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Intra-Cellular Therapies, Inc.
false
Smaller Reporting Company
2013
10-Q
2013-09-30
0001567514
--12-31
Q3
<div>
<p style="MARGIN-TOP: 18pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>4. Share-Based Compensation</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
At the Effective Time of the Merger, the Company assumed all stock
options then outstanding under ITI’s 2003 Equity Incentive
Plan (the 2003 Plan). The 2003 Plan provided 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 2003 Plan
expired by its terms in July 2013 and no new awards may be granted.
As of September 30, 2013, the only outstanding awards under
the 2003 Plan were options to purchase 1,462,380 shares of common
stock.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
Stock options granted under the 2003 Plan may be either incentive
stock options (ISOs) as defined by the Internal Revenue Code of
1986, as amended (the Code), or non-qualified stock options. The
Board of Directors determined who received options as well as the
vesting periods (which are generally two to three years) and
exercise prices of options. Options have a maximum term of ten
years. The exercise price of ISOs granted under the 2003 Plan must
be at least equal to the fair market value of the common stock on
the date of grant.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
In addition, in August 2013, the Board of Directors approved the
2013 Equity Incentive Plan (the 2013 Plan). The Company expects the
2013 Plan will be effective on November 7, 2013 upon the
effectiveness of stockholder approval of the plan by the
Company’s sole stockholder prior to the Merger. The maximum
number of shares of common stock that may be delivered in
satisfaction of awards under the 2013 Plan is 799,934 shares, plus
up to an additional maximum of 1,462,380 shares which may be issued
solely after the cancellation or expiration of any unexercised
stock options under the 2003 Plan that the Company assumed in the
Merger. In addition, the 2013 Plan contains an
“evergreen” provision, which allows for an annual
increase in the number of shares of common stock available for
issuance under the 2013 Plan on January 1 of each year
commencing on January 1, 2014 and ending upon expiration of
the 2013 Plan. The annual increase in the number of shares shall be
equal to the lesser of: 800,000 shares of common stock; 4% of the
number of shares of common stock outstanding as of such date; and
such lesser number of shares as determined by the Board of
Directors prior to the applicable January 1st date.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
These numbers are subject to adjustment in the event of a stock
split, stock dividend or other change in the Company’s
capitalization. Unless sooner terminated by the Board of Directors
or stockholders, the 2013 Plan will expire 10 years from its date
of effectiveness. Under the 2013 Plan, the Company may grant ISOs,
nonstatutory stock options, restricted stock awards, restricted
stock unit awards, stock appreciation rights and other stock awards
to its employees, directors and consultants. As of
September 30, 2013, no awards have been made under the 2013
Plan.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
Total stock-based compensation expense, related to all of the
Company’s share-based awards to employees, directors and
consultants recognized during three- and nine-months ended
September 30, 2013 and 2012, was comprised of the
following:</p>
<p style="MARGIN-TOP: 0pt; MARGIN-BOTTOM: 0pt; FONT-SIZE: 12pt">
 </p>
<table style="BORDER-COLLAPSE: collapse; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" border="0" cellspacing="0" cellpadding="0" width="92%" align="center">
<tr>
<td width="65%"></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 8pt">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td valign="bottom" colspan="6" align="center">
<p style="MARGIN-TOP: 0pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 8pt" align="center"><b>Three-Months Ended</b></p>
<p style="MARGIN-TOP: 0pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 1pt; FONT-SIZE: 8pt" align="center"><b>September 30</b></p>
</td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td valign="bottom" colspan="6" align="center">
<p style="MARGIN-TOP: 0pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 8pt" align="center"><b>Nine-Months Ended</b></p>
<p style="MARGIN-TOP: 0pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 1pt; FONT-SIZE: 8pt" align="center"><b>September 30</b></p>
</td>
<td valign="bottom"> </td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 8pt">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2013</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2012</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2013</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2012</b></td>
<td valign="bottom"> </td>
</tr>
<tr>
<td height="8"></td>
<td height="8" colspan="4"></td>
<td height="8" colspan="4"></td>
<td height="8" colspan="4"></td>
<td height="8" colspan="4"></td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Research and development</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"><b>$</b></td>
<td valign="bottom" align="right"><b>38,856</b></td>
<td valign="bottom" nowrap="nowrap"><b>  </b></td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">32,200</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"><b>$</b></td>
<td valign="bottom" align="right"><b>96,943</b></td>
<td valign="bottom" nowrap="nowrap"><b>  </b></td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">86,845</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
General and administrative</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"><b> </b></td>
<td valign="bottom" align="right"><b>80,361</b></td>
<td valign="bottom" nowrap="nowrap"><b>  </b></td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">65,261</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"><b> </b></td>
<td valign="bottom" align="right"><b>185,507</b></td>
<td valign="bottom" nowrap="nowrap"><b>  </b></td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">195,784</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Total share-based compensation expense</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"><b>$</b></td>
<td valign="bottom" align="right"><b>119,217</b></td>
<td valign="bottom" nowrap="nowrap"><b>  </b></td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">97,461</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"><b>$</b></td>
<td valign="bottom" align="right"><b>282,450</b></td>
<td valign="bottom" nowrap="nowrap"><b>  </b></td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">282,629</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
</table>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
The following table describes the weighted-average assumptions used
for calculating the value of options granted during the nine-months
ended September 30, 2013:</p>
<p style="MARGIN-TOP: 0pt; MARGIN-BOTTOM: 0pt; FONT-SIZE: 12pt">
 </p>
<table style="BORDER-COLLAPSE: collapse; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" border="0" cellspacing="0" cellpadding="0" width="68%" align="center">
<tr>
<td width="80%"></td>
<td valign="bottom" width="4%"></td>
<td></td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 8pt">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" align="center"><b>2013</b></td>
</tr>
<tr>
<td height="8"></td>
<td height="8" colspan="2"></td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Dividend yield</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom" align="center"><b>0%</b></td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Expected volatility</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom" align="center"><b>80%</b></td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Weighted-average risk-free interest rate</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom" align="center"><b><font style="WHITE-SPACE: nowrap">1.40% - 1.80%</font></b></td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Expected term</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom" align="center"><b>6.2 years</b></td>
</tr>
</table>
<p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px; FONT-SIZE: 1px">
 </p>
<p style="MARGIN-TOP: 0pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
Information regarding the stock options activity including
employees, directors and consultants as of September 30, 2013,
and changes during the period then ended, are summarized
as follows:</p>
<p style="MARGIN-TOP: 0pt; MARGIN-BOTTOM: 0pt; FONT-SIZE: 12pt">
 </p>
<table style="BORDER-COLLAPSE: collapse; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" border="0" cellspacing="0" cellpadding="0" width="84%" align="center">
<tr>
<td width="68%"></td>
<td valign="bottom" width="4%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="4%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="4%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 8pt">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>Number of</b><br />
<b>Shares</b></td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>Weighted-</b><br />
<b>Average</b><br />
<b>Exercise</b><br />
<b>Price</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>Weighted-</b><br />
<b>Average</b><br />
<b>Contractual</b><br />
<b>Life</b></td>
<td valign="bottom"> </td>
</tr>
<tr>
<td height="8"></td>
<td height="8" colspan="4"></td>
<td height="8" colspan="4"></td>
<td height="8" colspan="4"></td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Outstanding at December 31, 2012 (audited)</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">1,707,114</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"> </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">1.3802</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">4.4 years</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 3em; FONT-SIZE: 10pt">
Options granted (unaudited)</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">247,600</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"> </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">3.2600</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">6.2 years</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 3em; FONT-SIZE: 10pt">
Options exercised (unaudited)</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">(489,667</td>
<td valign="bottom" nowrap="nowrap">) </td>
<td valign="bottom"> </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">0.6470</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">1.3 years</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 3em; FONT-SIZE: 10pt">
Options canceled or expired (unaudited)</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">(2,667</td>
<td valign="bottom" nowrap="nowrap">) </td>
<td valign="bottom"> </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">2.9725</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">8.7 years</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Outstanding at September 30, 2013 (unaudited)</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">1,462,380</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"> </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">1.9410</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">5.5 years</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 3em; FONT-SIZE: 10pt">
Vested or expected to vest at September 30, 2013
(unaudited)</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">1,462,380</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"> </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">1.9410</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">5.5 years</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Exercisable at September 30, 2013 (unaudited)</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">1,118,156</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"> </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">1.5801</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">6.9 years</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
</table>
</div>
<div>
<p style="MARGIN-TOP: 18pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>Recently Issued Accounting Pronouncements</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
In April 2013, FASB issued Accounting Standards Update (ASU)
2013-02, <i>Reporting of Amounts Reclassified Out of Accumulated
Other Comprehensive Income,</i> 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.</p>
</div>
<div>
<p style="MARGIN-TOP: 18pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>Share-Based Compensation</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
Share-based payments are accounted for in accordance with the
provisions of ASC Topic 718, <i>Compensation—Stock
Compensation</i>. 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.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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 nine-months
ended September 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.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
ASC Topic 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 nine-months ended September 30, 2013 and 2012 and
the year ended December 31, 2012, and have not been
material.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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, <i>Valuation of Privately-Held-Company Equity
Securities Issued as Compensation</i>.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
Under ASC Topic 718, the cumulative amount of compensation cost
recognized for instruments classified as equity that ordinarily
would result in a future tax deduction under existing tax law shall
be considered to be a deductible difference in applying ASC
Topic 740, <i>Income Taxes</i>. 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.</p>
<p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px; FONT-SIZE: 1px">
 </p>
<p style="MARGIN-TOP: 0pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
Since the Company had net operating loss carryforwards as of
September 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.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
Equity instruments issued to non-employees are accounted for under
the provisions of ASC Topic 718 and ASC Topic 505-50,
<i>Equity/Equity-Based Payments to Non-Employees</i>. 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.</p>
</div>
<div>
<p style="MARGIN-TOP: 18pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>Fair Value Measurements</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
The Company applies the fair value method under ASC Topic 820,
<i>Fair Value Measurements and Disclosures</i>. 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:</p>
<p style="MARGIN-TOP: 0pt; MARGIN-BOTTOM: 0pt; FONT-SIZE: 6pt">
 </p>
<table style="BORDER-COLLAPSE: collapse; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="8%"> </td>
<td valign="top" width="4%" align="left">•</td>
<td valign="top" width="1%"> </td>
<td valign="top" align="left">Level 1—Fair value is
determined by using unadjusted quoted prices that are available in
active markets for identical assets and liabilities.</td>
</tr>
</table>
<p style="MARGIN-TOP: 6px; MARGIN-BOTTOM: 0px; FONT-SIZE: 1px">
 </p>
<table style="BORDER-COLLAPSE: collapse; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="8%"> </td>
<td valign="top" width="4%" align="left">•</td>
<td valign="top" width="1%"> </td>
<td valign="top" align="left">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.</td>
</tr>
</table>
<p style="MARGIN-TOP: 0pt; MARGIN-BOTTOM: 0pt; FONT-SIZE: 6pt">
 </p>
<table style="BORDER-COLLAPSE: collapse; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="8%"> </td>
<td valign="top" width="4%" align="left">•</td>
<td valign="top" width="1%"> </td>
<td valign="top" align="left">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.</td>
</tr>
</table>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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 September 30, 2013 and December 31,
2012. The carrying value of cash held in money market funds of
approximately $21.2 million as of September 30, 2013 and
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.</p>
</div>
<div>
<p style="MARGIN-TOP: 0pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>Revenue Recognition</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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 include strategic alliances, additional equity offerings,
grants and contracts, and research and development funding from
third parties.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
Revenue is recognized when all terms and conditions of the
agreements have been met, including persuasive evidence of an
arrangement, delivery has occurred or services have been rendered,
price is fixed or determinable and collectability is reasonably
assured. The Company is reimbursed for certain costs incurred on
specified research projects under the terms and conditions of
grants, collaboration agreements, and awards. The Company records
the amount of reimbursement as revenues on a gross basis in
accordance with ASC Topic 605-45, <i>Revenue Recognition/Principal
Agent Considerations</i>. 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.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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 the
Company, 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 Topic 605-25,
<i>Revenue Recognition—Multiple Element Arrangements</i>.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
The Company accounts for milestone revenue in accordance with ASC
Topic 605-28, <i>Milestone Method</i>. Under this guidance, the
Company recognizes 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:</p>
<p style="MARGIN-TOP: 0pt; MARGIN-BOTTOM: 0pt; FONT-SIZE: 6pt">
 </p>
<table style="BORDER-COLLAPSE: collapse; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="8%"> </td>
<td valign="top" width="4%" align="left">•</td>
<td valign="top" width="1%"> </td>
<td valign="top" align="left">The milestone payments are
non-refundable;</td>
</tr>
</table>
<p style="MARGIN-TOP: 0pt; MARGIN-BOTTOM: 0pt; FONT-SIZE: 6pt">
 </p>
<table style="BORDER-COLLAPSE: collapse; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="8%"> </td>
<td valign="top" width="4%" align="left">•</td>
<td valign="top" width="1%"> </td>
<td valign="top" align="left">Achievement of the milestone involves
a degree of risk and was not reasonably assured at the inception of
the arrangement;</td>
</tr>
</table>
<p style="MARGIN-TOP: 0pt; MARGIN-BOTTOM: 0pt; FONT-SIZE: 6pt">
 </p>
<table style="BORDER-COLLAPSE: collapse; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="8%"> </td>
<td valign="top" width="4%" align="left">•</td>
<td valign="top" width="1%"> </td>
<td valign="top" align="left">Substantive effort on our part is
involved in achieving the milestone;</td>
</tr>
</table>
<p style="MARGIN-TOP: 0pt; MARGIN-BOTTOM: 0pt; FONT-SIZE: 6pt">
 </p>
<table style="BORDER-COLLAPSE: collapse; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="8%"> </td>
<td valign="top" width="4%" align="left">•</td>
<td valign="top" width="1%"> </td>
<td valign="top" align="left">The amount of the milestone payment
is reasonable in relation to the effort expended or the risk
associated with achievement of the milestone; and</td>
</tr>
</table>
<p style="MARGIN-TOP: 0pt; MARGIN-BOTTOM: 0pt; FONT-SIZE: 6pt">
 </p>
<table style="BORDER-COLLAPSE: collapse; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="8%"> </td>
<td valign="top" width="4%" align="left">•</td>
<td valign="top" width="1%"> </td>
<td valign="top" align="left">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.</td>
</tr>
</table>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
Determination as to whether a payment meets the aforementioned
conditions involves management’s judgment. If any of these
conditions are not met, the resulting payment would not be
considered a substantive milestone, and therefore, the resulting
payment would be considered part of the consideration for the
single unit of accounting and be recognized as revenue in
accordance with the revenue models described above. In addition,
the determination that one such payment was not a substantive
milestone could prevent 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.</p>
</div>
<div>
<p style="MARGIN-TOP: 18pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>5. Collaborations and License Agreements</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>The Bristol-Myers Squibb License Agreement</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
On May 31, 2005 the Company (through its wholly owned
operating subsidiary, ITI) entered into a world-wide, exclusive
License Agreement with Bristol-Myers Squibb Company (BMS), pursuant
to which the Company holds a license to certain patents and
know-how of BMS relating to ITI-007 and other specified compounds.
The agreement was amended on November 3, 2010. The licensed
rights are exclusive, except BMS retains rights in specified
compounds in the fields of obesity, diabetes, metabolic syndrome
and cardiovascular disease. However, BMS has no right to use,
develop or commercialize ITI-007 and other specified compounds in
any field of use. The Company has the right to grant sublicenses of
the rights conveyed by BMS. The Company is obliged under the
license to use commercially reasonable efforts to develop and
commercialize the licensed technology. The Company is also
prohibited from engaging in the clinical development or
commercialization of specified competitive compounds.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
Under the agreement, the Company made an upfront payment of $1.0
million to BMS, and may be obliged to make milestone payments for
each licensed product of up to an aggregate of approximately $14.8
million. The Company is also obliged to make tiered single digit
percentage royalty payments on sales of licensed products. The
Company is obliged to pay to BMS a percentage of non-royalty
payments made in consideration of any sublicense.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
The agreement extends, and royalties are payable, on a
country-by-country and product-by-product basis, through the later
of ten years after first commercial sale of a licensed product in
such country, expiration of the last licensed patent covering a
licensed product, its method of manufacture or use, or the
expiration of other government grants providing market exclusivity,
subject to certain rights of the parties to terminate the agreement
on the occurrence of certain events. On termination of the
agreement, the Company may be obliged to convey to BMS rights in
developments relating to a licensed compound or licensed product,
including regulatory filings, research results and other
intellectual property rights.</p>
<p style="MARGIN-TOP: 18pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>The Takeda License and Collaboration Agreement</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
On February 25, 2011, the Company (through its wholly owned
operating subsidiary, ITI) entered into a license and collaboration
agreement with Takeda Pharmaceutical Company Limited (Takeda) under
which the Company agreed to collaborate to research, develop and
commercialize its proprietary compound ITI-214 and other selected
compounds that selectively inhibit PDE1 for use in the prevention
and treatment of human diseases. As part of the agreement, the
Company assigned to Takeda certain patents owned by the Company
that claim ITI-214 and granted Takeda an exclusive license to
develop and commercialize compounds identified in the conduct of
the research program that satisfy specified criteria. However, the
Company has retained rights to all compounds that do not meet the
specified criteria and the Company continues to develop PDE1
inhibitors outside the scope of the agreement.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
Under the terms of the agreement, the Company is conducting a
research program with an initial term of three years to identify
and characterize compounds that meet certain specified criteria
sufficient for further development by Takeda. The Company is
responsible for the Company’s expenses incurred in the
conduct of certain research activities specified in the research
plan. Takeda has agreed to reimburse the Company for expenses the
Company incurs in conducting additional research activities.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
Takeda is obliged to use commercially reasonable efforts to develop
and commercialize licensed compounds at its expense, and has agreed
to reimburse the Company for the costs and expenses of development
activities the Company may perform. The Company has formed a joint
steering committee with Takeda to coordinate and oversee activities
on which the Company and Takeda collaborate under the agreement.
The Company has the option to co-promote any licensed product in
the United States by assuming responsibility for a certain
percentage of the detailing activity with respect to that
product.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
The Company is responsible for supplying Takeda with ITI-214 for
nonclinical activities and Phase 1 clinical trials at the
Company’s expense. Takeda is responsible, at its expense, for
the manufacture and supply of compounds that it develops and
commercializes under the agreement for all other activities.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
Upon execution of the agreement, Takeda made a nonrefundable
payment to the Company. The Company 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 ranging from the
high single digits to the low teens in percent based on net sales
by Takeda.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
The agreement extends, on a country-by-country and
product-by-product basis, through the later of expiration of the
last licensed patent covering a licensed product, its method of
manufacture or use, the expiration of other government grants
providing market exclusivity or ten years after first commercial
sale of a licensed product in such country, subject to rights of
the parties to sooner terminate the agreement on certain events and
the right of Takeda to unilaterally terminate the agreement upon a
specified number of days’ prior notice. Upon the termination
of the agreement, Takeda is obliged to assign to the Company the
patents covering ITI-214 assigned to Takeda upon the execution of
the agreement, to grant the Company a license to develop and
commercialize licensed compounds developed by Takeda and to
transfer to the Company certain materials, information and
regulatory materials reasonably necessary for us to continue the
development and commercialization of those compounds.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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. The Company 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.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
To determine the selling price of a separate deliverable, the
Company uses the hierarchy as prescribed in ASC Topic 605-25
<i>Revenue Recognition</i> 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 the Company would transact a sale if the elements of
collaboration and license arrangements were sold on a stand-alone
basis. The Company was not able to establish VSOE or TPE for the
deliverables within collaboration and license arrangements, as the
Company does 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. The Company 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.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
During the three- and nine-months ended September 30, 2013,
the Company recognized revenue of $0.7 million, and $1.9 million
under this agreement, respectively. At September 30, 2013 and
December 31, 2012, $0.4 million and $1.7 million of
revenue, respectively, was deferred under this agreement.</p>
<p style="MARGIN-TOP: 18pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>Other License Agreement</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
In connection with the License, the Company issued 400,000 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.</p>
<p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px; FONT-SIZE: 1px">
 </p>
<p style="MARGIN-TOP: 0pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
In addition, the Company is required to use at least
$1.0 million annually of its resources for the development and
commercialization of the technology until the Company submits an
NDA. The Company met its spending requirements in 2012. There were
no other payments made or required for the three- and nine-months
ended September 30, 2013 and 2012 and the year ended
December 31, 2012.</p>
</div>
-2.43
<div>
<p style="MARGIN-TOP: 0pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
Information regarding the stock options activity including
employees, directors and consultants as of September 30, 2013,
and changes during the period then ended, are summarized
as follows:</p>
<p style="MARGIN-TOP: 0pt; MARGIN-BOTTOM: 0pt; FONT-SIZE: 12pt">
 </p>
<table style="BORDER-COLLAPSE: collapse; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" border="0" cellspacing="0" cellpadding="0" width="84%" align="center">
<tr>
<td width="68%"></td>
<td valign="bottom" width="4%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="4%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="4%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 8pt">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>Number of</b><br />
<b>Shares</b></td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>Weighted-</b><br />
<b>Average</b><br />
<b>Exercise</b><br />
<b>Price</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>Weighted-</b><br />
<b>Average</b><br />
<b>Contractual</b><br />
<b>Life</b></td>
<td valign="bottom"> </td>
</tr>
<tr>
<td height="8"></td>
<td height="8" colspan="4"></td>
<td height="8" colspan="4"></td>
<td height="8" colspan="4"></td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Outstanding at December 31, 2012 (audited)</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">1,707,114</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"> </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">1.3802</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">4.4 years</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 3em; FONT-SIZE: 10pt">
Options granted (unaudited)</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">247,600</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"> </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">3.2600</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">6.2 years</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 3em; FONT-SIZE: 10pt">
Options exercised (unaudited)</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">(489,667</td>
<td valign="bottom" nowrap="nowrap">) </td>
<td valign="bottom"> </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">0.6470</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">1.3 years</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 3em; FONT-SIZE: 10pt">
Options canceled or expired (unaudited)</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">(2,667</td>
<td valign="bottom" nowrap="nowrap">) </td>
<td valign="bottom"> </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">2.9725</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">8.7 years</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Outstanding at September 30, 2013 (unaudited)</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">1,462,380</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"> </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">1.9410</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">5.5 years</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 3em; FONT-SIZE: 10pt">
Vested or expected to vest at September 30, 2013
(unaudited)</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">1,462,380</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"> </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">1.9410</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">5.5 years</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Exercisable at September 30, 2013 (unaudited)</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">1,118,156</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"> </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">1.5801</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">6.9 years</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
</table>
</div>
<div>
<p style="MARGIN-TOP: 18pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>Comprehensive Income (Loss)</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
ASC Topic 220-10, <i>Reporting Comprehensive Income</i>, 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
nine-months ended September 30, 2013 and the year ended
December 31, 2012, the Company’s net loss equals
comprehensive loss.</p>
</div>
0.80
<div>
<p style="margin-top:6pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
Property and equipment consist of the following:</p>
<p style="font-size:12pt;margin-top:0pt;margin-bottom:0pt">
 </p>
<table cellspacing="0" cellpadding="0" width="76%" border="0" style="BORDER-COLLAPSE:COLLAPSE; font-family:Times New Roman; font-size:10pt" align="center">
<tr>
<td width="72%"></td>
<td valign="bottom" width="9%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="9%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr style="font-family:Times New Roman; font-size:8pt">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td valign="bottom" colspan="2" align="center" style="border-bottom:1.00pt solid #000000">
<b>September 30,</b><br />
<b>2013</b></td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td valign="bottom" colspan="2" align="center" style="border-bottom:1.00pt solid #000000"><b>December 31,</b><br />
<b>2012</b></td>
<td valign="bottom"> </td>
</tr>
<tr>
<td height="8"></td>
<td height="8" colspan="4"></td>
<td height="8" colspan="4"></td>
</tr>
<tr bgcolor="#CCEEFF" style="font-family:Times New Roman; font-size:10pt">
<td valign="top">
<p style="margin-left:1.00em; text-indent:-1.00em; font-size:10pt; font-family:Times New Roman">
Computer equipment</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"><b>$</b></td>
<td valign="bottom" align="right"><b>93,915</b></td>
<td nowrap="nowrap" valign="bottom"><b>  </b></td>
<td valign="bottom"> </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">92,318</td>
<td nowrap="nowrap" valign="bottom">  </td>
</tr>
<tr style="font-family:Times New Roman; font-size:10pt">
<td valign="top">
<p style="margin-left:1.00em; text-indent:-1.00em; font-size:10pt; font-family:Times New Roman">
Furniture and fixtures</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"><b> </b></td>
<td valign="bottom" align="right"><b>46,523</b></td>
<td nowrap="nowrap" valign="bottom"><b>  </b></td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">42,736</td>
<td nowrap="nowrap" valign="bottom">  </td>
</tr>
<tr bgcolor="#CCEEFF" style="font-family:Times New Roman; font-size:10pt">
<td valign="top">
<p style="margin-left:1.00em; text-indent:-1.00em; font-size:10pt; font-family:Times New Roman">
Scientific equipment</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"><b> </b></td>
<td valign="bottom" align="right"><b>2,851,947</b></td>
<td nowrap="nowrap" valign="bottom"><b>  </b></td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">2,824,076</td>
<td nowrap="nowrap" valign="bottom">  </td>
</tr>
<tr style="font-family:Times New Roman; font-size:10pt">
<td valign="top">
<p style="margin-left:1.00em; text-indent:-1.00em; font-size:10pt; font-family:Times New Roman">
Leasehold improvements</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"><b> </b></td>
<td valign="bottom" align="right"><b>319,553</b></td>
<td nowrap="nowrap" valign="bottom"><b>  </b></td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">319,553</td>
<td nowrap="nowrap" valign="bottom">  </td>
</tr>
<tr bgcolor="#CCEEFF" style="font-family:Times New Roman; font-size:10pt">
<td valign="top"></td>
<td valign="bottom">  </td>
<td valign="bottom"><b> </b></td>
<td valign="bottom" align="right"><b>3,311,938</b></td>
<td nowrap="nowrap" valign="bottom"><b>  </b></td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">3,278,683</td>
<td nowrap="nowrap" valign="bottom">  </td>
</tr>
<tr style="font-family:Times New Roman; font-size:10pt">
<td valign="top">
<p style="margin-left:1.00em; text-indent:-1.00em; font-size:10pt; font-family:Times New Roman">
Less accumulated depreciation</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"><b> </b></td>
<td valign="bottom" align="right"><b>(3,236,238</b></td>
<td nowrap="nowrap" valign="bottom"><b>) </b></td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">(3,220,417</td>
<td nowrap="nowrap" valign="bottom">) </td>
</tr>
<tr bgcolor="#CCEEFF" style="font-family:Times New Roman; font-size:10pt">
<td valign="top"></td>
<td valign="bottom">  </td>
<td valign="bottom"><b>$</b></td>
<td valign="bottom" align="right"><b>75,700</b></td>
<td nowrap="nowrap" valign="bottom"><b>  </b></td>
<td valign="bottom"> </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">58,266</td>
<td nowrap="nowrap" valign="bottom">  </td>
</tr>
</table>
</div>
-2.43
<div>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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 nine- months ended September 30, 2013 and 2012:</p>
<p style="MARGIN-TOP: 0pt; MARGIN-BOTTOM: 0pt; FONT-SIZE: 12pt">
 </p>
<table style="BORDER-COLLAPSE: collapse; FONT-FAMILY: Times New Roman; FONT-SIZE: 8pt" border="0" cellspacing="0" cellpadding="0" width="92%" align="center">
<tr>
<td width="68%"></td>
<td valign="bottom" width="2%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="2%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="2%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="2%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 8pt">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td valign="bottom" colspan="6" align="center">
<p style="MARGIN-TOP: 0pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 8pt" align="center"><b>Three-Months Ended</b></p>
<p style="MARGIN-TOP: 0pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 1pt; FONT-SIZE: 8pt" align="center"><b>September 30</b></p>
</td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td valign="bottom" colspan="6" align="center">
<p style="MARGIN-TOP: 0pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 8pt" align="center"><b>Nine-Months Ended</b></p>
<p style="MARGIN-TOP: 0pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 1pt; FONT-SIZE: 8pt" align="center"><b>September 30</b></p>
</td>
<td valign="bottom"> </td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 8pt">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2013</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2012</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2013</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2012</b></td>
<td valign="bottom"> </td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Stock options</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right"><b>712.525</b></td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">901,210</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right"><b>710,819</b></td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">901,210</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
</table>
</div>
<div>
<p style="margin-top:18pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
<b>3. Property and Equipment</b></p>
<p style="margin-top:6pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
Property and equipment consist of the following:</p>
<p style="font-size:12pt;margin-top:0pt;margin-bottom:0pt">
 </p>
<table cellspacing="0" cellpadding="0" width="76%" border="0" style="BORDER-COLLAPSE:COLLAPSE; font-family:Times New Roman; font-size:10pt" align="center">
<tr>
<td width="72%"></td>
<td valign="bottom" width="9%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="9%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr style="font-family:Times New Roman; font-size:8pt">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td valign="bottom" colspan="2" align="center" style="border-bottom:1.00pt solid #000000">
<b>September 30,</b><br />
<b>2013</b></td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td valign="bottom" colspan="2" align="center" style="border-bottom:1.00pt solid #000000"><b>December 31,</b><br />
<b>2012</b></td>
<td valign="bottom"> </td>
</tr>
<tr>
<td height="8"></td>
<td height="8" colspan="4"></td>
<td height="8" colspan="4"></td>
</tr>
<tr bgcolor="#CCEEFF" style="font-family:Times New Roman; font-size:10pt">
<td valign="top">
<p style="margin-left:1.00em; text-indent:-1.00em; font-size:10pt; font-family:Times New Roman">
Computer equipment</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"><b>$</b></td>
<td valign="bottom" align="right"><b>93,915</b></td>
<td nowrap="nowrap" valign="bottom"><b>  </b></td>
<td valign="bottom"> </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">92,318</td>
<td nowrap="nowrap" valign="bottom">  </td>
</tr>
<tr style="font-family:Times New Roman; font-size:10pt">
<td valign="top">
<p style="margin-left:1.00em; text-indent:-1.00em; font-size:10pt; font-family:Times New Roman">
Furniture and fixtures</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"><b> </b></td>
<td valign="bottom" align="right"><b>46,523</b></td>
<td nowrap="nowrap" valign="bottom"><b>  </b></td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">42,736</td>
<td nowrap="nowrap" valign="bottom">  </td>
</tr>
<tr bgcolor="#CCEEFF" style="font-family:Times New Roman; font-size:10pt">
<td valign="top">
<p style="margin-left:1.00em; text-indent:-1.00em; font-size:10pt; font-family:Times New Roman">
Scientific equipment</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"><b> </b></td>
<td valign="bottom" align="right"><b>2,851,947</b></td>
<td nowrap="nowrap" valign="bottom"><b>  </b></td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">2,824,076</td>
<td nowrap="nowrap" valign="bottom">  </td>
</tr>
<tr style="font-family:Times New Roman; font-size:10pt">
<td valign="top">
<p style="margin-left:1.00em; text-indent:-1.00em; font-size:10pt; font-family:Times New Roman">
Leasehold improvements</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"><b> </b></td>
<td valign="bottom" align="right"><b>319,553</b></td>
<td nowrap="nowrap" valign="bottom"><b>  </b></td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">319,553</td>
<td nowrap="nowrap" valign="bottom">  </td>
</tr>
<tr bgcolor="#CCEEFF" style="font-family:Times New Roman; font-size:10pt">
<td valign="top"></td>
<td valign="bottom">  </td>
<td valign="bottom"><b> </b></td>
<td valign="bottom" align="right"><b>3,311,938</b></td>
<td nowrap="nowrap" valign="bottom"><b>  </b></td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">3,278,683</td>
<td nowrap="nowrap" valign="bottom">  </td>
</tr>
<tr style="font-family:Times New Roman; font-size:10pt">
<td valign="top">
<p style="margin-left:1.00em; text-indent:-1.00em; font-size:10pt; font-family:Times New Roman">
Less accumulated depreciation</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"><b> </b></td>
<td valign="bottom" align="right"><b>(3,236,238</b></td>
<td nowrap="nowrap" valign="bottom"><b>) </b></td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">(3,220,417</td>
<td nowrap="nowrap" valign="bottom">) </td>
</tr>
<tr bgcolor="#CCEEFF" style="font-family:Times New Roman; font-size:10pt">
<td valign="top"></td>
<td valign="bottom">  </td>
<td valign="bottom"><b>$</b></td>
<td valign="bottom" align="right"><b>75,700</b></td>
<td nowrap="nowrap" valign="bottom"><b>  </b></td>
<td valign="bottom"> </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">58,266</td>
<td nowrap="nowrap" valign="bottom">  </td>
</tr>
</table>
<p style="margin-top:12pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
Depreciation expense for the three- and nine-months ended
September 30, 2013 was $4,729, and $15,821 respectively.</p>
</div>
P5Y6M
247600
P6Y2M12D
<div>
<p style="MARGIN-TOP: 18pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>Accounts Receivable</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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
September 30, 2013 and December 31, 2012, as the Company
has a history of collecting on all accounts including, but not
limited to, collaborations funding its research.</p>
</div>
P10Y
7737250
3.2600
<div>
<p style="MARGIN-TOP: 18pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>Property and Equipment</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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, <i>Property, Plant and Equipment</i>. 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.</p>
</div>
0.00
<div>
<p style="MARGIN-TOP: 18pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>Cash and Cash Equivalents</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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 money market
investments and 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.</p>
</div>
-13963457
1.00
0.6470
2667
<div>
<p style="MARGIN-TOP: 18pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>Research and Development</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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.</p>
</div>
P6Y10M24D
P5Y6M
489667
<div>
<p style="MARGIN-TOP: 18pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>Concentration of Credit Risk</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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.</p>
</div>
<div>
<p style="MARGIN-TOP: 18pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>2. Summary of Significant Accounting Policies</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>Use of Estimates</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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.</p>
<p style="MARGIN-TOP: 18pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>Cash and Cash Equivalents</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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 money market
investments and 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.</p>
<p style="PAGE-BREAK-BEFORE: always; MARGIN-TOP: 0pt; MARGIN-BOTTOM: 0pt">
</p>
<p style="MARGIN-TOP: 18pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>Fair Value Measurements</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
The Company applies the fair value method under ASC Topic 820,
<i>Fair Value Measurements and Disclosures</i>. 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:</p>
<p style="MARGIN-TOP: 0pt; MARGIN-BOTTOM: 0pt; FONT-SIZE: 6pt">
 </p>
<table style="BORDER-COLLAPSE: collapse; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="8%"> </td>
<td valign="top" width="4%" align="left">•</td>
<td valign="top" width="1%"> </td>
<td valign="top" align="left">Level 1—Fair value is
determined by using unadjusted quoted prices that are available in
active markets for identical assets and liabilities.</td>
</tr>
</table>
<p style="MARGIN-TOP: 6px; MARGIN-BOTTOM: 0px; FONT-SIZE: 1px">
 </p>
<table style="BORDER-COLLAPSE: collapse; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="8%"> </td>
<td valign="top" width="4%" align="left">•</td>
<td valign="top" width="1%"> </td>
<td valign="top" align="left">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.</td>
</tr>
</table>
<p style="MARGIN-TOP: 0pt; MARGIN-BOTTOM: 0pt; FONT-SIZE: 6pt">
 </p>
<table style="BORDER-COLLAPSE: collapse; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="8%"> </td>
<td valign="top" width="4%" align="left">•</td>
<td valign="top" width="1%"> </td>
<td valign="top" align="left">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.</td>
</tr>
</table>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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 September 30, 2013 and December 31,
2012. The carrying value of cash held in money market funds of
approximately $21.2 million as of September 30, 2013 and
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.</p>
<p style="MARGIN-TOP: 18pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>Financial Instruments</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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 September 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.</p>
<p style="MARGIN-TOP: 18pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>Concentration of Credit Risk</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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.</p>
<p style="MARGIN-TOP: 18pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>Accounts Receivable</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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
September 30, 2013 and December 31, 2012, as the Company
has a history of collecting on all accounts including, but not
limited to, collaborations funding its research.</p>
<p style="MARGIN-TOP: 18pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>Property and Equipment</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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, <i>Property, Plant and Equipment</i>. 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.</p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; FONT-SIZE: 1px">
 </p>
<p style="MARGIN-TOP: 0pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>Revenue Recognition</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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 include strategic alliances, additional equity offerings,
grants and contracts, and research and development funding from
third parties.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
Revenue is recognized when all terms and conditions of the
agreements have been met, including persuasive evidence of an
arrangement, delivery has occurred or services have been rendered,
price is fixed or determinable and collectability is reasonably
assured. The Company is reimbursed for certain costs incurred on
specified research projects under the terms and conditions of
grants, collaboration agreements, and awards. The Company records
the amount of reimbursement as revenues on a gross basis in
accordance with ASC Topic 605-45, <i>Revenue Recognition/Principal
Agent Considerations</i>. 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.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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 the
Company, 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 Topic 605-25,
<i>Revenue Recognition—Multiple Element Arrangements</i>.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
The Company accounts for milestone revenue in accordance with ASC
Topic 605-28, <i>Milestone Method</i>. Under this guidance, the
Company recognizes 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:</p>
<p style="MARGIN-TOP: 0pt; MARGIN-BOTTOM: 0pt; FONT-SIZE: 6pt">
 </p>
<table style="BORDER-COLLAPSE: collapse; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="8%"> </td>
<td valign="top" width="4%" align="left">•</td>
<td valign="top" width="1%"> </td>
<td valign="top" align="left">The milestone payments are
non-refundable;</td>
</tr>
</table>
<p style="MARGIN-TOP: 0pt; MARGIN-BOTTOM: 0pt; FONT-SIZE: 6pt">
 </p>
<table style="BORDER-COLLAPSE: collapse; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="8%"> </td>
<td valign="top" width="4%" align="left">•</td>
<td valign="top" width="1%"> </td>
<td valign="top" align="left">Achievement of the milestone involves
a degree of risk and was not reasonably assured at the inception of
the arrangement;</td>
</tr>
</table>
<p style="MARGIN-TOP: 0pt; MARGIN-BOTTOM: 0pt; FONT-SIZE: 6pt">
 </p>
<table style="BORDER-COLLAPSE: collapse; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="8%"> </td>
<td valign="top" width="4%" align="left">•</td>
<td valign="top" width="1%"> </td>
<td valign="top" align="left">Substantive effort on our part is
involved in achieving the milestone;</td>
</tr>
</table>
<p style="MARGIN-TOP: 0pt; MARGIN-BOTTOM: 0pt; FONT-SIZE: 6pt">
 </p>
<table style="BORDER-COLLAPSE: collapse; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="8%"> </td>
<td valign="top" width="4%" align="left">•</td>
<td valign="top" width="1%"> </td>
<td valign="top" align="left">The amount of the milestone payment
is reasonable in relation to the effort expended or the risk
associated with achievement of the milestone; and</td>
</tr>
</table>
<p style="MARGIN-TOP: 0pt; MARGIN-BOTTOM: 0pt; FONT-SIZE: 6pt">
 </p>
<table style="BORDER-COLLAPSE: collapse; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="8%"> </td>
<td valign="top" width="4%" align="left">•</td>
<td valign="top" width="1%"> </td>
<td valign="top" align="left">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.</td>
</tr>
</table>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
Determination as to whether a payment meets the aforementioned
conditions involves management’s judgment. If any of these
conditions are not met, the resulting payment would not be
considered a substantive milestone, and therefore, the resulting
payment would be considered part of the consideration for the
single unit of accounting and be recognized as revenue in
accordance with the revenue models described above. In addition,
the determination that one such payment was not a substantive
milestone could prevent 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.</p>
<p style="MARGIN-TOP: 18pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>Deferred Revenue</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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 September 30, 2013 and
December 31, 2012, no interest was due as the Company did not
have any deferred revenue from a government agency.</p>
<p style="PAGE-BREAK-BEFORE: always; MARGIN-TOP: 0pt; MARGIN-BOTTOM: 0pt">
</p>
<p style="MARGIN-TOP: 18pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>Research and Development</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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.</p>
<p style="MARGIN-TOP: 18pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>Income Taxes</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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.</p>
<p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px; FONT-SIZE: 1px">
 </p>
<p style="MARGIN-TOP: 0pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
The Company accounts for uncertain tax positions pursuant to ASC
Topic 740 (previously included in FASB Interpretation No. 48,
<i>Accounting for Uncertainty in Income Taxes–an
Interpretation of FASB Statement No. 109)</i>. 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.</p>
<p style="MARGIN-TOP: 18pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>Comprehensive Income (Loss)</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
ASC Topic 220-10, <i>Reporting Comprehensive Income</i>, 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
nine-months ended September 30, 2013 and the year ended
December 31, 2012, the Company’s net loss equals
comprehensive loss.</p>
<p style="MARGIN-TOP: 18pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>Share-Based Compensation</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
Share-based payments are accounted for in accordance with the
provisions of ASC Topic 718, <i>Compensation—Stock
Compensation</i>. 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.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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 nine-months
ended September 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.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
ASC Topic 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 nine-months ended September 30, 2013 and 2012 and
the year ended December 31, 2012, and have not been
material.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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, <i>Valuation of Privately-Held-Company Equity
Securities Issued as Compensation</i>.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
Under ASC Topic 718, the cumulative amount of compensation cost
recognized for instruments classified as equity that ordinarily
would result in a future tax deduction under existing tax law shall
be considered to be a deductible difference in applying ASC
Topic 740, <i>Income Taxes</i>. 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.</p>
<p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px; FONT-SIZE: 1px">
 </p>
<p style="MARGIN-TOP: 0pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
Since the Company had net operating loss carryforwards as of
September 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.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
Equity instruments issued to non-employees are accounted for under
the provisions of ASC Topic 718 and ASC Topic 505-50,
<i>Equity/Equity-Based Payments to Non-Employees</i>. 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.</p>
<p style="MARGIN-TOP: 18pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>Loss Per Share</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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 nine- months ended September 30, 2013 and 2012:</p>
<p style="MARGIN-TOP: 0pt; MARGIN-BOTTOM: 0pt; FONT-SIZE: 12pt">
 </p>
<table style="BORDER-COLLAPSE: collapse; FONT-FAMILY: Times New Roman; FONT-SIZE: 8pt" border="0" cellspacing="0" cellpadding="0" width="92%" align="center">
<tr>
<td width="68%"></td>
<td valign="bottom" width="2%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="2%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="2%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="2%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 8pt">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td valign="bottom" colspan="6" align="center">
<p style="MARGIN-TOP: 0pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 8pt" align="center"><b>Three-Months Ended</b></p>
<p style="MARGIN-TOP: 0pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 1pt; FONT-SIZE: 8pt" align="center"><b>September 30</b></p>
</td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td valign="bottom" colspan="6" align="center">
<p style="MARGIN-TOP: 0pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 8pt" align="center"><b>Nine-Months Ended</b></p>
<p style="MARGIN-TOP: 0pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 1pt; FONT-SIZE: 8pt" align="center"><b>September 30</b></p>
</td>
<td valign="bottom"> </td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 8pt">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2013</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2012</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2013</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2012</b></td>
<td valign="bottom"> </td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Stock options</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right"><b>712.525</b></td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">901,210</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right"><b>710,819</b></td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">901,210</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
</table>
<p style="MARGIN-TOP: 18pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>Recently Issued Accounting Pronouncements</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
In April 2013, FASB issued Accounting Standards Update (ASU)
2013-02, <i>Reporting of Amounts Reclassified Out of Accumulated
Other Comprehensive Income,</i> 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.</p>
</div>
2.9725
<div>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
Total stock-based compensation expense, related to all of the
Company’s share-based awards to employees, directors and
consultants recognized during three- and nine-months ended
September 30, 2013 and 2012, was comprised of the
following:</p>
<p style="MARGIN-TOP: 0pt; MARGIN-BOTTOM: 0pt; FONT-SIZE: 12pt">
 </p>
<table style="BORDER-COLLAPSE: collapse; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" border="0" cellspacing="0" cellpadding="0" width="92%" align="center">
<tr>
<td width="65%"></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 8pt">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td valign="bottom" colspan="6" align="center">
<p style="MARGIN-TOP: 0pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 8pt" align="center"><b>Three-Months Ended</b></p>
<p style="MARGIN-TOP: 0pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 1pt; FONT-SIZE: 8pt" align="center"><b>September 30</b></p>
</td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td valign="bottom" colspan="6" align="center">
<p style="MARGIN-TOP: 0pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 8pt" align="center"><b>Nine-Months Ended</b></p>
<p style="MARGIN-TOP: 0pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 1pt; FONT-SIZE: 8pt" align="center"><b>September 30</b></p>
</td>
<td valign="bottom"> </td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 8pt">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2013</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2012</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2013</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2012</b></td>
<td valign="bottom"> </td>
</tr>
<tr>
<td height="8"></td>
<td height="8" colspan="4"></td>
<td height="8" colspan="4"></td>
<td height="8" colspan="4"></td>
<td height="8" colspan="4"></td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Research and development</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"><b>$</b></td>
<td valign="bottom" align="right"><b>38,856</b></td>
<td valign="bottom" nowrap="nowrap"><b>  </b></td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">32,200</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"><b>$</b></td>
<td valign="bottom" align="right"><b>96,943</b></td>
<td valign="bottom" nowrap="nowrap"><b>  </b></td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">86,845</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
General and administrative</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"><b> </b></td>
<td valign="bottom" align="right"><b>80,361</b></td>
<td valign="bottom" nowrap="nowrap"><b>  </b></td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">65,261</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"><b> </b></td>
<td valign="bottom" align="right"><b>185,507</b></td>
<td valign="bottom" nowrap="nowrap"><b>  </b></td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">195,784</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Total share-based compensation expense</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"><b>$</b></td>
<td valign="bottom" align="right"><b>119,217</b></td>
<td valign="bottom" nowrap="nowrap"><b>  </b></td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">97,461</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"><b>$</b></td>
<td valign="bottom" align="right"><b>282,450</b></td>
<td valign="bottom" nowrap="nowrap"><b>  </b></td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">282,629</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
</table>
</div>
<div>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>Use of Estimates</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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.</p>
</div>
<div>
<p style="margin-top:12pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
<b>1. Organization</b></p>
<p style="margin-top:6pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
Intra-Cellular Therapies, Inc. (the Company), through its
wholly-owned operating subsidiary, ITI, Inc. (ITI), is a
biopharmaceutical company focused on the discovery and clinical
development of innovative, small molecule drugs that address
underserved medical needs in neuropsychiatric and neurological
disorders by targeting intracellular signaling mechanisms within
the central nervous system (CNS). The Company’s lead product
candidate, ITI-007, is in Phase 2 clinical trials as a
first-in-class treatment for schizophrenia.</p>
<p style="margin-top:12pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
ITI was incorporated in the State of Delaware on May 22, 2001
under the name “Intra-Cellular Therapies, Inc.” and
commenced operations in June 2002. ITI was founded to discover
and develop drugs for the treatment of neurological and psychiatric
disorders.</p>
<p style="margin-top:12pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
On August 29, 2013, ITI completed a reverse merger (the
Merger) with a public shell company named Oneida Resources Corp.
(Oneida). Oneida was formed in August 2012 as a vehicle to
investigate and, if such investigation warranted, acquire a target
company or business seeking the perceived advantages of being a
publicly held corporation. In the Merger, each outstanding share of
capital stock of ITI was exchanged for 0.5 shares of common stock
of Oneida, and each outstanding option and outstanding warrant of
ITI was assumed by Oneida and became exercisable for 0.5 shares of
Oneida common stock. As a result of the Merger and related
transactions, ITI survived as a wholly-owned subsidiary of Oneida,
Oneida changed its fiscal year end from March 31 to
December 31, and Oneida changed its name to Intra-Cellular
Therapies, Inc. (the Company). In addition, the Company began
operating ITI and its business, and therefore ceased being a shell
company. Following the Merger and the redemption of all then
outstanding shares of Oneida at the closing of the Merger, the
former shareholders of ITI owned 100% of the shares of the
Company’s outstanding capital stock.</p>
<p style="margin-top:12pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
Immediately prior to the Merger, on August 29, 2013, ITI 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 $15.3 million in
principal and $0.8 million in accrued interest from the conversion
of ITI’s then outstanding convertible promissory notes (the
Notes).</p>
<p style="margin-top:12pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
In accordance with Financial Accounting Standards Board (FASB),
Accounting Standards Codification (ASC) Topic 805, <i>Business
Combinations</i>, ITI is considered the acquirer for accounting
purposes, and will account for the transaction as a capital
transaction, because ITI’s former stockholders received 100%
of the voting rights in the combined entity and ITI’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 our consolidated financial
statements will be those of ITI and will be recorded at the
historical cost basis of the Company. All share and per share
amounts in the consolidated financial statements and related notes
have been retrospectively adjusted to reflect the one for 0.5
shares common stock exchange as well as the conversion of the Notes
and Redeemable Preferred Series A, B, and C convertible preferred
stock.</p>
</div>
<div>
<p style="MARGIN-TOP: 18pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>Loss Per Share</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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 nine- months ended September 30, 2013 and 2012:</p>
<p style="MARGIN-TOP: 0pt; MARGIN-BOTTOM: 0pt; FONT-SIZE: 12pt">
 </p>
<table style="BORDER-COLLAPSE: collapse; FONT-FAMILY: Times New Roman; FONT-SIZE: 8pt" border="0" cellspacing="0" cellpadding="0" width="92%" align="center">
<tr>
<td width="68%"></td>
<td valign="bottom" width="2%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="2%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="2%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="2%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 8pt">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td valign="bottom" colspan="6" align="center">
<p style="MARGIN-TOP: 0pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 8pt" align="center"><b>Three-Months Ended</b></p>
<p style="MARGIN-TOP: 0pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 1pt; FONT-SIZE: 8pt" align="center"><b>September 30</b></p>
</td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td valign="bottom" colspan="6" align="center">
<p style="MARGIN-TOP: 0pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 8pt" align="center"><b>Nine-Months Ended</b></p>
<p style="MARGIN-TOP: 0pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 1pt; FONT-SIZE: 8pt" align="center"><b>September 30</b></p>
</td>
<td valign="bottom"> </td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 8pt">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2013</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2012</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2013</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2012</b></td>
<td valign="bottom"> </td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Stock options</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right"><b>712.525</b></td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">901,210</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right"><b>710,819</b></td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">901,210</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
</table>
</div>
<div>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
The following table describes the weighted-average assumptions used
for calculating the value of options granted during the nine-months
ended September 30, 2013:</p>
<p style="MARGIN-TOP: 0pt; MARGIN-BOTTOM: 0pt; FONT-SIZE: 12pt">
 </p>
<table style="BORDER-COLLAPSE: collapse; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" border="0" cellspacing="0" cellpadding="0" width="68%" align="center">
<tr>
<td width="80%"></td>
<td valign="bottom" width="4%"></td>
<td></td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 8pt">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" align="center"><b>2013</b></td>
</tr>
<tr>
<td height="8"></td>
<td height="8" colspan="2"></td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Dividend yield</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom" align="center"><b>0%</b></td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Expected volatility</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom" align="center"><b>80%</b></td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt" bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Weighted-average risk-free interest rate</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom" align="center"><b><font style="WHITE-SPACE: nowrap">1.40% - 1.80%</font></b></td>
</tr>
<tr style="FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Expected term</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom" align="center"><b>6.2 years</b></td>
</tr>
</table>
</div>
<div>
<p style="MARGIN-TOP: 18pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>Financial Instruments</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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 September 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.</p>
</div>
<div>
<p style="MARGIN-TOP: 18pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>Deferred Revenue</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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 September 30, 2013 and
December 31, 2012, no interest was due as the Company did not
have any deferred revenue from a government agency.</p>
</div>
<div>
<p style="MARGIN-TOP: 18pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
<b>Income Taxes</b></p>
<p style="MARGIN-TOP: 6pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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.</p>
<p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px; FONT-SIZE: 1px">
 </p>
<p style="MARGIN-TOP: 0pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
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.</p>
<p style="MARGIN-TOP: 12pt; FONT-FAMILY: Times New Roman; MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt">
The Company accounts for uncertain tax positions pursuant to ASC
Topic 740 (previously included in FASB Interpretation No. 48,
<i>Accounting for Uncertainty in Income Taxes–an
Interpretation of FASB Statement No. 109)</i>. 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.</p>
</div>
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