company recognized $9 thousand and $10 thousand, respectively, in revenue related to intellectual property cost reimbursements.

9. Stock-Based Compensation
The Company’s equity incentive plans provide for the issuance of a variety of stock-based awards, including incentive stock options, nonstatutory stock options and awards of stock, to directors, officers and employees of the Company, as well as consultants and advisors to the Company. As of June 30, 2021, 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 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. The Company has granted performance-based and service-based RSUs with a vesting period of one, two or three years.
18

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

Effective January 1, 2021, an additional 1,274,487 shares were added to the Company’s 2014 Stock Incentive Plan, or the 2014 Plan, for future issuance pursuant to the terms of the 2014 Plan. As of June 30, 2021, there were 1,171,989 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 June 30,Six Months Ended June 30,
 2021202020212020
Research and development$1,745 $1,416 $3,596 $2,671 
General and administrative1,509 1,388 3,089 2,610 
Total stock-based compensation expense$3,254 $2,804 $6,685 $5,281 

Stock Options

Stock options are valued using the Black-Scholes-Merton option valuation model, and compensation cost is recognized based on such fair value over the period of vesting. The weighted-average fair value of options granted in the three and six months ended June 30, 2021 and 2020 reflect the following weighted-average assumptions:
 Three Months Ended June 30,Six Months Ended June 30,
 2021202020212020
Expected volatility70.57 %71.00 %69.83 %68.58 %
Expected term6.0 years6.0 years6.0 years6.0 years
Risk-free interest rate0.94 %0.42 %0.59 %1.33 %
Expected dividend yield % % % %
The following table provides certain information related to the Company’s outstanding stock options:
 Three Months Ended June 30,Six Months Ended June 30,
 2021202020212020
(Amounts in thousands, except per share data)
Weighted-average fair value of options granted, per option$2.66 $5.68 $7.17 $6.54 
Aggregate grant date fair value of options vested during the period$2,110 $2,051 $4,176 $4,236 
Total cash received from exercises of stock options$ $109 $89 $544 
Total intrinsic value of stock options exercised$ $190 $42 $283 

19

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

The following is a summary of stock option activity for the six months ended June 30, 2021:
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, 20204,652,870 $14.48 
      Granted848,543 $11.69 
      Exercised(10,130)$8.80 
      Forfeited or expired(41,762)$14.09 
Outstanding at June 30, 20215,449,521 $14.06 6.43$64 
Exercisable at June 30, 20213,675,958 $14.60 5.42$64 
Vested and expected to vest at June 30, 2021 (1)
5,296,782 $14.11 6.36$64 
(1)Represents the number of vested stock option shares as of June 30, 2021, plus the number of unvested stock option shares that the Company estimated as of June 30, 2021 would vest, based on the unvested stock option shares as of June 30, 2021 and an estimated forfeiture rate of 7%.

As of June 30, 2021, there was $12.7 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 2.4 years.

Restricted Stock Units
During the six months ended June 30, 2021, the Company granted 0.5 million RSUs to executives, employees and directors. RSUs are not included in issued and outstanding common stock until the shares have vested and settled. The fair value of an RSU is measured based on the market price of the underlying common stock on the date of grant.
The following is a summary of RSU activity for the six months ended June 30, 2021:
Number of
RSUs
Weighted-
Average
Grant Date Fair Value
   
Outstanding at December 31, 2020661,033 $10.64 
      Granted486,643 $9.74 
      Released(136,127)$10.87 
      Forfeited(31,857)$10.93 
Outstanding at June 30, 2021979,692 $10.15 

As of June 30, 2021, there was $6.5 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 1.4 years.

10. Income (Loss) Per Share
The Company has 61,273 outstanding warrants issued in connection with a 2017 Loan and Security Agreement with Hercules Capital, Inc. that are deemed to be participating securities. Accordingly, the Company applied the two-class method to calculate basic and diluted net earnings per share of common stock for the three months ended June 30, 2021. The two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to common stockholders. The two-class method was not applied for the six months ended June 30, 2021 or the three and six months ended June 30, 2020, as the Company’s participating securities do not have any obligation to absorb net losses.
Basic net income (loss) per common share is calculated by dividing net income (loss) allocable to common stockholders by the weighted-average common shares outstanding during the period, without consideration of common stock equivalents. The weighted-average common shares outstanding as of June 30, 2021 includes pre-funded warrants to purchase up to an aggregate of 1.8 million shares of common stock that were issued in connection with a public offering that closed in January 2020.
20

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

For periods with net income, diluted net earnings per share is calculated by either (i) adjusting the weighted-average shares outstanding for the dilutive effect of common stock equivalents, including warrants, stock options and RSUs outstanding for the period as determined using the treasury stock method or (ii) the two-class method considering common stock equivalents, whichever is more dilutive. 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 income (loss) per share for each period presented.
 Three Months Ended June 30,Six Months Ended June 30,
 2021202020212020
(Amounts in thousands, except per share amounts)
Basic Earnings Per Share:
Numerator:
Net income (loss)$5,425 $(12,991)$(17,244)$(33,468)
Income attributable to participating securities - basic10    
Income (loss) attributable to common stockholders - basic$5,415 $(12,991)$(17,244)$(33,468)
Denominator:
Weighted-average shares outstanding33,974 31,455 33,934 30,283 
Net income (loss) per share applicable to common stockholders - basic$0.16 $(0.41)$(0.51)$(1.11)
Diluted Earnings Per Share:
Numerator:
Net income (loss)$5,425 $(12,991)$(17,244)$(33,468)
Income attributable to participating securities - diluted10    
Income (loss) attributable to common stockholders - diluted$5,415 $(12,991)$(17,244)$(33,468)
Denominator:
Weighted-average shares outstanding33,974 31,455 33,934 30,283 
Dilutive impact from:
Stock options15    
Restricted stock units94    
Weighted-average shares outstanding - diluted34,083 31,455 33,934 30,283 
Net income (loss) per share applicable to common stockholders - diluted$0.16 $(0.41)$(0.51)$(1.11)
Anti-dilutive potential common stock equivalents excluded from the calculation of net income (loss) per share*:
Stock options5,4354,691 5,4504,691 
Restricted stock units886799 980799 
Warrants 61 61 61 
*For the three and six months ended June 30, 2021, the Company has presented "Anti-dilutive potential common stock equivalents excluded from the calculation of net income (loss) per share" to include all stock equivalents that could potentially
21

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

dilute basic income (loss) per share. The Company has corrected the presentation for the three and six months ended June 30, 2020 and has concluded that this change is not material to the current or any prior period financial statements.

11. Commitments

Lease

The Company currently has a lease, or the Lease, for approximately 56,000 square feet of office and laboratory space located at 65 Hayden Avenue, Lexington, Massachusetts, or the Premises. The Lease is classified as an operating lease. The lease term extends ten years following January 1, 2019. The Company is entitled to two five-year options to extend the Lease. The Lease provides for annual base rent of approximately $2.8 million in the first year following 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). 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.
The Company recorded a liability for the Lease of $16.9 million on January 1, 2019. This lease liability is amortized over the remaining lease term in an amount equal to the difference between the cash rent paid and the monthly interest calculated on the remaining lease liability. As of June 30, 2021, the Company had a current lease liability of $1.0 million and a non-current lease liability of $14.5 million recorded in its condensed consolidated balance sheets.
On January 1, 2019, the Company recorded a right-of-use asset in the amount of $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 in the amount of $4.5 million. The right-of-use asset is amortized over the remaining lease term in an amount equal to the difference between the calculated straight-line expense of the total lease payments less the monthly interest calculated on the remaining lease liability. As of June 30, 2021, the Company had a long-term lease asset of $8.8 million recorded in its condensed consolidated balance sheets.
The Company recognizes lease expense, calculated as the remaining cost of the Lease allocated over the remaining lease term, on a straight-line basis. Lease expense is presented as part of continuing operations in the condensed consolidated statements of operations and comprehensive loss. For the six months ended June 30, 2021, the Company recognized $1.2 million in lease expense.
For the six months ended June 30, 2021, the Company paid $1.5 million in rent. As a payment arising from an operating lease, the $1.5 million is classified within operating activities in the condensed consolidated statements of cash flows.
For the six months ended June 30, 2021 and 2020, the weighted-average remaining lease term was 7.5 years and 8.5 years, respectively, and the weighted-average discount rate was