Intra-Cellular Therapies, Inc. - FORM 8-K/A - EX-99.1

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8-K/A - AMENDMENT NO.1 TO FORM 8-K - Intra-Cellular Therapies, Inc.	d610873d8ka.htm
EX-99.2 - EX-99.2 - Intra-Cellular Therapies, Inc.	d610873dex992.htm

Exhibit 99.1


		FINANCIAL STATEMENTS

		Intra-Cellular Therapies, Inc.
		Years Ended December 31, 2012 and 2011
		With Report of Independent Registered Public Accounting Firm

Intra-Cellular Therapies, Inc.

Financial Statements

Years Ended December 31, 2012 and 2011

Contents


Report of Independent Registered Public Accounting Firm			1

Financial Statements

Balance Sheets			2
Statements of Operations			3
Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit			4
Statements of Cash Flows			5
Notes to Financial Statements			6

Report of Independent Registered Public Accounting Firm

The Board of Directors of

Intra-Cellular Therapies, Inc.

We have audited the accompanying balance sheets of Intra-Cellular Therapies, Inc. as of December 31, 2012 and 2011, and the related statements of operations, comprehensive income, redeemable convertible preferred stock and stockholders’ deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Intra-Cellular Therapies, Inc. at December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

McLean, VA

June 19, 2013

Intra-Cellular Therapies, Inc.

Balance Sheets


	December 31
	2012			2011
Assets
Current assets:
Cash and cash equivalents	$	15,645,528		$	13,693,215
Certificates of deposit		3,500,000			9,200,123
Accounts receivable		300,429			349,063
Prepaid expenses and other current assets		188,702			114,468

Total current assets		19,634,659			23,356,869
Property and equipment, net		58,266			67,056
Other assets		130,755			170,800

Total assets	$	19,823,680		$	23,594,725


Liabilities, redeemable convertible preferred stock and stockholders’ deficit
Current liabilities:
Accounts payable	$	41,608		$	595,864
Accrued liabilities		588,065			1,103,486
Accrued employee benefits		726,657			669,739
Deferred revenue – short-term		1,666,674			1,666,666
Convertible promissory notes		15,173,013			—

Total current liabilities		18,196,017			4,035,755

Deferred revenue – long-term		—			1,666,667
Series A Redeemable Convertible Preferred Stock, $0.001 par value: 10,000,000 shares authorized; 3,700,000 shares issued and outstanding at December 31, 2012 and 2011		6,755,992			6,459,992
Series B Redeemable Convertible Preferred Stock, $0.001 par value: 6,312,500 shares authorized; 3,631,898 shares issued and outstanding at December 31, 2012 and 2011		8,936,955			8,475,905
Series C Redeemable Convertible Preferred Stock, $0.001 par value: 8,060,048 shares authorized; 5,762,765 shares issued and outstanding at December 31, 2012 and 2011		15,141,345			14,205,340

Stockholders’ deficit:
Common stock, $.001 par value: 30,000,000 shares authorized; 11,269,530 and 11,202,990 shares issued and outstanding at December 31, 2012 and 2011, respectively		11,270			11,202
Additional paid-in capital		1,478,400			2,845,336
Accumulated deficit		(30,696,299	)		(14,105,472	)

Total stockholders’ deficit		(29,206,629	)		(11,248,934	)

Total liabilities, redeemable convertible preferred stock and stockholders’ deficit	$	19,823,680		$	23,594,725

See accompanying notes.

Intra-Cellular Therapies, Inc.

Statements of Operations


	Year Ended December 31
	2012			2011

Revenues:
License and collaboration revenue	$	3,117,991		$	22,327,464
Grant revenue		—			1,034,495

Total revenues		3,117,991			23,361,959


Costs and expenses:
Research and development		15,486,476			7,654,546
General and administrative		4,034,925			4,612,450

Total costs and expenses		19,521,401			12,266,996


(Loss) income from operations		(16,403,410	)		11,094,963
Interest expense		(193,498	)		(15	)
Interest income		39,002			62,315
Income taxes		(32,921	)		(64,834	)

Net (loss) income		(16,590,827	)		11,092,429
Cumulative dividends on redeemable convertible preferred stock		(1,672,223	)		(1,669,786	)

Net (loss) income attributable to common stockholders		(18,263,050	)		9,422,643


Net (loss) income per common share:
Basic	$	(1.63	)	$	0.39
Dilutive		(1.63	)		0.33

Weighted average number of common shares:
Basic		11,215,077			11,202,990
Dilutive		11,215,077			13,190,476

See accompanying notes.

Intra-Cellular Therapies, Inc.

Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit


	Series A Redeemable Convertible Preferred Stock				Series B Redeemable Convertible Preferred Stock				Series C Redeemable Convertible Preferred Stock				Common Stock				Additional Paid-in			Accumulated			Total Stockholders’
	Shares		Amount		Shares		Amount		Shares		Amount		Shares		Amount		Capital			Deficit			Deficit

Balance at December 31, 2010		3,700,000	$	6,163,992		3,631,898	$	8,005,827		5,762,765	$	13,269,334		11,202,990	$	11,202	$	4,266,968		$	(25,197,901	)	$	(20,919,731	)
Share-based compensation		—		—		—		—		—		—		—		—		280,452			—			280,452
Accretion of issuance costs		—		—		—		11,466		—		20,832		—		—		(32,298	)		—			(32,298	)
Dividends on redeemable convertible preferred stock		—		296,000		—		458,612		—		915,174		—		—		(1,669,786	)		—			(1,669,786	)
Net income		—		—		—		—		—		—		—		—		—			11,092,429			11,092,429

Balance at December 31, 2011		3,700,000		6,459,992		3,631,898		8,475,905		5,762,765		14,205,340		11,202,990		11,202		2,845,336			(14,105,472	)		(11,248,934	)
Exercise of stock options		—		—		—		—		—		—		66,540		68		31,013			—			31,081
Share-based compensation		—		—		—		—		—		—		—		—		295,106			—			295,106
Accretion of issuance costs		—		—		—		—		—		20,832		—		—		(20,832	)		—			(20,832	)
Dividends on redeemable convertible preferred stock		—		296,000		—		461,050		—		915,173		—		—		(1,672,223	)		—			(1,672,223	)
Net loss		—		—		—		—		—		—		—		—		—			(16,590,827	)		(16,590,827	)

Balance at December 31, 2012		3,700,000	$	6,755,992		3,631,898	$	8,936,955		5,762,765	$	15,141,345		11,269,530	$	11,270	$	1,478,400		$	(30,696,299	)	$	(29,206,629	)

See accompanying notes.

Intra-Cellular Therapies, Inc.

Statements of Cash Flows


	Year Ended December 31
	2012			2011
Operating activities
Net (loss) income	$	(16,590,827	)	$	11,092,429
Adjustments to reconcile net loss (income) to net cash (used in) provided by operating activities:
Depreciation		47,747			189,186
Share-based compensation expense		295,106			280,452
Changes in operating assets and liabilities:
Accounts receivable		48,634			(349,063	)
Prepaid expenses and other assets		(34,189	)		521,245
Accounts payable		(554,256	)		321,426
Accrued liabilities and employee benefits		(448,493	)		1,016,953
Deferred revenue		(1,666,659	)		3,132,038

Net cash (used in) provided by operating activities		(18,902,937	)		16,204,666

Investing activities
Purchases of investments		(12,000,000	)		(7,200,000	)
Maturities of investments		17,700,122			2,850,000
Purchase of property and equipment		(38,957	)		(17,825	)

Net cash provided by (used in) investing activities		5,661,165			(4,367,825	)

Financing activities
Proceeds from issuance of Series C Redeemable Convertible Preferred Stock, net of offering costs		—			—
Proceeds from issuance of convertible promissory notes, net		15,163,004			—
Proceeds from stock option exercises		31,081			—

Net cash provided by financing activities		15,194,085			—


Net increase (decrease) in cash and cash equivalents		1,952,313			11,836,841
Cash and cash equivalents at beginning of year		13,693,215			1,856,374

Cash and cash equivalents at end of year	$	15,645,528		$	13,693,215


Cash paid for interest	$	—		$	15

Cash paid for taxes	$	13,857		$	30,589

See accompanying notes.

Intra-Cellular Therapies, Inc.

Notes to Financial Statements

December 31, 2012

1. Organization

Intra-Cellular Therapies, Inc. (ITI or the Company) was incorporated in the state of Delaware on May 22, 2001 and commenced operations in June 2002. The Company was founded to discover and develop drugs for the treatment of neurological and psychiatric disorders. The Company’s technology is built on a unique and proprietary understanding of the intracellular effects of neurotransmitters. This know-how has allowed ITI to develop new drugs based on novel drug targets and to create unique molecular signatures for known neurotransmitters and drugs. This technology has also allowed ITI to screen potential lead compounds in more specific ways than are currently available. The Company’s technology addresses diseases of the central nervous system, including schizophrenia, cognition, Parkinson’s disease, anxiety, depression, Alzheimer’s disease, sleep, and those related to women’s health.

The Company earns its license and collaboration revenue from its significant partnership with Takeda Pharmaceutical Company Limited (Takeda). For the year ended December 31, 2011, the Company earned grant revenue under grants awarded by U.S. government agencies and foundations. In order to further its research projects and support its collaborations, the Company will require additional financing until such time that revenue streams are sufficient to generate consistent positive cash flow from operations. Possible sources of funds are strategic alliances, additional equity offerings, grants and contracts, and research and development funding from third parties.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles 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 certificates of deposit with commercial banks and financial institutions. Certificates of deposit with a maturity date of more than three months are classified separately on the balance sheet. Their carrying values approximate the fair market value.

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

Fair Value Measurements

The Company applies the fair value method under ASC 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value, establishes a fair value hierarchy for assets and liabilities measured at fair value and requires expanded disclosures about fair value measurements. The ASC 820 hierarchy ranks the quality and reliability of inputs, or assumptions, used in the determination of fair value and requires assets and liabilities carried at fair value to be classified and disclosed in one of the following categories based on the lowest level input used that is significant to a particular fair value measurement:

•

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 820 hierarchy.

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

The Company has no assets or liabilities that were measured using quoted prices for similar assets and liabilities or significant unobservable inputs (Level 2 and Level 3 assets and liabilities, respectively) as of December 31, 2012. The carrying value of cash held in money market funds of approximately $1.2 million as of December 31, 2012, is included in cash and cash equivalents and approximates market value based on quoted market price or Level 1 inputs.

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

Financial Instruments

The Company considers the recorded costs of its financial assets and liabilities, which consist of cash equivalents, accounts receivable, accounts payable and accrued liabilities, to approximate their fair value because of their relatively short maturities at December 31, 2012 and 2011. 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 remote.

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 December 31, 2012, as the Company has a history of collecting on all accounts including 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 360,

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

Property, Plant and Equipment. The Company considers historical performance and anticipated future results in its evaluation of potential impairment. The Company evaluates the carrying value of those assets in relation to the operating performance of the business and undiscounted cash flows expected to result from the use of those assets. Impairment losses are recognized when carrying value exceeds the undiscounted cash flows then management must determine the fair value of the underlying asset. No such impairment losses have been recognized to date.

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 605-45, Revenue Recognition/Principal Agent Considerations. The Company is the primary obligor with respect to purchasing goods and services from third-party suppliers, is obligated to compensate the service provider for the work performed, and has discretion in selecting the supplier. Provisions for estimated losses on research grant projects and any other contracts are made in the period such losses are determined.

Effective January 1, 2011, the Company adopted a new accounting standard that amends the guidance on the accounting for arrangements involving the delivery of more than one element. Pursuant to the new standard, each required deliverable is evaluated to determine whether it qualifies as a separate unit of accounting. For ITI this determination is generally based on whether the deliverable has “stand-alone value” to the customer. The Company adopted this new 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.

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

For MDRAs entered into prior to January 1, 2011 (pre-2011 arrangements) and not materially modified thereafter, we continue to apply our prior accounting policy with respect to such arrangements. Under this policy, in general, revenue from non-refundable, up-front fees related to intellectual property rights/licenses, where we have continuing involvement and where standalone value could not be determined under the previous guidance, is recognized ratably over the estimated period of ongoing involvement. In general, the consideration with respect to the other deliverables is recognized when the goods or services are delivered.

The adoption of this accounting standard did not have a material impact on our results of operations for the years ended December 31, 2012 and 2011, or on our financial positions as of December 31, 2012 and 2011. Our results of operations for the year ended December 31, 2010 also would not have been materially impacted if the accounting standard had been adopted on January 1, 2010.

In January 2011, the Company adopted ASC Topic 605-28, Milestone Method. Under this guidance, we recognize revenue contingent upon the achievement of a substantive milestone in its entirety in the period the milestone is achieved. Substantive milestone payments are recognized upon achievement of the milestone only if all of the following conditions are met:

•

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 our 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.

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

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 revenues in accordance with the revenue models described above. In addition, the determination that one such payment was not a substantive milestone could prevent us 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.

Deferred Revenue

Cash received as prepayment on future services is deferred and recognized as revenue as the services are performed. The Company must remit interest on any deferred revenue related to a governmental agency. As of December 31, 2012 and 2011, no interest was due as the Company did not have any deferred revenue from a government agency.

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, outside services, providers, materials and consulting fees.

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 its 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.

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

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 740 (previously included in Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109). Financial statement recognition of a tax position taken or expected to be taken in a tax return is determined based on a more-likely-than-not threshold of that position being sustained. If the tax position meets this threshold, the benefit to be recognized is measured as the tax benefit having the highest likelihood of being realized upon ultimate settlement with the taxing authority. The Company recognizes interest accrued related to unrecognized tax benefits and penalties in the provision for income taxes.

Comprehensive Income (Loss)

ASC 220-10, Reporting Comprehensive Income, requires the presentation of the comprehensive income or loss and its components as part of the financial statements. For the years ended December 31, 2012, 2011 and 2010, the Company’s net (loss) income equals comprehensive (loss) income.

Share-Based Compensation

Share-based payments are accounted for in accordance with the provisions of ASC 718, Compensation – Stock Compensation (ASC 718). The fair value of share-based payments is estimated, on the date of grant, using the Black-Scholes-Merton option-pricing model (the Black-Scholes model). The resulting fair value is recognized ratably over the requisite service period, which is generally the vesting period of the option.

For all time vesting awards granted, expense is amortized using the straight-line attribution method. For awards that contain a performance condition, expense is amortized using the accelerated attribution method. As share-based compensation expense recognized in the statements of operations for the years ended December 31, 2012 and 2011, is based on share-based awards ultimately expected to vest, it has been reduced for estimated forfeitures.

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Pre-vesting forfeitures are based on the Company’s historical experience for the years ended December 31, 2012, 2011 and 2010, and have not been material.

The Company utilizes the Black-Scholes model for estimating fair value of its stock options granted. Option valuation models, including 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 historical volatility of the common stock of comparable publicly traded entities and other factors due to the lack of historic information of the Company’s common stock. The expected life of stock-based options is the period of time for which the stock-based options are expected to be outstanding. Given the lack of historic exercise data, the expected life is determined using the “simplified method” which is defined 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.

Given the absence of an 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.

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

Under ASC 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 740, Income Taxes. The deductible temporary difference is based on the compensation cost recognized for financial reporting purposes; however, these provisions currently do not impact the Company, as all the deferred tax assets have a full valuation allowance.

Since the Company had net operating loss carryforwards as of December 31, 2012 and 2011, 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 are accounted for under the provisions of ASC 718 and ASC 505-50, Equity/Equity-Based Payments to Non-Employees. Accordingly, the estimated fair value of the equity instrument is recorded on the earlier of the performance commitment date or the date the services required are completed and are marked to market during the service period.

(Loss) Earnings Per Share

(Loss) Earnings per share is calculated under the two-class method under which all earnings (distributed and undistributed) are allocated to each class of common stock and participating securities based on their respective rights to receive dividends. In the event that the Board of Directors shall declare a dividend payable in cash or other property on the then-outstanding shares of common stock, the holders of the Redeemable Preferred Series A, B, and C convertible preferred stock shall be entitled to receive the amount of dividends per share of Preferred Stock that would be payable on the largest number of whole shares of Common Stock into which each share of Preferred Stock could then be converted. Therefore, the Redeemable Preferred Series A, B, and C Preferred Stock are participating securities.

Basic net (loss) income per common share is determined by dividing the net (loss) income allocable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted net (loss) income per share is computed by dividing the net (loss) income allocable to common stockholders 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 the if-converted method is used to determine the dilutive effect of the Company’s Redeemable Preferred Series A, B, and C convertible preferred stock.


	Year Ended December 30
	2012			2011
Basic (loss) income per common share
Net (loss) income	$	(16,590,827	)	$	11,092,429
Less: Undistributed (loss) earnings allocated to participating securities		(1,672,223	)		(6,747,903	)

Net (loss) earnings allocable to common shares	$	(18,263,050	)	$	4,344,526


Basic weighted average common shares outstanding		11,215,077			11,202,990

Basic (loss) earnings per common share	$	(1.63	)	$	0.39
Diluted (loss) earnings per common share
Net (loss) earnings	$	(16,590,827	)	$	11,092,429
Less: Undistributed (loss) earnings allocated to participating securities		(1,672,223	)		(6,747,903	)

Net (loss) earnings allocable to common shares	$	(18,263,050	)	$	4,344,526

Basic weighted average common shares outstanding		11,215,077			11,202,990
Effect of dilutive options		—			1,987,486

Diluted weighted average common shares outstanding		11,215,077			13,190,476

Diluted (loss) earnings per common share	$	(1.63	)	$	0.33

The following common stock equivalents were excluded in the calculation of diluted (loss) earnings per share because their effect would be anti-dilutive as applied to the loss from operations as of December 31, 2012:


	Year Ended December 31
	2012		2011
Series A, B, and C Preferred Stock		13,094,663		13,094,663
Stock options		2,132,194		—
Convertible promissory notes		834,106		—

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

Recently Issued Accounting Pronouncements

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income. ASU 2011-05 revises the manner in which entities present comprehensive income in their financial statements. The recent guidance removes the presentation options in ASC 220 and requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. ASU 2011-05 did not change the items that must be reported in other comprehensive income. The Company adopted the provisions of ASU 2011-05 for the year ended December 31, 2012 and elected the second option. However, for the years ended December 31, 2012 and 2011, the Company’s net (loss) income equals comprehensive (loss) income, and, therefore, a separate statement of other comprehensive income was not necessary.

3. Property and Equipment

Property and equipment consist of the following:


	December 31
	2012			2011

Computer equipment	$	92,318		$	107,940
Furniture and fixtures		42,736			42,736
Scientific equipment		2,824,076			2,786,539
Leasehold improvements		319,553			319,553

		3,278,683			3,256,768
Less accumulated depreciation		(3,220,417	)		(3,189,712	)

	$	58,266		$	67,056

Depreciation expense for the years ended December 31, 2012, 2011 and 2010 was $47,747, $189,186 and $386,992, respectively.

4. Redeemable Convertible Preferred Stock

In 2002, the Company issued 2,900,000 shares of Series A redeemable convertible preferred stock (Series A Preferred Stock) for proceeds of $2,828,322. In 2003, the Company issued 1,250,000 shares of Series A Preferred Stock for proceeds of $1,250,000.

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

4. Redeemable Convertible Preferred Stock (continued)

In 2006, the Company issued a total of 5,000,216 shares of Series B redeemable convertible preferred stock (Series B Preferred Stock) for proceeds of $7,863,725, net of $58,850 in offering costs.

In 2007, the Company issued a total of 4,030,024 shares of Series C redeemable convertible preferred stock (Series C Preferred Stock) for proceeds of $7,935,898, net of $64,102 in offering costs. In 2010, the Company issued a total of 2,687,915 shares of Series C Preferred Stock for proceeds of $5,274,886, net of $60,894 in offering costs.

In connection with the Series C Preferred Stock offering, approximately $450,000 of Series A Preferred Stock, $2,173,451 of Series B Preferred Stock and $1,896,116 of Series C Preferred Stock were converted to 2,773,492 shares of common stock in accordance with their respective conversion ratios.

Dividends are cumulative and accrue on each outstanding share of Series A, Series B and Series C Preferred Stock at an 8% rate per annum. These dividends would be paid when and if declared by the Board of Directors. At December 31, 2012 and 2011, accrued and unpaid dividends for each respective preferred stock issuance were as follows:


	December 31
	2012		2011

Series A Preferred Stock	$	3,325,667	$	3,029,667
Series B Preferred Stock		3,807,154		3,346,402
Series C Preferred Stock		4,099,657		3,184,484

Total	$	11,232,478	$	9,560,553

The Series A, Series B and Series C Preferred Stock have a liquidation preference senior to that of the common stock.

Series A Preferred Stock has a liquidation preference of $6,755,992 and $6,459,992 for December 31, 2012 and 2011, respectively. Series B Preferred Stock has a liquidation preference of $8,936,955 and $8,475,905 for December 31, 2012 and 2011, respectively. Series C Preferred Stock has a liquidation preference of $15,141,345 and $14,205,340 for December 31, 2012 and 2011, respectively.

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

4. Redeemable Convertible Preferred Stock (continued)

The Company is obligated to redeem shares of Series A, Series B and Series C Preferred Stock, if requested, by the majority of the holders. The beginning redemption of Series A, B and C Preferred Stock is February 26, 2016. The redemption for the Series A, Series B and Series C Preferred Stock, if requested, would take place in three equal installments over a two-year period.

The redemption price shall be equal to $1.00 per share, $1.58 per share and $1.99 per share plus all accrued and unpaid dividends for the Series A, Series B and Series C Preferred Stock, respectively, subject to certain equity adjustments for specified anti-dilutive transactions as defined.

The holders of the Series A, Series B and Series C Preferred Stock have the right to convert such shares, at their option and at any time, into shares of common stock at the then applicable conversion rate, as defined. The initial conversion rate is one common share for each preferred share, which is adjusted for specified anti-dilutive transactions, as defined. At December 31, 2012, the Company has reserved 3,700,000 shares, 3,631,898 shares and 5,762,765 shares of common stock for conversion of Series A, Series B and Series C Preferred Stock, respectively.

The Series A, Series B and Series C Preferred Stock will automatically convert into common stock at the then applicable conversion rate upon a majority vote of the Series A, Series B and Series C Preferred Stockholders or upon a public offering of the Company’s common stock, resulting in aggregate proceeds to the Company of at least $20 million and a price per share of at least $5.00.

The holders of Series A, Series B and Series C Preferred Stock are entitled to the whole number of votes equal to the number of shares of common stock into which such shares could be converted.

5. Share-Based Compensation

The Company sponsors the Intra-Cellular Therapies, Inc. 2003 Equity Incentive Plan (the Plan) to provide for the granting of stock awards, such as stock options, restricted common stock and stock appreciation rights to employees, directors and other individuals as determined by the Board of Directors. The Company reserved 3,700,000 shares of common stock for issuance under the Plan. In December 2012, the Company increased the number of shares of common stock reserved for issuance under the plan to 5,700,000.

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

5. Share-Based Compensation (continued)

Stock options granted under the Plan may be either incentive stock options (ISOs) as defined by the Internal Revenue Code, or non-qualified stock options. The Board of Directors determines who will receive options, the vesting periods (which are generally two to three years) and the exercise prices. Options have a maximum term of 10 years. The exercise price of ISOs granted under the Plan must be at least equal to the fair market value of the common stock on the date of grant.

Total stock-based compensation expense, related to all of the Company’s share-based awards to employees, directors and non-employees recognized during the years ended 2012 and 2011, was comprised of the following:


	Year Ended December 31
	2012		2011

Research and development	$	111,206	$	113,534
General and administrative		183,900		166,918

Total share-based compensation expense	$	295,106	$	280,452

The following table describes the weighted-average assumptions used for calculating the value of options granted for the years ended December 31:


	2012			2011

Dividend yield		0.0	%		—	%
Expected volatility		79.7	%		—
Weighted-average risk-free interest rate		1.2	%		—
Expected term		6.3 years			—

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

5. Share-Based Compensation (continued)

Information regarding the stock options activity including employees, directors and non-employees as of December 31, 2012, and changes during the year then ended, are summarized as follows:


	Number of Shares			Weighted- Average Exercise Price		Weighted- Average Contractual Life

Outstanding at December 31, 2011		3,175,567		$	0.61		5.0 years
Options granted		322,200			1.42		6.3 years
Options exercised		(66,540	)		0.47		3.0 years
Options canceled or expired		(17,000	)		1.37		7.9 years

Outstanding at December 31, 2012		3,414,227			0.66		4.4 years

Vested or expected to vest at December 31, 2012		3,416,227			0.69

Exercisable at December 31, 2012		3,151,353		$	0.58		3.9 years

The weighted-average grant date fair value for awards granted during the year ended December 31, 2012, was $0.99. Total intrinsic value of the options exercised was approximately $63,000 and $35,000 in the year ended December 31, 2012. The total fair value of shares vested in the years ended December 31, 2012 and 2011, was approximately $332,000 and $182,000 respectively.

During 2012, the Company granted options to certain scientific advisory board members of the Company to purchase 39,000 shares of common stock at an average exercise price of $1.42. There were no options granted during 2011. The options vest ratably over a period of 12 to 24 months. Stock compensation related to these grants will fluctuate with any changes in the underlying value of the Company’s common stock, as the performance period is not fixed.

The unrecognized share-based compensation expense related to employee stock option awards at December 31, 2012, is $285,327 and will be recognized over a weighted-average period of 1.9 years. The unrecognized share-based compensation expense related to employee stock option awards at December 31, 2011, is $259,899 and will be recognized over a weighted-average period of 1.5 years.

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

6. Income Taxes

The provision (benefit) for income taxes consists of:


	December 31
	2012			2011

Current	$	32,921		$	64,834
Deferred		(6,378,456	)		4,359,809
Valuation allowance		6,378,456			(4,359,809	)

Provision (benefit) for income taxes	$	32,921		$	64,834

The deferred tax provision has been entirely offset by a valuation allowance because the Company is currently utilizing the underlying tax benefits generated in previous years. The difference between the amounts of income tax benefit that would result from applying domestic federal statutory tax rates to the net loss relates to certain nondeductible expenses, state income taxes and the valuation allowance.

The Company’s deferred tax assets and liabilities were as follows:


	December 31
	2012			2011
Deferred tax assets:
Net operating loss carryforwards	$	8,418,507		$	1,118,070
Accrued expenses		215,865			416,268
Accrued employee benefits		282,268			259,638
Capitalized research and development costs		27,516			108,138
Research and development credit		1,928,714			1,612,459
Deferred revenue		643,669			1,287,333
Deferred tax liabilities:
Depreciation		130,017			147,165

Net deferred tax asset		11,646,556			4,949,071
Valuation allowance		(11,646,556	)		(4,949,071	)

Net deferred tax asset	$	—		$	—

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

6. Income Taxes (continued)

The net operating loss carryforwards of approximately $21.8 million will begin to expire in the year 2030 if unused. The use of the Company’s net operating loss carryforwards may be restricted due to changes in Company ownership.

7. Collaborations and License Agreements

Takeda Pharmaceutical Company Limited

On February 25, 2011, ITI entered into a license and collaboration agreement with Takeda Pharmaceutical Company Limited (Takeda) to develop and commercialize selective phosphodiesterase type 1 (PDE1) inhibitors, discovered by ITI, for the treatment of cognitive impairment associated with schizophrenia. This agreement is targeted worldwide, but ITI has retained the option to co-promote with Takeda in the United States.

Upon execution of the agreement, Takeda made a nonrefundable payment to the Company. ITI is eligible to receive payments of approximately $500 million in the aggregate upon achievement of certain development milestones and up to an additional $250 million in the aggregate upon achievement of certain sales-based milestones, along with tiered royalty payments based on net sales by Takeda. Takeda will be solely responsible for development, manufacturing and commercialization of PDE1 inhibitors. ITI and Takeda have formed a joint steering committee to coordinate and oversee activities on which the two companies collaborate under the agreement. ITI has the right, but not the obligation, to sit on the joint steering committee. There are no performance, cancellation, termination, or refund provisions in the arrangement that contain material financial consequences to the Company.

The Company evaluates all deliverables within an arrangement to determine whether or not they provide value on a stand-alone basis. The Company identified two deliverables in the arrangement, (1) a license to the Company’s intellectual property, and (2) research and development services (“R&D services”). Based on this evaluation, the deliverables were separated into units of accounting. The arrangement consideration that is fixed or determinable at the inception of the arrangement was allocated to the separate units of accounting based on their relative selling prices. We may exercise significant judgment in determining whether a deliverable is a separate unit of accounting, as well as in estimating the selling prices of such unit of accounting.

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

7. Collaborations and License Agreements (continued)

arrangements were sold on a stand-alone basis. We were not able to establish VSOE or TPE for the deliverables within collaboration and license arrangements, as we do not have a history of entering into such arrangements or selling the individual deliverables within such arrangements separately. In addition, there may be significant differentiation in these arrangements, which indicates that comparable third-party pricing may not be available. We determined that the selling price for the deliverables within collaboration and license arrangements should be determined using BESP. The process for determining BESP involved significant judgment on our part and included consideration of multiple factors such as prices offered by third parties, estimated direct expenses and other costs, and available data. The Company was able to determine the BESP for the license and R&D services, and thus, allocated the consideration in this arrangement based on relative selling price of each deliverable. The revenue allocated to the license was recognized upon the execution of the agreement as Takeda obtained the right to use the license upon execution of the agreement. The revenue for R&D services is being recognized over the estimated service period of 3 years.

During the years ended December 31, 2012 and December 31, 2011, the Company recognized revenue of $3.1 million and $22.3 million under this agreement, respectively. At December 31, 2012 and 2011, $1.7 million and $3.3 million of revenue was deferred under this agreement.

Beginning in 2003, the Company entered into several cooperative agreements and grants with the U.S. Army and the National Institutes of Health. Under these research agreements, the Company uses its patented technology to examine and characterize the effects of various agents and drugs on the signaling pathways in the brain and the biochemical mechanisms associated with various diseases of the brain. These agreements were originally from one to three years in length. The Company has not received any funding from these agreements since 2010. For the years ended December 31, 2012 and 2011, the Company recognized revenue of approximately $0 million and $1.03 million, respectively.

In May 2002, the Company entered into a license agreement (the License) and research agreement with a university. Under the provisions of the License, the Company is entitled to use this organization’s patented technology and other intellectual property relating to diagnosis and treatment of central nervous system disorders.

The License expires upon expiration of the patent rights or 15 years subsequent to the first sale of products developed through this License. The Company is required to make future milestone payments for initiation of clinical trials and approval of a New Drug Application (NDA). Should the Company commercialize the technology related to this License, the Company would be required to make royalty payments, and would also be required to pay fees under any sublicense agreements with third parties.

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

7. Collaborations and License Agreements (continued)

In connection with the License, the Company issued 800,000 shares of common stock to the organization. Upon issuance of the shares, the Company recorded the estimated fair value of the shares issued, approximately $120,000, as research and development expense.

In addition, the Company is required to use at least $1 million annually of its resources for the development and commercialization of the technology until the Company submits a NDA. The Company met its spending requirements in 2012, 2011 and 2010. There were no other payments made or required for the years ended December 31, 2012 and 2011.

In May 2005, the Company entered into a license agreement (the Agreement) with a company for the use of this company’s patented compounds. ITI intends to test and use the compounds in its research and development program as candidates for potential new drugs.

The Agreement expires on the later of 10 years after the first commercial sale of a product developed using the licensed compound or upon expiration of the patent rights. The Company is required to make future milestone payments for commencement of certain clinical trials and filings with the U.S. Food and Drug Administration. Should the Company sell products covered by the Agreement, the Company would be required to make royalty payments. There were no payments under this Agreement for the years ended December 31, 2012 and 2011.

8. Convertible Promissory Notes

In October 2012, the Company entered into an agreement with existing investors to obtain $15.2 million in exchange for convertible promissory notes net of $26,888 of offering costs. The proceeds will be used to finance research studies. The debt plus 6% accrued interest will be converted to 5,051,960 shares at ($3.01/share) of Series D Preferred Stock at the maturity date of October 25, 2013 or later if amended. The Company has amortized fees associated with the debt issuance and the balance remaining as of December 31, 2012 is $16,880.

9. Commitments and Contingencies

The Company currently has operating lease agreements with commitments for $605,000 through 2013 for laboratory and office facilities. Rent expense for the years ended December 31, 2012 and 2011 was $809,332 and $691,823, respectively.

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

10 . Employee Benefit Plan

The Company sponsors a defined contribution 401(k) plan covering all full-time employees. Participants may elect to contribute up to 15% of their annual pre-tax earnings up to the federally allowed maximum limits. The Company makes a matching contribution of 50% on the first 6% of contributions made by participants. Participant and Company contributions vest immediately. During the years ended December 31, 2012 and 2011, the Company recorded matching contribution expense of $79,656 and $76,231, respectively.

11. Subsequent Events

The Company evaluated subsequent events through June 19, 2013, the date these financial statements were issued.

FINANCIAL STATEMENTS

Intra-Cellular Therapies, Inc.

As of June 30, 2013 and December 31, 2012

and for the Three- and Six-Months Ended

June 30, 2013 and 2012

Intra-Cellular Therapies, Inc.

Financial Statements

As of June 30, 2013 and December 31, 2012 and for the

Three- and Six-Months Ended June 30, 2013 and 2012

Contents


Financial Statements

Balance Sheets			1
Statements of Operations			2
Statements of Cash Flows			3
Notes to Financial Statements			4

Intra-Cellular Therapies, Inc.

Balance Sheets


	June 30, 2013			December 31, 2012
	(Unaudited)			(Audited)
Assets
Current assets:
Cash and cash equivalents	$	8,340,347		$	15,645,528
Certificates of deposit		1,958,062			3,500,000
Accounts receivable		275,925			300,429
Prepaid expenses and other current assets		144,678			188,702

Total current assets		10,719,012			19,634,659
Property and equipment, net		56,017			58,266
Other assets		130,755			130,755

Total assets	$	10,905,784		$	19,823,680


Liabilities, redeemable convertible preferred stock, and stockholders’ deficit
Current liabilities:
Accounts payable	$	2,779,212		$	41,608
Accrued liabilities		3,097,887			588,065
Accrued employee benefits		726,261			726,657
Deferred revenue		833,346			1,666,674
Convertible promissory notes		15,289,893			15,173,013

Total current liabilities		22,726,599			18,196,017

Series A redeemable convertible preferred stock		6,903,992			6,755,992
Series B redeemable convertible preferred stock		9,166,871			8,936,955
Series C redeemable convertible preferred stock		15,609,346			15,141,345

Redeemable convertible preferred stock		31,680,209			30,834,292

Stockholders’ deficit:
Common stock, $.001 par value: 30,000 000 shares authorized; 11,668,646 and 11,269,530 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively		11,669			11,270
Additional paid-in capital		1,099,374			1,478,400
Accumulated deficit		(44,612,067	)		(30,696,299	)

Total stockholders’ deficit		(43,501,024	)		(29,206,629	)

Total liabilities and stockholders’ deficit	$	10,905,784		$	19,823,680

See accompanying notes.

Intra-Cellular Therapies, Inc.

Statements of Operations


	Three-Months Ended June 30						Six-Months Ended June 30
	2013			2012			2013			2012
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)

Revenues	$	643,264		$	1,494,730		$	1,241,516		$	2,071,144

Costs and expenses:
Research and development		7,787,901			9,438,445			12,740,161			13,132,693
General and administrative		903,406			1,115,351			1,950,014			2,112,282

Total costs and expenses		8,691,307			10,553,796			14,690,175			15,244,975


Loss from operations		(8,048,043	)		(9,059,066	)		(13,448,659	)		(13,173,831	)
Interest expense		(231,756	)		—			(473,072	)		—
Interest income		2,408			11,243			5,963			23,074
Income taxes		—			(8,230	)		—			(16,460	)

Net loss		(8,277,391	)		(9,056,053	)		(13,915,768	)		(13,167,217	)

Cumulative dividends on convertible preferred stock		(418,056	)		(418,056	)		(836,112	)		(836,112	)

Net loss attributable to common stockholders	$	(8,695,447	)	$	(9,474,109	)	$	(14,751,880	)	$	(14,003,329	)


Net loss per common share:
Basic	$	(0.76	)	$	(0.85	)	$	(1.30	)	$	(1.25	)
Dilutive		(0.76	)		(0.85	)		(1.30	)		(1.25	)

Weighted average number of common shares:
Basic & Dilutive		11,454,034			11,208,990			11,362,540			11,206,221

See accompanying notes.

Intra-Cellular Therapies, Inc.

Statements of Cash Flows


	Six-Months Ended June 30
	2013			2012
	(Unaudited)			(Unaudited)
Operating activities
Net loss	$	(13,915,768	)	$	(13,167,217	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		11,092			28,121
Share-based compensation expense		163,233			151,651
Changes in operating assets and liabilities:
Accounts receivable		24,504			(729,003	)
Prepaid expenses and other assets		85,962			17,191
Accounts payable		2,737,604			5,987,800
Accrued liabilities and employee benefits		2,526,306			(645,575	)
Deferred revenue		(833,328	)		(833,331	)

Net cash used in operating activities		(9,200,395	)		(9,190,363	)

Investing activities
Purchases of investments		—			(1,000,000	)
Maturities of investments		1,500,000			4,200,000
Purchase of property and equipment		(8,843	)		(28,108	)

Net cash provided by investing activities		1,491,157			3,171,892

Financing activities
Proceeds from issuance of convertible promissory notes, net		100,000			—
Proceeds from stock option exercises		194,261			4,767
Proceeds from stock subscription		109,796			—

Net cash provided by financing activities		404,057			4,767


Net decrease in cash and cash equivalents		(7,305,181	)		(6,013,704	)
Cash and cash equivalents at beginning of year		15,645,528			13,693,215

Cash and cash equivalents at end of year	$	8,340,347		$	7,679,511


Cash paid for taxes	$	300		$	8,648

See accompanying notes.

Intra-Cellular Therapies, Inc.

Notes to Financial Statements

June 30, 2013

1. Organization

The Company earns its license and collaboration revenue from its significant partnership with Takeda Pharmaceutical Company Limited (Takeda). In order to further its research projects and support its collaborations, the Company will require additional financing until such time that revenue streams are sufficient to generate consistent positive cash flow from operations. Possible sources of funds are strategic alliances, additional equity offerings, grants and contracts, and research and development funding from third parties.

2. Summary of Significant Accounting Policies

Use of Estimates

Cash and Cash Equivalents

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

Fair Value Measurements

•

Level 1 – Fair value is determined by using unadjusted quoted prices that are available in active markets for identical assets and liabilities.

•

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

The Company has no assets or liabilities that were measured using quoted prices for similar assets and liabilities or significant unobservable inputs (Level 2 and Level 3 assets and liabilities, respectively) as of June 30, 2013 and December 31, 2012. The carrying value of cash held in money market funds of approximately $1.2 million as of June 30, 2013 and December 31, 2012, is included in cash and cash equivalents and approximates market value based on quoted market price or Level 1 inputs.

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

Financial Instruments

The Company considers the recorded costs of its financial assets and liabilities, which consist of cash equivalents, accounts receivable, accounts payable and accrued liabilities, to approximate their fair value because of their relatively short maturities at June 30, 2013 and December 31, 2012. Management believes that the risks associated with its financial instruments are minimal as the counterparties are financial institutions of high credit standing.

Concentration of Credit Risk

Accounts Receivable

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, 2013 and December 31, 2012, as the Company has a history of collecting on all accounts including government agencies and collaborations funding its research.

Property and Equipment

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 360,

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

Revenue Recognition

The Company engages in transactions with delivery of more than one element. Each required deliverable is evaluated to determine whether it qualifies as a separate unit of accounting. For ITI this determination is generally based on whether the deliverable has “stand-alone value” to the customer. The Company adopted accounts for all Multiple-Deliverable Revenue Arrangements (MDRAs) in accordance with ASC 605-25, Revenue Recognition - Multiple Element Arrangements.

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

The Company accounts for milestone revenue in accordance with ASC Topic 605-28, Milestone Method. Under this guidance, we recognize revenue contingent upon the achievement of a substantive milestone in its entirety in the period the milestone is achieved. Substantive milestone payments are recognized upon achievement of the milestone only if all of the following conditions are met:

•

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 our 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.

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

Deferred Revenue

Cash received as prepayment on future services is deferred and recognized as revenue as the services are performed. The Company must remit interest on any deferred revenue related to a governmental agency. As of June 30, 2013 and December 31, 2012, no interest was due as the Company did not have any deferred revenue from a government agency.

Research and Development

Income Taxes

The Company accounts for uncertain tax positions pursuant to ASC 740 (previously included in Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes–an Interpretation of FASB Statement No. 109). Financial statement recognition of a tax position taken or expected to be taken in a tax return is determined based on a more-likely-than-not threshold of that position being sustained. If the tax position meets this threshold, the benefit to be recognized is measured as the tax benefit having the highest likelihood of being realized upon ultimate settlement with the taxing authority. The Company recognizes interest accrued related to unrecognized tax benefits and penalties in the provision for income taxes.

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

Comprehensive Income (Loss)

ASC 220-10, Reporting Comprehensive Income, requires the presentation of the comprehensive income or loss and its components as part of the financial statements if comprehensive income (loss) differs from net income (loss). For the three- and six-months ended June 30, 2013 and the year ended December 31, 2012, the Company’s net loss equals comprehensive loss.

Share-Based Compensation

For all time vesting awards granted, expense is amortized using the straight-line attribution method. For awards that contain a performance condition, expense is amortized using the accelerated attribution method. As share-based compensation expense recognized in the statements of operations for the three- and six-months ended June 30, 2013 and 2012 and the year ended December 31, 2012, is based on share-based awards ultimately expected to vest, it has been reduced for estimated forfeitures.

ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Pre-vesting forfeitures are based on the Company’s historical experience for the three- and six-months ended June 30, 2013 and 2012 the year-ended December 31, 2012, and have not been material.

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

Since the Company had net operating loss carryforwards as of June 30, 2013 and December 31, 2012, no excess tax benefits for the tax deductions related to share-based awards were recognized in the statements of operations.

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

Loss Per Share

Loss per share is calculated under the two-class method under which all earnings (distributed and undistributed) are allocated to each class of common stock and participating securities based on their respective rights to receive dividends. In the event that the Board of Directors shall declare a dividend payable in cash or other property on the then-outstanding shares of common stock, the holders of the Redeemable Preferred Series A, B, and C convertible preferred stock shall be entitled to receive the amount of dividends per share of Preferred Stock that would be payable on the largest number of whole shares of Common Stock into which each share of Preferred Stock could then be converted. Therefore, the Redeemable Preferred Series A, B, and C Preferred Stock are participating securities.

Basic net loss per common share is determined by dividing the net loss allocable to common stockholders 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 allocable to common stockholders 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 the if-converted method is used to determine the dilutive effect of the Company’s Redeemable Preferred Series A, B, and C convertible preferred stock.

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 as of the three- and six- months ended June 30, 2013 and 2012:

Three-Months Ended

June 30

Six-Months Ended

June 30

2013

2012

2013

2012

Series A, B, and C Preferred Stock

13,094,663

13,094,663

13,094,663

13,094,663

Stock options

2,360,333

2,065,513

2,360,000

2,061,135

Convertible promissory notes

5,079,699

—

5,065,015

—

Recently Issued Accounting Pronouncements

In April 2013, the Financial Accounting Standards (FASB) issued Accounting standards Update (ASU) 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which amended interim and annual reporting requirements about accumulated other comprehensive income (AOCI). In interim periods, companies are required to report information about reclassifications out of AOCI and changes in AOCI balances. The provision of ASU 2013-02 became effective for the first quarter of 2013. The adoption of ASU 2103-02 did not have a material effect on the Company’s consolidated results of operations, financial position or liquidity.

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

3. Property and Equipment

Property and equipment consist of the following:


	June 30, 2013			December 31, 2012

Computer equipment	$	94,314		$	92,318
Furniture and fixtures		46,523			42,736
Scientific equipment		2,827,136			2,824,076
Leasehold improvements		319,553			319,553

		3,287,526			3,278,683
Less accumulated depreciation		(3,231,509	)		(3,220,417	)

	$	56,017		$	58,266

Depreciation expense for the three- and six-months ended June 30, 2013 was $4,038, and $11,092 respectively.

4. Share-Based Compensation

Stock options granted under the Plan may be either incentive stock options (ISOs) as defined by the Internal Revenue Code, or non-qualified stock options. The Board of Directors determines who will receive options, the vesting periods (which are generally two to three years) and the exercise prices. Options have a maximum term of ten years. The exercise price of ISOs granted under the Plan must be at least equal to the fair market value of the common stock on the date of grant.

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

4. Share-Based Compensation (continued)

Total stock-based compensation expense, related to all of the Company’s share-based awards to employees, directors and non-employees recognized during three- and six-months ended June 30, 2013 and 2012 was comprised of the following:


	Three-Months Ended June 30				Six-Months Ended June 30
	2013		2012		2013		2012

Research and development	$	31,466	$	22,152	$	58,087	$	42,441
General and administrative		57,697		61,418		105,146		109,210

Total share-based compensation expense	$	89,163	$	83,570	$	163,233	$	151,651

The following table describes the weighted-average assumptions used for calculating the value of options granted during the six-months ended June 30, 2013:


	2013

Dividend yield		0	%
Expected volatility		80	%
Weighted-average risk-free interest rate		1.40	%
Expected term		6.2 years

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

4. Share-Based Compensation (continued)

Information regarding the stock options activity including employees, directors and non-employees as of June 30, 2013, and changes during the period then ended, are summarized as follows:


	Number of Shares			Weighted- Average Exercise Price		Weighted- Average Contractual Life

Outstanding at December 31, 2012 (audited)		3,414,227		$	0.66		4.4 years
Options granted (unaudited)		495,200			1.63		6.2 years
Options exercised (unaudited)		(362,666	)		0.54		2.9 years
Options canceled or expired (unaudited)		(5,334	)		1.49		8.9 years

Outstanding at June 30, 2013 (unaudited)		3,541,427			0.84		4.8 years

Vested or expected to vest at June 30, 2013 (unaudited)		3,541,427			0.84

Exercisable at June 30, 2013 (unaudited)		2,802,318		$	0.65		3.6 years

5. Collaborations and License Agreements

Takeda Pharmaceutical Company Limited

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

5. Collaborations and License Agreements (continued)

The Company evaluates all deliverables within an arrangement to determine whether or not they provide value on a stand-alone basis. Based on this evaluation, the deliverables were separated into units of accounting. The arrangement consideration that is fixed or determinable at the inception of the arrangement was allocated to the separate units of accounting based on their relative selling prices. We may exercise significant judgment in determining whether a deliverable is a separate unit of accounting, as well as in estimating the selling prices of such unit of accounting.

To determine the selling price of a separate deliverable, we use the hierarchy as prescribed in ASC Topic 605-25 based on vendor-specific objective evidence (VSOE), third-party evidence (TPE) or best estimate of selling price (BESP). VSOE is based on the price charged when the element is sold separately and is the price actually charged for that deliverable. TPE is determined based on third-party evidence for a similar deliverable when sold separately and BESP is the price at which we would transact a sale if the elements of collaboration and license arrangements were sold on a stand-alone basis. We were not able to establish VSOE or TPE for the deliverables within collaboration and license arrangements, as we do not have a history of entering into such arrangements or selling the individual deliverables within such arrangements separately. In addition, there may be significant differentiation in these arrangements, which indicates that comparable third-party pricing may not be available. We determined that the selling price for the deliverables within collaboration and license arrangements should be determined using BESP. The process for determining BESP involved significant judgment on our part and included consideration of multiple factors such as estimated direct expenses and other costs, and available data.

During the three- and six-months ended June 30, 2013, the Company recognized revenue of $0.8 million, and $1.6 million under this agreement, respectively. At June 30, 2013 and December 31, 2012, $0.8 million and $1.7 million of revenue was deferred under this agreement.

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

5. Collaborations and License Agreements (continued)

In addition, the Company is required to use at least $1 million annually of its resources for the development and commercialization of the technology until the Company submits a NDA. The Company met its spending requirements in 2012. There were no other payments made or required for the three- and six-months ended June 30, 2013 and 2012 and the year ended December 31, 2012.

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

6. Subsequent events

On August 29, 2013, pursuant to an Agreement and Plan of Merger dated August 23, 2013 (the Merger Agreement) by and among Oneida Resources Corp., a public shell company (Oneida); ITI, Inc., a wholly-owned subsidiary of Oneida (Merger Sub); and the Company, Merger Sub merged with and into the Company, with the Company remaining as the surviving entity and a wholly-owned operating subsidiary of Oneida (the Merger). At the effective time of the Merger (the Effective Time), the name of the Company was changed to ITI, Inc. Immediately following the Effective Time, a newly organized wholly-owned subsidiary of Oneida named “Intra-Cellular Therapies, Inc.” (the Name Change Merger Sub) merged with and into Oneida (the Name Change Merger), with the surviving entity named Intra-Cellular Therapies, Inc. (ITI).

Pursuant to the terms of the Merger Agreement, at the Effective Time, each share of common stock of the Company outstanding immediately prior to the Effective Time and each share of preferred stock of the Company outstanding immediately prior to the Effective Time was exchanged for one-half (1/2) of a share of common stock of ITI. ITI issued 22,134,647 shares of ITI common stock upon such exchange of the outstanding shares of Company common stock and preferred stock. In addition, at the Effective Time, ITI assumed the Company’s 2003 Equity Incentive Plan, as amended (the Plan), and all options to purchase the Company’s common stock then outstanding under the Plan, and such options became exercisable for an aggregate of 1,462,380 shares of ITI common stock. Each such outstanding option that had been granted by the Company under the Plan became exercisable for one-half (1/2) of a share of ITI common stock. At the Effective Time, ITI also assumed the outstanding warrant to purchase shares of Company common stock, and such warrant became exercisable for 1,822 shares of ITI common stock.

Immediately prior to the Merger, on August 29, 2013, the Company sold to accredited investors approximately $60.0 million of its shares of common stock, or 18,889,307 shares at a price of $3.1764 per share (the Private Placement), which included $15,289,893 in principal, plus accrued interest, of the Company’s then outstanding convertible promissory notes (the Notes), which were converted into shares of Company common stock at a price of $3.1764 per share. In connection with the Private Placement, the Company granted the investors in the Private Placement registration rights requiring the Company or any successor to register those shares of Company common stock (which were exchanged in the Merger for shares of ITI common stock,

Intra-Cellular Therapies, Inc.

Notes to Financial Statements (continued)

6. Subsequent events (continued)

along with the rest of the outstanding shares of the Company capital stock, except for dissenting shares) for public resale. The then existing stockholders who agreed to become parties to the registration rights agreement also became entitled to such registration rights, subject to specified differences in the agreement between the rights of new investors and existing stockholders. The existing Second Amended and Restated Investor Rights Agreement, by and among the Company and the investors listed therein, dated as of October 25, 2007, as amended, was terminated at the date of the Merger.

In accordance with ASC 805, “Business Combinations,” the Company is considered the accounting acquirer in the Merger and will account for the transaction as an exchange for one-half (¹/₂) of a share of common stock, because the Company’s stockholders received 100% of the voting rights in the combined entity and the Company’s senior management represents all of the senior management of the combined entity. Consequently, the assets and liabilities and the historical operations that will be reflected in consolidated financial statements of ITI will be those of the Company and will be recorded at their historical cost bases.

Intra-Cellular Therapies, Inc. - FORM 8-K/A - EX-99.1 - October 15, 2013

Attached files

Intra-Cellular Therapies, Inc. Reports