| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements of
Intra-Cellular Therapies, Inc. and its wholly own subsidiaries have
been prepared in conformity with accounting principles generally
accepted in the United States of America (“GAAP”). Any
reference in these notes to applicable guidance is meant to refer
to the authoritative United States generally accepted accounting
principles as found in the Accounting Standards Codification
(“ASC”) and Accounting Standards Update
(“ASU”) of the Financial Accounting Standards Board
(“FASB”). All intercompany accounts and transactions
have been eliminated in consolidation. The Company currently
operates in one operating segment. Operating segments are defined
as components of an enterprise about which separate discrete
information is available for the chief operating decision maker, or
decision making group, in deciding how to allocate resources and
assessing performance. The Company views its operations and manages
its business in one segment, which is discovering and developing
drugs for the treatment of neurological and psychiatric
disorders.
Use of Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying
notes. Although actual results could differ from those estimates,
management does not believe that such differences would be
material.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity
of three months or less from the date of purchase to be cash
equivalents. Cash and cash equivalents consist of checking
accounts, money market accounts, money market mutual funds, and
certificates of deposit with a maturity date of three months or
less. The carrying values of cash and cash equivalents approximate
the fair market value. Certificates of deposit, commercial paper,
corporate notes and corporate bonds with a maturity date of more
than three months are classified separately on the balance
sheet.
Investment Securities
Investment securities consisted of the following (in
thousands):
June 30, 2017
Amortized Unrealized Unrealized Estimated
(unaudited)
U.S. Government Agency Securities $ 96,187 $ — $ (140 ) $ 96,047
FDIC Certificates of Deposit (1) 13,228 — — 13,228
Certificates of Deposit 48,000 — — 48,000
Commercial Paper 40,825 1 (20 ) 40,806
Corporate Notes/Bonds 115,113 4 (160 ) 114,957
$ 313,353 $ 5 $ (320 ) $ 313,038
December 31, 2016
Amortized Unrealized Unrealized Estimated
U.S. Government Agency Securities $ 67,199 $ 1 $ (74 ) $ 67,126
FDIC Certificates of Deposit (1) 20,740 1 — 20,741
Certificates of Deposit 64,500 — — 64,500
Commercial Paper 67,352 11 (52 ) 67,311
Corporate Notes/Bonds 115,985 — (205 ) 115,780
$ 335,776 $ 13 $ (331 ) $ 335,458
(1) “FDIC Certificates of
Deposit” consist of deposits that are less than
$250,000.
The Company has classified all of its investment securities
available-for-sale, including those with maturities beyond one
year, as current assets on the consolidated balance sheets based on
the highly liquid nature of the investment securities and because
these investment securities are considered available for use in
current operations. As of June 30, 2017 and December 31,
2016, the Company held $15.3 million and $47.9 million,
respectively, of available-for-sale investment securities with
contractual maturity dates more than one year and less than two
years.
The Company monitors its investment portfolio for impairment
quarterly or more frequently if circumstances warrant. In the event
that the carrying value of an investment exceeds its fair value and
the decline in value is determined to be other-than-temporary, the
Company records an impairment charge within earnings attributable
to the estimated credit loss. In determining whether a decline in
the value of an investment is other-than-temporary, the Company
evaluates currently available factors that may include, among
others: (1) general market conditions; (2) the duration
and extent to which fair value has been less than the carrying
value; (3) the investment issuer’s financial condition
and business outlook; and (4) the Company’s assessment
as to whether it is more likely than not that the Company will be
required to sell a security prior to recovery of its amortized cost
basis.
As of June 30, 2017, the Company had approximately $19.5
million of investments that have been held for greater than one
year which had a temporary impairment of approximately $12,500. As
of December 31, 2016, the Company had approximately $25.5
million of investments that had been held for greater than one year
which had a temporary impairment of approximately $25,000.
The Company attributes the unrealized losses on the
available-for-sale securities as of June 30, 2017 and
December 31, 2016 to the variability in related market
interest rates. The Company does not intend to sell these
securities, nor is it more likely than not that the Company will be
required to sell them prior to the end of their contractual terms.
Furthermore, the Company does not believe that these securities
expose the Company to undue market risk or counterparty credit
risk. As such, the Company does not consider these securities to be
other-than-temporarily impaired.
Fair Value Measurements
The Company applies the fair value method under ASC Topic
820, Fair Value
Measurements and Disclosures
• Level 1—Fair value is
determined by using unadjusted quoted prices that are available in
active markets for identical assets and liabilities.
• Level 2—Fair value is
determined by using inputs other than Level 1 quoted prices
that are directly or indirectly observable. Inputs can include
quoted prices for similar assets and liabilities in active markets
or quoted prices for identical assets and liabilities in inactive
markets. Related inputs can also include those used in valuation or
other pricing models, such as interest rates and yield curves that
can be corroborated by observable market data.
• Level 3—Fair value is
determined by inputs that are unobservable and not corroborated by
market data. Use of these inputs involves significant and
subjective judgments to be made by a reporting entity—e.g.,
determining an appropriate adjustment to a discount factor for
illiquidity associated with a given security.
The Company evaluates financial assets and liabilities subject to
fair value measurements on a recurring basis to determine the
appropriate level at which to classify them each reporting period.
This determination requires the Company to make subjective
judgments as to the significance of inputs used in determining fair
value and where such inputs lie within the ASC Topic 820
hierarchy.
The Company has no assets or liabilities that were measured using
quoted prices for significant unobservable inputs (Level 3 assets
and liabilities) as of June 30, 2017 and December 31,
2016. The carrying value of cash held in money market funds of
approximately $14.0 million as of June 30, 2017 and $10.7
million as of December 31, 2016 is included in cash and cash
equivalents and approximates market value based on quoted market
price or Level 1 inputs.
The fair value measurements of the Company’s cash equivalents
and available-for-sale investment securities are identified in the
following tables (in thousands):
Fair Value Measurements at Reporting Date Using
June 30, Quoted Prices Significant Significant
Money Market Funds $ 13,999 $ 13,999 $ — $ —
U.S. Government Agency Securities 96,047 — 96,047 —
FDIC Certificates of Deposit 13,228 — 13,228 —
Certificates of Deposit 48,000 — 48,000 —
Commercial Paper 40,806 — 40,806 —
Corporate Notes/Bonds 114,957 — 114,957 —
$ 327,037 $ 13,999 $ 313,038 $ —
Fair Value Measurements at Reporting Date Using
December 31, Quoted Prices Significant Significant
Money Market Funds $ 10,724 $ 10,724 $ — $ —
U.S. Government Agency Securities 67,126 — 67,126 —
FDIC Certificates of Deposit 20,741 — 20,741 —
Certificates of Deposit 64,500 — 64,500 —
Commercial Paper 67,311 — 67,311 —
Corporate Notes/Bonds 115,780 — 115,780 —
$ 346,182 $ 10,724 $ 335,458 $ —
Financial Instruments
The Company considers the recorded costs of its financial assets
and liabilities, which consist of cash equivalents, accounts
receivable, prepaid expenses, accounts payable and accrued
liabilities, to approximate their fair value because of their
relatively short maturities at June 30, 2017 and
December 31, 2016. Management believes that the risks
associated with its financial instruments are minimal as the
counterparties are various corporations, financial institutions and
government agencies of high credit standing.
Concentration of Credit Risk
Cash equivalents are held with major financial institutions in the
United States. Certificates of deposit held with banks may exceed
the amount of insurance provided on such deposits. Generally, these
deposits may be redeemed upon demand and, therefore, bear minimal
risk.
Accounts Receivable
Accounts receivable that management has the intent and ability to
collect are reported in the balance sheets at outstanding amounts,
less an allowance for doubtful accounts. The Company writes off
uncollectible receivables when the likelihood of collection is not
probable.
The Company evaluates the collectability of accounts receivable on
a regular basis. The allowance, if any, is based upon various
factors including the financial condition and payment history of
customers, an overall review of collections experience on other
accounts and economic factors or events expected to affect future
collections experience. No allowance was recorded as of
June 30, 2017 and December 31, 2016, as the Company has a
history of collecting on all of its accounts, including those with
government agencies and collaborations funding its research.
Property and Equipment
Property and equipment is stated at cost and depreciated on a
straight-line basis over estimated useful lives ranging from three
to five years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful life
of the assets or the term of the related lease. Expenditures for
maintenance and repairs are charged to operations as incurred.
When indicators of possible impairment are identified, the Company
evaluates the recoverability of the carrying value of its
long-lived assets based on the criteria established in ASC
Topic 360, Property, Plant and
Equipment
Revenue Recognition
Revenue is recognized when all terms and conditions of the
agreements have been met, including persuasive evidence of an
arrangement, delivery has occurred or services have been rendered,
price is fixed or determinable and collectability is reasonably
assured. The Company is reimbursed for certain costs incurred on
specified research projects under the terms and conditions of
grants, collaboration agreements, and awards. The Company records
the amount of reimbursement as revenues on a gross basis in
accordance with ASC Topic 605-45, Revenue
Recognition/Principal Agent Considerations
The Company has entered into arrangements involving the delivery of
more than one element. Each required deliverable is evaluated to
determine whether it qualifies as a separate unit of accounting.
For the Company, this determination is generally based on whether
the deliverable has “stand-alone value” to the
customer. The Company adopted this accounting standard on a
prospective basis for all Multiple-Deliverable Revenue Arrangements
(“MDRAs”) entered into on or after January 1,
2011, and for any MDRAs that were entered into prior to
January 1, 2011, but materially modified on or after that
date.
The Company has adopted ASC Topic 605-28, Milestone Method
• The milestone payments are
non-refundable;
• Achievement of the milestone involves
a degree of risk and was not reasonably assured at the inception of
the arrangement;
• Substantive effort on the
Company’s part is involved in achieving the milestone;
• The amount of the milestone payment
is reasonable in relation to the effort expended or the risk
associated with achievement of the milestone; and
• A reasonable amount of time passes
between the up-front license payment and the first milestone
payment, as well as between each subsequent milestone payment.
Determination as to whether a payment meets the aforementioned
conditions involves management’s judgment. If any of these
conditions are not met, the resulting payment would not be
considered a substantive milestone and, therefore, the resulting
payment would be considered part of the consideration for the
single unit of accounting and be recognized as revenue in
accordance with the revenue models described above. In addition,
the determination that one such payment was not a substantive
milestone could prevent the Company from concluding that subsequent
milestone payments were substantive milestones and, as a result,
any additional milestone payments could also be considered part of
the consideration for the single unit of accounting and would be
recognized as revenue as such performance obligations are performed
under either the proportional performance or straight-line methods,
as applicable.
Research and Development
Except for payments made in advance of services, the Company
expenses its research and development costs as incurred. For
payments made in advance, the Company recognizes research and
development expense as the services are rendered. Research and
development costs primarily consist of salaries and related
expenses for personnel and resources and the costs of clinical
trials. Other research and development expenses include
pre-clinical analytical testing, manufacturing of drug product,
outside services, providers, materials and consulting fees.
Costs for certain development activities, such as clinical trials,
are recognized based on an evaluation of the progress to completion
of specific tasks using data such as subject enrollment, clinical
site activations or information provided to the Company by its
vendors with respect to their actual costs incurred. Payments for
these activities are based on the terms of the individual
arrangements, which may differ from the pattern of costs incurred,
and are reflected in the financial statements as prepaid or accrued
research and development expense, as the case may be.
As part of the process of preparing its financial statements, the
Company is required to estimate its expenses resulting from its
obligations under contracts with vendors, clinical research
organizations and consultants and under clinical site agreements in
connection with conducting clinical trials. The financial terms of
these contracts are subject to negotiations, which vary from
contract to contract and may result in payment flows that do not
match the periods over which materials or services are provided
under such contracts. The Company’s objective is to reflect
the appropriate clinical trial expenses in its financial statements
by matching those expenses with the period in which services are
performed and efforts are expended. The Company accounts for these
expenses according to the progress of the clinical trial as
measured by subject progression and the timing of various aspects
of the trial. The Company determines accrual estimates through
financial models taking into account discussion with applicable
personnel and outside service providers as to the progress or state
of consummation of trials, or the services completed. During the
course of a clinical trial, the Company adjusts its clinical
expense recognition if actual results differ from its estimates.
The Company makes estimates of its accrued expenses as of each
balance sheet date based on the facts and circumstances known to it
at that time. The Company’s clinical trial accruals are
dependent upon the timely and accurate reporting of contract
research organizations, clinical sites, and other third-party
vendors. Although the Company does not expect its estimates to be
materially different from amounts actually incurred, its
understanding of the status and timing of services performed
relative to the actual status and timing of services performed may
vary and may result in it reporting amounts that are too high or
too low for any particular period. For the three and six months
ended June 30, 2017 and 2016, there were no material
adjustments to the Company’s prior period estimates of
accrued expenses for clinical trials.
Income Taxes
Income taxes are accounted for using the liability method. Deferred
tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the year in which those temporary differences are
expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances are established when necessary
to reduce net deferred tax assets to the amount expected to be
realized. Income tax expense is the tax payable for the period and
the change during the period in deferred tax assets and
liabilities. The Company accounts for uncertain tax positions
pursuant to ASC Topic 740 (previously included in FASB
Interpretation No. 48, Accounting for Uncertainty
in Income Taxes—an Interpretation of FASB Statement
No. 109
Comprehensive Income (Loss)
All components of comprehensive income (loss), including net income
(loss), are reported in the financial statements in the period in
which they are incurred. Comprehensive income (loss) is defined as
the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner
sources. In accordance with accounting guidance, the Company
presents the impact of any unrealized gains or (losses) on its
investment securities in a separate statement of comprehensive
income (loss) for each period.
Share-Based Compensation
Share-based payments are accounted for in accordance with the
provisions of ASC Topic 718, Compensation—Stock
Compensation
For all awards granted with time-based vesting conditions, expense
is amortized using the straight-line attribution method. For awards
that contain a performance-based vesting condition, expense is
amortized using the accelerated attribution method. Share-based
compensation expense recognized in the statements of operations for
the three and six months ended June 30, 2017 and 2016 is based
on share-based awards ultimately expected to vest.
The Company utilizes the Black-Scholes model for estimating fair
value of its stock options granted. Option valuation models,
including the Black-Scholes model, require the input of subjective
assumptions, and changes in the assumptions used can materially
affect the grant date fair value of an award. These assumptions
include the risk-free rate of interest, expected dividend yield,
expected volatility and the expected life of the award.
Expected volatility rates are based on a combination of the
historical volatility of the common stock of comparable publicly
traded entities and the limited historical information about the
Company’s common stock. The expected life of stock options is
the period of time for which the stock options are expected to be
outstanding. Given the limited historical exercise data, the
expected life is determined using the “simplified
method,” which defines expected life as the midpoint between
the vesting date and the end of the contractual term.
The risk-free interest rates are based on the U.S. Treasury yield
for a period consistent with the expected term of the option in
effect at the time of the grant. The Company has not paid dividends
to its stockholders since its inception and does not plan to pay
cash dividends in the foreseeable future. Therefore, the Company
has assumed an expected dividend rate of zero.
Prior to January 1, 2014, at which time there was no active
market for the Company’s common stock, the exercise price of
the stock options on the date of grant was determined and approved
by the board of directors using several factors, including progress
and milestones achieved in the Company’s business development
and performance, the price per share of its convertible preferred
stock offerings, and general industry and economic trends. In
establishing the estimated fair value of the common stock, the
Company considered the guidance set forth in American Institute of
Certified Public Accountants Practice Guide, Valuation of
Privately-Held-Company Equity Securities Issued as
Compensation
A restricted stock unit (“RSU”) is a stock award that
entitles the holder to receive shares of the Company’s common
stock as the award vests. The fair value of each RSU is based on
the fair market value of the Company’s common stock on the
date of grant. The Company has granted RSUs that vest in three
equal annual installments provided that the employee remains
employed with the Company.
Beginning in the first quarter of 2016, the Company granted time
based RSUs that vest in three equal annual installments. In the
first quarter of 2017, the Company granted additional time-based
RSUs as well as performance-based RSUs, which vest based on the
achievement of certain milestones that include (i) the
submission of a new drug application (“NDA”) with the
U.S. Food and Drug Administration (the “FDA”),
(ii) the approval of the NDA by the FDA (the “Milestone
RSU grants”) and (iii) the achievement of certain
comparative shareholder returns against the Company’s peers
(the “TSR RSU grants”). The Milestone RSU grants were
valued at the closing price on March 8, 2017. The RSUs that
vest upon the NDA submission will be amortized through
December 31, 2018 based on the probable vesting date. The
amortization of the expenses for RSUs related to the approval of
the NDA will commence if and when the NDA filing has been approved
through the last day of the calendar year in which the milestone is
achieved. The TSR RSU grants were valued using the Monte Carlo
Simulation method and will be amortized over the life of the RSU
agreements which ends December 31, 2019. The Milestone RSU
grants and TSR RSU grants are target based and the ultimate awards,
if attained, could be the target amount or higher or lower than the
target amount, depending on the timing or achievement of the goal.
The Company is amortizing the expenses at the 100% targeted
amount.
Under ASC Topic 718, the cumulative amount of compensation cost
recognized for instruments classified as equity that ordinarily
would result in a future tax deduction under existing tax law shall
be considered to be a deductible difference in applying ASC
Topic 740, Income Taxes
Since the Company had net operating loss carryforwards as of
June 30, 2017 and 2016, no excess tax benefits for the tax
deductions related to share-based awards were recognized in the
statements of operations.
Equity instruments issued to non-employees for services are
accounted for under the provisions of ASC Topic 718 and ASC
Topic 505-50, Equity/Equity-Based
Payments to Non-Employees
Loss Per Share
Basic net loss per common share is determined by dividing the net
loss by the weighted-average number of common shares outstanding
during the period, without consideration of common stock
equivalents. Diluted net loss per share is computed by dividing the
net loss by the weighted-average number of common stock equivalents
outstanding for the period. The treasury stock method is used to
determine the dilutive effect of the Company’s stock option
grants and RSUs.
The following common stock equivalents were excluded in the
calculation of diluted loss per share because their effect would be
anti-dilutive as applied to the loss from operations for the three
and six months ended June 30, 2017 and 2016:
Three Months Ended June 30,
Six Months Ended June 30,
2017 2016 2017 2016
Stock options 483,782 1,388,298 483,782 1,388,298
RSUs 66,980 29,798 65,870 29,143
Recently Issued Accounting Standards
In May 2014, the FASB issued ASU No. 2014-09, Revenue
from Contracts with Customers (“ASU 2014-09”). ASU
2014-09 will eliminate transaction-specific and industry-specific
revenue recognition guidance under current GAAP and replace it with
a principle-based approach for determining revenue recognition. ASU
2014-09 will require that companies recognize revenue based on the
value of transferred goods or services as they occur in the
contract. ASU 2014-09 also will require additional disclosure about
the nature, amount, timing and uncertainty of revenue and cash
flows arising from customer contracts, including significant
judgments and changes in judgments and assets recognized from costs
incurred to obtain or fulfill a contract. In July 2015, the
FASB decided to defer the effective date of the standard from
January 1, 2017 to January 1, 2018, with an option that
permits companies to adopt the standard as early as the original
effective date. Early adoption of the standard prior to the
original effective date was not permitted. The standard permits the
use of either the retrospective or cumulative effect transition
method.
The Company started an initial impact assessment of the potential
changes from adopting ASU 2014-09. Based on the assessment
procedures performed to date the Company anticipates that the
adoption of ASU 2014-09 will primarily impact the contract revenues
recognized for collaborations and license agreements. The Company
is still completing its initial assessment of the impact of this
guidance, including the new disclosure requirements, as the Company
has not had product sales to date. The Company plans to adopt the
new standard effective January 1, 2018 using the modified
retrospective transition method. The Company continues to monitor
additional changes, modifications, clarifications or
interpretations being undertaken by the FASB, which may impact the
Company’s current conclusions.
In January 2016, the FASB issued ASU No. 2016-01,
Recognition and Measurement of Financial Assets and Financial
Liabilities (“ASU 2016-01”). ASU 2016-01 eliminates the
requirement to disclose the methods and significant assumptions
used to estimate the fair value that is required to be disclosed
for financial instruments measured at amortized cost on the balance
sheet. The standard also clarifies the need to evaluate a valuation
allowance on a deferred tax asset related to available-for-sale
securities in combination with the Company’s other deferred
tax assets. ASU 2016-01 is effective for annual reporting periods
beginning after December 15, 2017. The adoption of this
standard is not expected to have a material impact on the
Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases
(“ASU 2016-02”). ASU 2016-02 allows the recognition of
lease assets and lease liabilities by lessees for those leases
classified as operating leases under previous GAAP. The
classification criteria for distinguishing between finance leases
and operating leases are substantially similar to the
classification criteria for distinguishing between capital leases
and operating leases in the previous leases guidance. ASU 2016-02
is effective for annual reporting periods beginning after
December 15, 2018 and early adoption is permitted. The Company
is currently analyzing the impact of ASU 2016-02 and, at this time,
is yet to determine the impact of the new standard, if any, on the
Company’s consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation—Stock Compensation (“ASU 2016-09”).
ASU 2016-09 simplifies several areas of accounting for stock
compensation, including simplification of the accounting for income
taxes, classification of excess tax benefits on the Statement of
Cash Flows and forfeitures. ASU 2016-09 is effective for annual
reporting periods beginning after December 15, 2016. An entity
that elects early adoption must adopt all of the amendments in the
same period. The Company did not early adopt ASU 2016-09 as of and
for the period ended December 31, 2016. As of January 1,
2017, the Company adopted ASU 2016-09 for the quarter ended
March 31, 2017. Accordingly, the Company recognized previously
unrecognized excess tax benefits of $7 million recorded as deferred
tax assets with a corresponding offsetting full valuation allowance
at the beginning of 2017, which yielded no tax impact. |
