| 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 set forth 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):
March 31, 2018
Amortized Cost Unrealized Gains Unrealized (Losses) Estimated Fair Value
(unaudited)
U.S. Government Agency Securities $ 127,585 $
— $ (476 ) $ 127,109
FDIC Certificates of Deposit (1) 4,165
—
— 4,165
Certificates of Deposit 51,000
—
— 51,000
Commercial Paper 48,200
— (114 ) 48,086
Corporate Notes/Bonds 132,874
— (650 ) 132,224
$ 363,824 $
— $ (1,240 ) $ 362,584
December 31, 2017
Amortized Cost Unrealized Gains Unrealized (Losses) Estimated Fair Value
U.S. Government Agency Securities $ 126,330 $
— $ (348 ) $ 125,982
FDIC Certificates of Deposit (1) 8,306
—
— 8,306
Certificates of Deposit 103,500
—
— 103,500
Commercial Paper 51,414
— (61 ) 51,353
Corporate Notes/Bonds 137,790
— (390 ) 137,400
$ 427,340 $
— $ (799 ) $ 426,541
(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, available-for-sale
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 March 31, 2018, the aggregate related fair value of
investments with unrealized losses was $312.4 million and the
aggregate amount of unrealized losses was $1.24 million. Of the
$312.4 million, $279.7 million have been held in a continuous
unrealized loss position for less than 12 months and $32.7 million
have been held in a continuous loss position for 12 months or
longer. The total continuous unrealized loss for investments held
for less than 12 months and for investments held for 12 months or
longer is approximately $1.2 million and $48,000, respectively. As
of December 31, 2017, the Company had approximately $37.3 million
of investments with a continuous unrealized loss for 12 months or
longer of approximately $42,000.
The Company attributes the unrealized losses on
the available-for-sale
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 March 31, 2018 and
December 31, 2017. The carrying value of cash held in money
market funds of approximately $33.3 million as of
March 31, 2018 and $26.2 million as of December 31,
2017 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
Fair Value Measurements at Reporting Date Using
March 31, 2018 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)
Money Market Funds $ 33,308 $ 33,308 $
— $
—
U.S. Government Agency Securities 127,109
— 127,109
—
FDIC Certificates of Deposit 4,165
— 4,165
—
Certificates of Deposit 78,500
— 78,500
—
Commercial Paper 53,058
— 53,058
—
Corporate Notes/Bonds 132,224
— 132,224
—
$ 428,364 $ 33,308 $ 395,056 $
—
Fair Value Measurements at Reporting Date Using
December 31, 2017 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)
Money Market Funds $ 26,181 $ 26,181 $
— $
—
U.S. Government Agency Securities 125,982
— 125,982
—
FDIC Certificates of Deposit 8,306
— 8,306
—
Certificates of Deposit 103,500
— 103,500
—
Commercial Paper 51,353
— 51,353
—
Corporate Notes/Bonds 137,400
— 137,400
—
$ 452,722 $ 26,181 $ 426,541 $
—
Financial Instruments
The Company considers the recorded costs of its financial assets
and liabilities, which consist of cash equivalents, prepaid
expenses, accounts payable and accrued liabilities, to approximate
their fair value because of their relatively short maturities at
March 31, 2018 and December 31, 2017. 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, cash and cash equivalents
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
March 31, 2018 and December 31, 2017, as the Company has
a history of collecting on all its accounts including from
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
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 preclinical
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 months ended
March 31, 2018 and 2017, 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 more-likely-than-not
On December 22, 2017, President Trump signed into law the
“Tax Cuts and Jobs Act” (“TCJA”) that
significantly reforms the Internal Revenue Code of 1986, as amended
(the “Code”). The TCJA, among other things, includes
changes to U.S. federal tax rates, imposes significant additional
limitations on the deductibility of interest and net operating loss
carryforwards, allows for the expensing of capital expenditures,
and puts into effect the migration from a “worldwide”
system of taxation to a territorial system. In addition, the TCJA
repealed the alternative minimum tax and provides for a refund of
taxes paid between 2018 and 2021. With the passing of the TCJA, the
Company will receive a refund in future periods for alternative
minimum taxes paid in prior years. The Company therefore has
recognized a benefit of approximately $1.1 million for these
taxes.
The Company continues to evaluate the impact of the Global Low
Taxed Intangible Income (“GILTI”) provision of the
TCJA. The GILTI provisions require the Company to include in its
U.S. income tax return foreign subsidiary earnings in excess of an
allowable return on the foreign subsidiary’s tangible assets.
In its consolidated financial statements for the year ended
December 31, 2017, the Company elected an accounting policy to
treat GILTI as a current period expense when incurred. The Company
has estimated that it will not have any GILTI for 2018.
During December 2017, the SEC staff issued Staff Accounting
Bulletin No. 118 (“SAB 118”) to address the
application of U.S. GAAP in situations when a registrant does not
have the necessary information available, prepared, or analyzed
(including computations) in reasonable detail to complete the
accounting for certain income tax effects of the TCJA. The Company
has recognized the provisional tax impacts related to the release
of the valuation allowance with respect to AMT credits and the
revaluation of deferred tax assets and liabilities and included
these amounts in its consolidated financial statements for the year
ended December 31, 2017. The Company continues to evaluate the
effects of the TCJA and consider the amounts recorded to be
provisional. Additional time is needed to ensure that we have fully
analyzed and computed the tax effects of the TCJA on its tax
accounts. The Company has not made any adjustments related to its
provisional amounts recorded in this period, but continue to
evaluate the provisions of the TCJA. The Company will complete its
accounting during the measurement period provided under SAB 118 as
the Company obtains further clarity on the application of the TCJA
to its particular facts and report appropriately in 2018.
The Company recorded income tax expense of $0 and $1,600 for the
three months ended March 31, 2018 and 2017,
respectively. The Company’s effective tax rate for the
three months ended March 31, 2018 and 2017 was approximately
0% for both periods, respectively. The Company’s annual
effective tax rate of approximately 0% is substantially lower than
the U.S. statutory rate of 21% due to valuation allowances recorded
on current year losses where the Company is not at more-likely than
not to recognize a future tax benefit.
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
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 condition, expense is amortized using
the accelerated attribution method. Share-based compensation
expense recognized in the statements of operations for the three
months ended March 31, 2018 and 2017 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. For stock options
granted, the exercise price was determined by using the closing
market price of the Company’s common stock on the date of
grant.
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 and in the first quarter of
2017 and 2018, the Company granted time based RSUs that vest in
three equal annual installments. In the first quarter of 2017, the
Company granted 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
RSUs”) and (iii) the achievement of certain comparative
shareholder returns against the Company’s peers (the
“TSR RSUs”). The Milestone RSUs 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 submission has been approved through the last
day of the calendar year in which the milestone is achieved. The
TSR RSUs 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 RSUs and TSR RSUs 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 expense recognition related
to these equity grants is based on the Company’s best
estimate.
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
March 31, 2018 and 2017, no excess tax benefits for the tax
deductions related to share-based awards were recognized in the
statements of operations. In March 2016, the FASB issued
ASU No. 2016-09, 2016-09”). 2016-09 2016-09
Equity instruments issued to non-employees 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
months ended March 31, 2018 and 2017:
Three Months Ended March 31,
2018 2017
Stock Options 724,978 516,515
RSUs 314,302 74,834
TSR RSUs 59,344
—
Recently Issued Accounting Standards
In May 2014, the FASB issued ASC
Update No. 2014-09,
The Company adopted this standard using the “modified
retrospective method” which did not result in an impact to
its financial statements as the Company has not had product sales
to date. Upon commercializing a product or executing any revenue
generating contracts, the Company will provide additional
disclosures in the notes to the consolidated financial statements
related to the relevant aspects of any revenue generating contracts
that the Company has or into which the Company expects to
enter.
In January 2016, the FASB issued
ASU No. 2016-01, 2016-01”). 2016-01 available-for-sale 2016-01 2016-01
In February 2016, the FASB issued
ASU No. 2016-02, 2016-02”). 2016-02 2016-02 2016-02
In February 2018, the FASB issued
ASU 2018-02, |
