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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________
FORM 10-Q
_________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 1, 2022: 47,934,649



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,” “seek,” “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;
our plans to file a New Drug Application with the U.S. Food and Drug Administration in the first half of 2023;
the timing of and our ability to obtain and maintain marketing approvals for our product candidates;
developments relating to our competitors and our industry;
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 Incyte Corporation’s request that the Patent Trial and Appeal Board reconsider its final written decision with respect to 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 macroeconomic impacts, including the ongoing COVID-19 pandemic, increased global uncertainty and rising inflation, which may adversely impact our business, clinical trials and supply chain; 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
4


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 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:
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.
Our business may be adversely affected by the ongoing COVID-19 pandemic.
We are currently operating in a period of global economic uncertainty and capital markets disruption. Our business, financial condition and results of operations could be materially adversely affected by any negative impact on the global economy and capital markets.
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.
6


We contract with third parties for the manufacture and distribution of our product candidates for nonclinical and clinical testing and expect to continue to do so in connection with our future development and commercialization efforts. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or such quantities at an acceptable cost, or that the product candidates will not be of sufficient quality or 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)
June 30,December 31,
 20222021
Assets
Current assets:
Cash and cash equivalents$139,245 $141,636 
Investments, available for sale14,488  
Marketable equity securities839 1,463 
Interest receivable129  
Deferred offering costs 15 
Accounts receivable1,072 218 
Prepaid expenses and other current assets6,343 6,997 
Total current assets162,116 150,329 
Property and equipment, net4,776 5,242 
Restricted cash1,157 1,157 
Other assets 3 
Operating lease right-of-use asset, long-term8,344 8,585 
Total assets$176,393 $165,316 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$1,369 $2,606 
Accrued expenses and other liabilities, current portion13,511 12,359 
Lease liability, current portion1,280 1,155 
Total current liabilities16,160 16,120 
Accrued expenses, net of current portion 28 
Deferred revenue, long-term7,595 7,595 
Lease liability, net of current portion13,227 13,910 
Warrant liabilities, long-term (Note 13)11,619 15,438 
Total liabilities48,601 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; 16,602 and 13,997 shares of Series X1 issued and outstanding as of June 30, 2022 and December 31, 2021, respectively
  
Common stock, $0.001 par value per share; 200,000,000 and 100,000,000 shares authorized, 48,125,000 and 34,939,628 shares issued and 47,924,399 and 34,739,027 shares outstanding as of June 30, 2022 and December 31, 2021, respectively
45 34 
Additional paid-in capital539,103 461,765 
Accumulated other comprehensive loss(85)(76)
Accumulated deficit(411,271)(349,498)
Total stockholders’ equity127,792 112,225 
Total liabilities and stockholders’ equity$176,393 $165,316 
See accompanying notes.
8


CONCERT PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(UNAUDITED)
(Amounts in thousands, except per share data)
 Three Months Ended June 30,Six Months Ended June 30,
 2022202120222021
Revenue:
License and research and development revenue$21 $17 $22 $22 
Other revenue 32,000  32,000 
Total revenue21 32,017 22 32,022 
Operating expenses:
Research and development20,855 20,184 51,344 38,684 
General and administrative4,849 5,614 10,389 11,099 
Total operating expenses25,704 25,798 61,733 49,783 
(Loss) income from operations(25,683)6,219 (61,711)(17,761)
Investment income145 15 165 40 
Unrealized (loss) gain on marketable equity securities(60)(809)(624)477 
Unrealized gain on warrant liabilities (Note 13)2,050  894  
Net (loss) income$(23,548)$5,425 $(61,276)$(17,244)
Other comprehensive (loss) income:
Unrealized gain (loss) on investments, available for sale33 (2)(9)(18)
Comprehensive (loss) income$(23,515)$5,423 $(61,285)$(17,262)
Dividend attributable to down round feature of warrants(497) (497) 
Net (loss) income attributable to common stockholders - basic and diluted(24,045)5,415 (61,773)(17,244)
Net (loss) income per share applicable to common stockholders - basic and diluted$(0.59)$0.16 $(1.59)$(0.51)
Weighted-average number of common shares used in net (loss) income per share applicable to common stockholders
Basic41,042 33,974 38,877 33,934 
Diluted41,042 34,083 38,877 33,934 
See accompanying notes.
9


CONCERT PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
Six Months Ended June 30, 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 
Release of restricted stock units— — 95 — — — — — — 
Unrealized gain on short-term investments— — — — — — 33 — 33 
Stock-based compensation expense— — — — — 1,963 — — 1,963 
Conversion of preferred stock(1)— 1,376 — — — — — — 
Exercise of warrants4 — — — — 11,679 — — 11,679 
Reclassification of warrants to equity— — — — — 10,156 — — 10,156 
Dividend attributable to down round feature of warrants— — — — — 497 — (497) 
Sale of common stock, net of underwriters' discount and costs— — 11,500 — 11 50,932 — — 50,943 
Net loss— — — — — — — (23,548)(23,548)
Balance at June 30, 202217 $ 48,125 200 $45 $539,103 $(85)$(411,271)$127,792 
10


Six Months Ended June 30, 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 
Unrealized loss on short-term investments— — — — — — (2)— (2)
Stock-based compensation expense— — — — — 3,254 — — 3,254 
Net income— — — — — — — 5,425 5,425 
Balance at June 30, 2021 $ 32,374 200 $31 $409,452 $(76)$(286,691)$122,716 


See accompanying notes.
11


CONCERT PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
 Six Months Ended
June 30,
 20222021
Operating activities
Net loss$(61,276)$(17,244)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization638 785 
Stock-based compensation expense4,074 6,685 
Amortization of premiums on investments351 35 
Unrealized loss (gain) on marketable equity securities624 (477)
Unrealized gain on warrant liabilities(894) 
Non-cash lease expense241 176 
Changes in operating assets and liabilities:
Accounts receivable(854)(87)
Deferred offering costs15  
Interest receivable(129)144 
Prepaid expenses and other current assets654 (272)
Other assets3 30 
Accounts payable(1,240)(230)
Accrued expenses and other liabilities1,124 (1,481)
Income taxes receivable 2,346 
Operating lease liability(558)(450)
Net cash used in operating activities(57,227)(10,040)
Investing activities
Purchases of property and equipment(169)(140)
Purchases of investments(55,348) 
Maturities of investments40,500 52,713 
Net cash (used in) provided by investing activities(15,017)52,573 
Financing activities
Proceeds from exercise of stock options 89 
Proceeds from exercise of warrants18,910  
Proceeds from common stock sold, net of underwriters’ discount and costs50,943  
Proceeds from at-the-market offering, net of issuance costs 2,575 
Net cash provided by financing activities69,853 2,664 
Net (decrease) increase in cash, cash equivalents and restricted cash(2,391)45,197 
Cash, cash equivalents and restricted cash at beginning of period142,793 78,359 
Cash, cash equivalents and restricted cash at end of period$140,402 $123,556 
Supplemental cash flow information:
Purchases of property and equipment unpaid at period end$3 $36 
Public offering costs unpaid at period end$405 $15 
Cash paid included in measurement of lease liabilities$1,529 $1,484 
See accompanying notes.
12

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


1. Nature of Business
Concert Pharmaceuticals, Inc., or the Company, was incorporated on April 12, 2006 as a Delaware corporation and has its operations based in Lexington, Massachusetts. The Company is a 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 has successfully completed two Phase 3 clinical trials of CTP-543 for the treatment of adults with moderate to severe alopecia areata, a serious autoimmune dermatological condition, and intends to file a New Drug Application, or NDA, with the U.S. Food and Drug Administration, or FDA, in the first half of 2023.
Liquidity and Going Concern
As of June 30, 2022, the Company had cash, cash equivalents and investments of $153.7 million and net working capital of $146.0 million. The Company has incurred cumulative net losses of $411.3 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 seeks marketing approval for CTP-543 and conducts its open label, long-term extension studies and other clinical trials to support the submission of its NDA. For information regarding the Company’s recent equity financings, see Notes 12, 13 and 14.
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 similar products or technological innovations and the 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 second quarter of 2023. 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
13

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

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 the Company is unable to raise capital when needed or on acceptable terms, or if it is unable to procure collaboration arrangements to advance its programs, the Company would be forced to discontinue some of its operations or develop and implement a plan to further extend payables, reduce overhead or scale back its current operating plan until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan would be successful.
2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals and revisions of estimates, considered necessary for a fair presentation of the condensed consolidated financial statements have been included. Interim results for the six months ended June 30, 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 and expenses, 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 equity and 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 six months ended June 30, 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 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.
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified
14

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

Written Call Options (a consensus of the FASB Emerging Issues Task Force), which provides guidance on modifications or exchanges of a freestanding equity-classified written call option that is not within the scope of another topic. An entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as an exchange of the original instrument for a new instrument, and provides further guidance on measuring the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. ASU 2021-04 also provides guidance on the recognition of the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange on the basis of the substance of the transaction, in the same manner as if cash had been paid as consideration. ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply ASU 2021-04 prospectively to modifications or exchanges occurring on or after the effective date of ASU 2021-04.
The Company adopted ASU 2021-04 effective January 1, 2022, on a prospective basis. In conjunction with the warrant amendments discussed in Note 13, the Company recorded issuance costs of $7.2 million as a reduction of proceeds in additional paid-in capital for the warrant exercise and a corresponding increase to the remeasured fair value of the equity-classified warrants as of the modification date, resulting in no impact.
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 June 30, 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
June 30, 2022
Cash equivalents:
Money market funds$123,380 $ $ $123,380 
Investments, available for sale:
U.S. Treasury obligations 14,488  14,488 
Marketable equity securities:
Corporate equity securities839   839 
Total$124,219 $14,488 $ $138,707 
Warrant liabilities (Note 13)$ $11,619 $ $11,619 
15

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

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 
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 condensed consolidated balance sheets. Unrealized gains or losses from equity securities are included in net (loss) income. Unrealized gains or losses from other investments, including debt securities, are included in accumulated other comprehensive (loss) income. Premiums or discounts from par value are amortized to investment income over the life of the underlying investment.
Cash, cash equivalents, available-for-sale investments and marketable equity securities included the following as of June 30, 2022 and December 31, 2021:
Average MaturityAmortized CostUnrealized GainsUnrealized LossesFair Value
June 30, 2022
Cash$15,864 $— $— $15,864 
Money market funds123,381 — — 123,381 
Total cash and cash equivalents$139,245 $— $— $139,245 
U.S. Treasury obligations82 days$14,497 $— $(9)$14,488 
Total investments, available for sale$14,497 $— $(9)$14,488 
June 30, 2022Acquisition ValueUnrealized GainsUnrealized LossesFair Value
Marketable equity securities$10,451 $ $(9,612)$839 
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.
16

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

5. Restricted Cash
Restricted cash as of June 30, 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 June 30, 2022 and 2021:
June 30,
2022
June 30,
2021
Cash and cash equivalents$139,245 $122,399 
Restricted cash1,157 1,157 
Total cash, cash equivalents and restricted cash shown in the statements of cash flows$140,402 $123,556 
6. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following as of June 30, 2022 and December 31, 2021:
June 30,
2022
December 31,
2021
Accrued professional fees and other$1,389 $1,094 
Employee compensation and benefits1,687 3,617 
Research and development expenses10,435 7,648 
Accrued expenses and other liabilities, current portion$13,511 $12,359 
Employee compensation and benefits, net of current portion$ $28 
Accrued expenses and other liabilities, net of current portion$ $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 Code. Such changes would limit the Company’s use of its operating loss carryforwards and tax credits. In such a situation, the Company may be required to pay income taxes, even though significant operating loss carryforwards and tax credits exist.
The Company records a provision or benefit for income taxes on ordinary pre-tax income or loss based on its estimated effective tax rate for the year. As of June 30, 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 six months ended June 30, 2022, the Company applied the tax allocation rules of ASU 2019-12 to the $9 thousand of
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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 June 30, 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 June 30, 2022 or December 31, 2021.
Contract Liabilities
As of June 30, 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.

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
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

consultants and advisors to the Company. As of June 30, 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 June 30, 2022, there were 2,049,070 shares of common stock available for future awards under the 2014 Plan.
Total stock-based compensation expense related to all stock-based options and awards recognized in the condensed consolidated statements of operations and comprehensive loss consisted of:
 Three Months Ended June 30,Six Months Ended June 30,
 2022202120222021
Research and development$922 $1,745 $1,872 $3,596 
General and administrative1,042 1,509 2,202 3,089 
Total stock-based compensation expense$1,964 $3,254 $4,074 $6,685 
Stock Options
Stock options are valued using the Black-Scholes-Merton option valuation model, and compensation cost is recognized based on such fair value over the period of vesting. The weighted-average fair value of options granted in the three and six months ended June 30, 2022 and 2021 reflect the following weighted-average assumptions:
 Three Months Ended June 30,Six Months Ended June 30,
 2022202120222021
Expected volatility72.71%70.57%71.66%69.83 %
Expected term6.0 years6.0 years6.0 years6.0 years
Risk-free interest rate3.08%0.94%2.75%0.59 %
Expected dividend yield%%% %
The following table provides certain information related to the Company’s outstanding stock options:
 Three Months Ended June 30,Six Months Ended June 30,
 2022202120222021
(Amounts in thousands, except per share data)
Weighted-average fair value of options granted, per option$3.30 $2.66 $2.94 $7.17 
Aggregate grant date fair value of options vested during the period$1,030 $2,110 $2,939 $4,176 
Total cash received from exercises of stock options$ $ $ $89 
Total intrinsic value of stock options exercised$ $ $ $42 
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following is a summary of stock option activity for the six months ended June 30, 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 
      Granted66,113 $4.50 
      Exercised $ 
      Forfeited or expired(328,296)$15.53 
Outstanding at June 30, 20224,935,137 $13.99 5.65$26 
Exercisable at June 30, 20223,998,008 $14.55 5.08$7 
Vested and expected to vest at June 30, 2022 (1)
4,870,189 $14.02 5.61$24 
(1)Represents the number of vested stock option shares as of June 30, 2022, plus the number of unvested stock option shares that the Company estimated as of June 30, 2022 would vest, based on the unvested stock option shares as of June 30, 2022 and an estimated forfeiture rate of 7%.
As of June 30, 2022, there was $6.0 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 1.9 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 were service-based. Half of the grants to employees vested six months after the June 2021 RSU grant date and the remainder vested on the first anniversary of the June 2021 RSU grant date, and the grants to directors vested one day prior to the Company’s 2022 annual meeting of stockholders, or June 8, 2022.
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 FDA notifies the Company that it has accepted for filing an 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 June 30, 2022, 0.3 million of the 2020 RSUs, 0.1 million of the January 2021 RSUs and all 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.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following is a summary of RSU activity for the six months ended June 30, 2022:
Number of
RSUs
Weighted-
Average
Grant Date Fair Value
   
Outstanding at December 31, 2021628,192 $10.78 
      Granted1,103,975 $3.08 
      Released(309,372)$9.49 
      Forfeited(37,860)$8.54 
Outstanding at June 30, 20221,384,935 $4.99 
As of June 30, 2022, there was $4.8 million of unrecognized compensation cost related to RSUs that are expected to vest. The RSU costs are expected to be recognized over a weighted-average remaining vesting period of 1.9 years.
10. (Loss) Income Per Share
As of June 30, 2021, the Company had outstanding warrants to purchase 61,273 shares of common stock that were issued in connection with a 2017 Loan and Security Agreement with Hercules Capital, Inc., which were deemed to be participating securities. Accordingly, the Company applied the two-class method to calculate basic and diluted net earnings per share of common stock for the three months ended June 30, 2021. The two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to common stockholders. The two-class method was not applied for the three and six months ended June 30, 2022 or the six months ended June 30, 2021, as the Company’s participating securities do not have any obligation to absorb net losses.
Basic net (loss) income per common share is calculated by dividing net (loss) income allocable to common stockholders, adjusted to recognize the effect of a down round feature when it is triggered, by the weighted-average common shares outstanding during the period, without consideration of stock options, RSUs or preferred stock as common stock equivalents. Net loss allocable to common stockholders for the three and six months ended June 30, 2022 is adjusted for the effect of a triggered down round feature of warrants deemed to be a dividend. Refer to Note 13 for details regarding the triggered down round feature of the warrants. The weighted-average common shares outstanding as of June 30, 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) income 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.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table illustrates the determination of (loss) income per share for each period presented.
 Three Months Ended June 30,Six Months Ended June 30,
 2022202120222021
(Amounts in thousands, except per share amounts)
Basic Earnings Per Share:
Numerator:
Net (loss) income$(23,548)$5,425 $(61,276)$(17,244)
Income attributable to participating securities - basic