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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 March 31, 2022
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 May 2, 2022: 36,329,342



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;
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.
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
4


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 or on favorable terms, we could be forced to delay, reduce or eliminate our development programs or commercialization efforts.
Raising additional capital may cause dilution to our stockholders or require us to relinquish rights to our technologies or product candidates.
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
6


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 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.
Even if we, or our collaborators, obtain marketing approvals for our product candidates, the approved labeling may include significant safety warnings or use limitations, which could adversely affect the degree of market acceptance.
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)
March 31,December 31,
 20222021
Assets
Current assets:
Cash and cash equivalents$59,363 $141,636 
Investments, available for sale49,643  
Marketable equity securities899 1,463 
Interest receivable251  
Deferred offering costs 15 
Accounts receivable744 218 
Prepaid expenses and other current assets3,868 6,997 
Total current assets114,768 150,329 
Property and equipment, net5,015 5,242 
Restricted cash1,157 1,157 
Other assets2 3 
Operating lease right-of-use asset, long-term8,469 8,585 
Total assets$129,411 $165,316 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$2,755 $2,606 
Accrued expenses and other liabilities11,111 12,359 
Lease liability, current portion1,216 1,155 
Total current liabilities15,082 16,120 
Accrued expenses, net of current portion 28 
Deferred revenue, long-term7,595 7,595 
Lease liability, net of current portion13,574 13,910 
Warrant liabilities, long-term (Note 13)16,594 15,438 
Total liabilities52,845 53,091 
Commitments (Note 11)
Stockholders’ equity:
Preferred stock, $0.001 par value per share; 5,000,000 shares authorized; 32,500 shares designated as Series X1; 13,997 shares of Series X1 issued and outstanding as of March 31, 2022 and December 31, 2021, respectively
  
Common stock, $0.001 par value per share; 100,000,000 shares authorized; 35,153,943 and 34,939,628 shares issued and 34,953,342 and 34,739,027 shares outstanding as of March 31, 2022 and December 31, 2021, respectively
34 34 
Additional paid-in capital463,876 461,765 
Accumulated other comprehensive loss(118)(76)
Accumulated deficit(387,226)(349,498)
Total stockholders’ equity76,566 112,225 
Total liabilities and stockholders’ equity$129,411 $165,316 
See accompanying notes.
8


CONCERT PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
(Amounts in thousands, except per share data)
 Three Months Ended March 31,
 20222021
Revenue:
License and research and development revenue$ $5 
Operating expenses:
Research and development30,489 18,500 
General and administrative5,539 5,485 
Total operating expenses36,028 23,985 
Loss from operations(36,028)(23,980)
Investment income20 25 
Unrealized (loss) gain on marketable equity securities(564)1,286 
Unrealized loss on warrant liabilities (Note 13)(1,156) 
Net loss$(37,728)$(22,669)
Other comprehensive loss:
Unrealized loss on investments, available for sale(42)(16)
Comprehensive loss$(37,770)$(22,685)
Net loss per share applicable to common stockholders - basic and diluted$(1.03)$(0.67)
Weighted-average number of common shares used in net loss per share applicable to common stockholders - basic and diluted36,687 33,894 
See accompanying notes.
9


CONCERT PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
Three Months Ended March 31, 2022
 Preferred StockCommon StockAdditional paid-in capitalAccumulated other comprehensive lossAccumulated deficitTotal stockholders’ equity
 IssuedAmountIssuedIn TreasuryAmount
 (Amounts in thousands)
Balance at December 31, 2021
14 $ 34,938 200 $34 $461,765 $(76)$(349,498)$112,225 
Release of restricted stock units— — 216 — — — — — — 
Unrealized loss on short-term investments— — — — — — (42)— (42)
Stock-based compensation expense— — — — — 2,111 — — 2,111 
Net loss— — — — — — — (37,728)(37,728)
Balance at March 31, 2022
14 $ 35,154 200 $34 $463,876 $(118)$(387,226)$76,566 
Three Months Ended March 31, 2021
 Preferred StockCommon StockAdditional paid-in capitalAccumulated other comprehensive
loss
Accumulated deficitTotal stockholders’ equity
 IssuedAmountIssuedIn TreasuryAmount
 (Amounts in thousands)
Balance at December 31, 2020
 $ 32,063 200 $31 $400,636 $(58)$(269,447)$131,162 
Exercise of stock options— — 10 — — 89 — — 89 
Release of restricted stock units— — 136 — — — — — — 
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 costs— — 165 — — 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 
See accompanying notes.
10


CONCERT PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
 Three Months Ended
March 31,
 20222021
Operating activities
Net loss$(37,728)$(22,669)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization321 392 
Stock-based compensation expense2,111 3,431 
Amortization of premiums on investments172 29 
Unrealized loss (gain) on marketable equity securities564 (1,286)
Unrealized loss on warrant liabilities1,156  
Non-cash lease expense116 84 
Changes in operating assets and liabilities:
Accounts receivable(526)74 
Deferred offering costs15  
Interest receivable(251)118 
Prepaid expenses and other current assets3,129 1,243 
Other assets1 19 
Accounts payable147 278 
Accrued expenses and other liabilities(1,276)(2,206)
Operating lease liability(275)(221)
Net cash used in operating activities(32,324)(20,714)
Investing activities
Purchases of property and equipment(92)(92)
Purchases of investments(49,857) 
Maturities of investments 30,712 
Net cash (used in) provided by investing activities(49,949)30,620 
Financing activities
Proceeds from exercise of stock options 89 
Proceeds from at-the-market offering, net of issuance costs 2,575 
Net cash provided by financing activities 2,664 
Net (decrease) increase in cash, cash equivalents and restricted cash(82,273)12,570 
Cash, cash equivalents and restricted cash at beginning of period142,793 78,359 
Cash, cash equivalents and restricted cash at end of period$60,520 $90,929 
Supplemental cash flow information:
Purchases of property and equipment unpaid at period end$3 $3 
Cash paid included in measurement of lease liabilities$764 $742 
See accompanying notes.
11

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 late-stage clinical biopharmaceutical company that is developing CTP-543, a Janus Kinase 1 and Janus Kinase 2 (JAK 1/2) inhibitor that it discovered through the application of its deuterated chemical entity platform, or DCE Platform®. As discussed in detail in the “Overview” section in Part I, Item 2. of this Quarterly Report on Form 10-Q, the Company is evaluating CTP-543 in a Phase 3 clinical program for the treatment of alopecia areata, a serious autoimmune dermatological condition.
Liquidity and Going Concern
As of March 31, 2022, the Company had cash, cash equivalents and investments of $109.0 million and net working capital of $99.7 million. The Company has incurred cumulative net losses of $387.2 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, asset sales and other arrangements. The Company expects its expenses to increase in connection with its ongoing activities, particularly as it conducts its Phase 3 clinical program of CTP-543 in alopecia areata and seeks marketing approval for CTP-543. For information regarding the Company’s recent equity financings, see Notes 12 and 13.
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 entity’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 entity’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 or preferred 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 investments will allow the Company to meet its liquidity requirements into the fourth 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
12

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

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.
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 three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2022 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, 2021 filed with the Securities and Exchange Commission, or SEC, on March 3, 2022.
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 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; fair value of warrant liabilities; 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 three months ended March 31, 2022, 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, 2021.
Recently Adopted Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own stock, by eliminating the cash conversion and beneficial conversion feature accounting models for convertible debt and convertible preferred stock. Additionally, ASU 2020-06 eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments. ASU 2020-06 is effective for public business entities for fiscal years beginning after December 15, 2021 and interim periods within those fiscal years, or December 31, 2023 and interim periods within those fiscal years for companies who meet the SEC definition of smaller reporting company. Early adoption is permitted, and entities are allowed to adopt the guidance through either a modified retrospective method of transition or a fully retrospective method of
13

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

transition. The Company early adopted this standard effective January 1, 2022 on a modified retrospective basis, and it did not have a material effect on the condensed consolidated financial statements and related disclosures.
Pending Accounting Pronouncements
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 March 31, 2022 and December 31, 2021 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
March 31, 2022
Cash equivalents:
Money market funds$44,940 $ $ $44,940 
Investments, available for sale:
U.S. Treasury obligations49,643   49,643 
Marketable equity securities:
Corporate equity securities899   899 
Total$95,482 $ $ $95,482 
Warrant liabilities (Note 13)$ $16,594 $ $16,594 
Level 1Level 2Level 3Total
December 31, 2021
Cash equivalents:
Money market funds$132,850 $ $ $132,850 
Marketable equity securities:
Corporate equity securities1,463   1,463 
Total$134,313 $ $ $134,313 
Warrant liabilities (Note 13)$ $15,438 $ $15,438 
14

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

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 March 31, 2022 and December 31, 2021:
Average MaturityAmortized CostUnrealized GainsUnrealized LossesFair Value
March 31, 2022
Cash$14,423 $— $— $14,423 
Money market funds44,940 — — 44,940 
Total cash and cash equivalents$59,363 $— $— $59,363 
U.S. Treasury obligations87 days$49,685 $— $(42)$49,643 
Total investments, available for sale$49,685 $— $(42)$49,643 
March 31, 2022Acquisition ValueUnrealized GainsUnrealized LossesFair Value
Marketable equity securities$10,451 $ $(9,552)$899 
Amortized CostUnrealized GainsUnrealized LossesFair Value
December 31, 2021
Cash$8,786 $— $— $8,786 
Money market funds132,850 — — 132,850 
Total cash and cash equivalents$141,636 $— $— $141,636 
December 31, 2021Acquisition ValueUnrealized GainsUnrealized LossesFair Value
Marketable equity securities$10,451 $ $(8,988)$1,463 
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 2022 and 2021, there were no realized gains or losses on sales of investments, and no investments were adjusted other than for temporary declines in fair value.

15

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

5. Restricted Cash
Restricted cash as of March 31, 2022 and 2021 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, or the Premises. For additional information regarding the Company’s lease, refer to Note 11. Cash, cash equivalents and restricted cash consisted of the following as of March 31, 2022 and 2021:
March 31,
2022
March 31,
2021
Cash and cash equivalents$59,363 $89,772 
Restricted cash1,157 1,157 
Total cash, cash equivalents and restricted cash shown in the statements of cash flows$60,520 $90,929 
6. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following as of March 31, 2022 and December 31, 2021:
March 31,
2022
December 31,
2021
Accrued professional fees and other$617 $1,094 
Employee compensation and benefits874 3,617 
Research and development expenses9,620 7,648 
Accrued expenses and other liabilities$11,111 $12,359 
Employee compensation and benefits, net of current portion$ $28 
Accrued expenses and other liabilities, net of current portion$ $28 
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, or the 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 March 31, 2022, the Company forecasts an ordinary pre-tax loss for the year ended December 31, 2022 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.
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 three months ended March 31, 2022, the Company applied the tax allocation rules of ASU 2019-12 to the $42 thousand of
16

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

unrealized losses on available-for-sale investments recognized in other comprehensive loss, which did not have a material impact on the consolidated financial statements or related disclosures.
Effective for tax years beginning on or after January 1, 2022, research and experimental expenditures under Section 174 of the Code must be capitalized over five years when performed in the United States and over 15 years when performed outside of the United States. The modification is an accounting method change that will require the filing of Form 3115 with the Company's 2022 tax return. As of March 31, 2022, the Company has performed a high-level analysis of the impact of this legislation and determined that the Company’s projected loss position for 2022 does not result in income tax. The Company maintains its full valuation allowance.
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 March 31, 2022 or December 31, 2021.
Contract Liabilities
As of March 31, 2022 and December 31, 2021, the Company had $2.8 million in contract liabilities related to unsatisfied performance obligations as well as variable consideration paid in advance, but currently constrained from recognition. Contract liabilities are presented as deferred revenue and classified as current or non-current based on the timing of when the Company expects to recognize revenue. The $2.8 million in 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 Pharmaceuticals, Inc., or 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. 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 changed 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 year ended December 31, 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.

17

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

9. Stock-Based Compensation
The Company’s equity incentive plans provide for the issuance of a variety of stock-based awards, including incentive stock options, nonstatutory stock options and awards of stock, to directors, officers and employees of the Company, as well as consultants and advisors to the Company. As of March 31, 2022, 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 RSUs and service-based RSUs with a vesting period of one, two or three years.
Effective January 1, 2022, an additional 1,389,561 shares of common stock 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 March 31, 2022, there were 2,026,725 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 March 31,
 20222021
Research and development$950 $1,851 
General and administrative1,161 1,580 
Total stock-based compensation expense$2,111 $3,431 
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 months ended March 31, 2022 and 2021 reflect the following weighted-average assumptions:
 Three Months Ended March 31,
 20222021
Expected volatility70.33%69.71%
Expected term6.0 years6.0 years
Risk-free interest rate2.33%0.54%
Expected dividend yield%%
The following table provides certain information related to the Company’s outstanding stock options:
 Three Months Ended March 31,
 20222021
(Amounts in thousands, except per share data)
Weighted-average fair value of options granted, per option$2.47 $7.87 
Aggregate grant date fair value of options vested during the period$1,909 $2,066 
Total cash received from exercises of stock options$ $89 
Total intrinsic value of stock options exercised$ $42 
18

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

The following is a summary of stock option activity for the three months ended March 31, 2022:
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, 20215,197,320 $14.21 
      Granted29,200 $3.88 
      Exercised $ 
      Forfeited or expired(178,506)$15.70 
Outstanding at March 31, 20225,048,014 $14.09 5.8$2 
Exercisable at March 31, 20223,985,474 $14.72 5.2$2 
Vested and expected to vest at March 31, 2022 (1)
4,968,980 $14.13 5.8$2 
(1)Represents the number of vested stock option shares as of March 31, 2022, plus the number of unvested stock option shares that the Company estimated as of March 31, 2022 would vest, based on the unvested stock option shares as of March 31, 2022 and an estimated forfeiture rate of 7%.
As of March 31, 2022, there was $7.0 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 2.1 years.
Restricted Stock Units
On February 14, 2020, or the 2020 RSU grant date, the Company granted 0.4 million RSUs, or the 2020 RSUs, to certain officers and employees. All of the 2020 RSUs are service-based and vest ratably over three years, with one third of the 2020 RSUs vesting on each anniversary of the 2020 RSU grant date through February 14, 2023.
On January 5, 2021, or the January 2021 RSU grant date, the Company granted 0.3 million RSUs, or the January 2021 RSUs, to certain officers and employees. All of the January 2021 RSUs are service-based and vest ratably over three years, with one third of the January 2021 RSUs vesting on each anniversary of the January 2021 RSU grant date through January 5, 2024.
On June 10, 2021, or the June 2021 RSU grant date, the Company granted 0.2 million RSUs, or the June 2021 RSUs, to directors and certain employees. All of the June 2021 RSUs are service-based, with half of the grants to employees vesting six months after the June 2021 RSU grant date and the remainder vesting on the first anniversary of the June 2021 RSU grant date, and the grants to directors vesting on the earlier of the first anniversary of the June 2021 RSU grant date or one day prior to the Company’s 2022 annual meeting of stockholders.
On January 28, 2022, or the 2022 RSU grant date, the Company granted 0.7 million RSUs, or the 2022 RSUs, to certain officers and employees. All of the 2022 RSUs are service-based and vest ratably over three years, with one third of the 2022 RSUs vesting on each anniversary of the 2022 RSU grant date through January 28, 2025.
Also on the 2022 RSU grant date, the Company granted 0.3 million performance-based RSUs, or the 2022 PSUs, to certain officers and employees. The 2022 PSUs vest as to the total number of shares granted one business day after the date on which the U.S. Food and Drug Administration, or FDA, notifies the Company that it has accepted for filing a New Drug Application, or NDA, for CTP-543, provided that the date of acceptance is on or before October 31, 2023. The Company is using the straight-line method to recognize expense over the requisite service period based on its estimate of the number of 2022 PSUs that will vest. If there is a change in the estimate of the number of 2022 PSUs that are probable of vesting, the Company will cumulatively adjust compensation expense in the period that the change in estimate is made.
RSUs are not included in issued and outstanding common stock until the shares have vested and settled. As of March 31, 2022, 0.3 million of the 2020 RSUs, 0.1 million of the January 2021 RSUs and 0.1 million of the June 2021 RSUs had vested. The fair value of an RSU is measured based on the market price of the underlying common stock on the date of grant.
19

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

The following is a summary of RSU activity for the three months ended March 31, 2022:
Number of
RSUs
Weighted-
Average
Grant Date Fair Value
   
Outstanding at December 31, 2021628,192 $10.78 
      Granted1,005,575 $2.89 
      Released(214,315)$11.81 
      Forfeited(29,992)$9.40 
Outstanding at March 31, 20221,389,460 $4.94 
As of March 31, 2022, there was $5.2 million of unrecognized compensation cost related to RSUs that are expected to vest. The RSU costs are expected to be recognized over a weighted-average remaining vesting period of 2.1 years.
10. Loss Per Share
Basic net loss per common share is calculated by dividing net loss allocable to common stockholders by the weighted-average common shares outstanding during the period, without consideration of stock options, RSUs or preferred stock as common stock equivalents. The weighted-average common shares outstanding as of March 31, 2022 and 2021 includes pre-funded warrants to purchase up to an aggregate of 1.8 million shares of common stock that were issued in connection with a financing in 2020. For purposes of the diluted net loss per share calculation, common stock equivalents are excluded from the calculation if their effect would be anti-dilutive. As such, basic and diluted net loss per share applicable to common stockholders are the same for periods with a net loss.
The following table illustrates the determination of loss per share for each period presented.
 Three Months Ended March 31,
 20222021
(Amounts in thousands, except per share amounts)
Numerator:
Net loss applicable to common stockholders - basic and diluted$(37,728)$(22,669)
Denominator:
Weighted-average shares outstanding - basic and diluted36,687 33,894 
Net loss per share applicable to common stockholders - basic and diluted$(1.03)$(0.67)
Anti-dilutive potential common stock equivalents excluded from the calculation of net loss per share:
Stock options5,048 5,366 
Restricted stock units1,389 822 
Warrants16,311 61 
Series X1 Preferred Stock13,997  
20


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 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 March 31, 2022, the Company had a current lease liability of $1.2 million and a non-current lease liability of $13.6 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 March 31, 2022, the Company had a long-term lease asset of $8.5 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 three months ended March 31, 2022, the Company recognized $0.6 million in lease expense.
For the three months ended March 31, 2022, the Company paid $0.8 million in rent. As a payment arising from an operating lease, the $0.8 million is classified within operating activities in the condensed consolidated statements of cash flows.
For the three months ended March 31, 2022 and 2021, the weighted-average remaining lease term was 6.75 years and 7.75 years, respectively, and the weighted-average discount rate was 13.08%.
12. Open Market Sale Agreement
On March 1, 2019, the Company entered into an Open Market Sale Agreement, or the ATM Agreement, with Jefferies LLC, or Jefferies, with respect to an at-the-market offering program under which the Company may sell, from time to time at its sole discretion, shares of common stock having an aggregate offering price of up to $50.0 million, referred to as Placement Shares, through Jefferies as its sales agent. The Company will pay Jefferies a commission equal to 3.0% of the gross sales proceeds of any Placement Shares sold through Jefferies under the ATM Agreement.
On November 5, 2020, the Company entered into an amendment to the ATM Agreement with Jefferies to increase the aggregate offering price of Placement Shares that may be sold pursuant to the ATM Agreement from up to $50.0 million to up to $100.0 million. However, on March 7, 2021, the Company’s ability to further use the first $50.0 million expired. As a result, after March 7, 2021, the Company may only sell up to an additional $50.0 million pursuant to the ATM Agreement.
During the year ended December 31, 2021, the Company sold 165,323 shares of common stock pursuant to the ATM Agreement for net proceeds of $2.0 million, after payment of cash commissions of 3.0% of the gross proceeds to Jefferies. Cash provided by financing activities for the three months ended March 31, 2021 includes $0.5 million in net proceeds from sales pursuant to the ATM Agreement that had been classified as a receivable as of December 31, 2020.
During the three months ended March 31, 2022, the Company did not sell any shares of common stock pursuant to the ATM Agreement.
21

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

13. 2021 Sale of Common and Preferred Stock, Warrants and Royalty Interest
In November 2021, the Company entered into a structured financing, or the 2021 Financing, consisting of a securities purchase agreement, warrant agreements, or the Warrants, and a royalty purchase agreement, or the RPA. Pursuant to the 2021 Financing, the Company received aggregate gross proceeds of $65.0 million in exchange for the sale to a select group of institutional investors, or the Investors, of (i) 2,253,000 shares of common stock, (ii) 13,997 shares of Series X1 Preferred Stock, (iii) Warrants to purchase up to 16,250 shares of Series X1 Preferred Stock and (iv) a portion of the Company’s right to receive potential future AVP-786 royalties, or the Royalty Interest, under an existing development and licensing agreement, or the Avanir Agreement, with Avanir Pharmaceuticals, Inc., or Avanir, a subsidiary of Otsuka Pharmaceuticals, Co., Ltd.
Preferred Stock
In November 2021, the Company filed a certificate of designation with the Delaware Secretary of State setting forth the preferences, rights and limitations of a newly designated series of preferred stock known as “Series X1 Preferred Stock.” 32,500 shares have been designated as Series X1 Preferred Stock.
The Series X1 Preferred Stock is convertible into shares of common stock at a conversion rate of 1,000 shares of common stock per share of Series X1 Preferred Stock, at the option of the holder, subject to certain limitations. Except in limited circumstances, the Series X1 Preferred Stock does not have voting rights. Holders of the Series X1 Preferred Stock are entitled to receive dividends on an as converted to common stock basis when and if declared. In any liquidation or dissolution of the Company, the Series X1 Preferred Stock will rank on parity with the common stock in the distribution of assets, to the extent legally available for distribution, and will receive any dividends declared but unpaid on such shares.
Warrants
The Warrants consisted of (i) warrants to purchase an aggregate of 8,125 shares of Series X1 Preferred Stock at an initial exercise price (on a common stock equivalent basis) of $5.34 per share, or the First Tranche Warrants, and (ii) warrants to purchase an aggregate of an additional 8,125 shares of Series X1 Preferred Stock at an initial exercise price (on a common stock equivalent basis) of $7.35 per share, or the Second Tranche Warrants. The Warrants are exercisable at any time prior to the expiration date.
The term of the First Tranche Warrants and Second Tranche Warrants is contingent on the outcome of the Company’s CTP-543 THRIVE-AA1 Phase 3 clinical trial and THRIVE-AA2 Phase 3 clinical trial, respectively. The Warrants expire 90 days after the occurrence of both (i) the public disclosure by the Company of the achievement of statistical significance on each of the primary endpoints of the respective clinical trial and (ii) a determination by the Company that there are no safety or other issues that would impede the Company’s filing of an NDA without first requiring an additional clinical trial that is not already contemplated by the Company’s development plans for CTP-543. In the event that either event (i) or (ii) does not occur, the Warrants will expire 90 days after the earlier of (a) the public release of topline data from two ongoing Phase 3 clinical trials being conducted by Avanir in the indication of agitation in Alzheimer’s disease patients and (b) written notification to the Investors that the Company has received written notice from Avanir of a decision to cease both such clinical trials early. In the event that neither event (a) nor (b) occurs, the Warrants will expire upon the tenth anniversary from issuance.
The exercise price of the Warrants is subject to a one-time adjustment in the event that the Company sells capital stock or derivative securities convertible into or exercisable for capital stock (subject to certain exemptions) at a weighted-average price per share below the initial exercise price, in which case the initial exercise price will be automatically reset upon exercise of the Warrant to an exercise price that is the midpoint between the initial exercise price and the weighted-average price per share, provided that the adjusted exercise price cannot be less than $2.88 per share.
Royalty Interest
As part of the 2021 Financing, under the RPA, the Investors purchased the Royalty Interest. Investors are initially entitled to an aggregate base amount of the future royalty payments of 35.0% in respect of worldwide net sales of licensed products under the Avanir Agreement, and may increase their percentage ownership (i) by up to 7.5% upon the exercise in full by the Investors of the First Tranche Warrants and (ii) by up to an additional 7.5% upon the exercise in full by the Investors of the Second Tranche Warrants. Upon exercise of any portion of the First Tranche Warrants and/or Second Tranche Warrants by any Investor, such Investor is entitled to receive its pro rata share of the percentages set forth in the RPA.
22

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

Accounting Treatment
The Company received aggregate net proceeds of $64.4 million from the 2021 Financing after deducting offering expenses of $0.6 million payable by the Company.
The common stock, Series X1 Preferred Stock, Warrants and Royalty Interest were determined to be freestanding instruments, as they are legally detachable and separately exercisable from each other.
The Series X1 Preferred Stock is not redeemable outside the control of the Company, and the Company has the ability to settle any conversion in shares. As such, the Series X1 Preferred Stock is classified as a component of permanent stockholders’ equity within additional paid-in capital. The ability of the Series X1 Preferred Stock to be converted to common stock, or the Conversion Option, represents an embedded call option, and therefore, the Company performed an evaluation in accordance with ASC 815, Derivatives and Hedging, to determine whether the Conversion Option requires bifurcation as a derivative. As a result of the evaluation, the Company concluded that the Conversion Option feature is clearly and closely related to the equity host instrument and is not an embedded derivative requiring bifurcation. Additionally, the Company evaluated the Series X1 Preferred Stock for a beneficial conversion feature in accordance with ASC 470, Debt. The evaluation identified a beneficial conversion feature; however, because the Series X1 Preferred Stock was recorded at par value with the incremental amount recorded to additional paid-in capital, the beneficial conversion feature had no impact. As of January 1, 2022, the Company adopted ASU 2020-06. ASU 2020-06 eliminates the cash conversion and beneficial conversion feature accounting models for convertible debt and convertible preferred stock. As a result, the Company's adoption of ASU 2020-06 eliminated the beneficial conversion feature of the Series X1 Preferred Stock.
The Warrants include an exercise contingency that is based on an observable index other than the Company’s own operations, and therefore, are precluded from equity classification. As a result, the Warrants are classified as a liability and measured at fair value at inception with subsequent changes in fair value recognized in earnings as further discussed below.
The Royalty Interest does not meet the debt classification criteria, and as such, is accounted for under the deferred income model to be amortized under the units of revenue method. The two options to acquire an additional 7.5% of ownership in future AVP-786 royalties, or the Royalty Step Ups, are features embedded in the Royalty Interest. The Royalty Step Ups do not require bifurcation, as they are subject to scope exception because they pertain to the sale of future revenues.
The aggregate proceeds of the 2021 Financing were first allocated to the Warrants based on fair value, with the remaining proceeds allocated to the common stock, Series X1 Preferred Stock and Royalty Interest on a relative fair value basis. The First Tranche Warrants and Second Tranche Warrants were valued using a Black-Scholes-Merton option pricing model, resulting in a fair value of $7.5 million and $5.9 million, respectively, as of the date the Company entered into the 2021 Financing. The relative fair value allocated to common stock and Series X1 Preferred Stock totaled $6.5 million and $40.3 million, respectively. The relative fair value allocated to the Royalty Interest was $4.8 million.
Warrant Fair Value Assumptions
As of March 31, 2022 and December 31, 2021, the fair value of the First Tranche Warrants was $8.8 million and $8.5 million, respectively, and Second Tranche Warrants was $7.8 million and $6.9 million, respectively. The Company estimated the fair value of the Warrants using the Black-Scholes-Merton option pricing model. The fair value assumptions related to the Warrants as of March 31, 2022 and December 31, 2021 were as follows:
 As of March 31, 2022
 Tranche 1 WarrantsTranche 2 Warrants
Expected volatility74.42%78.21%
Expected term2.38 years2.55 years
Risk-free interest rate2.37%2.37%
Expected dividend yield%%
23

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

 As of December 31, 2021
 Tranche 1 WarrantsTranche 2 Warrants
Expected volatility75.90%76.40%
Expected term2.68 years2.80 years
Risk-free interest rate0.97%0.97%
Expected dividend yield%%
The expected term is probability-weighted based on the anticipated terms dictated by the possible outcomes of the Warrants. The expected volatility is calculated based on the historical volatility of the Company commensurate with the expected term. The risk-free interest rate is based on the average treasury bill interest rate over a period commensurate with the expected term. The expected dividend yield is zero, as the Company has not paid any dividends to date and has no current intention of paying cash dividends.
Related Party Participation in the 2021 Financing
The Investors included RA Capital Healthcare Fund, L.P., or RA Capital. At the time of entering into the 2021 Financing, RA Capital held greater than 5% of the Company's outstanding common stock, and two members of the Company's board of directors maintained minority, non-controlling interests in RA Capital. RA Capital purchased 7,500 shares of Series X1 Preferred Stock, 7,500 Warrants and a base amount of 16.2%, which could potentially increase up to 23.1%, of the Royalty Interest for $30.0 million in cash.
As of March 31, 2022 and December 31, 2021, the Company's condensed consolidated balance sheet includes RA Capital's portion of warrant liabilities of $7.7 million and $7.1 million, respectively, and deferred revenue of $2.2 million for both periods. For the three months ended March 31, 2022, the Company's condensed consolidated statement of operations and condensed consolidated statement of cash flows include RA Capital's portion of the unrealized loss on warrant liabilities of $0.5 million.
24


Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve significant risks and uncertainties. You should read the "Risk Factors" section in Part II, Item 1A. of this Quarterly Report on Form 10-Q for a discussion of important factors that could cause our actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

OVERVIEW
We are a late-stage clinical biopharmaceutical company that is developing CTP-543, a JAK 1/2 inhibitor that we discovered through the application of our DCE Platform. We are evaluating CTP-543 in a Phase 3 clinical program for the treatment of alopecia areata, a serious autoimmune dermatological condition. If these trials are successful, we intend to file an NDA with the FDA in the first half of 2023. There are currently no FDA-approved treatments for alopecia areata.
CTP-543
CTP-543 Opportunity
We believe that the market opportunity to treat alopecia areata within the United States is significant. Based on a recent large cross-sectional survey study, it is estimated that the current prevalence of alopecia areata in the United States may be up to approximately 1.5 million persons (Benigno M. Clinical, Cosmetic and Investigational Dermatology 2020). The study also estimates that about 43% of the alopecia areata population in the United States has 50% or greater loss of scalp hair. Given this prevalence and the substantial impact of alopecia areata on quality of life, the burden of alopecia areata within the United States is considerable. There are currently no FDA-approved treatments for alopecia areata, and we believe that the market opportunity within the United States could support multiple approved treatments.
CTP-543 is an oral JAK 1/2 inhibitor that we are developing for the treatment of moderate to severe alopecia areata. The FDA has granted CTP-543 Breakthrough Therapy designation for the treatment of adult patients with moderate to severe alopecia areata and Fast Track designation for the treatment of alopecia areata. CTP-543 is currently in Phase 3 development and could be one of the first treatments on the market if approved by the FDA.
Clinical Development of CTP-543
We have completed multiple Phase 2 clinical trials of CTP-543 for the treatment of moderate to severe alopecia areata to support the advancement of the program into Phase 3 development. In September 2019, we announced results from a Phase 2 double-blind, randomized, dose-ranging trial to evaluate three sequential doses of CTP-543 (4, 8 and 12 mg twice-daily) and a placebo control in 149 patients with moderate to severe alopecia areata. Patients treated with either 8 mg twice-daily or 12 mg twice-daily doses of CTP-543 met the primary efficacy endpoint with statistically significant differences (p <0.001) relative to placebo in the percentage of patients achieving a ≥ 50% relative change from baseline at 24 weeks. The 8 mg twice-daily and 12 mg twice-daily dose groups were also significantly different from placebo in the number of patients achieving ≥ 75% and ≥ 90% relative change in Severity of Alopecia Tool, or SALT, score between baseline at 24 weeks. A numerically but not statistically greater percentage of patients treated with the 4 mg twice-daily dose of CTP-543 met the primary efficacy endpoint. At 24 weeks, patients treated with 8 mg twice-daily and 12 mg twice-daily doses compared to placebo also rated significantly greater improvement in their alopecia areata on the Patient Global Impression of Improvement Scale. Treatment with CTP-543 was generally well tolerated. The most common side effects in the 8 mg or 12 mg twice-daily dose groups were headache, nasopharyngitis, upper respiratory tract infection, acne, nausea and low-density lipoprotein increase. One serious adverse event of facial cellulitis was reported in the 12 mg twice-daily dose group as possibly related to treatment; however, after a brief interruption, treatment continued and this patient completed the trial. No thromboembolic events were reported during the trial.
In June 2020, we released new data analyses from our Phase 2 dose-ranging trial of CTP-543 supporting the design of our Phase 3 program. The new data analyses revealed that statistically significant results were reported for the 8 mg twice-daily and 12 mg twice-daily doses of CTP-543 at more stringent response thresholds, which may be more clinically meaningful to patients, and positive findings were reported for clinician and patient reported outcome measures of scalp hair loss. At 24 weeks, 26% and 42% of patients who received CTP-543 in the 8 mg twice-daily and 12 mg twice-daily cohorts, respectively, achieved an absolute SALT score ≤ 20 (p <0.05 vs. placebo), indicating a clinically-meaningful 80% or greater scalp hair present. Data from the Clinician Global Impression of Improvement scale showed 75% of clinicians rated the response in the 12
25


mg twice-daily cohort and 61% of clinicians rated the response in the 8 mg twice-daily cohort as "much improved" or "very much improved" at 24 weeks. For both doses, there was a statistically significant difference from placebo (p <0.001).
In addition, we completed two Phase 2 clinical trials evaluating twice-daily dosing of CTP-543 compared to once-daily dosing of CTP-543. Based on the findings from those trials, we are utilizing the 8 mg twice-daily and 12 mg twice-daily doses in our ongoing clinical development program for CTP-543. The 8 mg twice-daily and 12 mg twice-daily arms of those studies provided efficacy comparable to the 8 mg twice-daily and 12 mg twice-daily arms, respectively, of our Phase 2 dose-ranging trial.
We conducted an end of Phase 2 meeting with the FDA in March 2020 and initiated the CTP-543 Phase 3 clinical program in November 2020, beginning with the THRIVE-AA1 trial. The THRIVE-AA1 trial is a double-blind, randomized, placebo-controlled clinical trial of CTP-543 to evaluate hair regrowth using the SALT score after 24 weeks of dosing in 708 adult patients with moderate to severe alopecia areata. The trial is evaluating 8 mg and 12 mg twice-daily doses of CTP-543 compared to placebo at sites in the United States, Canada and Europe. We announced the completion of enrollment of the THRIVE-AA1 trial in October 2021 and expect to report topline results in the second quarter of 2022.
In May 2021, we initiated the THRIVE-AA2 trial, which is our second Phase 3 clinical trial of CTP-543. The THRIVE-AA2 trial is a double-blind, randomized, placebo-controlled clinical trial of CTP-543 to evaluate hair regrowth using the SALT score after 24 weeks of dosing in 517 adult patients with moderate to severe alopecia areata. The trial is evaluating 8 mg and 12 mg twice-daily doses of CTP-543 compared to placebo at sites in the United States, Canada and Europe. We announced the completion of enrollment of the THRIVE-AA2 trial in January 2022 and expect to report topline results in the third quarter of 2022.
Eligible patients from our efficacy and safety studies with CTP-543 may also enroll in one of our open label, long-term extension studies. In July 2021, we provided an update showing that, relative to our Phase 2 clinical trials of CTP-543, hair regrowth using the SALT score was maintained or improved in the great majority of patients through one year of continuous dosing with 12 mg twice-daily of CTP-543.
Additional clinical trials are ongoing to support the submission of an NDA, which is currently planned for the first half of 2023.
Earlier-Stage Pipeline
We are currently assessing earlier-stage pipeline candidates as potential development candidates, including a once-daily, modified release formulation of CTP-543.
COLLABORATION PRODUCT CANDIDATES
In addition to our wholly-owned development programs, we have entered into collaborative arrangements with companies to develop deuterium-modified versions of their marketed products. Our partners are currently responsible for all development and future commercialization activities under these arrangements. In each of these collaborations, the deuterium-modified compound was independently discovered by us.
For example, in February 2012, we entered into a development and license agreement with Avanir for the worldwide rights to develop, manufacture and commercialize AVP-786. AVP-786 is a combination of deudextromethorphan hydrobromide (d6-DM) and quinidine sulfate (Q), a CYP2D6 inhibitor, being investigated for the treatment of neurologic and psychiatric disorders. In 2019, Avanir completed two Phase 3 clinical trials evaluating AVP-786 for the treatment of agitation associated with dementia of the Alzheimer’s type. The second of the Phase 3 clinical trials did not meet its primary or key secondary endpoints; however, following additional data analysis, Avanir decided to continue developing AVP-786 for the treatment of agitation associated with dementia of the Alzheimer’s type. Three additional Phase 3 clinical trials and an open label, long-term extension study for Alzheimer’s agitation are ongoing. Additionally, Avanir is conducting a Phase 2/3 clinical trial evaluating AVP-786 for the treatment of negative symptoms of schizophrenia. Under the Avanir Agreement, we received an upfront payment of $2.0 million and have received milestone payments of $6.0 million. We are eligible to earn up to $37.0 million in regulatory and commercial launch milestone payments with respect to AVP-786 and up to $125.0 million in sales-based milestone payments. Avanir is also required to pay us royalties at defined percentages ranging from the mid-single digits to low double digits below 20% on net sales of licensed products on a country-by-country basis. The royalty rate is reduced, on a country-by-country basis, during any period within the royalty term when there is no patent claim covering the licensed product in the particular country. We sold a portion of our right to receive these royalties in connection with the 2021 Financing. The Investors collectively own 35% of such royalties, with the percentage increasing incrementally up to 50% if all of the warrants issued in connection with the financing are exercised by the Investors.
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ASSET PURCHASE AGREEMENT WITH VERTEX PHARMACEUTICALS FOR CTP-656
In July 2017, we completed the sale of worldwide development and commercialization rights to CTP-656, now known as VX-561, and other assets related to the treatment of cystic fibrosis to Vertex. Pursuant to the Vertex Agreement, we received $160.0 million in cash. Additionally, upon the achievement of certain milestone events, Vertex agreed to pay us an aggregate of up to $90.0 million.
In May 2021, we entered into the Vertex Amendment, pursuant to which Vertex paid us $32.0 million in cash in exchange for the removal of the Milestone Obligation. As a result of the Vertex Amendment, we are not entitled to receive any further payments pursuant to the Vertex Agreement.
COVID-19 PANDEMIC
The COVID-19 pandemic continues to evolve. We could be materially and adversely affected by the risks, or the public perception of the risks, related to an epidemic, pandemic or other public health crisis, such as the COVID-19 pandemic, including but not limited to potential delays in our clinical trials. The ultimate extent of the impact of any epidemic, pandemic or other public health crisis on our business, financial condition and results of operations will depend on future developments, which are highly uncertain and subject to change will depend on future developments, which cannot be accurately predicted, including the duration of the pandemic, additional or modified government actions, variants or new information that may emerge concerning the severity of such epidemic, pandemic or other public health, among others. Accordingly, we cannot predict the extent to which our business, financial condition and results of operations may be affected by the COVID-19 pandemic, but we are monitoring the situation closely.
LIQUIDITY AND GOING CONCERN
As of March 31, 2022, we had cash, cash equivalents and investments of $109.0 million and net working capital of $99.7 million. We have incurred cumulative net losses of $387.2 million since our inception and require capital to continue future development activities. We do not have any products approved for sale and have not generated any revenue from product sales. We have financed our operations primarily through the public offering and private placement of our equity, debt financing, funding from collaborations and patent assignments, asset sales and other arrangements. We expect our expenses to increase in connection with our ongoing activities, particularly as we conduct our Phase 3 program of CTP-543 in alopecia areata and seek marketing approval for CTP-543. For information regarding our recently completed equity financings, see Notes 12 and 13 in the consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
We are 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 our pipeline, the need to obtain marketing approval for our product candidates, the need to successfully commercialize and gain market acceptance of our 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 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 our plans sufficiently alleviates the substantial doubt about our 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 our 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 board of directors before the date that the financial statements are issued.
Successful completion of our development programs and, ultimately, the attainment of profitable operations are dependent upon future events, including obtaining adequate financing to support our cost structure and operating plan. Our plans to alleviate our 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 our control:
27


raise funding through the sale of our common or preferred stock;
raise funding through debt financing; and
establish collaborations with potential partners to advance our product pipeline.
Based on our current operating plan, we believe that our current cash, cash equivalents and investments will allow us to meet our liquidity requirements into the fourth quarter of 2022. Our history of significant losses, our negative cash flows from operations, our limited liquidity resources currently on hand and our dependence on our ability to obtain additional financing to fund our operations after the current resources are exhausted, about which there can be no certainty, have resulted in our assessment that there is substantial doubt about our 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 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.
If we are unable to raise capital when needed or on acceptable terms, or if we are unable to procure collaboration arrangements to advance our programs, we would be forced to discontinue some of our operations or develop and implement a plan to further extend payables, reduce overhead or scale back our 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.
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FINANCIAL OPERATIONS OVERVIEW
Since our inception in 2006, we have devoted substantially all of our resources to our research and development efforts, including activities to develop our core capabilities in deuterium chemistry, identify potential product candidates, undertake nonclinical studies and clinical trials, manufacture clinical trial material in compliance with current good manufacturing practices, or cGMPs, provide general and administrative support for these operations and establish our intellectual property. We have generated an accumulated deficit of $387.2 million since inception through March 31, 2022 and will require substantial additional capital to fund our research and development activities. We do not have any products approved for sale and have not generated any revenue from product sales. We have financed our operations to date primarily through the public offering and private placement of our equity, debt financing, funding from collaborations and patent assignments, asset sales and other arrangements.
Our operating results may fluctuate significantly from year to year, depending on the timing and magnitude of cash payments received pursuant to collaboration and licensing arrangements and other agreements and the timing and magnitude of clinical trial and other development activities under our current development programs. Substantially all of our net losses have resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations.
We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We expect our expenses will increase substantially in connection with our ongoing activities as we continue research and development efforts, conduct additional nonclinical studies and clinical trials and seek marketing approval for our product candidates.
We do not expect to generate revenue from product sales unless and until we, or our collaborators, obtain marketing approval for one or more of our product candidates, which we expect will take a number of years and is subject to significant uncertainty. If we obtain, or believe that we are likely to obtain, marketing approval for any product candidates for which we retain commercialization rights, and intend to commercialize a product, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. We expect to seek to fund our operations through a combination of equity offerings, debt financings, collaboration and licensing arrangements and other sources for at least the next several years. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would force us to delay, limit, reduce or terminate our research and development programs and could have a material adverse effect on our financial condition and our ability to develop our products. We will need to generate significant revenues to achieve sustained profitability, and we may never do so.
Revenue
We have not generated any revenue from the sales of products. All of our revenue to date has been generated through collaboration, license and research arrangements with collaborators and nonprofit organizations for the development and commercialization of product candidates, a patent assignment agreement and asset sales.
The terms of these agreements may include one or more of the following types of payments: non-refundable license fees, payments for research and development activities, payments based on the achievement of specified milestones, payment of license exercise or option fees relating to product candidates and royalties on any net product sales. To date, we have received non-refundable upfront payments, several milestone payments, payments for research and development services provided to our collaborators, a change in control payment pursuant to a patent assignment agreement and payments for the sale of assets. However, we have not yet earned any license exercise or option fees, sales-based milestone payments or royalty revenue as a result of product sales.
In the future, we will seek to generate revenue from a combination of product sales and milestone payments and royalties on product sales in connection with our current collaborations or other collaborations we may enter into.
Research and development expenses
Research and development expenses consist primarily of costs incurred for the development of our product candidates, which include:
employee-related expenses, including salary, benefits, travel and stock-based compensation expense;
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expenses incurred under agreements with contract research organizations and investigative sites that conduct our clinical trials;
the cost of acquiring, developing and manufacturing clinical trial materials;
facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies;
platform-related lab expenses, which includes costs related to synthesis, analysis and in vitro and in vivo characterization of deuterated compounds to support the selection and progression of potential product candidates;
expenses related to consultants and advisors; and
costs associated with nonclinical activities and regulatory operations.
Research and development costs are expensed as incurred. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and our clinical sites.
A significant portion of our research and development costs have been external costs, which we track on a program-by-program basis. These external costs include fees paid to investigators, consultants, central laboratories and contract research organizations in connection with our clinical trials, and costs related to acquiring and manufacturing clinical trial materials. Our internal research and development costs are primarily personnel-related costs, depreciation and other indirect costs. We do not track our internal research and development expenses on a program-by-program basis, as they are deployed across multiple projects under development.
The successful development of any of our product candidates is highly uncertain. As such, at this time, we cannot reasonably predict with certainty the duration and completion costs of the current or future clinical trials of any of our product candidates or if, when or to what extent we will generate revenues from the commercialization and sale of any of our product candidates that obtain marketing approval. We may never succeed in achieving marketing approval for any of our product candidates. The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors, including:
the scope and rate of progress of our ongoing as well as any additional clinical trials and other research and development activities;
successful enrollment in and completion of clinical trials, including on account of the COVID-19 pandemic and its impact on clinical trial sites;
conduct of and results from ongoing as well as any additional clinical trials and research and development activities;
significant and changing government regulation;
the terms and timing and receipt of any marketing approvals;
the performance of our collaborators;
our ability to manufacture any of our product candidates that we are developing or may develop in the future; and
the expense and success of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, including potential claims that we infringe other parties’ intellectual property.
A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the cost and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials or other research and development activities beyond those that we currently anticipate will be required for the completion of clinical development of a product candidate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.
Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, due to the increased size and duration of later-stage clinical trials and the manufacturing that is typically required for those later-stage clinical trials. We expect research and development costs to increase significantly for the foreseeable future as our product candidate development programs progress, but we do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our development programs and plans.
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General and administrative expenses
General and administrative expenses consist primarily of salaries and related costs for personnel, including stock-based compensation and travel expenses for our employees in executive, operational, finance, legal, investor relations, business development and human resource functions. Other general and administrative expenses include facility-related costs, depreciation and other expenses not allocated to research and development expense and professional fees for directors, accounting and legal services and expenses associated with obtaining and maintaining patents. In both 2022 and 2021, we incurred expenses for intellectual property matters related to CTP-543.
We anticipate that our general and administrative expenses will increase in the future as our pipeline grows and matures. Additionally, if and when we believe that a marketing approval of the first product candidate that we intend to commercialize on our own appears likely, we anticipate an increase in payroll and related expenses as a result of our preparation for commercial operations, especially as it relates to the sales, marketing and distribution of our product candidates.
Investment income
Investment income consists of interest income earned on cash equivalents and investments. The amount of investment income earned in any particular period may vary primarily as a result of the amount of cash equivalents and investments held during the period and the types of securities included in our portfolio during the period. Our current investment policy is to maintain a diversified investment portfolio of U.S. government-backed securities and money market mutual funds consisting of U.S. government-backed securities.
Unrealized (loss) gain on marketable equity securities
Unrealized (loss) gain on marketable equity securities consists of changes in the fair value of shares of common stock of Processa Pharmaceuticals, Inc., or Processa, held by us.
Unrealized loss on warrant liabilities
Unrealized loss on warrant liabilities consists of changes in the fair value of warrant liabilities resulting from the 2021 Financing, as discussed further in Note 13 in the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
Income taxes
We record a provision or benefit for income taxes on pre-tax income or loss based on our estimated effective tax rate for the year. As of March 31, 2022, we forecast an ordinary pre-tax loss for the year ended December 31, 2022 and, since we maintain a full valuation allowance on our deferred tax assets, we did not record an income tax benefit for the three months ended March 31, 2022.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES
Our critical accounting policies are those policies which require the most significant judgments and estimates in the preparation of our condensed consolidated financial statements.
There have been no material changes to our critical accounting policies as detailed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on March 3, 2022.
PENDING AND RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
For detailed information regarding recently issued accounting pronouncements and the actual and expected impact on our condensed consolidated financial statements, see Note 2 in the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
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RESULTS OF OPERATIONS
Discussion of the three months ended March 31, 2022
The following table summarizes our results of operations for the three months ended March 31, 2022.
 Three Months Ended March 31,
(Amounts in thousands)2022
Operating expenses:
Research and development30,489 
General and administrative5,539 
Total operating expenses36,028 
Loss from operations(36,028)
Investment income20 
Unrealized loss on marketable equity securities(564)
Unrealized loss on warrant liabilities(1,156)
Net loss$(37,728)
Research and development expenses
The following table summarizes our research and development expenses for the three months ended March 31, 2022, with our external research expenses separately classified by program and our internal research expenses separately classified by category.
 Three Months Ended March 31,
(Amounts in thousands)2022
CTP-543 external expenses$24,464 
External expenses for other programs82 
Employee and contractor-related expenses4,641 
Facility and other expenses1,302 
Total research and development expenses$30,489 
Research and development expenses were $30.5 million for the three months ended March 31, 2022. CTP-543 external expenses primarily related to clinical development, including our Phase 3 clinical program. CTP-543 external expenses increased by $15.5 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 primarily due to our ongoing Phase 3 clinical trials and open label, long-term extension studies. External expenses for other programs consisted of costs incurred to develop our research pipeline. Employee and contractor-related expenses for the three months ended March 31, 2022 decreased by $1.3 million compared to the three months ended March 31, 2021 primarily due to decreases in cash compensation and non-cash stock-based compensation expenses. Facility and other expenses consisted primarily of rent and maintenance of the Premises.
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General and administrative expenses
The following table summarizes our general and administrative expenses for the three months ended March 31, 2022.
 Three Months Ended March 31,
(Amounts in thousands)2022
Employee salaries and benefits$2,658 
External professional service expenses1,657 
Facility, technology and other expenses1,152 
Depreciation and amortization 72 
Total general and administrative expenses$5,539 
General and administrative expenses were $5.5 million for the three months ended March 31, 2022 and 2021.
Investment income
Investment income was $20 thousand for the three months ended March 31, 2022 and consisted of interest income earned on cash equivalents and investments.
Unrealized loss on marketable equity securities
Unrealized loss on marketable equity securities was $0.6 million for the three months ended March 31, 2022. The unrealized loss on marketable equity securities consisted of changes in the fair value of shares of common stock of Processa held by us.
Unrealized loss on warrant liabilities
Unrealized loss on warrant liabilities was $1.2 million for the three months ended March 31, 2022. The unrealized loss on warrant liabilities consisted of changes in the fair value of warrant liabilities related to the 2021 Financing, as discussed further in Note 13 in the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
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Discussion of the three months ended March 31, 2021
The following table summarizes our results of operations for the three months ended March 31, 2021.
 Three Months Ended March 31,
(Amounts in thousands)2021
Revenue:
License and research and development revenue$
Operating expenses:
Research and development18,500 
General and administrative5,485 
Total operating expenses23,985 
Loss from operations(23,980)
Investment income25 
Unrealized gain on marketable equity securities1,286 
Net loss$(22,669)
License and research and development revenue
Total revenue was $5 thousand for the three months ended March 31, 2021. The revenue recognized for the three months ended March 31, 2021 was from intellectual property cost reimbursements.
Research and development expenses
The following table summarizes our research and development expenses for the three months ended March 31, 2021, with our external research expenses separately classified by program and our internal research expenses separately classified by category.
 Three Months Ended March 31,
(Amounts in thousands)2021
CTP-543 external expenses$9,015 
CTP-692 external expenses1,902 
External expenses for other programs290 
Employee and contractor-related expenses5,894 
Facility and other expenses1,399 
Total research and development expenses$18,500 
Research and development expenses were $18.5 million for the three months ended March 31, 2021. CTP-543 external expenses primarily related to clinical development, including multiple Phase 2 clinical trials. CTP-692 external expenses were primarily attributable to the Phase 2 clinical trial, although development activities related to CTP-692 were discontinued following such trial failing to meet the primary or other secondary endpoints. External expenses for other programs consisted of costs incurred to develop our research pipeline. Employee and contractor-related expenses consisted primarily of cash compensation and non-cash stock-based compensation expenses. Facility and other expenses consisted primarily of rent and maintenance of the Premises.
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General and administrative expenses
The following table summarizes our general and administrative expenses for the three months ended March 31, 2021.
 Three Months Ended March 31,
(Amounts in thousands)2021
Employee salaries and benefits$3,104 
External professional service expenses1,310 
Facility, technology and other expenses995 
Depreciation and amortization 76 
Total general and administrative expenses$5,485 
Investment income
Investment income was $25 thousand for the three months ended March 31, 2021 and consisted of interest income earned on cash equivalents and investments.
Unrealized gain on marketable equity securities
Unrealized gain on marketable equity securities was $1.3 million for the three months ended March 31, 2021 and consisted of changes in the fair value of shares of common stock of Processa held by us.
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LIQUIDITY AND CAPITAL RESOURCES
We have incurred cumulative losses and negative cash flows from operations since our inception in April 2006, and as of March 31, 2022, we had an accumulated deficit of $387.2 million. We anticipate that we will continue to incur losses for at least the next several years. We expect our expenses to increase in connection with our ongoing activities, particularly as we conduct our Phase 3 program of CTP-543 in alopecia areata and seek marketing approval for CTP-543. As a result, we will need additional capital to fund our operations, which we may raise through a combination of equity offerings, debt financings, collaboration and licensing arrangements and other sources.
As of March 31, 2022, we had cash, cash equivalents and investments of $109.0 million. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. Currently, our funds are held in U.S. government-backed securities and money market mutual funds consisting of U.S. government-backed securities.
We have financed our operations to date primarily through the public offering and private placement of our equity, debt financing, funding from collaborations and patent assignments, asset sales and other arrangements. In February 2014, we completed our initial public offering whereby we sold 6,649,690 shares of common stock at a price to the public of $14.00 per share, raising aggregate net proceeds of $83.1 million. In March 2015, we sold 3,300,000 shares of common stock through an underwritten public offering at a price to the public of $15.15 per share, raising aggregate net proceeds of $46.7 million. In January 2020, we sold 5,735,283 shares of common stock through an underwritten public offering at a price to the public of $9.92 per share. At the same time, we sold to a certain existing investor pre-funded warrants to purchase up to an aggregate of 1,800,000 shares of common stock at a purchase price of $9.919 per pre-funded warrant, which represents the per share public offering price for the common stock less the $0.001 per share exercise price for each pre-funded warrant. The aggregate net proceeds from the January 2020 financing was $70.1 million.
In July 2017, we completed the transaction contemplated by the Vertex Agreement. We received $160.0 million in cash upon closing, with $16.0 million initially held in escrow, which was released to us in February 2019. In May 2021, we entered into the Vertex Amendment and received an additional $32.0 million in cash.
In March 2019, we entered into the ATM Agreement with Jefferies. As of March 31, 2022, we had sold 2,209,687 shares of our common stock pursuant to the ATM Agreement for aggregate net proceeds of $25.2 million, after payment of cash commissions of 3.0% of the gross proceeds to Jefferies.
In November 2021, we closed the 2021 Financing, raising $64.4 million in aggregate net proceeds. The 2021 Financing consisted of the sale of (i) 2,253,000 shares of common stock, (ii) 13,997 shares of Series X1 Preferred Stock, (iii) warrants to purchase up to 16,250 shares of Series X1 Preferred Stock and (iv) a portion of our right to receive potential future AVP-786 royalties under the Avanir Agreement. If the warrants issued in connection with the 2021 Financing are exercised in full, we would receive additional gross proceeds of $103.1 million.
Management does not believe that our cash, cash equivalents and investments of $109.0 million as of March 31, 2022 are sufficient to fund our current operating plan for at least twelve months after the issuance of this Quarterly Report on Form 10-Q. Based on our current operating plan, we anticipate having sufficient capital to fund our operations into the fourth quarter of 2022. Our history of significant losses, negative cash flows from operations, limited liquidity resources currently on hand and dependence on our ability to obtain additional financing to fund our operations after the current capital resources are exhausted, about which there can be no certainty, raises substantial doubt about our ability to continue as a going concern. The interim consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q were prepared under the assumption that we will continue as a going concern and do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
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Cash flows
The following table sets forth the primary sources and uses of cash for each of the periods set forth below:
 Three Months Ended March 31,
(Amounts in thousands)20222021
Net cash (used in) provided by:
Operating activities$(32,324)$(20,714)
Investing activities(49,949)30,620 
Financing activities— 2,664 
Net (decrease) increase in cash, cash equivalents and restricted cash$(82,273)$12,570 
Operating activities. The cash used for operating activities generally approximates our net loss adjusted for non-cash items and changes in operating assets and liabilities. During the three months ended March 31, 2022, our operating activities used cash of $32.3 million as compared to cash used by operating activities of $20.7 million during the three months ended March 31, 2021. Cash used in operating activities during both the three months ended March 31, 2022 and 2021 was primarily driven by our development activities associated with CTP-543.
Investing activities. Net cash used in or provided by investing activities consisted of purchases of investments, proceeds from the maturity of investments and purchases of fixed assets. Net cash used in purchases of investments for the three months ended March 31, 2022 was $49.9 million. There were no purchases of investments for the three months ended March 31, 2021. There were no maturities of investments for the three months ended March 31, 2022. Net cash provided by maturities of investments for the three months ended March 31, 2021 was $30.7 million. Purchases of fixed assets for each of the three months ended March 31, 2022 and 2021 were $0.1 million.
Financing activities. Financing activities did not provide or use cash for the three months ended March 31, 2022. Financing activities provided cash of $2.7 million for the three months ended March 31, 2021. The cash provided by financing activities during the three months ended March 31, 2021 was attributable to the $2.6 million in proceeds from our at-the-market offering program and $0.1 million in proceeds from the exercise of stock options.
Operating capital requirements
We do not anticipate commercializing any of our product candidates until 2024 at the earliest. We anticipate that we will continue to generate losses for the foreseeable future, and we expect the losses to increase as we continue the development of, and seek marketing approvals for, our product candidates, and begin to commercialize any approved products for which we retain commercialization rights. We are subject to all of the risks incident in the development of new drug products, and we may encounter unforese