10-Q
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Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM
10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended March 31, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from
                    
to
                    
Commission File Number:
001-36274
 
INTRA-CELLULAR THERAPIES, INC.
(Exact name of registrant as specified in its charter)
 
     
Delaware
 
36-4742850
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
     
430 East 29th Street
New York, New York
 
10016
(Address of principal executive offices)
 
(Zip Code)
 
 
(646)
440-9333
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
         
Title of each class
 
Trading
Symbol(s)
 
Name of each exchange
on which registered
Common Stock
 
ITCI
 
The Nasdaq Global Select Market
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  
    No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  
    No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
 12b-2
of the Exchange Act.
             
Large accelerated filer
 
 
Accelerated filer
 
             
Non-accelerated
 filer
 
 
Smaller reporting company
 
             
 
 
Emerging growth company
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).    Yes  
    No  
As of May 5, 2020, the registrant had 66,450,525 shares of common stock outstanding.
 
 

Table of Contents
Intra-Cellular Therapies, Inc.
Index to Form
10-Q
             
   
1
 
             
Item 1.
     
1
 
             
     
1
 
             
     
2
 
             
     
3
 
             
     
4
 
             
     
5
 
             
     
6
 
             
Item 2.
     
21
 
             
Item 3.
     
31
 
             
Item 4.
     
31
 
         
   
31
 
             
Item 1.
     
31
 
             
Item 1A.
     
31
 
             
Item 2.
     
32
 
             
Item 3.
     
32
 
             
Item 4.
     
32
 
             
Item 5.
     
32
 
             
Item 6.
     
33
 
         
   
34
 
 
 
In this Quarterly Report on Form
10-Q,
the terms “we,” “us,” “our,” and the “Company” mean Intra-Cellular Therapies, Inc. and our subsidiaries. “ITI” refers to our wholly-owned subsidiary ITI, Inc. and “ITI Limited” refers to our wholly-owned subsidiary ITI Limited.
i

Table of Contents
PART I: FINANCIAL INFORMATION
Item 1.
FINANCIAL STATEMENTS
Intra-Cellular Therapies, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
                 
 
March 31,
2020
 
 
December 31,
2019
 
 
(Unaudited)
 
 
 
Assets
 
 
 
 
 
 
Current assets:
 
 
 
   
 
Cash and cash equivalents
 
$
179,593,032
 
  $
107,636,849
 
Investment securities,
available-for-sale
 
 
269,360,926
 
   
116,373,335
 
Restricted cash
 
 
1,400,000
 
   
—  
 
Accounts receivable, net
 
 
1,351,013
 
   
—  
 
Inventory
 
 
1,391,124
 
   
—  
 
Prepaid expenses and other current assets
 
 
7,876,405
 
   
6,313,785
 
                 
Total current assets
 
 
460,972,500
 
   
230,323,969
 
Property and equipment, net
 
 
2,132,987
 
   
2,259,740
 
Right of use assets, net
 
 
18,051,146
 
   
18,252,074
 
Deferred tax asset, net
 
 
—  
 
   
264,609
 
Other assets
 
 
86,084
 
   
86,084
 
                 
Total assets
 
$
481,242,717
 
  $
251,186,476
 
                 
Liabilities and stockholders’ equity
 
 
 
 
 
 
Current liabilities:
 
 
 
   
 
Accounts payable
 
$
10,994,082
 
  $
7,425,024
 
Accrued and other current liabilities
 
 
10,667,765
 
   
16,138,909
 
Lease liabilities, short-term
 
 
3,211,234
 
   
3,187,435
 
Accrued employee benefits
 
 
6,203,283
 
   
9,472,651
 
                 
Total current liabilities
 
 
31,076,364
 
   
36,224,019
 
Lease liabilities
 
 
19,718,023
 
   
19,955,186
 
                 
Total liabilities
 
 
50,794,387
 
   
56,179,205
 
Stockholders’ equity:
 
 
 
   
 
Common stock, $0.0001 par value: 100,000,000 shares authorized; 66,200,761 and 55,507,497 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively
 
 
6,620
 
   
5,551
 
Additional
paid-in
capital
 
 
1,188,095,880
 
   
904,971,772
 
Accumulated deficit
 
 
(757,508,971
)
   
(710,098,369
)
Accumulated comprehensive (loss) gain
 
 
(145,199
)
   
128,317
 
                 
Total stockholders’ equity
 
 
430,448,330
 
   
195,007,271
 
                 
Total liabilities and stockholders’ equity
 
$
481,242,717
 
  $
251,186,476
 
                 
 
 
 
See accompanying notes to these condensed consolidated financial statements.
1

Table of Contents
Intra-Cellular Therapies, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
                 
 
Three Months Ended March 31,
 
 
2020
 
 
2019
 
Revenues
 
 
 
   
 
Product sales, net
 
$
882,516
 
  $
—  
 
Grant revenue
 
 
200,963
 
   
—  
 
                 
Total revenues
 
 
1,083,479
 
   
—  
 
Operating expenses:
 
 
 
   
 
Cost of product sales
 
 
69,311
 
   
—  
 
Research and development
 
 
16,003,326
 
   
24,990,856
 
Selling, general and administrative
 
 
34,096,366
 
   
11,704,984
 
                 
Total operating expenses
 
 
50,169,003
 
   
36,695,840
 
                 
Loss from operations
 
 
(49,085,524
)
   
(36,695,840
)
Interest income
 
 
1,678,203
 
   
1,860,077
 
                 
Loss before provision for income taxes
 
 
(47,407,321
)
   
(34,835,763
)
Income tax expense
 
 
3,281
 
   
—  
 
                 
Net loss
 
$
(47,410,602
)
  $
(34,835,763
)
                 
Net loss per common share:
 
 
 
   
 
Basic & Diluted
 
$
(0.73
)
  $
(0.63
)
Weighted average number of common shares:
 
 
 
   
 
Basic & Diluted
 
 
65,106,103
 
   
55,113,226
 
 
 
 
See accompanying notes to these condensed consolidated financial statements.
2

Table of Contents
Intra-Cellular Therapies, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Loss (Unaudited)
                 
 
Three Months Ended March 31,
 
 
2020
 
 
2019
 
Net loss
 
$
(47,410,602
)
  $
(34,835,763
)
Other comprehensive (loss)
income
:
 
 
 
   
 
Unrealized (loss) gain on investment securities
 
 
(273,516
)
   
600,307
 
                 
Comprehensive loss
 
$
(47,684,118
)
  $
(34,235,456
)
                 
 
 
 
 
 
See accompanying notes to these condensed consolidated financial statements.
3

Table of Contents
Intra-Cellular Therapies, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
                                                 
 
    
Common Stock
   
Additional
Paid-in

Capital
 
 
Accumulated
Deficit
 
 
Accumulated
Comprehensive
Loss
 
 
Total
Stockholders’
Equity
 
 
Shares
 
 
Amount
 
Balance at December 31, 2018
   
54,895,295
    $
5,490
    $
880,753,339
    $
(562,376,191
)   $
(667,757
)   $
317,714,881
 
Exercise of stock options and issuances of restricted stock
   
231,844
     
23
     
31,213
     
—  
     
—  
     
31,236
 
Stock issued for services
   
3,986
     
—  
     
48,549
     
—  
     
—  
     
48,549
 
Share-based compensation
   
—  
     
—  
     
5,055,217
     
—  
     
—  
     
5,055,217
 
Net loss
   
—  
     
—  
     
—  
     
(34,835,763
)    
—  
     
(34,835,763
)
Other comprehensive gain
   
—  
     
—  
     
—  
     
—  
     
600,307
     
600,307
 
                                                 
Balance at March 31, 2019
   
55,131,125
    $
5,513
    $
885,888,318
    $
(597,211,954
)   $
(67,450
)   $
288,614,427
 
                                                 
 
 
 
 
 
 
                                                 
 
    
Common Stock
   
Additional
Paid-in

Capital
 
 
Accumulated
Deficit
 
 
Accumulated
Comprehensive
Income (Loss)
 
 
Total
Stockholders’
Equity
 
 
Shares
 
 
Amount
 
Balance at December 31, 2019
 
 
55,507,497
 
 
$
5,551
 
 
$
904,971,772
 
 
$
(710,098,369
)
 
$
128,317
 
 
$
195,007,271
 
Common shares issued January 2020
 
 
10,000,000
 
 
 
1,000
 
 
 
276,977,186
 
 
 
—  
 
 
 
—  
 
 
 
276,978,186
 
Exercise of stock options and issuances of restricted stock
 
 
689,781
 
 
 
69
 
 
 
589,092
 
 
 
—  
 
 
 
—  
 
 
 
589,161
 
Stock issued for services
 
 
3,483
 
 
 
—  
 
 
 
53,533
 
 
 
—  
 
 
 
—  
 
 
 
53,533
 
Share-based compensation
 
 
—  
 
 
 
—  
 
 
 
5,504,297
 
 
 
—  
 
 
 
—  
 
 
 
5,504,297
 
Net loss
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
(47,410,602
)
 
 
—  
 
 
 
(47,410,602
)
Other comprehensive loss
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
 
 
 
(273,516
)
 
 
(273,516
)
                                                 
Balance at March 31, 2020
 
 
66,200,761
 
 
$
6,620
 
 
$
1,188,095,880
 
 
$
(757,508,971
)
 
$
(145,199
)
 
$
430,448,330
 
                                                 
 
 
 
 
 
 
See accompanying notes to these condensed consolidated financial statements.
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Table of Contents
Intra-Cellular Therapies, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
                 
 
Three Months Ended March 31,
 
 
2020
 
 
2019
 
Cash flows used in operating activities
 
 
 
 
 
 
Net loss
 
$
(47,410,602
)
  $
(34,835,763
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
   
 
Depreciation
 
 
148,802
 
   
101,353
 
Share-based compensation
 
 
5,504,297
 
   
5,055,217
 
Stock issued for services
 
 
53,533
 
   
48,549
 
Amortization of premiums and discounts on investment securities, net
 
 
(298,210
)
   
(356,798
)
Changes in operating assets and liabilities:
 
 
 
   
 
Accounts receivable, net
 
 
(1,351,013
)
 
 
—  
 
Inventory
 
 
(1,391,124
)
 
 
—  
 
Prepaid expenses and other assets
 
 
(1,562,620
)
   
(526,089
)
Long term deferred tax asset, net
 
 
264,609
 
 
 
  
 
Accounts payable
 
 
3,569,058
 
   
(5,386,627
)
Accrued liabilities and other
 
 
(8,740,512
)
   
270,833
 
Lease liabilities, net
 
 
(12,436
)
   
—  
 
                 
Net cash used in operating activities
 
 
(51,226,218
)
   
(35,629,325
)
Cash flows (used in) provided by investing activities
 
 
 
 
 
 
Purchases of investments
 
 
(210,466,633
)
   
(14,327,684
)
Maturities of investments
 
 
57,503,736
 
   
59,136,544
 
Purchases of property and equipment
 
 
(22,049
)
   
(67,193
)
                 
Net cash (used in) provided by investing activities
 
 
(152,984,946
)
   
44,741,667
 
Cash flows provided by financing activities
 
 
 
 
 
 
Proceeds from exercise of stock options
 
 
589,161
 
   
31,236
 
Proceeds of public offering, net
 
 
276,978,186
 
   
—  
 
                 
Net cash provided by financing activities
 
 
277,567,347
 
   
31,236
 
                 
Net increase in cash, cash equivalents, and restricted cash
 
 
73,356,183
 
   
9,143,578
 
Cash, cash equivalents, and restricted cash at beginning of period
 
 
107,636,849
 
   
54,947,502
 
                 
Cash, cash equivalents, and restricted cash at end of period
 
$
180,993,032
 
  $
64,091,080
 
                 
Non-cash
investing and financing activities
 
 
 
 
 
 
Right of use assets under operating leases
 
$
97,234
 
  $
219,703
 
                 
 
 
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows:
                 
 
March 31,
 
 
2020
 
 
2019
 
Cash and cash equivalents
 
$
179,593,032
 
  $
64,091,080
 
Restricted cash
 
 
1,400,000
 
   
—  
 
                 
Total cash, cash equivalents and restricted cash
 
$
180,993,032
 
  $
64,091,080
 
                 
 
 
 
See accompanying notes to these condensed consolidated financial statements.
5

Table of Contents
Intra-Cellular Therapies, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2020
1. Organization
Intra-Cellular Therapies, Inc. (the “Company”), through its wholly-owned operating subsidiaries, ITI, Inc. (“ITI”) and ITI Limited, is a biopharmaceutical company focused on the discovery, clinical development and commercialization of innovative, small molecule drugs that address underserved medical needs primarily in neuropsychiatric and neurological disorders by targeting intracellular signaling mechanisms within the central nervous system (“CNS”). In December 2019, the Company announced that CAPLYTA
TM
(lumateperone) has been approved by the U.S. Food and Drug Administration (“FDA”) for the treatment of schizophrenia in adults (42mg/day). The Company initiated the commercial launch of CAPLYTA in
late
March 2020 and announced that CAPLYTA is available to pharmacies in the United States (U.S.). As used in these Notes to
Condensed Consolidated Financial Statements, “CAPLYTA” refers to lumateperone approved by the FDA for the treatment of schizophrenia in adults, and “lumateperone” refers to, where applicable, CAPLYTA as well as lumateperone for the treatment of indications beyond schizophrenia. Lumateperone is in Phase 3 clinical development as a novel treatment for bipolar depression.
On January 10, 2020, the Company completed a public offering of common stock in which the Company sold 10,000,000 shares of common stock at an offering price of $29.50 per share for aggregate gross proceeds of $295 million. After deducting underwriting discounts, commissions and
 
offering expenses, the net proceeds to the Company were approximately $277 million.
In order to further its commercial activities and research projects and support its collaborations, the Company will require additional financing until such time, if ever, that revenue streams are sufficient to generate consistent positive cash flow from operations. The Company currently projects that its cash, cash equivalents and investments will be sufficient to fund operating expenses and capital expenditures for at least one year from the date that these financial statements are filed with the Securities and Exchange Commission (the “SEC”). Possible sources of funds include public or private sales of the Company’s equity securities, sales of debt securities, the incurrence of debt from commercial lenders, strategic collaborations, licensing a portion or all of the Company’s product candidates and technology and, to a lesser extent, grant funding. On August 30, 2019, the Company filed a universal shelf registration statement on Form
S-3,
which was declared effective by the SEC on September 12, 2019, on which the Company registered for sale up to $350 million of any combination of its common stock, preferred stock, debt securities, warrants, rights and/or units from time to time and at prices and on terms that the Company may determine, which includes up to $75 million of common stock that the Company may issue and sell from time to time, through SVB Leerink LLC acting as its sales agent, pursuant to the sale agreement that the Company entered into with SVB Leerink on August 29, 2019 for the Company’s
“at-the-market”
equity program. In addition, on January 6, 2020, the Company filed an automatic shelf registration statement on Form
S-3
with the SEC, which became effective upon filing, on which the Company registered for sale an unlimited amount of any combination of its common stock, preferred stock, debt securities, warrants, rights, and/or units from time to time and at prices and on terms that the Company may determine, so long as the Company continues to satisfy the requirements of a “well-known seasoned issuer” under SEC rules. These registration statements will remain in effect for up to three years from the respective dates they became effective.
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 GAAP 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.
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Table of Contents
Revenue Recognition
Effective January 1, 2018, the Company adopted FASB ASC Topic 606,
 Revenue from Contracts with Customers
(“ASC Topic 606”). The Company did not generate any product related revenue prior to the three months ended March 31, 2020, and therefore the adoption of ASC Topic 606 did not have an impact to the Company’s financial statements for any prior periods or upon adoption. In accordance with ASC Topic 606, the Company recognizes revenue when the customer obtains control of a promised good or service, in an amount that reflects the consideration that the Company expects to receive in exchange for the good or service. The reported results for the three months ended March 31, 2020 reflect the application of ASC Topic 606.
To determine revenue recognition for arrangements that the Company determines are within the scope of ASC Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to arrangements that meet the definition of a contract under ASC Topic 606, including when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. For a complete discussion of accounting for product sales, see
Product Sales, net
(below).
Product Sales, net
The Company sells CAPLYTA to a limited number of Customers which include a number of national and select regional distributors. These Customers subsequently resell the Company’s products to specialty pharmacy providers, as well as other retail pharmacies and certain medical centers or hospitals. In addition to distribution agreements with Customers, the Company enters into arrangements with health care providers and payers that provide for government mandated and/or privately negotiated rebates, chargebacks, and discounts with respect to the purchase of the Company’s products. As of March 31, 2020, the Company had executed agreements with its Customers in place; however, additional distribution agreements were signed subsequent to the quarter close. The Company recognizes revenue on product sales when the Customer obtains control of the Company’s product, which occurs at a point in time (upon delivery). Product revenues are recorded net of applicable reserves for variable consideration, including discounts and allowances. If taxes should be collected from Customers relating to product sales and remitted to governmental authorities, they will be excluded from revenue.
Reserves for Variable Consideration
Revenues are calculated based on the wholesale acquisition cost that the Company charges to distributors for CAPLYTA less variable consideration for which reserves are established. Components of variable consideration may include trade discounts and allowances, product returns, provider chargebacks and discounts, government rebates, payer rebates, and other incentives, such as voluntary patient assistance, and other allowances that are offered within contracts between the Company and its Customers, payers, and other indirect customers relating to the Company’s sales of its product.
These reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, include estimates that take into consideration a range of possible outcomes which are either considered mo
st
likely or probability-weighted in accordance with the expected value method in ASC Topic 606 for relevant factors such as current contractual and statutory requirements, specific known market events and trends, forecasted customer buying and payment patterns. The Company’s estimates regarding the payer mix for CAPLYTA and historical industry information regarding the payer mix for comparable pharmaceutical products and product portfolios, in particular, historical information related to similar products in their initial launch stages. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the respective underlying contracts after considering whether revenue should be constrained under ASC 606.
The amount of variable consideration which is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period. The Company’s analyses also contemplated application of the constraint in accordance with the guidance, under which it determined a material reversal of revenue would not occur in a future period for the estimates detailed below as of March 31, 2020 and, therefore, the transaction price was not reduced further during the three months ended March 31, 2020. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates, which would affect net product sales and earnings in the period such variances become known.
 
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Table of Contents
Trade Discounts and Allowances
— The Company generally provides Customers with discounts which include incentive fees that are explicitly stated in the Company’s contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized. In addition, the Company compensates (through trade discounts and allowances) its Customers for sales order management, data, and distribution services. However, the Company has determined such services received to date are not distinct from the Company’s sale of products to the Customer and, therefore, these payments have been recorded as a reduction of net sales within the condensed consolidated statements of operations through March 31, 2020, as well as a reduction to trade receivables, net on the condensed consolidated balance sheets.
Product Returns
— Consistent with industry practice, the Company generally offers Customers a limited right of return for product that has been purchased from the Company based on the product’s expiration date, which lapses upon shipment to a patient. The Company estimates the amount of its product sales that may be returned by its Customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized, as well as an accrued expenses and other current liabilities on the condensed consolidated balance sheets. The Company currently estimates product return liabilities using available industry data and its own sales information, including its visibility into the inventory remaining in the distribution channel. The Company has not received any returns to date.
Provider Chargebacks and Discounts
— Chargebacks for fees and discounts to providers represent the estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices charged to Customers who directly purchase the product from the Company. Customers charge the Company for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivables, net. Chargeback amounts are generally determined at the time of resale to the qualified healthcare provider by Customers, and the Company generally issues credits for such amounts within a few weeks of the Customer’s notification to the Company of the resale. Reserves for chargebacks consist of credits that the Company expects to issue for units that remain in the distribution channel inventories at each reporting
period-end
that the Company expects will be sold to qualified healthcare providers, and chargebacks that Customers have claimed, but for which the Company has not yet issued a credit. For the three months ended March 31, 2020, these amounts were not significant.
Government Rebates
— The Company is subject to discount obligations under state Medicaid and Medicare programs. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses and other current liabilities on the condensed consolidated balance sheets. For Medicare, the Company also estimates the number of patients in the prescription drug coverage gap for whom the Company will owe an additional liability under the Medicare Part D program. The Company’s liability for these rebates consists of estimates of claims under these programs for the current quarter, and estimated future claims under these programs that will be made for product that has been recognized as revenue, but which remains in the distribution channel inventories at the end of each reporting period.
Payer Rebates
— The Company contracts with certain private payer organizations, primarily insurance companies and pharmacy benefit managers, for the payment of rebates with respect to utilization of its product. The Company estimates these rebates and records such estimates in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability recorded as an accrued expenses and other current liabilities on the condensed consolidated balance sheets.
Other Incentives
— Other incentives which the Company offers include voluntary patient assistance programs, such as the
co-pay
assistance program, which are intended to provide financial assistance to qualified commercially-insured patients with prescription drug
co-payments
required by payers. The calculation of the accrual for
co-pay
assistance is based on an estimate of claims and the cost per claim that the Company expects to receive associated with product that has been recognized as revenue but remains in the distribution channel inventories at the end of each reporting period. The Company also has a voucher program whereby a patient can receive a prescription at no cost and whereby the Company reimburses the pharmacy for 100% of the sales price of the prescription. The Company estimates the number of claims through vouchers for product that is in the distribution channel inventories and reduces recognized revenue accordingly.
The adjustments are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included as a component of accrued expenses and other current liabilities on the condensed consolidated balance sheets.
Chargebacks, discounts, fees, and returns are recorded as reductions of trade receivables, net on the condensed consolidated balance sheets. Government and other rebates are recorded as a component of accrued expenses and other current liabilities on the condensed consolidated balance sheets.
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Table of Contents
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 condensed consolidated balance sheets.
Investment Securities,
available-for-sale
Investment securities consisted of the following (in thousands):
                                 
 
March 31, 2020
 
 
Amortized
Cost
 
 
Unrealized
Gains
 
 
Unrealized
(Losses)
 
 
Estimated
Fair
Value
 
 
(Unaudited)
 
U.S. Government Agency Securities
  $
86,053
    $
187
    $
(4
)   $
86,236
 
Commercial Paper
   
89,361
     
53
     
(22
)    
89,392
 
Corporate Notes/Bonds
   
94,092
     
120
     
(479
)    
93,733
 
                                 
  $
 
269,506
    $
360
    $
(505
)   $
269,361
 
                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                 
 
December 31, 2019
 
 
Amortized
Cost
 
 
Unrealized
Gains
 
 
Unrealized
(Losses)
 
 
Estimated
Fair
Value
 
U.S. Government Agency Securities
  $
35,462
    $
35
    $
(3
)   $
35,494
 
Certificates of Deposit
   
3,000
     
 
 
     
 
 
     
3,000
 
Commercial Paper
   
39,013
     
10
     
(5
)    
39,018
 
Corporate Notes/Bonds
   
38,770
     
91
     
 
 
     
38,861
 
                                 
  $
 
116,245
    $
136
    $
(8
)   $
116,373
 
                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Company has classified all of its investment securities
available-for-sale,
including those with maturities beyond one year, as current assets on the condensed consolidated balance sheets based on the highly liquid nature of the investment securities and because these investment securities are considered available for use in current operations. As of March 31, 2020, and December 31, 2019, the Company held $91.3 million and $3.0 million, respectively, of
available-for-sale
investment securities with contractual maturity dates more than one year and less than two years.
The Company monitors its investment portfolio for overall risk, specifically credit risk loss, quarterly or more frequently if circumstances warrant. The Company would estimate the expected credit loss over the lifetime of the asset and record an allowance for the portion of the amortized cost basis of the financial asset that the Company does not expect to collect.
At March 31, 2020, the Company had 28 securities in an unrealized loss position and at December 31, 2019 the Company had six securities in an unrealized loss position. The aggregate related fair value of investments with unrealized losses as of March 31, 2020 was $113.4 million, which consisted of $16.7 million from U.S. Government agency securities, $26.7 million of Commercial paper, and $69.9 million of Corporate notes/bonds. The aggregate amount of unrealized losses as of March 31, 2020 was approximately $520,000, which consisted of $4,000 from U.S. Government agency securities, $22,000 from Commercial paper, and $494,000 from Corporate notes/bonds. Of the $113.4 million, $106.6 million has been held in a continuous unrealized loss position for less than 12 months and $6.8 million has been held in a continuous loss position for 12 months or longer. The total continuous unrealized loss for investments held for 12 months or longer is approximately $1,000 as of March 31, 2020. As of December 31, 2019, the Company had approximately $29.6 million of investments with a continuous unrealized loss for 12 months or longer of which approximately $12.5 million have been held in a continuous loss position for 12 months or longer.
The Company reviewed all of the investments which were in a loss position at the respective balance sheet dates, as well as reviewed the remainder of the portfolio. The Company has analyzed the unrealized losses and determined that market conditions were the primary factor driving these changes. After analyzing the securities in an unrealized loss position, the portion of these losses that relate to changes in credit quality is insignificant.
 
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Table of Contents
Fair Value Measurements
The Company applies the fair value method under ASC Topic 820,
Fair Value Measurements and Disclosures
. ASC Topic 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 Topic 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 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, 2020 and December 31, 2019. The carrying value of money market funds of approximately $85.0 million as of March 31, 2020 and $49.9 million as of December 31, 2019 is included in cash and cash equivalents and approximates market value based on quoted market prices or Level 1 inputs. The carrying value of
c
ertificates of deposit of approximately $58.3 million and $47.6 million as of March 31, 2020 and December 31, 2019, respectively, is included in cash and cash equivalents and approximates market value based on quoted market prices or Level 2 inputs.
The carrying value of commercial paper of approximately $3.0 million as of December 31, 2019 is included in cash and cash equivalents and approximates market value based on quoted market prices or Level 2 inputs.
 
T
he carrying value of commercial paper of approximately $
12.0
 million and the carrying value of U.S. Government Agency Securities of approximately $
20.0
 million as of March 31, 2020
are
included in cash and cash equivalents and approximates market value based on quoted market prices or Level 2 inputs.
The fair value measurements of the Company’s cash equivalents and
available-for-sale
investment securities are identified in the following tables (in thousands):
 
 
 
Fair Value Measurements at
Reporting Date Using
 
 
   March 31,  
2020
 
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
 
Significant
Other
Observable
Inputs
(Level 2)
 
 
Significant
Unobservable
Inputs
(Level 3)
 
Money Market Funds
  $
84,966
    $
84,966
    $
—  
    $
—  
 
U.S. Government Agency Securities
   
106,235
     
—  
     
106,235
     
—  
 
Certificates of Deposit
   
58,254
     
—  
     
58,254
     
—  
 
Commercial Paper
   
101,387
     
—  
     
101,387
     
—  
 
Corporate Notes/Bonds
   
93,733
     
—  
     
93,733
     
—  
 
Restricted Cash
 
 
1,400
 
 
 
1,400
 
 
 
 
 
 
 
 
 
 
 
                                 
  $
445,975
    $
86,366
    $
359,609
    $
—  
 
                                 
 
10

Table of Contents
 
 
 
Fair Value Measurements at
Reporting Date Using
 
 
December 31,
2019
 
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
 
Significant
Other
Observable
Inputs
(Level 2)
 
 
Significant
Unobservable
Inputs
(Level 3)
 
Money Market Funds
  $
49,882
    $
49,882
    $
—  
    $
—  
 
U.S. Government Agency Securities
   
35,494
     
—  
     
35,494
     
—  
 
Certificates of Deposit
   
50,622
     
—  
     
50,622
     
—  
 
Commercial Paper
   
42,015
     
—  
     
42,015
     
—  
 
Corporate Bonds/Notes
   
38,861
     
—  
     
38,861
     
—  
 
                                 
  $
216,874
    $
49,882
    $
166,992
    $
—  
 
                                 
Financial Instruments
The Company considers the recorded costs of its financial assets and liabilities, which consist of cash equivalents, restricted cash, prepaid expenses, other assets, accounts payable, accrued liabilities, accrued employee benefits and lease liabilities, short-term, to approximate their fair value because of their relatively short maturities at March 31, 2020 and December 31, 2019. 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.
Accounts Receivable, net
The Company’s accounts receivable, net, primarily arise from product sales. They are generally stated at the invoiced amount and do not bear interest. Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established and which result from wholesaler rebates chargebacks, prompt pay discounts,
co-pay
assistance and distribution fees.
The Company monitors the financial performance and creditworthiness of its customers so that it can properly assess and respond to changes in the customers’ credit profiles. Of the first quarter 2020 sales, 96% were generated from three major industry wholesalers. 
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist of accounts receivable, net from customers and cash, cash equivalent and investments held at financial institutions. For the quarter ended March 31, 2020, the majority of the Company’s accounts receivable, net arose from product sales in the U.S. and all customers have standard payment terms which generally require payment within 90 days. Three
 
individual customers accounted for approximately 61.4%, 18% and 17% of product sales for the quarter ended March 31, 2020. As of March 31, 2020, the Company believes that such customers are of high credit quality.
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.
Restricted Cash
Restricted cash is collateral used under the letter of credit arrangement for the vehicle lease agreement. The Company adopted ASU No.
 2016-18,
Restricted Cash (“ASU
2016-18”)
and now includes restricted cash balances within the cash, cash equivalents and restricted cash balance on the statement of cash flows.
 
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Inventory
The Company values its inventories at the lower of cost or estimated net realizable value. The Company determines the cost of its inventories, which includes amounts related to materials and manufacturing overhead, on a
first-in,
first-out
(“FIFO”) basis. The Company performs an assessment of the recoverability of capitalized inventory during each reporting period, and it writes down any excess and obsolete inventories to their estimated net realizable value in the period in which the impairment is first identified. Such impairment charges, if they occur, are recorded within cost of product sales.
The Company capitalizes inventory costs associated with the Company’s products after regulatory approval when, based on management’s judgment, future commercialization is considered probable and the future economic benefit is expected to be realized. Inventory acquired and manufactured prior to receipt of regulatory approval of a product candidate is expensed as research and development expense as incurred. Inventory that can be used in either the production of clinical or commercial product is expensed as research and development expense when selected for use in a clinical manufacturing campaign.
Shipping and handling costs for product shipments to customers are recorded as incurred in cost of product sales along with costs associated with manufacturing the product, and any inventory write-downs. Royalties due to Bristol-Myers Squibb Company (“BMS”) under the Company’s licensing agreement are included in cost of product sales.
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
. 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, in which case management must determine the fair value of the underlying asset. No such impairment losses have been recognized to date.
Cost of Product Sales
Our cost of product sales relates to sales of CAPLYTA. Cost of product sales primarily includes product royalty fees, overhead, and direct costs (inclusive of material, shipping, and manufacturing costs). Cost of product sales were approximately $69,000 and $0 for the three months ended March 31, 2020, and March 31, 2019, respectively
,
as there were no sales in 2019.
For the product royalty fees, the Company entered into an exclusive License Agreement with Bristol-Myers Squibb Company (“BMS”), for which the Company is obliged to make tiered single digit percentage royalty payments ranging between 59% on sales of licensed products. The related royalties are recorded within cost of product sales on the statement of operations. 
Prior to FDA approval of CAPLYTA, the Company recorded $17.5 million of costs associated with the manufacturing of lumateperone as part of research and development expenses
between
2017 
a
nd 2019. From December 20, 2019, the date of approval of CAPLYTA, through December 31, 2019 there was no production and no inventory costs were incurred.
Therefore, at December 31, 2019, no inventory costs had been capitalized. The cost of product sales in the three months ended March 31, 2020 are lower than incurred because of previously expensed inventory.
Research and Development, Including Clinical Trial Expenses
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, among other factors. 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.
 
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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 various clinical information provided by vendors and discussion with applicable personnel and external 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, 2020 and 2019, there were no material adjustments to the Company’s prior year 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
). 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.
The Company’s effective tax rate for the three months ended March 31, 2020 and 2019 was approximately 0%. 
This effective tax rate 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 more-likely than not to recognize a future tax benefit.
On March 27, 2020, the United States enacted The
Coronavirus
Aid, Relief and Economic Security (CARES) Act which includes several significant business tax provisions that, among other things, would eliminate the taxable income limit for certain net operating losses (NOL) and allow businesses the option to carry back NOLs arising in 2018, 2019, and 2020 to the five prior tax years; accelerate refunds of previously generated corporate Alternative Minimum Tax (AMT) credits; generally loosen the business interest limitation under section 163(j) from 30 percent to 50 percent for years 2019 and 2020; and fix the “retail glitch” for qualified improvement property in the 2017 tax code overhaul known informally as the Tax Cuts and Jobs Act (TCJA, P.L.
115-97).
Other technical corrections are also included in these tax provisions. The measure also adds an employee retention credit to encourage employers to maintain headcounts even if employees cannot report to work because of issues related to the
coronavirus
, a temporary provision allowing companies to defer remitting to the government the employee share of some payroll taxes, among other things. The Company reviewed the provisions and does not expect there to be a material tax impact on our financial statements for the period ending Mach 31, 2020. In particular, the Company reclassified its deferred tax asset related to the AMT tax credit
carryforward
of $265,000 to a current tax receivable as it anticipates receiving the refund upon the filing of its tax return for year ended December 31, 2019 as opposed to over the next few calendar years.
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Comprehensive Income (Loss)
All components of comprehensive income (loss), including net income (loss), are reported in the financial statements in the period in which they are incurred. Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from
non-owner
sources. In accordance with accounting guidance, the Company presents the impact of any unrealized gains or (losses) on its investment securities in a separate statement of comprehensive income (loss) for each period.
Share-Based Compensation
Share-based payments are accounted for in accordance with the provisions of ASC Topic 718,
Compensation—Stock Compensation
. 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 awards granted with time based vesting conditions, expense is amortized using the straight-line attribution method. Share-based compensation expense recognized in the statements of operations for the three months ended March 31, 2020 and 2019 accounts for forfeitures as they occur.
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 for quarterly periods prior to December 31, 2019 were 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. In the fourth quarter of 2019, expected volatility rates are based entirely on the historical volatility of 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.
In the first quarter of each fiscal year beginning in 2016, 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”) to the FDA for
 
lumateperone for the treatment of schizophrenia, (ii) the approval of the NDA by the FDA (together, the “Milestone RSUs”) and (iii) the achievement of certain comparative shareholder returns against the Company’s peers (the “TSR RSUs”). The Milestone RSUs related to the NDA submission has been fully amortized through December 31, 2018. The NDA submission milestone was achieved in the third quarter of 2018, so the Milestone RSUs related to the NDA submission vested on December 31, 2018. The Milestone RSU’s related to the NDA approval was achieved in the fourth quarter of 2019, so the RSU’s vested on December 31, 2019. The amortization of the expenses for Milestone RSUs related to the approval of the NDA was fully amortized on December 31, 2019. The TSR RSUs were valued using the Monte Carlo Simulation method and were amortized over the life of the RSUs based on the agreements which vested on January 24, 2020.
In the first quarter of 2020, the Company granted 86,000 shares performance-based RSUs, which vest based on the achievement of certain milestones that include (i) the approval of a planned NDA by the FDA and (ii) the achievement of certain comparative shareholder returns against the Company’s peers (the “2020 TSR RSUs”). The 2020 TSR RSUs were valued using the Monte Carlo Simulation method and will be amortized over the life of the RSUs based on the agreements.
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 is considered to be a deductible difference in applying ASC Topic 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.
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Since the Company had net operating loss carryforwards as of March 31, 2020 and 2019, no excess tax benefits for the tax deductions related to share-based awards were recognized in the condensed consolidated statements of operations.
Equity instruments issued to
non-employees
for services are accounted for under the provisions of ASC Topic 718 and ASC Topic
505-50,
Equity/Equity-Based Payments to Non-Employees
. Accordingly, the estimated fair value of the equity instrument is recorded on the earlier of the performance commitment date or the date the required services are completed and are marked to market during the service period.
In June 2018, the Company’s stockholders approved the Company’s 2018 Equity Incentive Plan pursuant to which 4,750,000 additional shares of common stock were reserved for future equity grants.
In December 2019, the Company adopted the Intra-Cellular Therapies, Inc. 2019 Inducement Award Plan (the “2019 Inducement Plan”) without stockholder approval pursuant to Rule 5635(c)(4) of the Nasdaq Listing Rules. Pursuant to the 2019 Inducement Plan, the Company may grant stock options, RSUs, stock awards and other stock-based awards for up to a total of 1,000,000 shares of common stock to new employees of the Company. As of March 31, 2020, stock options and RSUs for 314,138 shares have been granted under the 2019 Inducement Plan.
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 could be anti-dilutive as applied to the loss from operations for the three months ended March 31, 2020 and 2019:
                 
 
Three Months Ended
March 31,
 
 
2020
 
 
2019
 
Stock Options
   
6,408,389
     
6,012,069
 
RSUs
   
1,695,397
     
1,296,634
 
TSR RSUs
   
86,044
     
269,129
 
 
 
 
 
 
 
 
Recently Issued Accounting Standards
In June 2016, the FASB issued ASU No.
 2016-13,
“Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU
2016-13”).
This guidance applies to all entities and impacts how entities account for credit losses for most financial assets and other instruments. For
available-for-sale
debt securities, entities will be required to recognize an allowance for credit losses rather than a reduction to the carrying value of the asset. For trade receivables, loans and
held-to-maturity
debt securities, entities will be required to estimate lifetime expected credit losses. The Company adopted this standard on January 1, 2020. The Company evaluated the implications of the new standard, inclusive of the applicable financial statement disclosures required, as well as to its internal controls, business processes, and accounting policies, noting there was no significant impact to the financial statements as of January 1, 2020 and for the three-month period ended March 31, 2020.
3. Revenue
On December 20, 2019, the FDA approved CAPLYTA for the treatment of schizophrenia in adults. Subsequent to receiving FDA approval, the Company entered into its initial contracts with a limited number of Customers to distribute CAPLYTA. These contracts will be accounted for under ASC Topic 606, which was adopted in a prior period. Under ASC Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to be entitled in exchange for those goods or services. 
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To date, the Company’s only source of product sales has been from the U.S. sales of CAPLYTA, which it began shipping to Customers in March 2020. The product sales, net for the quarter ended March 31, 2020
were $
882,516
.
 
4. Inventory
Inventory consists of the following:
         
 
March 31,
2020
 
Raw materials
  $
 
Work in process
   
1,250,025
 
Finished goods
   
141,099
 
         
Total inventories
  $
1,391,124
 
         
 
 
 
 
 
 
 
 
Inventory acquired prior to receipt of the FDA approval on December 20, 2019 for CAPLYTA was expensed as research and development expense as incurred. No inventory was produced from the FDA approval date through the end of 2019; therefore, no inventory was capitalized on the consolidated balance sheet as of December 31, 2019.
5. Property and Equipment
Property and equipment consist of the following:
                 
 
March 31,
2020
 
 
December 31,
2019
 
Computer equipment
 
$
243,532
 
  $
243,532
 
Furniture and fixtures
 
 
423,097
 
   
423,097
 
Scientific equipment
 
 
3,883,276
 
   
3,861,227
 
Leasehold improvements
 
 
1,240,315
 
   
1,240,315
 
                 
 
5,790,220
 
 
5,768,171
 
Less accumulated depreciation
 
 
(3,657,233
)
   
(3,508,431
)
                 
 
$
2,132,987
 
  $
2,259,740
 
                 
 
 
 
 
 
 
 
 
Depreciation expense for the three months ended March 31, 2020 and 2019 was $148,802 and $101,353, respectively.
6. Right of Use Assets and Lease Liabilities
Real Estate Leases
In 2014, the Company entered into a long-term lease with a related party which, as amended, provided for a lease of useable laboratory and office space located in New York, New York. A member of the Company’s board of directors is the Executive Chairman of the parent company to the landlord under this lease. Concurrent with this lease, the Company entered into a license agreement to occupy certain vivarium related space in the same facility for the same term and rent escalation provisions as the lease. This license has the primary characteristics of a lease and is characterized as a lease in accordance with ASU
2016-02
for accounting purposes. In September 2018, the Company further amended the lease to obtain additional office space beginning October 1, 2018 and to extend the term of the lease for previously acquired space. The lease, as amended, has a term of 14.3 years ending in May 2029. In February 2019, the Company entered into a long-term lease for office space in Towson, Maryland beginning March 1, 2019. The lease has a term of 3.2 years ending in April 2022 and includes limited rent abatement and escalation provisions.
In adopting ASU
2016-02
as of January 1, 2019, the Company elected the package of practical expedients, which permit the Company not to reassess under the new standard the historical lease classification. The Company made an accounting policy election to keep leases with an initial term of 12 months or less off of the condensed consolidated balance sheets. The Company also elected the lessee component election, allowing the Company to account for the lease and
non-lease
components as a single lease component. In determining whether a contract contains a lease, asset and service agreements are assessed at onset and upon modification for criteria of specifically identified assets, control and economic benefit. The Company recognized those lease payments in the consolidated statements of operations on a straight-line basis over the lease term. The Company uses the rate implicit in the contract whenever possible when determining the applicable discount rate. As the majority of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. On the lease commencement dates, the Company estimated the lease liabilities and the right of use assets at present value using its applicable incremental borrowing rates of its two long-term leases of 7.2% for the Company’s
 
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Maryland lease of 3.2 years and 9.1% for the Company’s New York leases of 14.3 years. On January 1, 2019, upon adoption of ASU
2016-02,
the Company recorded right of use assets of approximately $20.2 million, lease liabilities of $23.4 million and eliminated deferred rent of $3.2 million. At the execution of the Maryland lease in 2019, the Company recorded a right of use asset and a lease liability of $0.2 million, which represented a
non-cash
transaction.
Maturity analysis under the lease agreements are as follows:
         
Nine months ending December 31, 2020
  $
2,515,636
 
Year ending December 31, 2021
   
3,448,323
 
Year ending December 31, 2022
   
3,491,166
 
Year ending December 31, 2023
   
3,566,466
 
Year ending December 31, 2024
   
3,675,196
 
Thereafter
   
17,627,041
 
         
Total
   
34,323,828
 
Less: Present value discount
   
(11,488,613
)
         
Total Lease liability
  $
22,835,215
 
         
Less: Current portion
   
(3,211,234
)
         
Long-term lease liabilities
  $
19,623,981
 
         
 
 
 
 
 
 
 
Lease expense for the three months ended March 31, 2020 and 2019 was approximately $818,000 and $830,000, respectively.
Vehicle Fleet Lease
On May 17, 2019, the Company entered into an agreement (the “Vehicle Lease”) with a company (the Lessor) to acquire motor vehicles for certain employees. The Vehicle Lease provides for individual leases for the vehicles, which at each lease Commencement was determined to qualify for operating lease treatment. The Company began leasing vehicles under the Vehicle Lease in March 2020.
The contractual period of each lease is 12 months, followed by
month-to-month
renewal periods. The Company estimates the lease term for each vehicle to be 30 months based on industry standards. The lease permits either party to terminate the lease at any time via written notice to the other party. The Company neither acquires ownership, nor has the option to purchase the vehicles
at
any time. The Company is required to maintain an irrevocable $1.4 million letter of credit that the Lessor may draw upon in the event the Company defaults on the Vehicle Lease. The $1.4 million was recorded as restricted cash on the condensed consolidated balance sheet.
The nature of the lease is one commonly referred to as “TRAC” lease, as it contains a terminal rental adjustment clause, or “TRAC” clause.” The TRAC clause limits lessee
exposure, or likelihood of having a variable lease payment
due at lease termination. This variable lease payment amount would be any difference between the vehicle stipulated (capitalized) cost and the sum of the reserve and net proceeds from disposal as described in the Vehicle Lease. Further, the Lessor guarantees that the net proceeds will not be less than 20% of the vehicle capitalized cost in the first 12 months, and 30% of the vehicle capitalized cost at the beginning of subsequent
12-month
period increments.
Right of use asset and lease liability for the vehicle fleet lease were approximately $94,042 and $94,042, respectively, as of March 31, 2020 which represented a
non-cash
transaction. The operating cash outflows related to vehicle fleet operating lease obligations for the quarter ended March 31, 2020 were $3,335.
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Table of Contents
The following table presents the Vehicle Lease balances within the condensed consolidated balance sheet, weighted average remaining fleet lease term, and the weighted average discount rates related to the Vehicle Lease as of March 31, 2020:
                 
Lease Assets and Liabilities – Fleet
 
Classification
 
March 31,
2020
 
Assets
 
 
 
 
Right of use assets, net
 
Operating lease right of use assets
 
 
 
 
 
 
 
 
$
94,042
 
             
 
  $
94,042
 
Liabilities
 
 
 
 
Current
 
   
 
Lease liabilities, short-term
 
Operating lease liabilities
  $
 
Non-Current
 
   
 
Lease liabilities
 
Non-current
operating lease liabilities
   
94,042
 
             
Total lease liabilities
 
  $
94,042
 
Weighted average remaining lease term
 
   
2.4 years
 
Weighted average discount rate
 
   
1.80
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The following table presents the maturity of the Company’s fleet lease liability as of March 31, 2020:
         
Nine months ending December 31, 2020
  $
20,555
 
Year ending December 31, 2021
   
27,407
 
Year ending December 31, 2022
   
49,797
 
Year ending December 31, 2023
   
—  
 
Year ending December 31, 2024
   
—  
 
Thereafter
   
—  
 
         
Total
   
97,759
 
Less: Present value discount
   
(3,717
)
         
Total operating lease liabilities
  $
94,042
 
         
Less: Current portion
   
—  
 
         
Long-term lease liabilities
  $
 
 
94,042
 
         
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Right of use assets and lease liabilities for operating leases were approximately $18.1 million and $22.9 million, respectively, as of March 31, 2020.
7. Share-Based Compensation
On June 18, 2018, the Company’s stockholders approved the 2018 Equity Incentive Plan (the “2018 Plan”). The 2018 Plan provides for the granting of stock-based awards, such as stock options, restricted common stock, RSUs and stock appreciation rights to employees, directors and consultants as determined by the Board of Directors. The 2018 Plan replaced the Company’s Amended and Restated 2013 Equity Incentive Plan (the “2013 Plan”). The Company will grant no further stock options or other awards under the 2013 Plan. Any options or other awards outstanding under the 2013 Plan remain outstanding in accordance with their terms and the terms of the 2013 Plan. In December 2019, the Company adopted the 2019 Inducement Plan for the grant of equity awards of up to 1,000,000 shares of common stock to newly hired employees.
As of December 31, 2019, the total number of shares reserved under all equity plans was 11,287,390 and the Company had 2,208,317shares available for future issuance under the 2018 Plan and the 2019 Inducement Plan. Stock options granted under the 2018 Plan and the 2019 Inducement Plan may be either incentive stock options (“ISOs”) as defined by the Code, or
non-qualified
stock options. The Board of Directors determines who will receive options, the vesting periods (which are generally one to three years) and the exercise prices of such options. Options have a maximum term of 10 years. The exercise price of ISOs granted under the 2018 Plan and the 2019 Inducement Plan must be at least equal to the fair market value of the common stock on the date of grant.
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Total stock-based compensation expense related to all of the Company’s share-based awards, including stock options and RSUs to employees, directors and consultants, recognized during the three months ended March 31, 2020 and 2019, was comprised of the following:
                 
 
Three Months Ended
March 31,
 
 
2020
 
 
2019
 
Inventoriable costs
 
$
293,384
 
  $
—  
 
Research and development
 
 
2,006,855
 
   
2,407,644
 
General and administrative
 
 
3,204,058
 
   
2,647,573
 
                 
Total share-based compensation expense
 
$
5,504,297
 
  $
5,055,217
 
                 
 
 
 
 
 
 
 
 
 
The following table describes the weighted-average assumptions used for calculating the value of options granted during the three months ended March 31, 2020 and 2019:
                 
 
2020
 
 
2019
 
Dividend yield
 
 
0
%
   
0
%
Expected volatility
 
 
91.6-92.5
%
   
85.7
%
Weighted-average risk-free interest rate
 
 
1.42
%
   
2.52
%
Expected term (in years)
 
 
6.0
 
   
6.0
 
 
 
 
 
 
 
 
 
 
Information regarding stock option awards under the 2019 Inducement Plan, including with respect to grants to employees as of March 31, 2020, and changes during the three-month period then ended, are summarized as follows:
                         
 
Number
of
Shares
 
 
Weighted-
Average
Exercise
Price
 
 
Weighted-
Average
Contractual
Life
 
Outstanding at December 31, 2019
   
    $
     
 
Options granted in 2020
   
39,728
    $
17.18
     
10.0 years
 
                         
Outstanding at March 31, 2020
   
39,728
    $
17.18
     
10.0 years
 
                         
Vested or expected to vest at
March 31, 2020
   
39,728
    $
17.18